AMENDMENT #3 TO FORM S-11
Table of Contents

As filed with the Securities and Exchange Commission on September 2, 2005

Registration No. 333-123809


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

AMENDMENT NO. 3

TO

FORM S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 


 

DIAMONDROCK HOSPITALITY COMPANY

(Exact Name of Registrant as Specified in its Governing Instruments)

 


6903 Rockledge Drive, Suite 800, Bethesda, Maryland 20817, (240) 744-1150

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

William W. McCarten

Chief Executive Officer

DiamondRock Hospitality Company

6903 Rockledge Drive, Suite 800, Bethesda, Maryland 20817

(240) 744-1150

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 


 

Copy to:

Gilbert G. Menna, Esq.

Suzanne D. Lecaroz, Esq.

Goodwin Procter LLP

Exchange Place, 53 State Street

Boston, MA 02109

(617) 570-1000

 


 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

 

If any securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement of the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

 



Table of Contents

The information in this prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED September     , 2005

 

PROSPECTUS

 

20,850,000 Shares of Common Stock

 

DIAMONDROCK HOSPITALITY COMPANY

 

LOGO

 

This prospectus relates to up to 20,850,000 shares of common stock of DiamondRock Hospitality Company that the selling stockholders named in this prospectus may offer for sale from time to time. The registration of these shares does not necessarily mean the selling stockholders will offer or sell all or any of these shares of common stock. We will not receive any of the proceeds from the sale of any shares of common stock by the selling stockholders, but will incur expenses in connection with the offering.

 

The selling stockholders from time to time may offer and resell the shares held by them directly or through agents or broker-dealers on terms to be determined at the time of sale. To the extent required, the names of any agent or broker-dealer and applicable commissions or discounts and any other required information with respect to any particular offer will be set forth in a prospectus supplement that will accompany this prospectus. A prospectus supplement also may add, update or change information contained in this prospectus.

 

We expect to qualify as a real estate investment trust, or REIT, for federal income tax purposes and will elect to be taxed as a REIT under the federal income tax laws for the taxable year ending December 31, 2005 and subsequent taxable years.

 

Our common stock is listed on the New York Stock Exchange under the symbol “DRH”. The last reported sale price on August 30, 2005 was $11.93 per share.

 

Shares of our common stock are subject to ownership limitations that we must impose in order for us to qualify, and maintain our status, as a REIT.

 

See “ Risk Factors” beginning on page 18 of this prospectus for certain risk factors relevant to an investment in shares of our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is                 , 2005


Table of Contents

TABLE OF CONTENTS

SUMMARY    1
Our Company    1
Our Competitive Strengths    2
Risk Factors    2
Our Business Objective and Strategies    4
Hotel Industry    5
Our Initial Hotel Properties    6
Our Recently Acquired Hotel Properties    8
Our Structure    9
Our Principal Office    11
Our Tax Status    11
Restrictions on Ownership of Our Stock    11
Our Distribution Policy    12
Registration Rights Agreement    12

Lock-Up Agreements and Resale Blackout Periods

   13

SUMMARY SELECTED FINANCIAL AND OPERATING DATA

   14
RISK FACTORS    18

Risks Related to Our Business, Growth Strategy and Investment Sourcing Relationship with Marriott

   18
Risks Related to the Hotel Industry    26

General Risks Related to the Real Estate Industry

   30

Risks Related to Our Organization and Structure

   32

Risks Related to our Initial Public Offering and Resale of our Common Stock

   36
FORWARD LOOKING STATEMENTS    39
MARKET DATA    40
USE OF PROCEEDS    40

DIVIDEND POLICY AND DISTRIBUTIONS

   41
CAPITALIZATION    44

SELECTED FINANCIAL AND OPERATING DATA

   45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   49
Overview    49
Critical Accounting Policies and Estimates    52
Other Recent Accounting Pronouncements    53
Results of Operations    53
Liquidity and Capital Resources    56
Off-Balance Sheet Arrangements    58
Outstanding Debt    58
Financing Strategy    59
Contractual Obligations    60

 

Cash Distribution Policy

   60
Inflation    60
Seasonality    60
Geographic Concentration    60
Tax and Depreciation    61
Qualitative Disclosures about Market Risk    62
HOTEL INDUSTRY    63
OUR BUSINESS    67
Our Company    67
Our Competitive Strengths    67
Our Business Objective and Strategies    70

Hotel Industry Segments

   71
Environmental Matters    71
Competition    72
Employees    72
Legal Proceedings    72
Regulation    73
Insurance    73
OUR PROPERTIES    74
Our Initial Hotel Properties    74
Our Recently Acquired Hotel Properties    85
Mortgage Debt    94
OUR PRINCIPAL AGREEMENTS    95
The Information Acquisition Agreement    95
Our Hotel Management Agreements    95

Our Hotel Franchise Agreement

   101
Our TRS Leases    102
Our Ground Lease Agreements    104
MANAGEMENT    107

Our Directors and Senior Executive Officers

   107
Corporate Governance Profile    109
Board of Directors and Committees    110
Audit Committee    110

Nominating and Corporate Governance Committee

   110
Compensation Committee    111

Compensation Committee Interlocks and Insider Participation

   111
Code of Business Conduct and Ethics    111
Conflicts of Interest    112
Vacancies on our Board of Directors    112
Compensation of Directors    112
Executive Compensation    113
Employment Agreements    113
Annual Incentive Bonus Policy    114
401(k) Plan    115
Equity Incentive Plan    115
Liability, Exculpation and Indemnification    116

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   119
Transactions with Marriott    119

Arrangements with our Senior Executive Officers and Certain Directors

   122

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

   123

Investments in Real Estate or Interests in Real Estate

   123

Investments in Mortgages, Structured Financings and Other Lending Policies

   123

Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers

   123
Dispositions    124
Financing Policies    124
Equity Capital Policies    124
FORMATION OF OUR COMPANY    126

INSTITUTIONAL TRADING OF OUR COMMON STOCK

   127
PRINCIPAL STOCKHOLDERS    128
SELLING STOCKHOLDERS    129

REGISTRATION RIGHTS AGREEMENT

   146
LOCK-UP AGREEMENTS    148

DESCRIPTION OF CAPITAL STOCK AND CERTAIN MATERIAL PROVISIONS OF MARYLAND LAW, OUR CHARTER AND BYLAWS

   149
General    149
Common Stock    149
Preferred Stock    149

Power to Issue Additional Shares of Common Stock and Preferred Stock

   150
Restrictions on Ownership and Transfer    150
Transfer Agent and Registrar    152

Certain Provisions of Maryland Law and of Our Charter and Bylaws

   152

DESCRIPTION OF THE PARTNERSHIP AGREEMENT OF DIAMONDROCK HOSPITALITY LIMITED PARTNERSHIP

   156
Management of the Operating Partnership    156

Removal of the General Partners; Transfer of the General Partner’s Interest

   156

Amendments of the Partnership Agreement

   156
Redemption Rights    157

Issuance of Additional Units, Common Stock or Convertible Securities

   157
Tax Matters    158
Extraordinary Transactions    158
Term    158

Exculpation and Indemnification of the General Partner

   158

SHARES ELIGIBLE FOR FUTURE SALE

   159
General    159
Rule 144    159
Rule 701    160
Redemption Rights    160

FEDERAL INCOME TAX CONSIDERATIONS

   161
Taxation of the Company    161
Qualification as a REIT    163

Qualified REIT Subsidiaries and Disregarded Entities

   168
Taxation of the Operating Partnership    168
Investments in Taxable REIT Subsidiaries    169

Taxation of U.S. Stockholders Holding Common Stock

   170
Unrelated Business Taxable Income    172

Information Reporting Requirements and Backup Withholding Tax

   172

Taxation of Non-U.S. Stockholders Holding Common Stock

   173
State, Local, and Foreign Tax    174
ERISA CONSIDERATIONS    175
PLAN OF DISTRIBUTION    177
LEGAL MATTERS    179
EXPERTS    179

WHERE YOU CAN FIND MORE INFORMATION

   179
REPORTS TO STOCKHOLDERS    180

INDEX TO FINANCIAL STATEMENTS

   F-1

 

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SUMMARY

 

The following summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus, including “Risk Factors” and our historical and pro forma financial statements appearing elsewhere in this prospectus, before investing in our common stock. References in this prospectus to “we,” “our,” “us” and “our company” refer to DiamondRock Hospitality Company, including, as the context requires, DiamondRock Hospitality Limited Partnership, our operating partnership, as well as our other direct and indirect subsidiaries, including our existing taxable REIT subsidiary, Bloodstone TRS, Inc. References to “Marriott” are to Marriott International, Inc., including, as the context requires, its subsidiaries. References to “RevPAR” are to revenue per available room, which is the product of average daily rate, which we refer to as “ADR,” and occupancy, and is a key performance indicator for the hotel industry.

 

Our Company

 

We are a self-advised real estate company that owns, acquires and invests in upper upscale and upscale hotel properties located primarily in North America. To a lesser extent, we may invest, on a selective basis, in premium limited-service and extended-stay hotel properties in urban locations. We completed our initial public offering of our common stock on June 1, 2005.

 

Our senior management team has extensive experience and a broad network of relationships in the hotel industry, which we believe provides us with ongoing access to hotel property investment opportunities and enables us to quickly identify and consummate acquisitions. We began operations in July 2004 when we completed a private placement of our common stock. Since our July 2004 private placement and prior to our initial public offering, we acquired our seven initial hotels, comprising 2,357 rooms, located in the following markets: New York City (2 hotels), Washington D.C., Los Angeles, Salt Lake City, Northern California and Lexington, Kentucky for purchase prices aggregating approximately $368.0 million (including pre-funded capital improvements). Subsequent to our initial public offering, we acquired seven hotels, comprising 3,280 rooms, located in the following markets: Fort Worth, Atlanta (2 hotels), St. Thomas (U.S. Virgin Islands), Los Angeles, Oak Brook (Illinois) and Vail (Colorado) for purchase prices aggregating approximately $475.1 million (including pre-funded capital improvements).

 

We have an investment sourcing relationship with Marriott, a leading worldwide hotel brand, franchise and management company. Marriott has agreed to provide us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to Marriott. This investment sourcing relationship with Marriott has already facilitated the acquisition of seven of our fourteen hotel properties. We believe that our ability to implement our business strategies is greatly enhanced by the continuing source of additional acquisition opportunities generated by this relationship, as many of the properties Marriott brings to our attention are offered to us through “off-market” transactions, meaning that they are not made generally available to other hospitality companies. However, neither we nor Marriott have entered into a binding agreement or commitment setting forth the terms of this investment sourcing relationship. As a result, our investment sourcing relationship may be modified or terminated at any time by either party.

 

We intend to use Marriott as our preferred, but not exclusive, hotel management company for our hotel properties and expect to benefit from Marriott’s strong brands and its excellent hotel management services. Marriott-branded hotels have an extensive record of generating premiums in RevPAR over competitive brands. Each of our hotel properties operates under a recognized Marriott brand, including Marriott®, Renaissance Hotels and Resorts®, SpringHill Suites® and Courtyard by Marriott®. In connection with our July 2004 private placement, Marriott purchased 3.0 million shares of our common stock. In addition, concurrently with the completion of our initial public offering, we sold directly to Marriott 1,428,571 shares of our common stock at the initial public offering price. As of the date of this prospectus, Marriott owns 8.7% of our outstanding common stock (including unvested restricted stock).


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Our Competitive Strengths

 

We believe we distinguish ourselves from other owners, acquirors and investors in hotel properties through our competitive strengths, which include:

 

    Experienced Management Team.    We believe the extensive hotel industry experience of our senior management team will enable us to effectively implement our business strategies. Our senior management team of William W. McCarten, John L. Williams, Mark W. Brugger, Michael D. Schecter and Sean M. Mahoney has extensive experience in lodging, real estate and related service industries, including hotel asset management, acquisitions, mergers, dispositions, development, redevelopment and financing. Collectively, they have been involved in hotel transactions aggregating several billion dollars and over 100,000 hotel rooms.

 

    Marriott Investment Sourcing Relationship.    Our investment sourcing relationship with Marriott provides us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to Marriott. Our senior management team currently meets with senior representatives of Marriott approximately every two weeks to discuss, among other things, potential hotel property investment opportunities known to Marriott. As a result of Marriott’s extensive network, relationships and knowledge of hotel property investment opportunities, we believe we have preferred access to a unique source of hotel property investment opportunities, many of which may not be available to other hospitality companies. Since our formation in 2004, Marriott has provided us access to more than $1.9 billion of off-market acquisition opportunities. Our relationship with Marriott has facilitated the acquisition of seven of our fourteen hotel properties, including the Marriott Griffin Gate Resort and the Lodge at Sonoma Renaissance Resort & Spa, both of which we acquired directly from Marriott.

 

    Proven Acquisition Capability.    Our senior management team has established a broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, commercial real estate brokers and other key industry participants. These industry relationships have provided us with another valuable source of potential hotel property investment opportunities. We believe that our ability to quickly identify, negotiate, finance and consummate acquisitions has positioned us as a preferred buyer of hotel properties.

 

    Growth-Oriented Capital Structure.     We have obtained a three-year, $75.0 million senior secured revolving credit facility from Wachovia Bank, National Association (an affiliate of Wachovia Capital Markets, LLC, which was a co-managing underwriter in our initial public offering), as administrative agent under the credit facility, and Citicorp North America, Inc. (an affiliate of Citigroup Global Markets Inc., which was a lead managing underwriter in our initial public offering) and Bank of America, N.A. (an affiliate of Banc of America Securities LLC, which was a co-managing underwriter in our initial public offering), as co-syndication agents under the credit facility. Each of these underwriters for our initial public offering is a tri-lead arranger and tri-book runner under the credit facility. This facility may be expanded to $250.0 million, at our election, subject to the approval of the lenders, to fund additional acquisitions and renovations and for general working capital and other corporate purposes. We maintain a target leverage ratio of 45% to 55% of our aggregate property investment and repositioning costs.

 

Risk Factors

 

See “Risk Factors” beginning on page 18 for certain risk factors relevant to an investment in our common stock, including, among others:

 

    We were formed in May 2004 and commenced operations in July 2004 and have a limited operating history.

 

    Our management has no prior experience operating a REIT and limited experience operating a public company and therefore may have difficulty in successfully and profitably operating our business.

 

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    We cannot assure you that we will qualify, or remain qualified, as a REIT.

 

    All of our current hotel properties are managed by Marriott, except for the Vail Marriott Mountain Resort & Spa, which is franchised by Marriott. As a result, our success is dependent in part on the continued success of Marriott and its brands.

 

    Failure of the hotel industry to continue to improve may adversely affect our ability to execute our business strategies, which, in turn, would adversely affect our ability to make distributions to our stockholders.

 

    We face competition for the acquisition of hotels and we may not be successful in identifying or completing hotel acquisitions that meet our criteria, which may impede our growth.

 

    Our investment sourcing relationship with Marriott is non-exclusive and based on a non-binding understanding that may be changed or terminated at any time, which could adversely affect our ability to execute our business strategies, which in turn, would adversely affect our ability to make distributions to our stockholders.

 

    In order to maintain our investment sourcing relationship with Marriott, Marriott may encourage us to enter into transactions or hotel management agreements that are not in our best interests.

 

    We rely on hotel management companies, including Marriott, to operate our hotel properties under the terms of hotel management agreements. Even if we believe our hotel properties are being operated inefficiently or in a manner that does not result in satisfactory RevPAR and operating profits, we may not have sufficient rights under our hotel management agreements to enable us to force the hotel management company to change its method of operation of our hotel properties.

 

    Our hotel management agreements require us to bear the operating risks of our hotel properties. Our operating risks include decreased hotel revenues and increased operating expenses. Any decreases in hotel revenues or increases in operating expenses may have a material adverse impact on our earnings and cash flow.

 

    As of the date of this prospectus, we have approximately $358.4 million in debt outstanding. Future debt service obligations may adversely affect our operating results, require us to liquidate our properties, jeopardize our tax status as a REIT or limit our ability to make distributions to our stockholders. Additionally, if we were to default on our secured debt, the loss of any property securing the debt would adversely affect our ability to satisfy other financial obligations.

 

    We acquired interests in portions of four of our hotel properties and the golf course associated with two separate properties by acquiring a leasehold interest in the land on which the building is located; and we may acquire additional properties in the future through the purchase of hotels subject to similar ground leases. As lessee under ground leases, we are exposed to the risk of losing the property, or a portion of the property, upon termination, or an earlier breach by us, of the ground lease.

 

    Our hotel properties are and will continue to be subject to various operating risks common to the hotel industry. Competition for acquisitions, the seasonality of the hotel industry, our investment concentration in a particular segment of the real estate industry and the need for capital expenditures could harm our future operating results and adversely affect our ability to make distributions to our stockholders.

 

    The events of September 11, 2001, recent economic trends, the military action in Afghanistan and Iraq and the possibility of future terrorist acts and military action have adversely affected the hotel industry generally, and similar future events could adversely affect the industry in the future.

 

    Uninsured and underinsured losses with respect to our hotel properties could adversely affect our operating results and our ability to make distributions to our stockholders.

 

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    Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our portfolio in response to changing economic, financial and investment conditions may be limited. In addition, because our hotel management agreements contain restrictions on our ability to dispose of our hotel properties and are typically long-term agreements that do not terminate in the event of a sale, our ability to sell our hotel properties may be further limited.

 

    Provisions of our charter and bylaws may limit the ability of a third party to acquire control of our company, which may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

 

    If we fail to qualify for or lose our status as a REIT, we would be subject to federal income tax on our taxable income, reducing amounts available for distribution to our stockholders.

 

    As a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. In the event of future downturns in our operating results and financial performance or the need for unanticipated capital improvements to our hotel properties, we may be unable to declare or pay distributions to our stockholders.

 

    The number of shares of common stock available for future sale may have an adverse effect on the market price of our common stock.

 

Our Business Objective and Strategies

 

Our principal business objective is to maximize stockholder value through a combination of dividends, growth in funds from operations and increases in net asset value. We believe that we can create long-term value in our hotel properties by taking advantage of individual market recovery opportunities and aggressive asset management and repositioning, which may include: (i) re-branding, (ii) capital renovation and/or (iii) changing hotel management. In order to achieve our business objective, we intend to pursue the following strategies:

 

    Disciplined Acquisition of Hotel Properties.    We will seek to create value by acquiring upper upscale and upscale hotel properties in geographically diverse locations, and to a lesser extent, premium limited service and extended stay hotels in urban locations, in accordance with our disciplined acquisition strategy. Our focus is on acquiring undermanaged or undercapitalized hotel properties at prices below replacement cost and that are located in markets where we expect demand growth will outpace new supply.

 

    Aggressive Asset Management.    We intend to aggressively manage our hotel properties by continuing to employ value-added strategies (such as re-branding, renovating, or changing management) designed to increase the operating results and value of our hotel property investments. We currently plan to invest approximately $33.5 million in 2005 and the first quarter of 2006 to renovate our initial hotels, including $27.0 million in capital that has been pre-funded into various escrow accounts and $25.9 million in 2005 and the first quarter of 2006 to renovate our recently acquired hotel properties, including $11.5 million in capital that has been pre-funded into various escrow accounts. We do not operate our hotel properties, but we have structured, and intend to continue to structure, our hotel management agreements to allow us to closely monitor the performance of our hotels and to ensure, among other things, that our third-party managers: (i) implement an approved business and marketing plan, (ii) implement a disciplined capital expenditure program and (iii) establish and prudently spend appropriate furniture, fixtures and equipment reserves.

 

    Opportunistic Hotel Repositioning.    We intend to seek opportunities to acquire hotel properties that will benefit from repositioning, including re-branding, renovating or changing management to increase the operating results and value of our hotel property investments. We believe our investment sourcing relationship with Marriott will yield many of these opportunities.

 

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Hotel Industry

 

We believe the hotel industry, as a whole, is continuing to recover from a pronounced downturn that occurred over the three-year period from 2001-2003. This recovery has been, and we expect it to continue to be, primarily driven by increased demand for hotel rooms. According to Smith Travel Research, demand for hotel rooms, measured by total rooms sold, increased by 0.3% in 2002, 1.5% in 2003 and 4.7% in 2004 and is projected to increase by 4.0% in 2005. By comparison, hotel room supply grew by 1.6% in 2002, 1.2% in 2003 and 1.0% in 2004 and is projected to increase by 1.2% in 2005 as compared to its past 15-year historical annual average of 2.1%.

 

We expect that sustained growth in demand, combined with lower projected growth in new supply, will result in continued improvement of hotel industry fundamentals. According to Smith Travel Research:

 

    occupancy increased by 3.7% in 2004 and is projected to increase by 2.8% in 2005;

 

    ADR increased by 4.0% in 2004 and is projected to increase by 4.2% in 2005; and

 

    RevPAR increased by 7.8% in 2004 and is projected to increase by 7.1% in 2005.

 

LOGO

 

We expect that our hotel properties will be well-positioned to benefit from this recovery in hotel industry fundamentals.

 

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Our Initial Hotel Properties

 

The following table sets forth certain operating information for each of our initial hotel properties. This information includes periods prior to our acquisition of these hotels:

 

Property


  

Location


   Month/Year
Acquired


   Number of
Rooms(1)


   Average
Occupancy(2)


    ADR(2)

   RevPAR(2)

Courtyard Manhattan/

Midtown East

   New York, New York    11/04    307    89.2 %   $ 199.43    $ 177.85

Torrance Marriott

   Los Angeles County, California    1/05    487    77.4       99.64      77.16

Salt Lake City Marriott

Downtown

   Salt Lake City, Utah    12/04    510    67.9       115.51      78.49

Marriott Griffin Gate

Resort

   Lexington, Kentucky    12/04    408    68.1       110.10      74.94

Bethesda Marriott Suites

   Bethesda, Maryland    12/04    274    74.6       153.74      114.74

Courtyard Manhattan/

Fifth Avenue

   New York, New York    12/04    189    89.3       140.96      125.88
The Lodge at Sonoma Renaissance Resort & Spa    Sonoma, California    10/04    182    65.1       187.34      122.03
              
                   
TOTAL/WEIGHTED AVERAGES         2,357    75.0 %   $ 135.94    $ 101.90
              
                   

(1) As of December 31, 2004.
(2) For the fiscal year ended December 31, 2004.

 

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The following table sets forth information regarding our investment in each of our initial hotel properties:

 

Property


  Location

  Year
Opened


  Number
of
Rooms(1)


  Purchase
Price(2)


  Pre-Funded
Capital
Improvement
Escrows(3)


  Projected
Additional
Capital
Improvements(4)


  Total
Projected
Investment(5)


  Total
Projected
Investment
Per Room


Courtyard Manhattan/ Midtown East   New York,
New York
  1998   307   $ 74,318,000   $ 4,539,000   $ —     $ 78,857,000   $ 256,863
Torrance Marriott   Los
Angeles
County,
California
  1985   487     62,002,000     10,000,000     —       72,002,000     147,848
Salt Lake City Marriott Downtown   Salt Lake
City, Utah
  1981   510     49,584,000     3,761,000     500,000     53,845,000     105,578
Marriott Griffin Gate Resort   Lexington,
Kentucky
  1981   408     46,887,000     2,955,000     —       49,842,000     122,162
Bethesda Marriott Suites   Bethesda,
Maryland
  1990   274     41,062,000     830,000     4,000,000     45,892,000     167,489
Courtyard Manhattan/ Fifth Avenue   New York,
New York
  1990   189     35,623,000     4,117,000     2,000,000     41,740,000     220,847
The Lodge at Sonoma Renaissance Resort & Spa   Sonoma,
California
  2001   182     31,545,000     800,000     —       32,345,000     177,720
           
 

 

 

 

     

TOTALS/WEIGHTED AVERAGE

  2,357   $ 341,021,000   $ 27,002,000   $ 6,500,000   $ 374,523,000   $ 158,898
           
 

 

 

 

     

(1) As of December 31, 2004.
(2) Purchase price includes, for each hotel property, all amounts paid to the seller, assumed debt and amounts paid for working capital plus costs paid with respect to third-party professional fees in connection with our purchase, but it does not include costs related to mortgage debt used by us to finance the purchase of the hotel property or escrow accounts established for the pre-funded capital improvements.
(3) Pre-funded capital improvement escrows are amounts pre-funded into various escrow accounts.
(4) Represents projected additional capital improvements scheduled to occur through the end of the first quarter of 2006 that have not been pre-funded into an escrow account.
(5) Total projected investment, for each hotel property, is the sum of the purchase price, pre-funded capital improvements and projected additional capital improvements.

 

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Our Recently Acquired Hotel Properties

 

We used a portion of the net proceeds from our initial public offering to acquire and invest in five additional hotel properties for an aggregate purchase price, including pre-funded capital improvement escrows, of approximately $382.7 million. We acquired the Marriott Los Angeles Airport, the Marriott Atlanta Alpharetta, the Frenchman’s Reef & Morning Star Marriott Beach Resort and the Renaissance Worthington as a package for a purchase price of approximately $318.3 million on June 23, 2005. We sometimes refer to these hotels collectively as the “Capital Hotel Investment Portfolio.” We also acquired the Vail Marriott Mountain Resort & Spa for approximately $64.4 million on June 24, 2005. In addition, in July 2005, we acquired the Oak Brook Hills Marriott Resort and the SpringHill Suites Atlanta Buckhead for approximately $99.8 million. The following table sets forth information regarding these recently acquired hotels:

 

Property


  

Location


   Number of
Rooms(1)


   Average
Occupancy(2)


    ADR(2)

    RevPAR(2)

 

Renaissance Worthington

   Fort Worth, Texas    504    73.0 %   $ 138.55     $ 101.15  

Marriott Atlanta Alpharetta

   Atlanta, Georgia    318    59.9       121.20       72.59  
Frenchman’s Reef &
Morning Star Marriott
Beach Resort
   St. Thomas, U.S. Virgin Islands    504    71.5       188.49       134.73  
Marriott Los Angeles
Airport
   Los Angeles, California    1,004    79.1       96.50       76.30  
Vail Marriott Mountain
Resort & Spa
   Vail, Colorado    346    60.0       188.81       113.38  
Oak Brook Hills Marriott
Resort
   Oak Brook, Illinois    384    49.1       121.95       59.93  
SpringHill Suites Atlanta
Buckhead
   Buckhead area of Atlanta, Georgia    220    N.A. (3)     N.A. (3)     N.A. (3)
         
                      

TOTAL/WEIGHTED AVERAGES

   3,280    68.9 %   $ 133.27     $ 91.85  
         
                      

(1) As of December 31, 2004.
(2) For the fiscal year ended December 31, 2004.
(3) Not applicable. The hotel opened on July 1, 2005 and therefore has no historical operating results.

 

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Table of Contents

The following table sets forth information regarding our investment in each of our recently acquired hotels:

 

Property


  Year
Opened/
Renovated


  Number
of
Rooms(1)


  Purchase
Price(2)


  Pre-Funded
Capital
Improvement
Escrows(3)


  Projected
Additional
Capital
Improvements(4)


  Total
Projected
Investment(5)


  Total
Projected
Investment
Per Room


Renaissance Worthington   1981   504   $ 83,012,000   $ 874,000   $ —     $ 83,886,000   $ 166,440
Marriott Atlanta Alpharetta   2000   318     39,329,000     1,233,000     —       40,562,000     127,553
Frenchman’s Reef & Morning Star Marriott Beach Resort   1973/1984   504     73,244,000     1,453,000     3,039,000     77,736,000     154,238
Marriott Los Angeles Airport   1973   1,004     111,306,000     7,897,000     2,357,000     121,560,000     121,076
Vail Marriott Mountain Resort & Spa   1983/2002   346     64,356,000     —       1,500,000     65,856,000     190,335
Oak Brook Hills Marriott
Resort
  1987   384     65,748,000     —       7,500,000     73,248,000     190,750
SpringHill Suites Atlanta
Buckhead
  2005   220     34,083,000     —       —       34,083,000     154,923
       
 

 

 

 

     
TOTALS/WEIGHTED AVERAGE   3,280   $ 471,078,000   $ 11,457,000   $ 14,396,000   $ 496,931,000   $ 151,503
       
 

 

 

 

     

(1) As of December 31, 2004.
(2) Purchase price includes, for each hotel property, all amounts paid to the seller and amounts paid for working capital plus costs paid with respect to third-party professional fees in connection with our purchase, but it does not include costs related to mortgage debt used by us to finance the purchase of the hotel property or escrow accounts established for the pre-funded capital improvements.
(3) Pre-funded capital improvement escrows are amounts pre-funded into various escrow accounts.
(4) With respect to the hotels comprising the Capital Hotel Investment Portfolio, represents projected additional capital improvements scheduled to occur through the end of the first quarter of 2006 that were not pre-funded into an escrow account. With respect to the Vail Marriott Mountain Resort & Spa, represents projected additional capital improvements to be undertaken pursuant to a property improvement plan that was not pre-funded into an escrow account. We currently expect that these capital improvements will be undertaken in 2006 and 2007.
(5) Total projected investment, for each hotel property, is the sum of the purchase price, pre-funded capital improvements and projected additional capital improvements.

 

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Our Structure

 

We were formed as a Maryland corporation in May 2004. We conduct our business through a traditional umbrella partnership REIT, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, limited partnerships, limited liability companies or other subsidiaries of our operating partnership. We are the sole general partner of our operating partnership and currently own, either directly or indirectly, all of the limited partnership units of our operating partnership. In the future, we may issue limited partnership units to third parties from time to time in connection with acquisitions of hotel properties. In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income test required for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, we lease each of our hotel properties to a wholly-owned subsidiary of Bloodstone TRS, Inc., our taxable REIT subsidiary, or TRS, except for the Frenchman’s Reef & Morning Star Marriott Beach Resort, which is owned by a Virgin Islands corporation, which we have elected to be treated as a TRS. As a result, we will not utilize a lease structure for that hotel. We refer to these subsidiaries of Bloodstone TRS, Inc. as our TRS lessees. We may form additional TRSs and TRS lessees in the future.

 

The following chart shows our corporate structure as of the date of this prospectus:

 

LOGO

 

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Table of Contents

Hotel Industry Segments

 

References to “upper upscale” and “upscale” are to hotels classified in those categories by Smith Travel Research, Inc. Smith Travel Research, Inc. classifies the hotel industry into the following chain scales, as determined by each brand’s annual average system-wide daily rates: luxury, upper upscale, upscale, midscale with food and beverage, midscale without food and beverage, and economy. The category of “upper upscale” includes hotels such as Embassy Suites Hotels, Hilton, Hyatt, Marriott and Sheraton; the category of “upscale” includes hotels such as Courtyard by Marriott, SpringHill Suites by Marriott, Crowne Plaza, Hawthorn Suites, Hilton Garden Inn, Radisson and Residence Inn by Marriott. ‘‘Extended-stay” hotels are hotels generally designed to accommodate guests staying more than six nights and typically provide rooms with fully equipped kitchens, entertainment systems, office spaces with computer and telephone lines and access to fitness centers and other amenities. “Limited-service” hotels target budget-conscious travelers and therefore have fewer amenities, such as in-house food and beverage facilities.

 

Our Principal Office

 

Our principal office is located at Democracy Center, 6903 Rockledge Drive, Bethesda, MD 20817, which is across the street from Marriott’s corporate headquarters, and our telephone number is 240-744-1150. Our Internet address is http://www.drhc.com. The information on our website does not constitute a part of this prospectus.

 

Our Tax Status

 

We did not elect REIT tax status for our first taxable year ended December 31, 2004 but operated as a taxable C corporation for 2004. We intend to elect to be taxed as a REIT for federal income tax purposes for our taxable year ending on December 31, 2005 and for subsequent taxable years. If we qualify for taxation as a REIT, we generally will not be subject to federal income tax on that portion of our ordinary income or net capital gain that is currently distributed to our stockholders. Our ability to qualify as a REIT will depend upon our satisfaction of various operational and organizational requirements, including requirements related to the nature of our assets, the sources of our income, the diversity of our stock ownership and the distributions to our stockholders, including a requirement that we distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates (up to 35%) as well as state and local taxes. Even if we qualify as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property. Our taxable REIT subsidiary, Bloodstone TRS, Inc., owner of our TRS lessees, is fully subject to corporate income tax as a C corporation on its earnings and the earnings of our TRS lessees. Our non-U.S. properties may be subject to tax where they are located irrespective of our status as a U.S. REIT.

 

In order to qualify as a REIT, our income must come primarily from “rents from real property,” mortgage interest and real estate gains. Qualifying “rents from real property” include rents from interests in real property, certain charges for services customarily rendered in connection with the rental of real property, and a limited amount of rent attributable to personal property that is leased under, or in connection with, a lease of real property. However, operating revenues from a hotel property are not qualifying “rents from real property.” Therefore, we generally must lease our hotel properties to another party from whom we will derive rent income that will qualify as “rents from real property” under the REIT rules. Accordingly, we generally will lease each of our hotels to a taxable TRS lessee, except that a TRS may own hotel properties such as the Frenchman’s Reef & Morning Star Marriott Beach Resort and any other foreign hotels we acquire. Each TRS lessee will pay rent to us that generally should qualify as “rents from real property,” provided that an “eligible independent contractor” operates and manages each hotel property on behalf of the TRS lessee. We expect that each of our hotel properties will be managed by an “eligible independent contractor.” The income remaining in our TRS lessees from the payment of rent to us, management fees, operating expenses and other costs will be subject to corporate tax.

 

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Table of Contents

Restrictions on Ownership of Our Stock

 

Our charter generally prohibits any stockholder from beneficially owning more than 9.8% of our common stock or of the value of the aggregate outstanding shares of our capital stock, except that certain “look-through entities,” such as mutual funds, may beneficially own up to 15% of our common stock or of the value of the aggregate outstanding shares of our capital stock. Our bylaws, however, provide for certain exemptions from the ownership limitation, provided generally that the grant of such exemptions will not jeopardize our REIT status. Our charter also prohibits any person from owning or transferring shares of our capital stock if such ownership or transfer would result in our failure to meet certain REIT requirements under the Internal Revenue Code, or Code, or certain NYSE listing requirements.

 

Our Distribution Policy

 

We intend to distribute to our stockholders each year on a regular quarterly basis sufficient amounts of our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiary and TRS lessees, which are subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

 

    90% of our REIT taxable income determined without regard to the dividends paid deduction, plus

 

    90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus

 

    any excess non-cash income.

 

We paid a distribution of $0.0326 per share on June 28, 2005 to our stockholders of record as of June 17, 2005. Additionally, we intend to pay a full quarterly distribution of $0.1725 per share to our stockholders of record at the end of the third quarter of 2005. Starting on June 1, 2005, these two distributions represent, on an annualized basis, $0.69 per share. We expect that approximately 25.0% of our estimated initial annual distribution will represent a return of capital and that such initial annual distribution will represent 100.8% of our estimated cash available for distribution for the twelve month period ending June 16, 2006. Included in these distributions will be a distribution of our non-REIT earnings and profits. Non-REIT earnings and profits are currently estimated to be $2.3 million and consist of accumulated earnings and profits in 2004 prior to the first year for which we will elect REIT status. To the extent our initial annual distribution is in excess of 100% of our estimated cash available for distribution, we will use existing cash to fund such shortfall. We do not intend to borrow funds to fund any such shortfall.

 

The actual amount and timing of distributions, however, will be at the discretion of our board of directors and will depend upon our actual results of operations and a number of other factors deemed relevant by our board of directors. Our cash available for distribution may be less than 90% of our REIT taxable income, in which case we could be required to either sell assets or borrow funds to make distributions. Distributions to our stockholders generally will be taxable to our stockholders as ordinary income; however, because a significant portion of our investment will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distribution may constitute a tax-free return of capital rather than taxable dividend income to stockholders.

 

Selling Stockholders

 

This prospectus relates to up to 20,850,000 shares of common stock that the selling stockholders named in this prospectus may offer for sale from time to time.

 

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Table of Contents

Registration Rights Agreement

 

Pursuant to a registration rights agreement among us, our operating partnership, Friedman, Billings, Ramsey & Co., Inc. and certain holders of our common stock, entered into on July 7, 2004, which we refer to as the registration rights agreement, we were required, among other things, to file with the SEC by April 7, 2005, the resale shelf registration statement of which this prospectus is a part, registering all of the shares of common stock purchased or placed by Friedman, Billings, Ramsey & Co., Inc. in our July 2004 private placement and all of the 3.0 million shares of common stock purchased by Marriott in our July 2004 private placement. The resale shelf registration statement of which this prospectus is a part was initially filed on April 4, 2005. We are required, under the registration rights agreement, to use our commercially reasonable efforts to cause the resale shelf registration statement of which this prospectus is a part to become effective under the Securities Act as promptly as practicable, but no later than October 4, 2005 (subject to certain extensions), and to maintain the resale shelf registration statement of which this prospectus is a part continuously effective under the Securities Act for a specified period.

 

Lock-Up Agreements and Resale Blackout Periods

 

Lock-up Agreements.    Our senior executive officers and directors and Marriott have entered into lock-up agreements that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for a period of 180 days after the date of the prospectus relating to our initial public offering. In addition, subject to specified exceptions, certain of our directors and senior executive officers and Marriott also have entered into lock-up agreements in connection with our July 2004 private placement that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for 180 days after the effective date of this resale shelf registration statement. Citigroup Global Markets Inc. and Friedman, Billings, Ramsey & Co., Inc., on behalf of the underwriters in our initial public offering, may, in their discretion, release all or any portion of the common stock subject to the lock-up agreements with our directors and officers at any time without notice or stockholder approval, in which case, our other stockholders would also be released from the restrictions pursuant to the registration rights agreement.

 

Resale Blackout Periods.    We will be permitted, under limited circumstances, to suspend the use, from time to time, of this prospectus, and therefore suspend sales under the registration statement of which this prospectus is a part, for certain periods, referred to as “blackout periods,” if a majority of the independent directors of our board, in good faith, determines that we are in compliance with the terms of the registration rights agreement and that it is in our best interest to suspend the use of the registration statement of which this prospectus is a part and certain other specified events have occurred, and we provide selling stockholders written notice of the suspension. The cumulative blackout periods in any 12-month period may not exceed an aggregate of 90 days and furthermore may not exceed 30 days in any 90-day period. We may not institute a blackout period more than six times in any 24-month period.

 

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Table of Contents

SUMMARY SELECTED FINANCIAL AND OPERATING DATA

 

We present in this prospectus certain historical and pro forma financial data. We also present certain operational data and non-U.S. generally accepted accounting principles, or GAAP, financial measures on a historical and pro forma basis.

 

The summary historical financial information as of December 31, 2004, and the period from May 6, 2004 (inception) to December 31, 2004, has been derived from our historical financial statements audited by KPMG LLP, independent registered public accounting firm, whose report with respect to such financial information is included elsewhere in this prospectus. The summary historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements as of December 31, 2004 and for the period from May 6, 2004 (inception) to December 31, 2004, and the related notes. The unaudited summary historical financial information as of June 17, 2005, and for the period from January 1, 2005 to June 17, 2005, has been derived from our historical financial statements. The unaudited summary historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the unaudited consolidated financial statements as of June 17, 2005 and for the period from January 1, 2005 to June 17, 2005, and the related notes.

 

The unaudited pro forma consolidated balance sheet data as of June 17, 2005 is presented as if:

 

    the completion of our initial public offering and application of the net proceeds from our initial public offering,

 

    the acquisitions of the Vail Marriott Mountain Resort & Spa, the Capital Hotel Investment Portfolio, the SpringHill Suites Atlanta Buckhead and the Oak Brook Hills Marriott Resort,

 

    the receipt of proceeds from (i) $62.5 million mortgage debt related to the Frenchman’s Reef & Morning Star Marriott Beach Resort, (ii) $82.6 million mortgage debt related to the Marriott Los Angeles Airport, and (iii) $57.4 million mortgage debt related to the Renaissance Worthington Hotel, and

 

    a $6.0 million draw on our $75 million senior secured credit facility

 

had occurred on June 17, 2005.

 

The unaudited pro forma consolidated statement of operations and other data for the two fiscal quarters ended June 17, 2005 and the year ended December 31, 2004 are presented as if:

 

    the completion of our initial public offering and application of the net proceeds from our initial public offering,

 

    the acquisition of our initial seven hotels,

 

    the acquisitions of the Vail Marriott Mountain Resort & Spa, the Capital Hotel Investment Portfolio, the SpringHill Suites Atlanta Buckhead and the Oak Brook Hills Marriott Resort,

 

    our July 2004 private placement,

 

    our REIT election,

 

    the receipt of proceeds from (i) $62.5 million mortgage debt related to Frenchman’s Reef & Morning Star Marriott Beach Resort, (ii) $82.6 million mortgage debt related to the Marriott Los Angeles Airport, and (iii) $57.4 million mortgage debt related to the Renaissance Worthington Hotel, and

 

    a $6.0 million draw on our $75 million senior secured credit facility

 

had occurred on the first day of the periods presented.

 

These adjustments are also discussed in detail under “Unaudited Pro Forma Financial Data.” The pro forma information is not necessarily indicative of what our actual financial position or results of operations would have been as of the dates or for the periods indicated, nor does it purport to represent our future financial position or results of operations.

 

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Table of Contents

We present the following two non-GAAP financial measures throughout this prospectus that we believe are useful to investors as key measures of our operating performance: (1) earnings before interest expense, taxes, depreciation and amortization, or EBITDA; and (2) funds from operations, or FFO. These financial measures are discussed further under “Selected Financial and Operating Data.”

 

Amounts presented in accordance with our definitions of EBITDA and FFO may not be comparable to similar measures disclosed by other companies, as not all companies calculate these non-GAAP measures in the same manner. EBITDA and FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and FFO may include funds that may not be used for our discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions and other commitments or uncertainties. Although we believe that EBITDA and FFO can enhance your understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In this section and under “Selected Financial and Operating Data,” we include a quantitative reconciliation of EBITDA and FFO to the most directly comparable GAAP financial performance measure, which is net income (loss).

 

    Historical

    Pro Forma (unaudited)

 
    Period from
January 1, 2005
to June 17, 2005
(unaudited)


   

Period from
May 6, 2004 to

December 31, 2004


    Two Fiscal
Quarters Ended
June 17, 2005


    Year Ended
December 31, 2004


 

Statement of operations data:

                               

Total revenues

  $ 59,864,497     $ 7,073,864     $ 158,113,277     $ 305,238,401  

Operating costs and expenses:

                               

Hotel operating expenses

    47,817,935       6,166,890       117,997,705       242,515,275  

Corporate expenses

    7,946,739       4,114,165       7,946,739       8,384,457  

Depreciation and amortization

    8,703,130       1,053,283       15,921,772       33,050,368  
   


 


 


 


Total operating expenses

    64,467,804       11,334,338       141,866,216       283,950,100  

Operating (loss)/income

    (4,603,307 )     (4,260,474 )     16,247,061       21,288,301  

Interest and other income

    (560,827 )     (1,333,837 )     (560,827 )     (1,333,837 )

Interest expense

    6,484,739       773,101       9,513,071       20,670,182  
   


 


 


 


(Loss)/income before income taxes

    (10,527,219 )     (3,699,738 )     7,294,817       1,951,956  

Income tax (provision)/benefit

    (558,847 )     1,582,113       (651,000 )     7,991,000  
   


 


 


 


Net (loss)/income

  $ (11,086,066 )   $ (2,117,625 )   $ 6,643,817     $ 9,942,956  
   


 


 


 


FFO(1)

  $ (2,382,936 )   $ (1,064,342 )   $ 22,565,589     $ 42,993,324  
   


 


 


 


EBITDA(2)(3)

  $ 4,660,650     $ (1,873,354 )   $ 32,729,660     $ 55,672,506  
   


 


 


 


    Historical

    Pro Forma

       
   

As of

June 17, 2005
(unaudited)


   

As of

December 31, 2004


   

As of

June 17, 2005
(unaudited)


       

Balance sheet data:

                               

Property and equipment, net

  $ 345,765,289     $ 285,642,439     $ 813,418,289          

Cash and cash equivalents

    273,125,031       76,983,107       416,410          

Total assets

    657,791,443       391,691,179       866,785,245          

Total debt

    159,309,226       180,771,810       367,809,226          

Total other liabilities

    21,926,876       15,331,951       22,420,678          

Shareholders’ equity

    476,555,341       195,587,418       476,555,341          

 

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Table of Contents
    Historical (unaudited)

    Pro Forma (unaudited)

 
    Period from
January 1, 2005 to
June 17, 2005


   

Period from
May 6, 2004 to

December 31, 2004


    Two Fiscal
Quarters Ended
June 17, 2005


    Year Ended
December 31, 2004


 

Statistical data:

                               

Number of hotels

    7       6       14       14  

Number of rooms

    2,357       1,870       5,637       5,637  

Occupancy

    74.5 %     67.9 %     73.3 %     71.5 %

ADR

  $ 144.90     $ 184.22     $ 149.47     $ 134.51  

RevPAR

  $ 107.97     $ 125.02     $ 109.55     $ 96.24  

(1) Funds from operations (FFO), as defined by the National Association of Real Estate Investment Trusts (NAREIT), is net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). The calculation of FFO may vary from entity to entity, thus our presentation of FFO may not be comparable to other similarly titled measures of other reporting companies. FFO is not intended to represent cash flows for the period. FFO has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

 

  FFO is a supplemental industry-wide measure of REIT operating performance, the definition of which was first proposed by NAREIT in 1991 (and clarified in 1995, 1999 and 2002). Since the introduction of the definition by NAREIT, the term has come to be widely used by REITs. Historical GAAP 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, many industry investors have considered presentations of operating results for real estate companies that use historical GAAP cost accounting to be insufficient by themselves. Accordingly, we believe FFO (combined with our primary GAAP presentations) help improve our stockholders’ ability to understand our operating performance. We only use FFO as a supplemental measure of operating performance. The following is a reconciliation between net income (loss) and FFO:

 

     Historical

    Pro Forma (unaudited)

    

Period from
January 1, 2005

to June 17,
2005

(unaudited)


   

Period from
May 6, 2004 to

December 31, 2004


   

Two Fiscal Quarters

Ended

June 17, 2005


   Year Ended
December 31, 2004


Net (loss)/income

   $ (11,086,066 )   $ (2,117,625 )   $ 6,643,817    $ 9,942,956

Real estate related depreciation and amortization

     8,703,130       1,053,283       15,921,772      33,050,368
    


 


 

  

FFO

   $ (2,382,936 )   $ (1,064,342 )   $ 22,565,589    $ 42,993,324
    


 


 

  

 

(2)

EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure for us and for our stockholders and is a complement to net income and other financial performance measures provided in accordance with GAAP. We use EBITDA to measure the financial performance of our operating hotels because it excludes expenses such as depreciation and amortization, taxes and interest expense, which are not indicative of operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on a variety of factors unrelated to the hotels’ financial performance, we can more accurately assess the financial performance of our hotels. Under GAAP, hotel properties are recorded at historical cost at the time of acquisition and are depreciated on a straight line basis. By excluding depreciation and amortization, we believe EBITDA provides a basis for measuring the financial performance of hotels unrelated to historical cost. However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to

 

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Table of Contents
 

operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity. The following is a reconciliation between net income (loss) and EBITDA:

 

     Historical

    Pro Forma (unaudited)

 
    

Period from
January 1, 2005
to June 17,
2005

(unaudited)


   

Period from
May 6, 2004

to

December 31, 2004


   

Two Fiscal Quarters

Ended

June 17, 2005


   Year Ended
December 31, 2004


 

Net (loss)/income

   $ (11,086,066 )   $ (2,117,625 )   $ 6,643,817    $ 9,942,956  

Interest expense

     6,484,739       773,101       9,513,071      20,670,182  

Income tax expense/(benefit)

     558,847       (1,582,113 )     651,000      (7,991,000 )

Depreciation and amortization

     8,703,130       1,053,283       15,921,772      33,050,368  
    


 


 

  


EBITDA

   $ 4,660,675     $ (1,873,354 )   $ 32,729,660    $ 55,672,506  
    


 


 

  


 

(3) The fiscal year ended December 31, 2004 and the two fiscal quarters ended June 17, 2005 EBITDA includes the impact of approximately $6.9 million and $3.2 million, respectively, of non-cash straight-line ground rent expense recorded for the Bethesda Marriott Suites, the Marriott Griffin Gate Resort golf course and Courtyard Manhattan/Fifth Avenue ground leases.

 

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RISK FACTORS

 

An investment in our common stock involves a number of risks. The risks described below represent the material risks you should carefully consider before making an investment decision. These risks may materially and adversely affect our business, liquidity, financial condition and results of operations, in which case the value of our common stock could decline significantly and you could lose all or a part of your investment. The risk factors described below are not the only risks that may affect us. Some statements in this prospectus, including statements in the following risk factors, constitute forward looking statements. Please refer to the section entitled “Forward Looking Statements.”

 

Risks Related to Our Business, Growth Strategy and Investment Sourcing Relationship with Marriott

 

We were formed in May 2004 and commenced operations in July 2004 and have a limited operating history.

 

We have only recently been organized and commenced operations and, as a result, we have a limited operating history. We are subject to the risks generally associated with the formation of any new business, including unproven business models, untested plans, uncertain market acceptance and competition with established businesses. Consequently, it may be difficult for you to evaluate our historical performance.

 

Our management has no prior experience operating a REIT and limited experience operating a public company and therefore may have difficulty in successfully and profitably operating our business.

 

Prior to joining our company, our management had no experience operating a REIT and limited experience operating a public company. As a result, we cannot assure you that we will be able to successfully operate as a REIT or execute our business strategies as a public company and you should be especially cautious in drawing conclusions about the ability of our management team to execute our business plan.

 

We cannot assure you that we will qualify, or remain qualified, as a REIT.

 

We currently plan to elect to be taxed as a REIT for our taxable year ending December 31, 2005 and subsequent taxable years, and we expect to qualify as a REIT for such taxable year and future taxable years, but we cannot assure you that we will qualify, or will remain qualified, as a REIT. If we fail to qualify as a REIT for federal income tax purposes, all of our earnings will be subject to federal income taxation, which will reduce the amount of cash available for distribution to our stockholders.

 

Our ability to pay our estimated initial annual distribution, which represents approximately 100.8% of our estimated cash available for distribution for the twelve months ending June 16, 2006, depends upon our actual operating results and we may have to borrow funds to pay this distribution.

 

We paid a distribution of $0.0326 per share on June 28, 2005 to our stockholders of record as of June 17, 2005. Starting on June 1, 2005, we expect to pay a distribution of $0.69 per share on an annualized basis, which represents approximately 100.8% of our estimated cash available for distribution for the twelve months ending June 16, 2006. This distribution amount is currently expected to exceed our actual cash flows from operations. To the extent our initial annual distribution is in excess of 100% of our estimated cash available for distribution, we will use existing cash to fund such shortfall. We do not intend to borrow funds to fund any such shortfall. However, if existing cash is insufficient to fund any such shortfall, we may either need to borrow funds to make up the shortfall or reduce the amount of the distribution. Our use of debt to fund distributions will decrease the cash available for distributions to our stockholders. Our current loan agreements restrict our ability to borrow to fund distributions. If we need to borrow funds on a regular basis to meet our distribution requirements or if we reduce the amount of the distribution, our stock price may be adversely affected.

 

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Failure of the hotel industry to continue to improve may adversely affect our ability to execute our business strategies, which, in turn, would adversely affect our ability to make distributions to our stockholders.

 

Our business strategy is focused in the hotel industry, and we cannot assure you that hotel industry fundamentals will continue to improve. Economic slowdown and world events outside our control, such as terrorism, have adversely affected the hotel industry in the recent past and if these events reoccur, may adversely affect the industry in the future. In the event conditions in the hotel industry do not continue to improve as we expect, our ability to execute our business strategies will be adversely affected, which, in turn, would adversely affect our ability to make distributions to our stockholders.

 

Most of our hotels are upper upscale and upscale hotels; the upper upscale segments of the hotel market are highly competitive and generally subject to greater volatility than other segments of the market, which could harm our profitability.

 

The upper upscale and upscale segments of the hotel business are highly competitive. Our hotels compete on the basis of location, room rates and quality, service levels, reputation and reservation systems, among many other factors. There are many competitors in our hotel chain scale segments, and many of these competitors have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and rental revenue at our hotels, which would harm our operations. Also, over-building in the hotel industry may increase the number of rooms available and may decrease the average occupancy and room rates at our hotels. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale and upscale hotels when compared to other classes of hotels.

 

We are experiencing and expect to continue to experience rapid growth and may not be able to adapt our management and operational systems to integrate the hotel properties we expect to invest in and reposition without unanticipated disruption or expense.

 

Since we commenced operations in July 2004, we have experienced rapid growth and have developed our business strategies based on the expectation of continued rapid growth. We cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems, or hire and retain qualified operational staff to integrate and manage our investment in or repositioning of any hotel properties. Our failure to successfully integrate and manage acquisitions could have a material adverse effect on our financial condition and results of operations and our ability to make distributions to our stockholders.

 

We face competition for the acquisition of hotels and we may not be successful in identifying or completing hotel acquisitions that meet our criteria, which may impede our growth.

 

One component of our business strategy is expansion through acquisitions, and we may not be successful in identifying or completing acquisitions that are consistent with our strategy. We compete with institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. This competition for hotel investments may increase the price we pay for hotels and these competitors may succeed in acquiring those hotels that we seek to acquire. Furthermore, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater marketing and financial resources, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of entities competing for suitable hotels may increase in the future, which would increase demand for these hotels and the prices we must pay to acquire them. If we pay higher prices for hotels, our returns on investment and profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield the returns we expect and may result in stockholder dilution.

 

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Our success depends in part on the success of Marriott.

 

All of our current hotel properties are managed by Marriott, except for the Vail Marriott Mountain Resort & Spa, which is franchised by Marriott. As a result, our success is dependent in part on the continued success of Marriott and its brands. If market recognition or the positive perception of these Marriott brands is reduced or compromised, the goodwill associated with Marriott branded hotels may be adversely affected and the results of operations of our hotel properties managed by Marriott may be adversely affected. Similarly, if Marriott experiences a general decline in its business, no longer has access to high quality investment opportunities or experiences a reduction in its access to hotel investment opportunities, our business strategies could be adversely affected.

 

Our investment sourcing relationship with Marriott is non-exclusive and based on a non-binding understanding that may be changed or terminated at any time, which could adversely affect our ability to execute our business strategies, which in turn, would adversely affect our ability to make distributions to our stockholders.

 

Our investment sourcing relationship with Marriott is non-exclusive and based on a non-binding understanding that creates limited legal obligations. Both parties are free to terminate or attempt to change our investment sourcing relationship at any time, without notice or explanation. While Marriott intends to provide us a “first look” at hotel investment opportunities known to Marriott that are consistent with our stated business strategies, it will not provide us with opportunities where it is contractually or ethically prohibited from doing so, or where Marriott believes it would be damaging to existing Marriott relationships. The only limited legal obligation that will arise from this understanding is that we and Marriott have agreed for a two-year period beginning on July 1, 2004 not to enter into certain strategic agreements with other third parties. While we retain the right to utilize any hotel brand and any hotel management company, we believe that our utilization of brands or hotel management companies other than Marriott could adversely affect our investment sourcing relationship with Marriott. Termination of, or an adverse change in, our investment sourcing relationship with Marriott may limit our sources of acquisition and investment opportunities and therefore adversely affect our ability to execute our business strategies. Our inability to execute our business strategies would adversely affect our ability to make distributions to our stockholders.

 

Our investment sourcing relationship with Marriott may not result in the acquisition of any future hotel properties.

 

We believe that access to information about hotel property investment opportunities known to Marriott will provide us with a competitive advantage by providing us with knowledge about a potential investment opportunity before it has been widely marketed. Therefore, while we expect that this competitive advantage will lead to favorable investments by us, we cannot assure you that this “first look” will result in the acquisition of any future hotel properties or provide us with a competitive advantage. Additionally, as a result of our investment sourcing relationship with Marriott, we may not be aware, or in a position to take advantage, of favorable investment opportunities known to other hotel operators.

 

Marriott may encourage us to enter into transactions or hotel management agreements that are favorable to Marriott.

 

Pursuant to our investment sourcing relationship with Marriott, we have pursued and intend to continue to pursue, hotel property investment opportunities referred to us by Marriott, and we intend to utilize Marriott as our preferred hotel management company. It is possible that in connection with a particular hotel property acquisition or hotel management agreement, Marriott will encourage us to enter into an acquisition or hotel management agreement with terms that are more favorable to Marriott than we might otherwise agree to with a third party. In order to maintain our investment sourcing relationship with Marriott, we may not seek the most advantageous terms with Marriott with regard to a particular acquisition or hotel management agreement as we might otherwise seek with third parties.

 

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Our success depends in part on maintaining good relations with Marriott.

 

Our senior executive officers are familiar with the Marriott management, strategy and processes but do not have significant experience with other brand companies or hotel management companies. Over the last several years, Marriott has been involved in contractual and other disputes with owners of the hotel properties it manages. Although we currently maintain good relations with Marriott, we cannot assure you that disputes between us and Marriott regarding the management of our properties or the services it provides to us will not arise. Should our relationship with Marriott deteriorate, we believe that one of our competitive advantages could be eliminated. In particular, we may be denied access to information about which hotel properties may be available for sale and how such hotel properties may be repositioned. As a result, we would seek to grow by investing in hotel properties that are being competitively pursued in the marketplace, which may result in our paying higher prices for assets or being denied access to otherwise attractive hotel investment opportunities.

 

Our objectives may conflict from time to time with the objectives of Marriott, which conflict may adversely impact the operation and profitability of a hotel property.

 

Marriott and its affiliates own, operate or franchise properties other than our hotel properties, including properties that directly compete with our hotel properties. Therefore, Marriott may have short-term or long-term goals and objectives that conflict with our own, including with respect to the brands under which our hotel properties operate. These differences may be significant and may include the remaining term of any hotel management agreement, trade area restrictions with respect to competition by Marriott or its affiliates or differing policies, procedures or practices. As a result of these potentially differing objectives, Marriott may present to us, and we may invest in, hotel investment opportunities, and enter into management agreements, that are less favorable to us than other alternatives. These differing objectives could result in a deterioration in our relationship with Marriott and may adversely affect our ability to execute our business strategies, which in turn, would adversely affect our ability to make distributions to our stockholders.

 

Our results of operations are highly dependent on the management of our hotel properties by third-party hotel management companies.

 

In order to qualify as a REIT, we cannot operate our hotel properties or participate in the decisions that affect the daily operations of our hotel properties. Our TRS lessees may not operate these hotel properties and, therefore, they must enter into third-party hotel management agreements with one or more eligible independent contractors (including Marriott). Thus, third-party hotel management companies that enter into management contracts with our TRS lessees will control the daily operations of our hotel properties.

 

Under the terms of the hotel management agreements that we have entered into with Marriott (or its affiliates), or will enter into in the future with Marriott or other third-party hotel management companies, our ability to participate in operating decisions regarding our hotel properties will be limited. We currently rely and will continue to rely on these hotel management companies to adequately operate our hotel properties under the terms of the hotel management agreements. We do not have the authority to require any hotel property to be operated in a particular manner or to govern any particular aspect of its operations (for instance, setting room rates). Thus, even if we believe our hotel properties are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, ADRs and operating profits, we may not have sufficient rights under our hotel management agreements to enable us to force the hotel management company to change its method of operation. We can only seek redress if a hotel management company violates the terms of the applicable hotel management agreement with the TRS lessee, and then only to the extent of the remedies provided for under the terms of the hotel management agreement. Our current management agreements are generally non-terminable, subject to certain exceptions for cause (see “Our Principal Agreements—Our Hotel Management Agreements”), and in the event that we need to replace any of our hotel management companies pursuant to termination for cause, we may experience significant disruptions at the affected properties, which may adversely affect our ability to make distributions to our stockholders.

 

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Our current hotel management agreements contain certain restrictions against the sale of a hotel property to certain parties, which may affect the value of our hotel properties.

 

The hotel management agreements that we have entered into with Marriott (and those we expect to enter into in the future) contain provisions restricting our ability to dispose of our hotel properties to certain parties, which, in turn, may have an adverse affect on the value of our hotel properties. Marriott’s hotel management agreements generally prohibit the sale of a hotel property to:

 

    certain competitors of Marriott;

 

    purchasers who are insufficiently capitalized; or

 

    purchasers who might jeopardize certain liquor or gaming licenses.

 

Our mortgage agreements and ground leases contain certain provisions that may limit our ability to sell our hotel properties.

 

In order to assign or transfer our rights and obligations under certain of our mortgage agreements, we generally must:

 

    obtain the consent of the lender;

 

    pay a fee equal to a fixed percentage of the outstanding loan balance; and

 

    pay any costs incurred by the lender in connection with any such assignment or transfer.

 

Additionally, our ground lease agreements with respect to Bethesda Marriott Suites and Salt Lake City Marriott Downtown require consent of the lessor for assignment or transfer. These provisions of our mortgage agreements and ground leases may limit our ability to sell our hotel properties which, in turn, could adversely impact the price realized from any such sale.

 

Our current hotel management agreements contain provisions requiring us to pay certain fees to the property manager even if the hotel property is not profitable, which may adversely affect our ability to sell the hotel property.

 

The hotel management agreements that we have entered into with Marriott (and those we expect to enter into in the future) contain provisions that require us to pay substantial base management fees to Marriott irrespective of whether the hotels are profitable and incentive management fees that represent a substantial portion of the net operating income from the particular hotel property. As a result, because our hotel properties would have to be sold subject to the applicable hotel management agreement, these fee payment provisions may deter some potential purchasers and could adversely impact the price realized from any such sale.

 

Our current hotel management agreements are generally long term, which may adversely affect our ability to sell the hotel properties.

 

Our current hotel management agreements that we have entered into with Marriott contain initial terms ranging from fifteen to forty years and certain agreements have renewal periods, at the option of the property manager, of ten to forty-five years. Because our hotel properties would have to be sold subject to the applicable hotel management agreement, the term length of a hotel management agreement may deter some potential purchasers and could adversely impact the price realized from any such sale.

 

Our TRS lessee structure subjects us to the risk of increased operating expenses.

 

Our hotel management agreements require us to bear the operating risks of our hotel properties. Our operating risks include not only changes in hotel revenues and changes in our TRS lessees’ ability to pay the rent due under the leases, but also increased operating expenses, including, among other things:

 

    wage and benefit costs;

 

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    repair and maintenance expenses;

 

    energy costs;

 

    property taxes;

 

    insurance costs; and

 

    other operating expenses.

 

Any decreases in hotel revenues or increases in operating expenses could have a materially adverse effect on our earnings and cash flow.

 

Our ability to make distributions to our stockholders is subject to fluctuations in our financial performance, operating results and capital improvement requirements.

 

As a REIT, we generally will be required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. In the event of future downturns in our operating results and financial performance or unanticipated capital improvements to our hotel properties, we may be unable to declare or pay distributions to our stockholders. The timing and amount of distributions are in the sole discretion of our board of directors, which will consider, among other factors, our actual results of operations, debt service requirements, capital expenditure requirements for our properties and our operating expenses. We may not generate sufficient cash in order to fund distributions to our stockholders.

 

Among the factors which could adversely affect our results of operations and our distributions to stockholders are reduced net operating profits or operating losses, increased debt service requirements and capital expenditures at our hotel properties. Among the factors which could reduce our net operating profits are decreases in hotel property revenues and increases in hotel property operating expenses. Hotel property revenue can decrease for a number of reasons, including increased competition from a new supply of rooms and decreased demand for rooms. These factors can reduce both occupancy and room rates at our hotel properties.

 

If we were to default on our secured debt in the future, the loss of any property securing the debt would harm our ability to satisfy other obligations.

 

A substantial portion of our debt (including the three-year, $75.0 million senior secured revolving credit facility we entered into with Wachovia Bank, National Association, Citicorp North America, Inc. and Bank of America, N.A. on July 8, 2005) is secured by first mortgage deeds of trust on our properties or by pledges of our equity interests in our subsidiary entities that own our properties. Although our existing secured debt documents do not contain cross-default provisions, using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property that secures any loans for which we are in default. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders. If this occurs, our financial condition, cash flow and ability to satisfy our other debt obligations or ability to pay dividends may be adversely affected.

 

Future debt service obligations could adversely affect our operating results, may require us to liquidate our properties, may jeopardize our tax status as a REIT and limit our ability to make distributions to our stockholders.

 

We currently maintain a policy that limits our total debt level to no more than 60% of our aggregate property investment and repositioning costs. Our board of directors, however, may change or eliminate this debt

 

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limit, and/or the policy itself, at any time without the approval of our stockholders. In the future, we and our subsidiaries may be able to incur substantial additional debt, including secured debt. Incurring such debt could subject us to many risks, including the risks that:

 

    our cash flow from operations will be insufficient to make required payments of principal and interest;

 

    we may be more vulnerable to adverse economic and industry conditions;

 

    we may be required to dedicate a substantial portion of our cash flow from operations to the repayment of our debt, thereby reducing the cash available for distribution to our stockholders, funds available for operations and capital expenditures, future investment opportunities or other purposes;

 

    the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and

 

    the use of leverage could adversely affect our stock price and the ability to make distributions to our stockholders.

 

If we violate covenants in our future indebtedness agreements, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on favorable terms, if at all.

 

If we obtain debt in the future and do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance this debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancings, increases in interest expense could adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our hotel properties on disadvantageous terms, potentially resulting in losses adversely affecting cash flow from operating activities. In addition, we may place mortgages on our hotel properties to secure our line of credit or other debt. To the extent we cannot meet these debt service obligations, we risk losing some or all of those properties to foreclosure. Additionally, our debt covenants could impair our planned strategies and, if violated, result in a default of our debt obligations.

 

Higher interest rates could increase debt service requirements on our floating rate debt and could reduce the amounts available for distribution to our stockholders, as well as reduce funds available for our operations, future investment opportunities or other purposes. We may obtain in the future one or more forms of interest rate protection—in the form of swap agreements, interest rate cap contracts or similar agreements—to “hedge” against the possible negative effects of interest rate fluctuations. However, we cannot assure you that any hedging will adequately mitigate the adverse effects of interest rate increases or that counterparties under these agreements will honor their obligations. In addition, we may be subject to risks of default by hedging counter-parties. Adverse economic conditions could also cause the terms on which we borrow to be unfavorable.

 

Our existing indebtedness contains financial covenants that could limit our operations and our ability to make distributions to our stockholders.

 

Our existing indebtedness contains financial and operating covenants, such as net worth requirements, fixed charge coverage and debt ratios and other limitations which will restrict our ability to make distributions or other payments to our stockholders, sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. In addition, our existing indebtedness contains restrictions (including lockbox and cash management provisions) that may under circumstances specified in the loan agreements prohibit our subsidiaries that own our hotels from making distributions or paying dividends, repaying loans to us or other subsidiaries or transferring any of their assets to us or another subsidiary. Failure to meet our financial covenants could result from, among other things, changes in our results of operations, the incurrence of debt or changes in general economic conditions. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. Failure to comply with any of the covenants in our senior secured revolving credit facility could result in a default under one or more of our debt instruments. This could

 

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cause one or more of our lenders to accelerate the timing of payments and could harm our business, operations, financial condition or liquidity. Advances under our senior secured revolving credit facility will be subject to borrowing base requirements based on the hotels securing the facility.

 

Our ownership of properties through ground leases exposes us to the loss of such properties upon breach or termination of the ground leases.

 

We acquired interests in four hotel properties and the golf course associated with a fifth property by acquiring a leasehold interest in land underlying the property, and we may acquire additional hotel properties in the future through the purchase of hotel properties subject to ground leases. As lessee under ground leases, we are exposed to the possibility of losing the hotel property, or a portion of the hotel property, upon termination, or an earlier breach by us, of the ground lease.

 

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturer’s financial condition and disputes between us and our co-venturers.

 

We may co-invest in the future with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In this event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt, fail to fund their share of required capital contributions, make dubious business decisions or block or delay necessary decisions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

 

Our success depends on key personnel whose continued service is not guaranteed.

 

We depend on the efforts and expertise of our senior executive officers to manage our day-to-day operations and strategic business direction. The loss of any of their services could have an adverse effect on our operations.

 

We have entered into an agreement with each of our senior executive officers that provides each of them benefits in the event his employment is terminated by us without cause, by him for good reason, or under certain circumstances following a change of control of our company.

 

We have entered into an agreement with each of our senior executive officers, except Mr. Mahoney, that provides each of them with severance benefits if his employment is terminated by us without cause, by him for good reason, or with respect to all our senior executive officers, under certain circumstances following a change of control of our company. Certain of these benefits and the related tax indemnity could prevent or deter a change of control of our company that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

 

A portion of our revenues may be attributable to operations outside of the United States, which will subject us to different legal, monetary and political risks, as well as currency exchange risks, and may cause unpredictability in a significant source of our cash flows that could adversely affect our ability to make distributions to our stockholders.

 

We may acquire selective hotel properties outside of the United States. International investments and operations generally are subject to various political and other risks that are different from and in addition to risks in U.S. investments, including:

 

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    the enactment of laws prohibiting or restricting the foreign ownership of property;

 

    laws restricting us from removing profits earned from activities within the foreign country to the United States, including the payment of distributions, i.e., nationalization of assets located within a country;

 

    variations in the currency exchange rates, mostly arising from revenues made in local currencies;

 

    change in the availability, cost and terms of mortgage funds resulting from varying national economic policies;

 

    changes in real estate and other tax rates and other operating expenses in particular countries; and

 

    more stringent environmental laws or changes in such laws.

 

In addition, currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Liabilities arising from differing legal, monetary and political risks as well as currency fluctuations could adversely affect our financial condition, operating results and our ability to make distributions to our stockholders. In addition, the requirements for qualifying as a REIT limit our ability to earn gains, as determined for federal income tax purposes, attributable to changes in currency exchange rates. These limitations may significantly limit our ability to invest outside of the United States or impair our ability to qualify as a REIT.

 

Any properties we invest in outside of the United States may be subject to foreign taxes.

 

In the future, in addition to the Frenchman’s Reef & Morning Star Marriott Beach Resort, which we acquired as part of the Capital Hotel Investment Portfolio, we may invest in additional hotel properties located outside the United States. Jurisdictions outside the United States will generally impose taxes on our hotel properties and our operations within their jurisdictions. To the extent possible, we will structure our investments and activities to minimize our foreign tax liability, but we will likely incur foreign taxes with respect to non-U.S. properties. For example, we own the Frenchman’s Reef & Morning Star Marriott Beach Resort through a Virgin Islands corporation, which we have elected to be treated as a TRS. The income of this subsidiary is subject to U.S. Virgin Islands corporate income tax, although this ownership structure allows us to take advantage of certain favorable tax benefits in the U.S. Virgin Islands that reduce the effective rate of U.S. Virgin Islands tax. We expect the favorable U.S. Virgin Islands tax arrangement will continue for approximately seven more years and may be extended if certain conditions are met. However, there can be no assurance that this favorable U.S. Virgin Islands tax arrangement will be extended and the benefits are subject to change by the U.S. Congress. If these tax benefits are terminated, the income of our Virgin Islands corporate subsidiary will be subject to U.S. Virgin Islands corporate income tax at regular U.S. Virgin Islands rates. Moreover, the requirements for qualification as a REIT may preclude us from always using the structure that minimizes our foreign tax liability. Furthermore, because we expect to qualify as a REIT, we and our stockholders will derive little or no benefit from the foreign tax credits arising from the foreign taxes we pay. As a result, foreign taxes we pay will reduce our income and available cash flow from our foreign hotel properties, which, in turn, could reduce our ability to make distributions to our stockholders.

 

Risks Related to the Hotel Industry

 

Our ability to make distributions to our stockholders may be affected by factors unique to the hotel industry.

 

Operating Risks.    Our hotel properties are and will continue to be subject to various operating risks common to the hotel industry, many of which are beyond our control, including:

 

    competition from other hotel properties that may be located in our markets, some of which may have greater marketing and financial resources than us;

 

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    an over-supply or over-building of hotel properties in our markets, which could adversely affect occupancy rates and revenues at our properties;

 

    dependence on business and commercial travelers and tourism;

 

    increases in energy costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;

 

    increases in operating costs due to inflation and other factors that may not be offset by increased room rates;

 

    necessity for periodic capital reinvestment to repair and upgrade our hotel properties;

 

    changes in interest rates and in the availability, cost and terms of debt financing;

 

    changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

 

    adverse effects of a downturn in the hotel industry; and

 

    risks generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.

 

These factors could reduce the net operating profits of our TRS lessees, which in turn could adversely affect our ability to make distributions to our stockholders.

 

Competition for Acquisitions.    We compete for hotel investment opportunities with competitors that may have a different appetite for risk than we do or have substantially greater financial resources than we do. This competition may generally limit the number of suitable investment opportunities offered to us and may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new hotel properties on attractive terms.

 

Seasonality of Hotel Industry.    Some hotel properties that we have acquired or may acquire in the future have business that is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our quarterly earnings may be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues and to make distributions to our stockholders.

 

Investment Concentration in Single Industry.    Our entire business is related to the hotel industry. Therefore, a downturn in the hotel industry, in general, will have a material adverse effect on our hotels’ revenues and the net operating profits of our TRS lessees and amounts available for distribution to our stockholders.

 

Capital Expenditures.    Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:

 

    construction cost overruns and delays;

 

    a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms;

 

    uncertainties as to market demand or a loss of market demand after capital improvements have begun; and

 

    disputes with franchisors/managers regarding compliance with relevant management/franchise agreements.

 

The costs of these capital improvements could adversely affect our financial condition and amounts available for distribution to our stockholders.

 

The development of hotel properties is subject to timing, budgeting and other risks that may adversely affect our operating results and our ability to make distributions to stockholders.

 

We may selectively engage in new developments of hotel properties as market conditions warrant. Developing hotel properties involves a number of risks, including risks associated with:

 

    construction delays or cost overruns that may increase project costs;

 

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    receipt of zoning, occupancy and other required governmental permits and authorizations;

 

    development costs incurred for projects that are not pursued to completion;

 

    acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

 

    ability to raise capital; and

 

    governmental restrictions on the nature or size of a project.

 

We cannot assure you that any development project will be completed on time or within budget. Our inability to complete a project on time or within budget may adversely affect our operating results and our ability to make distributions to our stockholders.

 

The hotel industry is capital intensive and our inability to obtain financing could limit our growth.

 

Our hotel properties require periodic capital expenditures and renovations to remain competitive and the acquisition of additional hotel properties requires significant capital expenditures. We may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we generally must distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to maintain our REIT tax status. As a result, our ability to fund capital expenditures, or investments through retained earnings, is very limited. Consequently, we will rely upon the availability of debt or equity capital to fund our investments and capital improvements, but these sources of funds may not be available on favorable terms and conditions. Neither our charter nor our bylaws limits the amount of debt that we can incur; however, we may not be able to obtain additional equity or debt financing on favorable terms, if at all.

 

The events of September 11, 2001, recent economic trends, the military action in Afghanistan and Iraq and the possibility of future terrorist acts and military action have adversely affected the hotel industry generally, and similar future events could adversely affect the industry in the future.

 

Before September 11, 2001, hotel owners and operators had begun experiencing declining RevPAR, as a result of the slowing U.S. economy. The terrorist attacks of September 11, 2001 and the after-effects (including the possibility of more terror attacks in the United States and abroad), combined with economic trends and the U.S.-led military action in Afghanistan and Iraq, substantially reduced business and leisure travel and hotel industry RevPAR generally. If the economy once again declines or there is a future terrorist attack in the United States, our business may be materially and adversely affected. We cannot predict the extent to which these factors will directly or indirectly impact your investment in our common stock, the hotel industry or our operating results in the future. Declining RevPAR at hotels that we acquire would reduce our net income and restrict our ability to fund capital improvements at our hotels and our ability to make distributions to stockholders necessary to maintain our status as a REIT. Additional terrorist attacks, acts of war or similar events could have further material adverse effects on the markets on which shares of our common stock will trade, the hotel industry at large and our operations in particular.

 

Potential future outbreaks of contagious diseases could have a material adverse effect on our revenues and results of operations due to decreased travel, especially in areas significantly affected by the disease.

 

In 2003, the outbreak of Severe Acute Respiratory Syndrome, or SARS, drastically decreased travel in areas significantly affected by the disease. Potential future outbreaks of SARS or other contagious diseases could adversely impact travel to areas where we have hotel properties, which could have a material adverse effect on our revenues or results of operations.

 

We place significant reliance on technology.

 

The hotel industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, procurement, reservation systems, customer loyalty programs,

 

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distribution and guest amenities. These technologies can be expected to require refinements and there is the risk that advanced new technologies will be introduced. If various systems and technologies become outdated or new technology is required, we may not be able to replace outdated technology or introduce or achieve expected benefits from new technology as quickly as our competition, within budgeted costs for such technology, or at all, which in turn may have an adverse effect on our revenues and results of operations.

 

We may be adversely affected by increased use of business-related technology which may reduce the need for business-related travel.

 

The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, demand for hotel properties may decrease and our profitability may be adversely affected.

 

Uninsured and underinsured losses with respect to our hotel properties could adversely affect our operating results and our ability to make distributions to our stockholders.

 

We have acquired and intend to maintain comprehensive insurance on each of our hotel properties, including liability, terrorism, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel property owners. We cannot assure you that such coverage will be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods and losses from foreign terrorist activities such as those on September 11, 2001 or losses from domestic terrorist activities such as the Oklahoma City bombing may not be insurable or may not be insurable on reasonable economic terms. Future lenders may require such insurance and our failure to obtain such insurance could constitute a default under loan agreements. Depending on our access to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default could have a material adverse effect on our results of operations and ability to obtain future financing.

 

In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel property, as well as the anticipated future revenue from that particular hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position with regard to the damaged or destroyed property.

 

Noncompliance with governmental regulations could adversely affect our operating results.

 

Environmental Matters

 

Our hotel properties are and will be subject to various federal, state and local environmental laws. Under these laws, courts and government agencies may have the authority to require us, as owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under the environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment. A person that arranges for the disposal or treatment, or transports for disposal or treatment, a

 

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hazardous substance at a property owned by another person may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property.

 

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, certain laws require a business using chemicals (such as swimming pool chemicals at a hotel property) to manage them carefully and to notify local officials that the chemicals are being used.

 

We could be responsible for the costs associated with a contaminated property. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our stockholders. We cannot assure you that future laws or regulations will not impose material environmental liabilities or that the current environmental condition of our hotel properties will not be affected by the condition of the properties in the vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

 

We may face liability regardless of:

 

    our knowledge of the contamination;

 

    the timing of the contamination;

 

    the cause of the contamination; or

 

    the party responsible for the contamination of the property.

 

Although we have taken and will take commercially reasonable steps to assess the condition of our properties, there may be unknown environmental problems associated with our properties. If environmental contamination exists on our properties, we could become subject to strict, joint and several liability for the contamination by virtue of our ownership interest. In addition, we are obligated to indemnify our lenders for any liability they may incur in connection with a contaminated property.

 

The presence of hazardous substances on a property may adversely affect our ability to sell the property and could cause us to incur substantial remediation costs. The discovery of environmental liabilities attached to our properties could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to our stockholders.

 

Americans with Disabilities Act and Other Changes in Governmental Rules and Regulations

 

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or private litigants winning damages. If we are required to make substantial modifications to our hotel properties, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected.

 

General Risks Related to the Real Estate Industry

 

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

 

Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties or investments in our portfolio in response to changing economic, financial and investment conditions

 

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may be limited. In addition, because all of our hotel management agreements contain restrictions on our ability to dispose of our hotel properties, are typically long-term and do not terminate in the event of a sale, our ability to sell hotel properties may be further limited. The real estate market is affected by many factors that are beyond our control, including:

 

    adverse changes in international, national, regional and local economic and market conditions;

 

    changes in interest rates and in the availability, cost and terms of debt financing;

 

    changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

 

    the ongoing need for capital improvements, particularly in older structures;

 

    changes in operating expenses; and

 

    civil unrest, acts of God, including earthquakes, floods and other natural disasters and acts of war or terrorism, including the consequences of terrorist acts such as those that occurred on September 11, 2001, which may result in uninsured losses.

 

We may decide to sell our hotel properties in the future. We cannot predict whether we will be able to sell any hotel property or investment for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property or loan.

 

We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a hotel property, we may agree to lock-out provisions that materially restrict us from selling that hotel property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that hotel property. These facts and any others that would impede our ability to respond to adverse changes in the performance of our hotel properties could have a material adverse effect on our operating results and financial condition, as well as our ability to make distributions to stockholders.

 

Increases in our property taxes could adversely affect our ability to make distributions to our stockholders.

 

Each of our hotel properties is subject to real and personal property taxes. These taxes on our hotel properties may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our ability to make distributions to our stockholders could be adversely affected.

 

Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

 

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of mold to which our hotel guests or employees could be exposed at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would reduce our cash available for distribution. In addition, exposure to mold by our guests or employees, management company employees or others could expose us to liability if property damage or health concerns arise.

 

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Risks Related to Our Organization and Structure

 

Our failure to qualify as a REIT under the federal tax laws will result in adverse tax consequences.

 

The federal income tax laws governing REITs are complex.

 

We intend to operate in a manner that will qualify us as a REIT under the federal income tax laws beginning January 1, 2005. The REIT qualification requirements are extremely complex, however, and interpretations of the federal income tax laws governing qualification as a REIT are limited. Accordingly, we cannot be certain that we will be successful in operating so that we can qualify as a REIT. At any time, new laws, interpretations, or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT. We have not applied for or obtained a ruling from the Internal Revenue Service that we will qualify as a REIT.

 

Failure to qualify as a REIT would subject us to federal income tax.

 

If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay any such tax. If we cease to be a REIT, we no longer would be required to distribute most of our taxable income to our stockholders. Unless we were entitled to relief under certain federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

 

Failure to make required distributions would subject us to tax.

 

In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. As a result, for example, of differences between cash flow and the accrual of income and expenses for tax purposes, or of nondeductible expenditures, our REIT taxable income in any given year could exceed our cash available for distribution. In addition, to the extent we may retain earnings of our TRS lessees in those subsidiaries, such amount of cash would not be available for distribution to our stockholders to satisfy the 90% distribution requirement. Accordingly, we may be required to borrow money or sell assets to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise tax in a particular year.

 

The formation of our TRSs and TRS lessees increases our overall tax liability.

 

Bloodstone TRS, Inc. and any other of our domestic TRSs, are subject to federal and state income tax on their taxable income. The taxable income of our TRS lessees is included in the taxable income of Bloodstone TRS, Inc. and currently consists and generally will continue to consist of revenues from the hotel properties leased by our TRS lessees plus, in certain cases, key money payments (amounts paid to us by a hotel management company in exchange for the right to manage a hotel property we acquire), net of the operating expenses for such properties and rent payments to us. Accordingly, although our ownership of Bloodstone TRS, Inc. and our TRS lessees allows us to participate in the operating income from our hotel properties in addition to receiving rent, that operating income is fully subject to income tax. Such taxes could be substantial. Our non-U.S. TRSs also may be subject to tax in jurisdictions where they operate. The after-tax net income of Bloodstone TRS, Inc., our TRS lessees and our other TRSs is available for distribution to us.

 

We incur a 100% excise tax on transactions with Bloodstone TRS, Inc. and our TRS lessees or other TRSs that are not conducted on an arm’s-length basis. For example, to the extent that the rent paid by one of our TRS lessees exceeds an arm’s-length rental amount, such amount potentially is subject to the excise tax. We intend

 

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that all transactions between us and our TRS lessees will continue to be conducted on an arm’s-length basis and, therefore, that the rent paid by our TRS lessees to us will not be subject to the excise tax.

 

Consequences of our operating as a C corporation for 2004.

 

As a C corporation, for our first taxable year ended December 31, 2004, we incurred federal and state income taxes of approximately $0.9 million. In addition, because we were a C corporation for our taxable year ended December 31, 2004, we generally will be subject to a corporate-level tax on a taxable disposition of any appreciated asset we hold as of the effective date of our REIT election which is expected to be January 1, 2005, which tax could reduce the amount that we could otherwise distribute to our stockholders. Specifically, if we dispose of a built-in-gain asset in a taxable transaction prior to the tenth anniversary of the effective date of our REIT election, we would be subject to tax at the highest regular corporate rate (currently 35%) on the lesser of the gain recognized and the asset’s built-in-gain.

 

In addition, to qualify as a REIT, we may not have, at the end of any taxable year, any undistributed earnings and profits accumulated in any non-REIT taxable year. Our non-REIT earnings and profits will include any earnings and profits we accumulated before the effective date of our REIT election. For our first taxable year ended December 31, 2004, we had approximately $2.3 million of non-REIT earnings and profits. To the extent necessary, we will declare a special distribution of any undistributed non-REIT earnings and profits in the last quarter of 2005 and pay such distribution before the close of 2005. Moreover, we intend to distribute (and avoid tax on) our 2005 REIT taxable income.

 

We could lose our REIT status if Marriott or another hotel management company with which we enter into hotel management agreements fails to qualify as an “eligible independent contractor” under the Code.

 

The hotel properties leased by our TRS lessees must be operated by an “eligible independent contractor” as defined in the Code in order for the rental income from our TRS lessees to qualify as rents from real property under the applicable REIT income tests. A hotel owned by a TRS also must be operated by an eligible independent contractor. In order to qualify as an eligible independent contractor, a hotel management company must satisfy certain requirements, including that the hotel management company may not own, directly or indirectly, more than 35% of our stock and not more than 35% of the hotel management company may be owned, directly or indirectly, by one or more persons owning 35% or more of our stock. For purposes of determining whether these ownership limits are satisfied, actual ownership as well as constructive ownership under the rules of Section 318 of the Code (with certain modifications) is taken into account. Each of our TRS lessees has hired and we anticipate will continue to hire a hotel management company that we expect to qualify as an eligible independent contractor to manage and operate the hotel properties leased by our TRS lessee, and Marriott intends to qualify as an eligible independent contractor. However, constructive ownership under Section 318 of the Code resulting, for example, from relationships between Marriott or another hotel management company and any of our stockholders could impact Marriott’s or such other hotel management company’s ability to satisfy the applicable ownership limits. Discovery of any such relationship could disqualify Marriott or another hotel management company as an eligible independent contractor, which could in turn cause us to fail to qualify as a REIT. If we fail to qualify for or lose our status as a REIT, we would be subject to federal income tax on our taxable income. See “Federal Income Tax Considerations.” In addition, in such event, the hotel management agreements that we expect to enter into with Marriott may not be terminable, thereby making it impossible to avoid such disqualification. Consistent with hotel management agreements already in place with Marriott, we do not expect that our hotel management agreements with Marriott will provide us with protection from such an occurrence.

 

Plans should consider ERISA risks of investing in our common stock.

 

ERISA and Section 4975 of the Code prohibit certain transactions that involve (i) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts and (ii) any person who is a

 

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“party in interest” or “disqualified person” with respect to such plan. Consequently, the fiduciary of a plan contemplating an investment in our common stock should consider whether our company, any other person associated with the issuance of our common stock or any affiliate of the foregoing is or may become a “party in interest” or “disqualified person” with respect to the plan and, if so, whether an exemption from such prohibited transaction rules is applicable. If a fiduciary of a plan engages in certain transactions with a “party in interest” or “disqualified person” for which no prohibited transaction exemption is available, the parties to the transaction could be subject to excise taxes and other penalties. See “ERISA Considerations.”

 

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

 

At any time, the federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or our stockholders.

 

Provisions of our charter may limit the ability of a third party to acquire control of our company.

 

Our charter provides that no person may beneficially own more than 9.8% of our common stock or of the value of the aggregate outstanding shares of our capital stock, except certain “look-through entities,” such as mutual funds, which may beneficially own up to 15% of our common stock or of the value of the aggregate outstanding shares of our capital stock. Our board of directors has waived this ownership limitation for Marriott Hotel Services, Inc. and certain institutional investors in the past. Our bylaws provide that, notwithstanding any other provision of our charter or the bylaws, our board of directors will exempt any person from the ownership limitation, provided that:

 

    such person shall not beneficially own shares of capital stock that would cause an “individual” (within the meaning of Section 542(a)(2) of the Internal Revenue Code, but not including a “qualified trust” (as defined in Code Section 856(h)(3)(E)) subject to the look-through rule of Code Section 856(h)(3)(A)(i)) to beneficially own (i) shares of capital stock in excess of 9.8% in value of the aggregate of the outstanding shares of our capital stock or (ii) shares of common stock in excess of 9.8% (in value or in number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of our common stock;

 

    the board of directors obtains such representations and undertakings from such person as are reasonably necessary to ascertain that such person’s ownership of such shares of capital stock will not now or in the future jeopardize our ability to qualify as a REIT under the Code; and

 

    such person agrees that any violation or attempted violation of any of the foregoing restrictions or any such other restrictions that may be imposed by our board of directors will result in the automatic transfer of the shares of stock causing such violation to a trust.

 

Any amendment, alteration or repeal of this provision of our bylaws shall be valid only if approved by the affirmative vote of a majority of votes cast by stockholders entitled to vote generally in the election of directors.

 

These ownership limitations may prevent an acquisition of control of our company by a third party without our board of directors’ approval, even if our stockholders believe the change of control is in their best interests. Our charter authorizes our board of directors to issue up to 100,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Furthermore, our board of directors may, without any action by the stockholders, amend our charter from time to time to increase or decrease the aggregate number of shares of stock of any class or series that we have authority to issue. Issuances of additional shares of stock may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

 

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Certain advance notice provisions of our bylaws may limit the ability of a third party to acquire control of our company.

 

Our bylaws provide that (a) with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the bylaws and (b) with respect to special meetings of stockholders, only the business specified in our notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the board of directors may be made only (i) pursuant to our notice of the meeting, (ii) by the board of directors or (iii) provided that the board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the bylaws. These advance notice provisions may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

 

Provisions of Maryland law may limit the ability of a third party to acquire control of our company.

 

Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests, including:

 

    “business combination” provisions that, subject to certain limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

 

We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our board of directors and by amendment to our bylaws, and in the case of the control share provisions of the MGCL, pursuant to a provision in our bylaws. However, our board of directors may amend, alter or repeal the resolution to opt in to the business combination provisions of the MGCL, provided that, in accordance with our bylaws, such amendment, alteration or repeal of the resolution is approved, at a meeting duly called, by the affirmative vote of a majority of votes cast by stockholders entitled to vote generally for directors and the affirmative vote of a majority of continuing directors. Our directors may also, by amendment to our bylaws, opt in to the control share provisions of the MGCL in the future, provided that, in accordance with our bylaws, such decision to opt in is approved, at a meeting duly called, by the affirmative vote of a majority of votes cast by a majority stockholders entitled to vote generally for directors and the affirmative vote of a majority of continuing directors.

 

Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to take certain actions that may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders’ best interests.

 

Our ownership limitations may restrict or prevent you from engaging in certain transfers of our common stock.

 

In order to maintain our REIT qualification, among other requirements, no more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal

 

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income tax laws to include various kinds of entities) during the last half of any taxable year (other than the first year for which a REIT election is made). In addition, the REIT rules generally prohibit a manager of one of our hotel properties from owning, directly or indirectly, more than 35% of our stock and a person who holds 35% or more of our stock from also holding, directly or indirectly, more than 35% of any such hotel management company. To qualify for and preserve REIT status, our charter contains an aggregate share ownership limit and a common share ownership limit. Generally, any shares of our stock owned by affiliated owners will be added together for purposes of the aggregate share ownership limit, and any shares of common stock owned by affiliated owners will be added together for purposes of the common share ownership limit.

 

If anyone transfers or owns shares in a way that would violate the aggregate share ownership limit or the common share ownership limit (unless such ownership limits have been waived by our board of directors), or prevent us from continuing to qualify as a REIT under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate share ownership limit or the common share ownership limit. If this transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then we will consider the initial intended transfer or ownership to be null and void from the outset. The intended transferee or owner of those shares will be deemed never to have owned the shares. Anyone who acquires or owns shares in violation of the aggregate share ownership limit, the common share ownership limit (unless such ownership limits have been waived by our board of directors) or the other restrictions on transfer or ownership in our charter bears the risk of a financial loss when the shares are redeemed or sold if the market price of our stock falls between the date of purchase and the date of redemption or sale.

 

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

 

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego attractive business or investment opportunities. Thus, compliance with the REIT requirements may hinder our ability to operate solely to maximize profits.

 

The ability of our board of directors to revoke our REIT status without stockholder approval may cause adverse consequences to our stockholders.

 

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

 

Risks Related to our Initial Public Offering and Resale of our Common Stock

 

We cannot assure you that an active trading market for our common stock will be sustained.

 

On June 1, 2005, we completed an initial public offering of our common stock, which is listed on the New York Stock Exchange. Prior to our initial public offering, there had not been a public market for our common stock. While there has been significant trading in our common stock since our initial public offering, we cannot assure you that an active trading market for the shares of common stock offered hereby will be sustained. In the absence of an active public trading market, an investor may be unable to liquidate an investment in our common stock. We cannot assure you that the price at which the shares of common stock selling in the public market will not be lower than the price at which they were sold by the underwriters of our initial public offering.

 

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The market price of our equity securities may vary substantially.

 

The trading prices of equity securities issued by REITs have historically been affected by changes in market interest rates. One of the factors that may influence the price of our common stock or preferred stock in public trading markets is the annual yield from distributions on our common stock or preferred stock as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our stock to demand a higher annual yield, which could reduce the market price of our equity securities.

 

Other factors that could affect the market price of our equity securities include the following:

 

    actual or anticipated variations in our quarterly results of operations;

 

    changes in market valuations of companies in the hotel or real estate industries;

 

    changes in expectations of future financial performance or changes in estimates of securities analysts;

 

    fluctuations in stock market prices and volumes;

 

    issuances of common stock or other securities in the future;

 

    the addition or departure of key personnel; and

 

    announcements by us or our competitors of acquisitions, investments or strategic alliances.

 

The number of shares available for future sale could cause our share price to decline.

 

As of the date of this prospectus, we have 50,815,864 shares of common stock outstanding. We cannot predict whether future issuances of shares of our common stock or the availability of shares for resale in the open market will decrease the market price of our common stock. Sales of substantial numbers of shares of our common stock in the public market, or the perception that such sales might occur, could adversely affect the market price of our common stock. We may issue from time to time additional common stock or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of common stock or the perception that these sales could occur may adversely effect the prevailing market price for our common stock. In addition, the sale of these shares could impair our ability to raise capital through a sale of additional equity securities.

 

Any future redemption of our operating partnership units for common stock, portfolio or business acquisitions and other issuances of our common stock could have an adverse effect on the market price of our common stock. In addition, future issuances of our common stock may be dilutive to existing stockholders.

 

Lock-up agreements may not limit the number of shares of common stock sold into the market.

 

Our executive officers and directors and Marriott have entered into lock-up agreements that prohibit these holders from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for a period of 180 days after the date of the prospectus relating to our initial public offering. Subject to specified exceptions, certain of our directors and senior executive officers and Marriott also have entered into lock-up agreements in connection with our July 2004 private placement that prohibit them from selling, pledging, transferring or otherwise disposing of our common stock or securities convertible into our common stock for 180 days after the effective date of the registration statement of which this prospectus is a part. In addition, in accordance with the registration rights agreement, subject to specified exceptions, holders of shares of common stock sold in our July 2004 private placement have agreed not to offer, pledge, sell or otherwise dispose of any of shares of our common stock or securities convertible into our common stock that they have acquired prior to the date of the prospectus relating to our initial public offering for 60 days following the effective date of the registration statement relating to our initial public offering, which was May 25, 2005. These 60-day lock-up agreements expired on July 24, 2005. Citigroup Global Markets, Inc. and Friedman,

 

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Billings, Ramsey & Co., Inc., on behalf of the underwriters in our initial public offering, may, in their discretion, release all or any portion of the common stock subject to the lock-up agreements with our directors and officers at any time without notice or stockholder approval, in which case, our other stockholders would also be released from the restrictions pursuant to the registration rights agreement. If the restrictions under the lock-up agreements and the registration rights agreement are waived or terminated, up to approximately 22,448,671 shares of common stock will be available for sale into the market, subject only to applicable securities rules and regulations, which could reduce the market price for our common stock.

 

We cannot assure you that we will be able to make distributions to our stockholders in the future.

 

We intend to make annual distributions on a regular quarterly basis in sufficient amounts so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiary and TRS lessees, which are subject to tax at regular corporate rates). This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Code. However, our ability to pay distributions may be adversely affected by the risk factors described in this prospectus. All distributions are made at the discretion of our board of directors and will depend upon our earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will be able to pay distributions in the future. In addition, some of our distributions may include a return of capital.

 

An increase in market interest rates may have an adverse effect on the market price of our common stock.

 

One of the factors that investors may consider in deciding whether to buy or sell our common stock is our dividend rate as a percentage of the market price of our common stock, relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our common stock or seek securities paying higher dividends or interest. The market price of our common stock likely will be strongly affected by the earnings and return that we derive from our investments and income with respect to our properties and our related distributions to stockholders, and not from the market value or underlying appraised value of the properties or investments themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our common stock. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common stock could decrease because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.

 

Future offerings of debt securities or preferred stock, which would be senior to our common stock upon liquidation and for the purposes of distributions, may cause the market price of our common stock to decline.

 

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. We will be able to issue additional shares of common stock or preferred stock without stockholder approval, unless stockholder approval is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Preferred stock and debt, if issued, could have a preference on liquidating distributions or a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest.

 

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FORWARD LOOKING STATEMENTS

 

We make statements in this prospectus that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, our pro forma financial statements and all of our statements regarding anticipated growth in our funds from operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “seek,” “approximately,” “intend,” “plan,” “pro forma,” “estimate” or “anticipate” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans, market statistics, or intentions.

 

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

    the factors discussed in this prospectus, including without limitation those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business,” “Hotel Industry” and “Our Properties;”

 

    adverse economic or real estate developments in our markets;

 

    general economic conditions;

 

    the degree and nature of our competition;

 

    increased interest rates and operating costs;

 

    difficulties in identifying properties to acquire;

 

    difficulties in completing acquisitions;

 

    our failure to obtain necessary outside financing;

 

    availability of and our ability to retain qualified personnel;

 

    our failure to qualify or maintain our status as a REIT;

 

    changes in our business or investment strategy;

 

    availability, terms and deployment of capital;

 

    general volatility of the capital markets and the market price of our common stock;

 

    environmental uncertainties and risks related to natural disasters;

 

    changes in foreign currency exchange rates; and

 

    changes in real estate and zoning laws and increases in real property tax rates.

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. You should carefully consider this risk when you make an investment decision concerning our common stock. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the section above entitled “Risk Factors.”

 

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MARKET DATA

 

Market data and forecasts used in this prospectus have been obtained from independent industry sources as well as from research reports prepared for other purposes, including market information compiled by Smith Travel Research, Inc. which, among other things, provides research reports and forecasts on the performance of the hotel and travel industry. We have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus.

 

USE OF PROCEEDS

 

We will not receive any proceeds from the sale by the selling stockholders of the shares of common stock offered by this prospectus.

 

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DIVIDEND POLICY AND DISTRIBUTIONS

 

Except for our distribution of $0.0326 per share to our stockholders of record as of June 17, 2005, we have not declared or paid any dividends on our common stock since our inception in May 2004. We intend to generally distribute to our stockholders each year on a regular quarterly basis sufficient amounts of our REIT taxable income so as to avoid paying U.S. corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiary and TRS lessees, which are all subject to U.S. tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:

 

    90% of our REIT taxable income determined without regard to the dividends paid deduction, plus;

 

    90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus;

 

    any excess non-cash income.

 

See “Federal Income Tax Considerations.”

 

In our first taxable year ended December 31, 2004, we had approximately $2.3 million of non-REIT earnings and profits. In order to qualify as a REIT, we may not have, at the end of any taxable year, any undistributed earnings and profits accumulated in any non-REIT taxable year. We therefore intend to distribute these earnings and profits, which we currently estimate will be approximately $2.3 million, to eliminate any 2004 non-REIT earnings and profits, regardless of our 2005 REIT taxable income. To the extent necessary, we will declare a special distribution of any undistributed non-REIT earnings and profits in the last quarter of 2005 and pay such distribution before the close of 2005. Moreover, we intend to distribute (and avoid tax on) our 2005 REIT taxable income.

 

We paid a distribution of $0.0326 per share on June 28, 2005 to our stockholders of record as of June 17, 2005. Additionally, we intend to pay a full quarterly distribution of $0.1725 per share to our stockholders of record at the end of the third quarter of 2005. Starting on June 1, 2005, these two distributions represent, on an annualized basis, $0.69 per share. We expect that approximately 25.0% of our estimated initial annual distribution will represent a return of capital and that such initial annual distribution will represent 100.8% of our estimated cash available for distribution for the twelve month period ending June 16, 2006. To the extent our initial annual distribution is in excess of 100% of our estimated cash available for distribution, we will use existing cash to fund such shortfall. We do not intend to borrow funds to fund any such shortfall.

 

The actual amount, timing and frequency of our distributions will be at the discretion of, and authorized by, our board of directors and will depend on our actual results of operations and a number of other factors, including:

 

    the timing of our investment of the net proceeds of our initial public offering;

 

    the rent received from our TRS lessees;

 

    our debt service requirements (including restrictions (such as lockbox and cash management provisions) that may under certain circumstances specified in the loan agreements prohibit our subsidiaries that own our hotels from making distributions or paying dividends, repaying loans to us or other subsidiaries or transferring any of their assets to us or another subsidiary);

 

    capital expenditure requirements for our hotel properties;

 

    unforeseen expenditures at our hotel properties;

 

    our taxable income and the taxable income of our TRSs and TRS lessees;

 

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    the annual distribution requirement under the REIT provisions of the Code;

 

    our operating expenses and the operating expenses of our TRSs and TRS lessees; and

 

    other factors that our board of directors may deem relevant.

 

In addition, our ability to make distributions to our stockholders will depend, in part, upon the amount of distributions we receive from our operating partnership, DiamondRock Hospitality Limited Partnership, which will depend upon the amount of lease payments received from our TRS lessees, and, in turn, upon the management of our hotel properties by third party hotel management companies, who will be engaged to operate our hotels. There are currently no legal, operational or other restrictions that prevent our TRSs from making distributions to our operating partnership and our operating partnership from making a distribution to us. However, our senior secured revolving credit facility has a covenant limiting our maximum REIT dividend payout to 100% of our cash available for distribution during any four-quarter period (subject to dividend payments necessary to preserve our REIT status).

 

To the extent permitted while maintaining our REIT status, we may retain earnings of our TRSs and TRS lessees in those subsidiaries, and such amount of cash would not be available to satisfy the 90% distribution requirement. If our cash available for distribution to our stockholders is less than 90% of our REIT taxable income, we could be required to sell assets or borrow funds to make distributions. Dividend distributions to our stockholders will generally be taxable to our stockholders as ordinary income to the extent of our current or accumulated earnings and profits. Because a significant portion of our investments are equity ownership interests in hotel properties, which results in depreciation and non-cash changes against our income, a portion of our distributions may constitute a tax-free return of capital. Finally, we cannot assure you that we will have cash available for distributions to our stockholders.

 

The following table sets forth calculations relating to the intended initial distribution based on our pro forma financial data, and we cannot assure you that the intended initial distribution will be made or sustained. The calculations are being made solely for the purpose of illustrating the initial distribution and are not necessarily intended to be a basis for determining future distributions. The calculations include the following material assumptions:

 

    income and cash flows from operations for the twelve months ended June 17, 2005 will be substantially the same for the twelve months ending June 16, 2006, with the exception of additional corporate expenses not permitted to be included as a pro forma adjustment for the twelve months ended June 17, 2005 and increases in contractual ground rent for the twelve months ending June 16, 2006;

 

    cash flows used in investing activities will be the contractually committed and planned amounts for the twelve months ending June 16, 2006; and

 

    cash flows used in financing activities will be the contractually committed amounts for the twelve months ending June 16, 2006.

 

These calculations do not assume any changes to our operations or any acquisitions or dispositions, which would affect our operating results and cash flows, or changes in our outstanding common stock. We cannot assure you that our actual results will be as indicated in the calculations below. All dollar amounts are in thousands.

 

Pro forma net income for the twelve months ended June 17, 2005:

      

Pro forma net income for the year ended December 31, 2004

   $ 9,942,956

Add: Pro forma net income for the fiscal quarter ended June 17, 2005

     6,643,817

Less: Pro forma net income for the fiscal quarter ended June 18, 2004

     3,468,781
    

 

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Pro forma net income for the twelve months ended June 17, 2005

     13,117,992  

Add: Depreciation and amortization

     33,580,826  

Add: Non-cash straight line ground rent expense

     6,890,239  

Add: Non-cash amortization of restricted stock

     6,189,927  

Add: Amortization of deferred financing costs

     405,083  

Add: Non-cash adjustment to interest rate caps

     25,656  

Less: Amortization of deferred key money

     (158,333 )

Less: Amortization of debt premium

     (163,992 )

Less: Amortization of unfavorable lease provision

     (138,200 )

Less: Non-cash income tax benefit

     (7,440,000 )

Less: Increase in contractual ground rent

     (20,333 )

Less: Additional corporate expenses not permitted to be included as a pro forma adjustment

     (330,000 )
    


Estimated cash flows from operations for the twelve months ending June 16, 2006

     51,958,865  

Cash flows used in investing activities—required capital escrow contributions(2)

     (13,297,423 )

Cash flows used in financing activities—scheduled principal payments on debt payable

     (3,113,034 )
    


Estimated cash available for distribution for the twelve months ending June 16, 2006

   $ 35,548,408  

Intended initial distribution(1)

   $ 35,836,091  
    


Ratio of intended initial distribution to estimated cash available for distribution

     100.8 %
    



(1) Represents the aggregate amount of the intended annual distribution multiplied by 51,936,364 shares of common stock eligible for dividends as of the date of this prospectus, including 382,500 shares granted to the corporate officers in conjunction with our initial public offering and 738,000 restricted shares issued to senior management and employees .
(2) Estimated amount based on the amount of furniture, fixtures and equipment escrow contributions required pursuant to our management agreements. Annual contributions to these reserves range from 0% to 5% of the revenues of each hotel. These capital expenditures exclude $6.5 million of additional capital improvements related to our initial hotels and $14.4 million of additional capital improvements related to the acquisitions of the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort.

 

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CAPITALIZATION

 

The following table sets forth:

 

    our actual capitalization as of June 17, 2005.

 

    our pro forma capitalization, as adjusted to give effect to (i) the acquisitions of the Vail Marriott Mountain Resort & Spa, the Capital Hotel Investment Portfolio, the SpringHill Suites Atlanta Buckhead and the Oak Brook Hills Marriott Resort; (ii) the receipt of proceeds from $62.5 million mortgage debt related to the Frenchman’s Reef & Morning Star Marriott Beach Resort, $82.6 million mortgage debt related to the Marriott Los Angeles Airport, $57.4 million mortgage debt related to the Renaissance Worthington Hotel and a $6.0 million draw on our $75 million senior secured credit facility.

 

     As of June 17, 2005 (unaudited)

 
     Actual

     Pro Forma

 

Cash and cash equivalents

   $ 273,125,031      $ 416,410  
    


  


Total debt(1)

     159,309,226        367,809,226  

Shareholders’ equity

                 

Preferred stock, $.01 par value per share, 10,000,000 shares authorized, no shares issued and outstanding

     —          —    

Common stock, $.01 par value per share, 100,000,000 shares authorized, 50,815,864 shares issued and outstanding on a historical and pro forma basis(2)

     508,159        508,159  

Additional paid-in capital

     489,250,873        489,250,873  

Accumulated deficit

     (13,203,691 )      (13,203,691 )
    


  


Total shareholders’ equity

     476,555,341        476,555,341  
    


  


Total capitalization

   $ 635,864,567      $ 844,364,567  
    


  



(1) For a description of our senior secured revolving credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
(2) Excludes 738,000 unvested restricted shares of our common stock issued to our executive officers and other employees and 382,500 shares of deferred stock issued to our executive officers pursuant to our equity incentive plan, and 1,151,609 shares of common stock available for future awards under our equity incentive plan.

 

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SELECTED FINANCIAL AND OPERATING DATA

 

We present in this prospectus certain historical and pro forma financial data. We also present certain operational data and non-GAAP financial measures on a historical and pro forma basis.

 

The selected historical financial information as of December 31, 2004, and the period from May 6, 2004 (inception) to December 31, 2004, has been derived from our historical financial statements audited by KPMG LLP, independent registered public accounting firm, whose report with respect to such financial information is included elsewhere in this prospectus. The selected historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements as of December 31, 2004 and for the period from May 6, 2004 (inception) to December 31, 2004, and the related notes. The unaudited summary historical financial information as of June 17, 2005, and for the period from January 1, 2005 to June 17, 2005, has been derived from our historical financial statements. The unaudited summary historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the unaudited consolidated financial statements as of June 17, 2005 and for the period from January 1, 2005 to June 17, 2005, and the related notes.

 

The unaudited pro forma consolidated balance sheet data as of June 17, 2005 is presented as if:

 

    the completion of our initial public offering and application of the net proceeds from our initial public offering,

 

    the acquisitions of the Vail Marriott Mountain Resort & Spa, the Capital Hotel Investment Portfolio, the SpringHill Suites Atlanta Buckhead and the Oak Brook Hills Marriott Resort,

 

    the receipt of proceeds from (i) $62.5 million mortgage debt related to Frenchman’s Reef & Morning Star Marriott Beach Resort, (ii) $82.6 million mortgage debt related to the Marriott Los Angeles Airport, and (iii) $57.4 million mortgage debt related to the Renaissance Worthington Hotel, and

 

    a $6.0 million draw on our $75 million senior secured credit facility

 

had occurred on June 17, 2005.

 

The unaudited pro forma consolidated statement of operations and other data for the two fiscal quarters ended June 17, 2005, the year ended December 31, 2004 are presented as if:

 

    the completion of our initial public offering and application of the net proceeds from our initial public offering,

 

    the acquisition of our initial seven hotels,

 

    the acquisitions of the Vail Marriott Mountain Resort & Spa, the Capital Hotel Investment Portfolio, the SpringHill Suites Atlanta Buckhead and the Oak Brook Hills Marriott Resort,

 

    our July 2004 private placement,

 

    our REIT election,

 

    the receipt of proceeds from (i) $62.5 million mortgage debt related to Frenchman’s Reef & Morning Star Marriott Beach Resort, (ii) $82.6 million mortgage debt related to the Marriott Los Angeles Airport, and (iii) $57.4 million mortgage debt related to the Renaissance Worthington Hotel, and

 

    a $6.0 million draw on our $75 million senior secured credit facility

 

had occurred on the first day of the periods presented.

 

These adjustments are also discussed in detail under “Unaudited Pro Forma Financial Data.” The pro forma information is not necessarily indicative of what our actual financial position or results of operations would have been as of the dates or for the periods indicated, nor does it purport to represent our future financial position or results of operations.

 

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We present the following two non-GAAP financial measures throughout this prospectus that we believe are useful to investors as key measures of our operating performance: (1) EBITDA; and (2) FFO.

 

EBITDA represents net income (loss) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.

 

We compute FFO in accordance with standards established by NAREIT, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure.

 

We caution investors that amounts presented in accordance with our definitions of EBITDA and FFO may not be comparable to similar measures disclosed by other companies, since not all companies calculate these non-GAAP measures in the same manner. EBITDA and FFO should not be considered as an alternative measure of our net income (loss), operating performance, cash flow or liquidity. EBITDA and FFO may include funds that may not be available for our discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions and other commitments and uncertainties. Although we believe that EBITDA and FFO can enhance your understanding of our results of operations, these non-GAAP financial measures, when viewed individually, are not necessarily better indicators of any trend as compared to GAAP measures such as net income (loss) or cash flow from operations. In addition, you should be aware that adverse economic and market conditions may harm our cash flow. Under “Summary Historical and Pro Forma Financial and Operating Data” and this section, as required, we include a quantitative reconciliation of EBITDA and FFO to the most directly comparable GAAP financial performance measure, which is net income (loss).

 

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    Historical

    Pro Forma (unaudited)

 
    Period from
January 1,
2005 to
June 17, 2005
(unaudited)


   

Period from
May 6,
2004 to

December 31, 2004


    Two Fiscal
Quarters Ended
June 17, 2005


    Year Ended
December 31, 2004


 

Statement of operations data:

                               

Revenues:

                               

Rooms

  $ 42,501,868     $ 5,137,370     $ 100,194,215     $ 190,209,394  

Food and beverage

    14,205,252       1,507,960       47,640,691       91,457,085  

Other

    3,157,377       428,534       10,278,371       23,571,922  
   


 


 


 


Total revenues

    59,864,497       7,073,864       158,113,277       305,238,401  
   


 


 


 


Operating costs and expenses:

                               

Rooms

    10,586,057       1,455,380       23,486,641       47,842,534  

Food and beverage

    10,762,154       1,266,827       33,310,138       67,986,966  

Other

    26,469,724       3,444,683       61,200,926       126,685,775  

Corporate expenses

    7,946,739       4,114,165       7,946,739       8,384,457  

Depreciation and amortization

    8,703,130       1,053,283       15,921,772       33,050,368  
   


 


 


 


Total operating expenses

    64,467,804       11,334,338       141,866,216       283,950,100  
   


 


 


 


Operating (loss)/income

    (4,603,307 )     (4,260,474 )     16,247,061       21,288,301  

Interest income

    (560,827 )     (1,333,837 )     (560,827 )     (1,333,837 )

Interest expense

    6,484,739       773,101       9,513,071       20,670,182  
   


 


 


 


(Loss)/income before income taxes

    (10,527,219 )     (3,699,738 )     7,294,817       1,951,956  

Income tax (provision)/benefit

    (558,847 )     1,582,113       (651,000 )     7,991,000  
   


 


 


 


Net (loss)/income

  $ (11,086,066 )   $ (2,117,625 )   $ 6,643,817     $ 9,942,956  
   


 


 


 


FFO(1)

  $ (2,382,936 )   $ (1,064,342 )   $ 22,565,589     $ 42,993,324  
   


 


 


 


EBITDA(2)(3)

  $ 4,660,650     $ (1,873,354 )   $ 32,729,660     $ 55,672,506  
   


 


 


 


 

     Historical

    Pro Forma

       
     As of June 17,
2005
(unaudited)


   

As of

December 31,

2004


    As of June 17,
2005
(unaudited)


       

Balance sheet data:

                                

Property and equipment, net

   $ 345,765,289     $ 285,642,439     $ 813,418,289          

Cash and cash equivalents

     273,125,031       76,983,107       416,410          

Total assets

     657,791,443       391,691,179       866,785,245          

Total debt

     159,309,226       180,771,810       367,809,226          

Total other liabilities

     21,926,876       15,331,951       22,420,678          

Shareholders’ equity

     476,555,341       195,587,418       476,555,341          
     Historical (unaudited)

    Pro Forma (unaudited)

 
     Period from
January 1, 2005
to June 17, 2005


   

Period from
May 6, 2004 to

December 31, 2004


    Two Fiscal
Quarters Ended
June 17, 2005


    Year Ended
December 31, 2004


 

Statistical data:

                                

Number of hotels

     7       6       14       14  

Number of rooms

     2,357       1,870       5,637       5,637  

Occupancy

     74.5 %     67.9 %     73.3 %     71.5 %

ADR

     $144.90       $184.22       $149.47     $ 134.51  

RevPAR

     $107.97       $125.02       $109.55     $ 96.24  

 

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(1) FFO, as defined by NAREIT, is net income (loss) (determined in accordance with GAAP, excluding gains (losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). The calculation of FFO may vary from entity to entity, thus our presentation of FFO may not be comparable to other similarly titled measures of other reporting companies. FFO is not intended to represent cash flows for the period. FFO has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

 

   FFO is a supplemental industry-wide measure of REIT operating performance, the definition of which was first proposed by NAREIT in 1991 (and clarified in 1995, 1999 and 2002). Since the introduction of the definition by NAREIT, the term has come to be widely used by REITs. Historical GAAP 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, many industry investors have considered presentations of operating results for real estate companies that use historical GAAP cost accounting to be insufficient by themselves. Accordingly, we believe FFO (combined with our primary GAAP presentations) help improve our stockholders’ ability to understand our operating performance. We only use FFO as a supplemental measure of operating performance. The following is a reconciliation between net income (loss) and FFO:

 

     Historical

     Pro Forma (unaudited)

    

Period from
January 1, 2005
to June 17, 2005

(unaudited)


    

Period from

May 6, 2004

to December 31,
2004


    

Two Fiscal Quarters
Ended

June 17, 2005


  

Year Ended
December 31,

2004


Net (loss)/income

   $ (11,086,066 )    $ (2,117,625 )    $ 6,643,817    $ 9,942,956

Real estate related depreciation and amortization

     8,703,130        1,053,283        15,921,772      33,050,368
    


  


  

  

FFO

   $ (2,382,936 )    $ (1,064,342 )    $ 22,565,589    $ 42,993,324
    


  


  

  

 

(2) EBITDA is defined as net income (loss) before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure for us and for our stockholders and is a complement to net income and other financial performance measures provided in accordance with GAAP. We use EBITDA to measure the financial performance of our operating hotels because it excludes expenses such as depreciation and amortization, taxes and interest expense, which are not indicative of operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on a variety of factors unrelated to the hotels’ financial performance, we can more accurately assess the financial performance of our hotels. Under GAAP, hotel properties are recorded at historical cost at the time of acquisition and are depreciated on a straight line basis. By excluding depreciation and amortization, we believe EBITDA provides a basis for measuring the financial performance of hotels unrelated to historical cost. However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as calculated by us, may not be comparable to EBITDA reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity. The following is a reconciliation between net income (loss) and EBITDA:

 

     Historical

     Pro Forma (unaudited)

 
     Period from
January 1,
2005 to
June 17, 2005
(unaudited)


    

Period from

May 6, 2004 to

December 31,
2004


    

Two Fiscal

Quarters Ended

June 17, 2005


  

Year Ended
December 31,

2004


 

Net (loss)/income

   $ (11,086,066 )    $ (2,117,625 )    $ 6,643,817    $ 9,942,956  

Interest expense

     6,484,739        773,101        9,513,071      20,670,182  

Income tax expense/(benefit)

     558,847        (1,582,113 )      651,000      (7,991,000 )

Depreciation and amortization

     8,703,130        1,053,283        15,921,772      33,050,368  
    


  


  

  


EBITDA

   $ 4,660,650      $ (1,873,354 )    $ 32,729,660    $ 55,672,506  
    


  


  

  


 

(3) The fiscal year ended December 31, 2004 and the two fiscal quarters ended June 17, 2005 EBITDA includes the impact of approximately $6.9 million and $3.2 million, respectively, of non-cash straight-line ground rent expense recorded for the Bethesda Marriott Suites, the Marriott Griffin Gate Resort golf course and Courtyard Manhattan/Fifth Avenue ground leases.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We were recently formed and did not commence revenue generating operations until July 2004. Please see “Risk Factors—Risks Related to Our Business, Growth Strategy and Investment Sourcing Relationship With Marriott” for a discussion of risks relating to our limited operating history. The following discussion should be read in conjunction with our audited financial statements and the related notes thereto included elsewhere in this prospectus.

 

Overview

 

We are a real estate hospitality company that owns, acquires and invests in upper upscale and upscale hotel properties located primarily in North America. To a lesser extent, we may invest, on a selective basis, in limited service and extended stay hotel properties in urban locations. We began operations in July 2004 when we completed a private placement of our common stock to certain institutional and accredited investors in which net proceeds of approximately $196.3 million were raised.

 

On May 26, 2005, pursuant to Rule 424(b)(4) of the Securities Act, we filed a final prospectus with the Securities and Exchange Commission with respect to an initial public offering of 26,087,000 shares of our common stock (including 1,428,571 shares of our common stock sold directly to Marriott) at an initial public offering price of $10.50 per share. On May 31, 2005, the underwriters of our initial public offering exercised their over-allotment option to purchase an additional 3,698,764 shares of our common stock. The closing of our initial public offering occurred on June 1, 2005. The net proceeds to us from the sale of our common stock in our initial public offering, after deducting the underwriting discount and the estimated offering expenses payable by us, were approximately $289.4 million.

 

Our principal business objective is to maximize stockholder value through a combination of dividends, growth in funds from operations and increases in net asset value. We believe that we can create long-term value in the hotel properties we acquire by taking advantage of individual market recovery opportunities, aggressive asset management and repositioning. We currently plan to invest approximately $33.5 million and $25.9 million in 2005 and in the first quarter of 2006 to renovate our initial hotels, including one hotel that has been re-branded, and our recently acquired hotels, respectively.

 

Since our July 2004 private placement and prior to our initial public offering, we acquired the following seven hotel properties, comprising 2,357 rooms: Courtyard Manhattan/Midtown East in New York, New York; Torrance Marriott in Los Angeles, California; Salt Lake City Marriott Downtown in Salt Lake City, Utah; Marriott Griffin Gate Resort in Lexington, Kentucky; Bethesda Marriott Suites in Bethesda, Maryland; Courtyard Manhattan/Fifth Avenue in New York, New York; and The Lodge at Sonoma Renaissance Resort & Spa, in Northern California. Subsequent to our initial public offering, we acquired the following seven hotel properties, comprising 3,280 rooms: Renaissance Worthington in Fort Worth, Texas; Marriott Atlanta Alpharetta in Atlanta, Georgia; Frenchman’s Reef & Morning Star Marriott Beach Resort in St. Thomas, U.S. Virgin Islands; Marriott Los Angeles Airport in Los Angeles, California; Vail Marriott Mountain Resort & Spa in Vail, Colorado, Oak Brook Hills Marriott Resort in Oak Brook, Illinois and the SpringHill Suites Atlanta Buckhead in Atlanta, Georgia.

 

We conduct substantially all of our operations through DiamondRock Hospitality Limited Partnership, our operating partnership. We are the sole general partner of our operating partnership and as a result we control the operating partnership. At present, we own 100% of the partnership units either directly or through our wholly-owned subsidiary, DiamondRock Hospitality, LLC, although, in the future, we may issue limited partnership units to third parties in exchange for capital or in exchange for interests in hotel properties from time to time. We also may issue limited partnership units to management as a substitute for restricted stock grants or other equity-based compensation. Sellers of hotel properties that receive limited partnership units of our operating partnership in exchange for their ownership interest in those properties may be able to defer recognition of any taxable gain that would be recognized in a cash sale until such time as their limited partnership units are redeemed or we sell the contributed properties. Upon a limited partner’s election to have us redeem its units, we may redeem them, at

 

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our election, either for cash or shares of our common stock on a one-for-one basis, subject to any lock-up or other restrictions that may exist. Whenever we issue stock, we will be obligated to contribute any net proceeds we receive from such issuance to our operating partnership and our operating partnership will, in turn, be obligated to issue an equivalent number of limited partnership units to us. Our operating partnership will distribute the income it generates from its operations to us to the extent not payable to other limited partners. In turn, we expect to distribute a substantial majority of the amounts we receive from our operating partnership to our stockholders in the form of quarterly cash distributions.

 

We intend to elect to be treated as a self-advised REIT, effective January 1, 2005. For us to qualify as a REIT, we cannot operate our hotel properties. Therefore, our operating partnership and its subsidiaries lease our hotel properties to our TRS lessees (except for Frenchman’s Reef & Morningstar Marriott Beach Resort, which is owned directly by a TRS), who in turn must engage one or more eligible independent contractors to manage our hotel properties. The leases generally provide for a fixed annual base rent plus percentage rent and certain other additional charges. We have entered into hotel management agreements with Marriott for all of our current hotel properties, except for the hotel management agreement relating to the Vail Marriott Mountain Resort & Spa, which is subject to a franchise agreement with Marriott. Our TRS lessees and our TRS holding Frenchman’s Reef & Morningstar Marriott Beach Resort are consolidated into our financial statements for accounting purposes. However, because our operating partnership, our TRS lessees and our TRSs are controlled by us, our principal source of funds on a consolidated basis come from the operations of our hotels properties. The earnings of our TRSs and our TRS lessees are subject to federal and state income tax that generally apply to C corporations; such tax reduces our funds from operations and the cash available for distribution to our stockholders.

 

The discussion below relates to the results of operations of the hotel properties that we own. The historical financial statements presented herein were prepared in accordance with GAAP. We have contributed the net proceeds from our initial public offering to our operating partnership. Our operating partnership used approximately $193.8 million of the net proceeds received from our initial public offering to fund a portion of the purchase price of the Capital Hotel Investment Portfolio and the Vail Marriott Mountain Resort & Spa. We funded the balance of the purchase price for these properties through two mortgage loans secured by first mortgage liens on the Marriott Los Angeles Airport and Renaissance Worthington hotels aggregating $140.0 million and bearing interest at 5.30% and 5.40%, respectively, and available corporate cash. Furthermore, our operating partnership used approximately $64.0 million of the net proceeds received from our initial public offering to repay the following indebtedness:

 

    approximately $20.0 million of debt incurred in connection with the acquisition of The Lodge at Sonoma Renaissance Resort & Spa; and

 

    approximately $44.0 million of senior and subordinated debt incurred in connection with the acquisition of Torrance Marriott.

 

We also acquired the Oak Brook Hills Marriott Resort and the SpringHill Suites Atlanta Buckhead for purchase prices of $65.7 million and $34.1 million, respectively. The properties were acquired using cash on hand, a draw on our senior secured credit facility and the proceeds of a $62.5 million ten year loan secured with a mortgage on the Frenchman’s Reef & Morningstar Marriott Beach Resort, which bears interest at 5.44%. Therefore, the discussion below should not be read as being indicative of any future operating results of our company.

 

Industry Trends and Outlook

 

We believe the hotel industry, as a whole, is continuing to recover from a pronounced downturn that occurred over the three-year period from 2001-2003. This recovery has been, and we expect it to continue to be, primarily driven by increased demand for hotel rooms as compared to increases in hotel room supply. According to Smith Travel Research, Inc., demand for hotel rooms, measured by total rooms sold, increased by 0.3% in 2002, 1.5% in 2003 and 4.7% in 2004 and is projected to increase by 4.0% in 2005. By comparison, hotel room supply grew by 1.6% in 2002, 1.2% in 2003 and 1.0% in 2004 and is projected to increase by 1.2% in 2005 as

 

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compared to its past 15-year historical annual average of 2.1%. As a result, we expect that sustained growth in demand and lower growth in supply will result in continued improvement of hotel industry fundamentals. Specifically, according to Smith Travel Research, Inc.:

 

    occupancy increased 3.7% in 2004 and is projected to increase by 2.8% in 2005;

 

    average daily rate, or ADR, increased by 4% in 2004 and is projected to increase by 4.2% in 2005; and

 

    RevPAR increased by 7.8% in 2004 and is projected to increase by 7.1% in 2005.

 

While we believe the trends in room demand and growth supply will result in continued improvement in hotel industry fundamentals, we cannot assure you that these trends will continue. The trends discussed above may not continue for any number of reasons, including an economic slowdown and world events outside of our control, such as terrorism. In the past, these events have adversely affected the hotel industry and if these events reoccur, they may adversely affect the industry in the future.

 

Key Indicators of Financial Condition and Operating Performance

 

We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP, as well as other financial information that is not prepared in accordance with GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotel properties, groups of hotel properties and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:

 

    occupancy percentage;

 

    ADR;

 

    RevPAR;

 

    EBITDA; and

 

    FFO.

 

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. ADR and RevPAR include only room revenue. Room revenue comprised approximately 73% of our total revenues for the fiscal year ended December 31, 2004, and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms. RevPAR, which is calculated as the product of ADR and occupancy percentage, is another important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis.

 

Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction and the pricing strategies of competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of Marriott and its brands.

 

We also use EBITDA and FFO as measures of the financial performance of our business. EBITDA and FFO are supplemental financial measures, and are not defined by GAAP. EBITDA and FFO, as calculated by us, may not be comparable to EBITDA and FFO reported by other companies that do not define EBITDA and FFO exactly as we define those terms. EBITDA and FFO do not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as alternatives to operating income or net income determined in accordance with GAAP, as indicators of performance or as alternatives to cash flows from

operating activities as indicators of liquidity. See “Selected Financial and Operating Data” for further discussion of our use of EBITDA and FFO and reconciliations to net income.

 

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Critical Accounting Policies and Estimates

 

Our consolidated financial statements include the accounts of DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:

 

Investment in Hotel Properties.    Investments in hotel properties are stated at acquisition cost and allocated to land, property and equipment and identifiable intangible assets at fair value in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Property and equipment are recorded at fair value based on analyses, including current replacement cost for similar capacity and allocated to buildings, improvements, furniture, fixtures and equipment based on analysis performed by management and appraisals received from independent third parties. Property and equipment are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and land improvements and one to ten years for furniture and equipment. Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We typically enter into a new hotel management agreement based on market terms at the time of acquisition. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.

 

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the investments in hotel properties may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of an investment in a hotel property exceed the hotel’s carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the estimated fair market value is recorded and an impairment loss recognized.

 

Revenue Recognition.    Hotel revenues, including room, golf, food and beverage, and other hotel revenues, are recognized as the related services are provided.

 

Stock-based Compensation.    We account for stock-based employee compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation. For restricted stock awards, we record unearned compensation equal to the number of shares awarded multiplied by the average price of our common stock on the date of the award. Unearned compensation is amortized using the straight-line method over the period in which the restrictions lapse (i.e., vesting period). For unrestricted stock awards, we record compensation expense on the date of the award equal to

 

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the number of shares awarded multiplied by the average price of our common stock on the date of the award, less the purchase price for the stock, if any.

 

Accounting for Key Money.    Marriott has contributed to us certain amounts, which we refer to as key money, in exchange for the right to manage certain of our hotel properties. We defer key money received from a hotel manager in conjunction with entering into a long-term hotel management agreement and amortize the amount received against management fees over the term of the management agreement.

 

Other Recent Accounting Pronouncements

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, or “SFAS 123(R).” SFAS 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The FASB has concluded that companies could adopt the new standard in one of two ways: either the modified prospective transition method or the modified retrospective transition method. Using the modified prospective transition method, a company would recognize share-based employee compensation cost from the beginning of the fiscal period in which the recognition provisions are first applied as if the fair-value-based accounting method had been used to account for all employee awards granted, modified, or settled after the effective date and to any awards that were not fully vested as of the effective date. Using the modified retrospective method, a company would recognize employee compensation cost for periods presented prior to the adoption of the proposed standard in accordance with the original provisions of SFAS No. 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro forma disclosures provided in accordance with SFAS No. 123. For periods after the date of adoption of the standard, the modified prospective transition method described above would be applied. SFAS 123(R) becomes effective for public companies no later than the beginning of the first fiscal year beginning after June 15, 2005. We currently utilize the fair value approach for accounting for stock compensation, and therefore expect that the impact on our financial condition and results of operations of adopting SFAS 123(R) is expected to be minimal.

 

Results of Operations

 

May 6, 2004 (inception) through December 31, 2004

 

We were formed on May 6, 2004, began operations in July 2004 and acquired our first hotel property in October 2004. We completed our private placement of common stock in July 2004 and received proceeds, net of offering costs and fees, of approximately $196.3 million. Stockholders’ equity at December 31, 2004 was approximately $195.6 million. Our GAAP loss before income taxes, for the period from inception through December 31, 2004, was $3.7 million.

 

Revenue.    We had total revenues of $7.1 million for the period from May 6, 2004 to December 31, 2004. Revenue consists primarily of the room, food and beverage and other revenues from The Lodge at Sonoma and the Courtyard Midtown East for the periods subsequent to our acquisition dates of October 27, 2004 and November 19, 2004, respectively. Revenues are also included for the post acquisition period for our other four acquisitions, completed during the last two weeks of 2004. The average occupancy of our hotels was 67.9% for the periods subsequent to acquisition. The hotels collectively achieved an ADR of $184.22 and RevPAR of $125.02, respectively, for the periods subsequent to acquisition. Our full year 2004 pro forma revenues, assuming we acquired the initial seven hotels, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2004, were $305.2 million.

 

Hotel operating expenses.    Our hotel operating expenses totaled $6.2 million for the period from May 6, 2004 to December 31, 2004. Hotel operating expenses consist primarily of operating expenses of The Lodge at Sonoma and the Courtyard Midtown East for the periods subsequent to our acquisition dates of October 27, 2004 and November 19, 2004, respectively. Operating expenses are also included for the post acquisition period of our

 

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other four 2004 acquisitions, which were completed during the last two weeks of 2004. Our 2004 pro forma hotel operating expenses, which assumes we acquired the initial seven hotels, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2004, are $242.5 million. Our 2004 pro forma hotel operating expenses include annual straight-line ground rent relating to three of our initial hotels of $8.2 million, which consists of $6.9 million of non-cash ground rent expense and $1.3 million of cash expense in annual contractual ground rent.

 

Depreciation and amortization expense.    Our depreciation and amortization expense totaled $1.1 million for the period from May 6, 2004 to December 31, 2004. Depreciation and amortization is recorded on our hotels for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. The furniture, fixtures and equipment depreciable lives are less than one year for the Courtyard Midtown East, the Courtyard Fifth Avenue and the Bethesda Marriott Suites since these hotels will undergo significant renovations in 2006. Our 2004 pro forma depreciation expense, assuming we acquired the initial seven hotels, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2004, is $33.1 million, which reflects the use of actual depreciation lives assigned to the assets in purchase accounting.

 

Corporate expenses.    Our corporate expenses totaled $4.1 million for the period from May 6, 2004 to December 31, 2004. Corporate expenses principally consist of employee related costs, including base payroll, bonus and restricted stock. Corporate expenses also include organizational costs, professional fees and directors’ fees. We incurred $140,000 in audit fees in 2004 relating to our corporate audit and lender-required audits. In addition, we capitalized $33,000 of audit fees relating to our July 2004 private placement. In conjunction with our complying with Rule 3-05 of Regulation S-X, we capitalized $510,000 of audit fees related to the audits of our initial hotels. All fees paid to our independent registered public accounting firm in 2004 related to audit services. Our 2004 pro forma corporate expenses are $8.4 million. The pro forma 2004 corporate expenses include our budgeted corporate expenses with the exception of the impact of share grants that were awarded to the executive officers in connection with our initial public offering due to the one time impact of these awards and certain budgeted corporate expenses that do not meet the pro forma criteria under Article 11 of Regulation S-X under the Securities Act of 1933, as amended. The pro forma corporate expenses consist of $3.7 million of employee payroll, bonus and other compensation, $2.4 million of restricted stock expense, $753,000 of professional fees, $378,000 of directors’ fees, $367,000 of office and equipment rent, $313,000 of insurance costs, $251,000 of shareholder fees and $190,000 of other corporate expenses.

 

Interest expense.    Our interest expense totaled $0.8 million for the period from May 6, 2004 to December 31, 2004. Interest expense relates to the mortgage debt incurred in connection with our acquisitions. Our mortgage debt on two of our hotels bears interest at variable rates based on LIBOR. The interest rates as of December 31, 2004 on these two mortgage loans were 4.74% and 5.04%, respectively. The mortgage debt on our other four hotels bears interest at fixed rates ranging from 5.11% to 7.69% per year. Our 2004 pro forma interest expense, assuming we acquired the initial seven hotels, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2004, and repaid the mortgage debt on The Lodge at Sonoma Renaissance Resort & Spa and the Torrance Marriott on January 1, 2004, was $20.7 million.

 

Income taxes.     We recorded an income tax benefit of $1.6 million for the period from May 6, 2004 to December 31, 2004. The 2004 current tax liability of $0.9 million is the result of temporary differences primarily resulting from deferred key money, capitalized pre-opening costs, restricted stock expense, straight-line ground rent, depreciation and other items that will result in 2004 taxable income. A significant portion of the deferred tax assets recorded in 2004 was expensed in the first quarter of 2005 in connection with our REIT election.

 

Period from January 1, 2005 to June 17, 2005

 

As of June 17, 2005, we owned seven hotel properties. Our total assets were $657.8 million as of June 17, 2005. Total liabilities were $181.2 million as of June 17, 2005, including $159.3 million of debt. Shareholders’

 

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equity was approximately $476.6 million as of June 17, 2005. Our net loss for the period from January 1, 2005 to June 17, 2005 was $11.1 million.

 

Revenue.    We had total revenues of $59.9 million for the period from January 1, 2005 to June 17, 2005. Revenue consists primarily of the room, food and beverage and other revenues from the initial seven hotels. The average occupancy of our hotels was 74.8% for the period from January 1, 2005 to June 17, 2005. The hotels collectively achieved an ADR of $144.70 and RevPAR of $108.17 during the period from January 1, 2005 to June 17, 2005. The RevPAR of the initial seven hotels increased 13.3% from the comparable period in 2004. The pro forma revenues for the period from January 1, 2005 to June 17, 2005, assuming we acquired the Torrance Marriott, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2005, were $158.1 million.

 

The following key hotel operating statistics are for all of our seven initial properties for the period from January 1, 2005 to June 17, 2005 and period from January 3, 2004 to June 18, 2004. The hotel operating statistics for the period ended June 18, 2004 reflect the results of operations of the hotels under previous ownership.

 

     Period from January 1,
2005 to June 17, 2005


   Period from January 3,
2004 to June 18, 2004


   % Change

 

Occupancy %

     74.8%      73.2%    2.2 %

ADR

   $ 144.70    $ 130.41    11.0 %

RevPAR

   $ 108.17    $ 95.44    13.3 %

 

Hotel operating expenses.    Our hotel operating expenses totaled $47.8 million for the period from January 1, 2005 to June 17, 2005. Hotel operating expenses consist primarily of operating expenses of the initial seven hotels, including approximately $3.2 million of non-cash straight line ground rent expense. The pro forma hotel operating expenses for the period from January 1, 2005 to June 17, 2005, assuming we acquired the Torrance Marriott, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2005, were $118.0 million.

 

Depreciation and amortization expense.    Our depreciation and amortization expense totaled $8.7 million for the period from January 1, 2005 to June 17, 2005. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. The furniture, fixtures and equipment depreciable lives are less than one year for the Courtyard Midtown East, the Courtyard Fifth Avenue and the Bethesda Marriott Suites since these hotels will undergo significant renovations within the next year. The pro forma depreciation expense for the period from January 1, 2005 to June 17, 2005, assuming we acquired the Torrance Marriott, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2005, was $15.9 million, which reflects the use of actual depreciation lives assigned to the assets in purchase accounting.

 

Corporate expenses.    Our corporate expenses totaled $7.9 million for the period from January 1, 2005 to June 17, 2005. Corporate expenses principally consist of employee related costs, including base payroll, bonus and restricted stock. Corporate expenses also include organizational costs, professional fees and directors’ fees. We recorded an expense of $3,736,250 during the period from January 1, 2005 to June 17, 2005 as a result of our commitment to issue on the fifth anniversary of our initial public offering 382,500 shares of common stock to our executive officers.

 

Interest expense.    Our interest expense totaled $6.5 million for the period from January 1, 2005 to June 17, 2005. This interest expense related to mortgage debt incurred (or in one case acquired) in connection with our acquisition of our initial seven hotels. As of June 17, 2005, we had property specific mortgage debt outstanding on five of our hotels. On four of the hotels, we had fixed rate secured debt, which bears interest at rates ranging from 5.11% to 7.69% per year. On the fifth hotel, we had variable rate secured debt, the interest of which is

 

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based on LIBOR plus a spread. The interest rate as of June 17, 2005 on this mortgage loan was 5.95%. In addition, during the period from January 1, 2005 to June 17, 2005, we repaid the mortgage debt on the Torrance Marriott ($44 million) and the Lodge at Sonoma, a Renaissance Resort & Spa ($20 million). In conjunction with the repayment of the mortgage on the Lodge at Sonoma, a Renaissance Resort & Spa, we incurred a prepayment penalty of approximately $50,000 which is classified as interest expense on the accompanying condensed consolidated statements of operations. In conjunction with the repayment of these mortgages, we wrote off unamortized deferred financing fees of approximately $655,000 which is also classified as interest expense on the accompanying condensed consolidated statements of operations. The pro forma interest expense for the period from January 1, 2005 to June 17, 2005, assuming we acquired the Torrance Marriott, the Capital Hotel Investment Portfolio, the Vail Marriott Mountain Resort & Spa and the Oak Brook Hills Marriott Resort on January 1, 2005 and repaid the mortgage debt on The Lodge at Sonoma Resort & Spa and the Torrance Marriott hotels on January 1, 2005, was $9.5 million.

 

Income taxes.    We recorded an expense for income taxes of $558,847 for the period from January 1, 2005 to June 17, 2005. We recorded an income statement charge of $1.4 million in the period to reverse a portion of the deferred tax assets recorded in 2004 in connection with our REIT election. This charge was offset by an income tax benefit of $848,490 recorded on the pre-tax loss of Bloodstone TRS, Inc. for the period from January 1, 2005 to June 17, 2005.

 

Liquidity and Capital Resources

 

Our short-term liquidity requirements consist primarily of funds necessary to fund future distributions to our stockholders to maintain our REIT status as well as to pay for operating expenses and other expenditures directly associated with our hotel properties, including:

 

    recurring maintenance and capital expenditures necessary to maintain our hotel properties properly; and

 

    interest expense and scheduled principal payments on outstanding indebtedness.

 

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our anticipated secured revolving credit facility.

 

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotel properties, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our hotel properties, scheduled debt payments and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital including the cash we received upon completion of our initial public offering, cash provided by operations, and borrowings, as well as through the issuances of additional equity or debt securities. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the capital markets may not be consistently available to us on terms that are attractive, or at all. We believe that our existing cash and cash equivalents, together with the net proceeds from our initial public offering, cash flow from operations and borrowings, will be sufficient to fund the $33.5 million of renovation costs in 2005 and the first quarter of 2006 for our initial hotels and to fund our cash requirements during the next twelve months.

 

We intend to utilize various types of debt to finance a portion of the costs of acquiring additional hotel properties. We expect this debt will include long-term, fixed-rate, mortgage loans, variable-rate term loans, and secured revolving lines of credit. We entered into approximately $82.6 million in first mortgage debt in connection with our acquisition of the Marriott Los Angeles Airport, approximately $57.4 million of first mortgage debt in connection with our acquisition of the Renaissance Worthington and approximately $62.5 million in first mortgage debt on the Frenchman’s Reef & Morning Star Marriott Beach Resort.

 

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In order to qualify as a REIT and to avoid U.S. corporate-level tax on the income we distribute to our stockholders, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, on an annual basis. Therefore, once the total net proceeds of our initial public offering and our July 2004 private placement are substantially fully invested, we intend to raise additional capital in order to grow our business and invest in additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we anticipate that any debt we incur in the future would include restrictions (including lockbox and cash management provisions) that under certain circumstances will prohibit our subsidiaries that own our hotels from making distributions or paying dividends, repaying loans to us or other subsidiaries or transferring any of their assets to us or another subsidiary. For additional information regarding our distribution policies and requirements, see “Dividend Policy and Distributions.”

 

Our Senior Secured Revolving Credit Facility

 

We obtained a three-year, $75.0 million senior secured revolving credit facility from Wachovia Bank, National Association, as administrative agent under the credit facility, and Citicorp North America, Inc. and Bank of America, N.A., as co-syndication agents under the credit facility on July 8, 2005. Our operating partnership is the borrower under the credit facility. The credit facility is guaranteed by substantially all of our material subsidiaries and is secured by first mortgages on certain of our qualifying properties, which make up the “borrowing base.” Torrance Marriott and the Vail Marriott Mountain Resort & Spa are the two hotel properties initially comprising the borrowing base. We may add hotels to the borrowing base but only if the applicable hotel is:

 

    a full-service, select-service or extended-stay hotel;

 

    operated by managers and subject to management agreements acceptable to the agent and a specified number of lenders under the credit facility (Marriott and Vail Resorts are deemed to be approved third-party managers under the facility);

 

    free of all material structural and title defects;

 

    free from environmentally hazardous materials, as verified by a Phase I environmental assessment; and

 

    wholly-owned by us on a fee simple basis (ground leases covering the property are permissible).

 

The credit facility is available to us for three years, starting from July 10, 2005. We may extend the maturity date of the credit facility for an additional year upon the payment of applicable fees and the satisfaction of certain other conditions, such as the provision of adequate notice, our not defaulting on the terms of the credit facility and the truth of certain representations and warranties in all material respects at the time of extension. We also have the right to increase the amount of the loan to $250.0 million with the lenders’ approval. On July 29, 2005, we made a $5.0 million draw under this credit facility.

 

We pay interest on the periodic advances under the credit facility at varying rates, based upon either LIBOR or the applicable prime rate, plus an agreed upon additional margin amount. The interest rate depends upon our level of outstanding indebtedness in relation to the value of our assets from time to time, as follows:

 

     Leverage Ratio

 
     70% or greater

    65% to 70%

    less than 65%

 

Prime rate margin

   1.25 %   1.00 %   0.75 %

LIBOR margin

   2.00 %   1.75 %   1.45 %

 

In addition to the interest payable on amounts outstanding under the credit facility, we are required to pay an annual amount equal to 0.35% of the unused portion of the credit facility.

 

We have the right to select LIBOR-based loans for periods which may vary from one month to six months. We will only be obligated to pay interest on the loan until the final maturity, but have the right to repay all or any

 

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portion of the loan from time to time without penalty or premium, other than customary early payment fees if we repay a LIBOR loan before the end of the contract period. We are obligated to pay interest on prime rate-based loans every month, and interest on LIBOR-based loans either at the end of the LIBOR contract period or, if sooner, every three months.

 

Our ability to borrow under the credit facility will be dependent upon the size of the borrowing base, from time to time. We are permitted to borrow up to 65% of the lesser of (1) the appraised value of the borrowing base properties or (2) our cost of the borrowing base properties. Included in our cost of the borrowing base properties are renovation costs that we incur following the acquisition of the borrowing base properties. In addition, the net operating income generated by the borrowing base properties, as calculated by Wachovia Bank, National Association, must at all times be greater than 140% of the implied minimum debt service. The implied minimum debt service is an amount calculated by Wachovia Bank, National Association to be the equivalent of the debt service that would be payable under conventional mortgage loans in an amount equal to the amount outstanding under the credit facility.

 

In addition, we are required to comply with a series of financial and other covenants in order to borrow under the facility. These covenants include the following:

 

    At no time during the first year of the credit facility may our total indebtedness be more than 75% of our total assets. Similarly, our total indebtedness may not exceed 70% of our total assets during the second year or 65% of our total assets during the third year.

 

    Our adjusted EBITDA must at all times exceed 150% of the sum of our regularly scheduled debt service plus our preferred dividends.

 

    We cannot have more than 50% of our total indebtedness as floating rate debt that is not subject to an interest rate protection agreement.

 

Off-Balance Sheet Arrangements

 

We lease the land underlying the Bethesda Marriott Suites and the Courtyard Manhattan/Fifth Avenue, and portions of the land underlying the Renaissance Worthington, pursuant to ground leases that provide for ground lease rental payments that are stipulated in the ground leases and increase in pre-established amounts over the remaining terms of the leases. We lease the land underlying the Salt Lake City Marriott Downtown pursuant to a ground lease that provides for ground lease payments that are calculated based on a percentage of gross revenues. We record the future minimum ground rent payments on the Bethesda Marriott Suites and the Courtyard Manhattan/Fifth Avenue on a straight-line basis as required by accounting principles generally accepted in the United States. We also lease the ground under the Marriott Griffin Gate Resort golf course and under the Oak Brook Hills Marriott Resort golf course and the ground under a portion of the Salt Lake City Marriott Downtown ballroom not covered by the main ground lease underlying the hotel.

 

Outstanding Debt

 

As of the date of this prospectus, we have approximately $358.4 million of outstanding mortgage debt. In addition, we have drawn $5 million on our line of credit. The following table sets forth our mortgage debt obligations on our hotel properties:

 

Property


   Principal
Balance


   Prepayment
Penalties


   Interest Rate

  Maturity
Date


   Amortization
Provisions


Courtyard Manhattan/Midtown East

   $ 44,423,508    No(1)    5.195%   12/09    25 years

Salt Lake City Marriott Downtown

     38,376,466    Yes(1)    5.50%   12/14    20 years(6)

Marriott Griffin Gate Resort

     30,645,703    Yes(2)    5.11%   1/10    25 years

Bethesda Marriott Suites

     19,483,924    Yes(3)    7.69%   2/23    25 years

Courtyard Manhattan/Fifth Avenue

     23,000,000    No(4)    LIBOR
+ 2.70%(7)
  1/07(5)    Interest Only

Marriott Los Angeles Airport

     82,600,000    No(8)    5.30%   10 years    Interest Only

Renaissance Worthington

     57,400,000    No(8)    5.40%   10 years    30 years(9)

Frenchman’s Reef & Morning Star Marriott Beach Resort

     62,500,000    No(8)    5.44%   10 years    30 years(10)
    

                  

Total:

   $ 358,429,601                   
    

                  

 

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(1) The debt may not be prepaid until three months prior to the maturity date of the mortgage loan (the “Prepayment Release Date”). For Salt Lake City Marriott Downtown, we may prepay the loan on or after the Prepayment Release Date without payment of fees. However, we must pay to the lender, simultaneously with such prepayment, the interest that would have accrued on the outstanding principal balance of the loan at the regular interest rate through the end of the interest period in which such prepayment occurs.
(2) We may not prepay the loan without the express written consent of the lender, and we have no right to prepay the debt until October 2009. Notwithstanding the foregoing, if the lender accepts prepayment of the debt prior to October 2009, we must pay a penalty equal to the greater of (i) 1% of the outstanding principal and (ii) the present value, as of the prepayment calculation date, of a series of monthly payments over the remaining term of the loan, each equal to the amount of interest that would be due on the portion of the loan being prepaid, assuming an annual interest rate of 5.11% over the discounted reinvestment yield, as such term is defined in the agreement.
(3) The debt may be prepaid. If it is prepaid prior to August 2012, it is subject to a prepayment fee equal to the greater of i) one percent of the outstanding principal amount or ii) a yield maintenance premium determined as set forth in the Deed of Trust.
(4) The debt may be prepaid at par as of December 2005.
(5) The debt allows for three one-year extensions provided that certain conditions are met.
(6) There is an accelerated amortization provision based on a predetermined formula of available cash flow.
(7) We have entered into an interest rate cap agreement on this debt. Breakage fees may be payable if the debt is repaid.
(8) Prepayment of the debt on the Marriott Los Angeles Airport and Renaissance Worthington is not permitted until the earlier of (i) two years after securitization (the lender intends to sell all or a portion of the debt through one or more public offerings) or (ii) four years from the closing date. Thereafter, we may pay a defeasance deposit in lieu of a prepayment of the debt. Prepayment in full will be permitted at par on the last three payment dates before the maturity date. For the loan secured by the mortgage on Frenchman’s Reef & Morning Star Marriott Beach Resort, we may release the lien of mortgage through a defeasance deposit at any time after the earlier of (i) two years after securitization or (ii) thirty months after the closing date of the loan.
(9) The debt has a four-year interest only period. After the expiration of that period, the debt will amortize based on a thirty-year schedule.
(10) The debt has a three-year interest only period. After the expiration of that period, the debt will amortize based on a thirty-year schedule.

 

Financing Strategy

 

We currently maintain a policy that limits our total debt level to no more than 60% of our aggregate property investment and repositioning costs with a target leverage of 45% to 55% of our aggregate property investment and repositioning costs. Our board of directors, however, may change or eliminate this debt limit, and/or the policy itself, at any time, without the approval of our stockholders. We have a debt ratio of approximately 42.2% of our pro forma property investment and repositioning costs as of June 17, 2005.

 

Going forward, we will consider a number of factors when evaluating our level of indebtedness and making financial decisions, including, among others, the following:

 

    the interest rate of the proposed financing;

 

    prepayment penalties and restrictions on refinancing;

 

    the purchase price of properties we acquire with debt financing;

 

    our long-term objectives with respect to the financing;

 

    our target investment returns;

 

    the ability of particular properties, and our company as a whole, to generate cash flow sufficient to cover expected debt service payments;

 

    overall level of consolidated indebtedness;

 

    timing of debt and lease maturities;

 

    provisions that require recourse and cross-collateralization;

 

    corporate credit ratios, including debt service coverage, debt to total market capitalization and debt to undepreciated assets; and

 

    the overall ratio of fixed and variable-rate debt.

 

Beyond our secured revolving credit facility, we intend to use other financing methods as necessary, including obtaining from banks, institutional investors or other lenders, financings through property mortgages,

 

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bridge loans, letters of credit, and other arrangements, any of which may be unsecured or may be secured by mortgages or other interests in our investments. In addition, we may issue publicly or privately placed debt instruments. When possible and desirable, we will seek to replace short-term sources of capital with long-term financing.

 

Our indebtedness may be recourse, non-recourse or cross-collateralized and may be fixed rate or variable rate. If the indebtedness is non-recourse, the collateral will be limited to the particular properties to which the indebtedness relates. In addition, we may invest in properties subject to existing loans secured by mortgages or similar liens on the properties, or may refinance properties acquired on a leveraged basis. We may use the proceeds from any borrowings to refinance existing indebtedness, to refinance investments, for general working capital or for other purposes when we deem it advisable.

 

Contractual Obligations

 

The following table outlines the timing of payment requirements related to our consolidated mortgage debt and other commitments as of December 31, 2004.

 

     Payments due by period

     Total

  

Less than

1 year


  

1 to 3

years


  

4 to 5

years


  

After 5

years


Long-Term Debt Obligations

   $ 177,827,573    $ 3,113,034    $ 49,699,211    $ 47,579,899    $ 77,435,429

Operating Lease Obligations—Ground Leases

   $ 608,071,048    $ 1,260,432    $ 2,648,853    $ 2,941,491    $ 601,220,272

Office Space

   $ 87,000    $ 87,000    $ —      $ —      $ —  

 

Cash Distribution Policy

 

We operated as a taxable C Corporation during our first taxable year ended December 31, 2004. We will elect to be taxed as a REIT under the Code for the taxable year ending on December 31, 2005 and subsequent taxable years. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction, to our stockholders. It is our current intention to comply with these requirements, elect REIT status and maintain such status going forward. As a REIT, we generally will not be subject to U.S. corporate federal, state or local income taxes on taxable income we distribute to our stockholders (although the taxable income of Bloodstone TRS, Inc., our TRS lessees and other TRSs generally will be subject to regular corporate tax). If we fail to qualify as a REIT in any taxable year, we will be subject to federal, state and local income taxes at regular corporate rates and we may not be able to qualify as a REIT for four subsequent tax years. Even if we qualify for federal taxation as a REIT, we may be subject to certain state, local and foreign taxes on our income and property and to federal income and excise taxes on our undistributed taxable income. See “Dividend Policy and Distributions.”

 

Inflation

 

Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our hotel management companies to raise room rates.

 

Seasonality

 

The operations of hotel properties historically have been seasonal depending on location and, accordingly, we expect some seasonality in our business.

 

Geographic Concentration

 

Our hotel properties are located in the following markets: New York City (2 hotels), Washington D.C., Los Angeles (2 hotels), Salt Lake City, Northern California, Lexington, Kentucky, Atlanta (2 hotels), Fort Worth, Vail (Colorado), St. Thomas (U.S. Virgin Islands) and Oak Brook, Illinois.

 

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Tax and Depreciation

 

The following table reflects certain real estate tax information for our hotel properties:

 

Property


 

Federal

Tax Basis

(In thousands)


  Property
Tax Rate
2004
Estimate(1)


   

Real Estate
Tax 2004
Estimate

(In thousands)


 

Depreciation
Method


  Tax
Depreciation
Life (Years)


 

Annual

Depreciation
Percent (%)


 

Courtyard

Manhattan/Midtown

East

  $ 71,144   1.48 %   $ 1,052  

Straight-Line

  39   2.564 %

Torrance Marriott

    51,504   1.38       711  

Straight-Line

  39   2.564  

Salt Lake City Marriott

Downtown

    45,292   1.42       645  

Straight-Line

  39   2.564  

Marriott Griffin Gate

Resort

    41,297   0.79       325  

Straight-Line

  39   2.564  

Bethesda Marriott

Suites

    46,271   1.12       517  

Straight-Line

  39   2.564  

Courtyard

Manhattan/Fifth

Avenue

    33,779   2.36       798  

Straight-Line

  39   2.564  

The Lodge at Sonoma

Renaissance Resort &

Spa

    27,410   1.22       335  

Straight-Line

  39   2.564  

Renaissance Worthington

    73,272   1.45       1,064   Straight-Line   39   2.564  

Marriott Atlanta Alpharetta

    38,212   0.90       344   Straight-Line   39   2.564  

Frenchman’s Reef & Morning Star Marriott Beach Resort(2)

    69,846   —         —     Straight-Line   39   2.564  

Marriott Los Angeles Airport

    107,898   0.99       1,064   Straight-Line   39   2.564  

Vail Marriott Mountain Resort & Spa

    58,263   0.51       297   Straight-Line   39   2.564  

SpringHill Suites Atlanta Buckhead(3)

    N/A   N/A       N/A   Straight-Line   39   2.564  

Oak Brook Hills Marriott Resort

    59,459   0.64       379   Straight-Line   39   2.564  

(1) Per $1,000 of assessed value.
(2) This hotel is exempt from real estate taxes pursuant to an agreement with the U.S. Virgin Islands Industrial Development Commission.
(3) Property tax information is not applicable. The hotel opened on July 1, 2005 and therefore has no historical operating results.

 

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Qualitative Disclosures about Market Risk

 

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and which we expect to be exposed to in the future, is interest rate risk. Some of our outstanding debt has a variable interest rate. We use interest rate caps to manage our interest rate risks relating to our variable rate debt. Our total outstanding debt at June 17, 2005 was approximately $156.4 million, of which approximately $23.0 million or 14.7% was variable rate debt. If market rates of interest on our variable debt were to increase by 1.0%, or approximately 100 basis points, the increase in interest expense on our variable debt would decrease future earnings and cash flows by approximately $230,000 annually. On the other hand, if market rates of interest on our variable rate were to decrease by one percentage point, or approximately 100 basis points, the decrease in interest expense on our variable rate debt would increase future earnings and cash flow by approximately $230,000. As of June 17, 2005 the fair value of the fixed rate debt approximated book value.

 

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HOTEL INDUSTRY

 

Hotel Industry Recovery.    We believe that the U.S. hotel industry is continuing to recover from the severe effects of an economic slowdown and reduction in travel following the terrorist attacks of September 11, 2001, which led to declines in room rates as hotels competed more aggressively for fewer guests. As a result, hotel industry RevPAR and operating performance declined substantially in the period 2001 to 2003.

 

General economic and local market conditions affect the levels of business and leisure travel, which in turn affect hotel demand and, therefore, operating performance. Along with hotel demand, new hotel room supply is another important factor affecting the hotel industry’s performance. Room rates, occupancy and RevPAR typically increase when demand growth exceeds supply growth. According to Smith Travel Research, Inc., demand for hotel rooms recently increased while growth in the supply of new hotel rooms slowed and is expected to remain at historically low levels for the next several years.

 

Attractive Environment for Acquisitions.    We believe that the current environment presents the opportunity to acquire hotel properties at an attractive time in the hotel industry cycle and participate in improved hotel industry fundamentals. As economic conditions continue to improve, we expect a number of hotel properties with attractive values will be sold over the near-term. Unlike the last industry downturn in the early 1990’s, current hotel owners generally have not been compelled to sell their hotels at distressed prices. In the most recent downturn, hotel properties generally were more conservatively leveraged and hotel owners therefore were able to comply with their debt service obligations despite the cash flow reductions caused by the economic and industry slowdown. While the hotel industry is now recovering from the general economic decline of the previous few years, we believe that a significant number of hotel owners are motivated to sell their hotel properties for a number of reasons. Some owners are restructuring their portfolios by selling some hotels in order to restore service levels and accelerate maintenance and capital expenditures to capitalize on recovering demand levels and increase potential revenue streams at their remaining hotels. Other owners have been forced to hold their assets longer than planned during the market downturn and are seeking to sell into the first rising market in several years.

 

Because the market appears to accept the notion of broad hotel market recovery, sellers are demanding and receiving relatively high multiples of trailing earnings for their hotels. We believe that, even at such relatively high valuations, hotel industry performance indicators will generally continue to improve, providing the opportunity for future increases in revenues and profits.

 

Favorable Long-Term Demand Fundamentals.    As shown in the chart below, hotel room demand has historically been highly correlated with GDP growth. From 1988 to 2000, demand for hotel rooms grew at an average annual rate of approximately 2.6%, in line with the 3.3% average annual growth rate in GDP during the same period. However, a declining economy and the terrorist attacks of September 11, 2001 led to sharp declines in travel activities in 2001. Beginning in 2002, hotel room demand and GDP showed signs of improvement. Hotel room demand increased by 0.3% in 2002 and 1.5% in 2003, while GDP increased by 1.9% in 2002 and 3.0% in 2003. In 2004, the general economic and hotel room demand recovery continued, as hotel room demand increased by 4.7% and GDP increased by 4.4%. It is projected that hotel room demand will grow by 4.0% in 2005.

 

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LOGO

 

We expect that sustained growth in demand, combined with lower projected growth in new supply, as discussed below, will result in continued improvement of hotel industry fundamentals. According to Smith Travel Research:

 

    occupancy increased by 3.7% in 2004 and is projected to increase by 2.8% in 2005; and

 

    ADR increased by 4.0% in 2004 and is projected to increase by 4.2% in 2005.

 

Favorable Supply Fundamentals.    Historically, periods of weak hotel industry performance have been followed by a decrease in the growth of new hotel supply as availability of new development capital declines. Although improving operating fundamentals encourage new construction, development may require up to several years to complete. As a result, supply growth typically lags behind a hotel industry recovery. As shown in the graph below, new hotel room supply growth averaged 2.6% annually from 1988 to 2000, which is an average growth rate that is approximately equal to the average growth rate for demand over the same period of time, but since 2001, hotel room supply increased by only 1.6% in 2002, 1.2% in 2003 and 1.0% in 2004. New hotel room supply is projected to grow by 1.2% in 2005, as compared to its past 15-year historical annual average of 2.1%. We expect that if new supply remains constrained in 2005 and beyond, even moderate increases in demand should translate into further increases in hotel revenues and profitability.

 

LOGO

 

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Improving RevPAR.    RevPAR is generally higher in periods when room demand exceeds new supply growth. In 2001 and 2002, hotel room demand declined significantly below new room supply, resulting in RevPAR declines of 6.9% in 2001 and 2.7% in 2002. The aggregate percentage decline over this two-year period substantially surpassed the aggregate percentage decline for the 1990-91 period, previously considered one of the worst periods in the modern history of the U.S. hotel industry. We believe the industry is recovering in a pattern similar to that following the post-1991 decline. In 2003, hotel room demand stabilized and RevPAR increased 0.4%. In 2004, hotel demand increased significantly, leading to a significant increase in RevPAR of 7.8%, and RevPAR growth of 7.1% is projected for 2005.

 

LOGO

 

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Improving Margins.    The hotel industry has operated more efficiently over the past decade, notwithstanding the significant industry downturn of 2001-2003. Periods of strong RevPAR growth tend to be characterized by increases in gross operating margin, or GOP margins, while periods of slower RevPAR growth or periods of RevPAR decline tend to be characterized by GOP margin decreases. For example, from 2000 through 2003, GOP margins declined from 40.9% to 35.0% as RevPAR declined by an average of 3.1% annually. We believe that as economic conditions continue to improve, our hotel occupancy rates will increase, making it possible for us to increase daily rates and thereby increase our RevPAR and operating margins.

 

LOGO

 

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OUR BUSINESS

 

Our Company

 

We are a self-advised real estate company that owns, acquires and invests in upper upscale and upscale hotel properties located primarily in North America. To a lesser extent, we may invest, on a selective basis, in premium limited-service and extended-stay hotel properties in urban locations.

 

We began operations in July 2004 when we completed a private placement of our common stock.

 

Our Competitive Strengths

 

We believe we distinguish ourselves from other owners, acquirors and investors in hotel properties through our competitive strengths, which provide us with a competitive advantage over our competitors in implementing our strategies. Our competitive strengths include:

 

Experienced Management Team.    We believe the extensive hotel industry experience of our senior management team will enable us to effectively implement our business strategies. Our senior management team of William W. McCarten, John L. Williams, Mark W. Brugger, Michael D. Schecter and Sean M. Mahoney has extensive experience in lodging, real estate and related service industries, including hotel asset management, acquisitions, mergers, dispositions, development, redevelopment and financing. Collectively, they have been involved in hotel transactions aggregating several billion dollars and over 100,000 hotel rooms. In particular, our senior executive officers have the following experience:

 

    Mr. McCarten had over twenty-five years experience with the Marriott organization. Over the course of his career with Marriott and its related entities, he served in a variety of positions, including Chief Executive Officer of HMSHost Corporation (formerly Host Marriott Services Corporation) and Executive Vice President and Operating Group President of Host Marriott Corporation, each a publicly traded company. Mr. McCarten oversaw the spin-off of HMSHost Corporation through its merger with Autogrill S.P.A. The common stock of HMSHost Corporation initially traded at $6.25 per share and HMSHost Corporation was subsequently purchased by Autogrill, S.P.A. in 1999 for $15.75 per share (a 152% return). Mr. McCarten serves as our Chairman and Chief Executive Officer.

 

    Mr. Williams had over twenty-five years experience with Marriott and recently served as Executive Vice President of North American Hotel Development for Marriott, where he had primary responsibility for the acquisition and development of full-service hotel projects involving Marriott Hotels & Resorts, Renaissance Hotels & Resorts and The Ritz-Carlton. He has extensive experience in acquiring, repositioning, developing and redeveloping hotels. Mr. Williams serves as our President and Chief Operating Officer.

 

    Mr. Brugger has over a decade of experience in real estate and finance. He recently served as the Vice President Project Finance with Marriott as well as Chief Executive Officer of a non-lodging Marriott subsidiary with over $300 million in annual revenues. His experience includes structured finance transactions totaling in excess of $2 billion as well as the acquisition, disposition and financing of investment properties. Mr. Brugger serves as our Executive Vice President, Chief Financial Officer and Treasurer.

 

    Mr. Schecter has fifteen years experience practicing law, including six years with Marriott. He has led and successfully completed a wide array of transactions in the hotel industry, including mergers and acquisitions, dispositions, joint ventures, and financings. Mr. Schecter serves as our General Counsel and Secretary.

 

    Mr. Mahoney has over eleven years experience as a certified public accountant. He most recently served as a senior manager with Ernst & Young LLP. He has extensive experience with clients in the real estate and hotel industries. Mr. Mahoney serves as our Chief Accounting Officer and Corporate Controller.

 

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Marriott Investment Sourcing Relationship.    Our investment sourcing relationship with Marriott provides us, subject to certain limitations, with a “first look” at hotel property acquisition and investment opportunities known to Marriott. As a result of Marriott’s extensive network, relationships and knowledge of hotel property investment opportunities, we believe we have preferred access to a unique source of hotel property investment opportunities, many of which may not be available to other hospitality companies.

 

We regularly explore with Marriott how to further our investment sourcing relationship in order to maximize the value of the relationship to both parties. To date, both companies have worked proactively to convert appropriate opportunities into hotel property investments made by us and managed by Marriott. Our senior management team currently meets with senior representatives of Marriott approximately every two weeks to discuss, among other things, potential hotel property investment opportunities known to Marriott that are consistent with our stated business strategy.

 

Since our formation in 2004, Marriott has provided us with access to more than $1.9 billion of off-market acquisition opportunities. Marriott has contributed to us certain amounts in exchange for the right to manage hotel properties we have acquired. We refer to these amounts as “key money.” Marriott has provided us with key money of approximately $9.5 million in the aggregate in connection with our acquisitions of the Courtyard Manhattan/Midtown East ($2.5 million), the Courtyard Manhattan/Fifth Avenue ($1.0 million), the Torrance Marriott ($3.0 million), the Oak Brook Hills Marriott Resort ($2.5 million) and SpringHill Suites Atlanta Buckhead ($0.5 million). In connection with our acquisitions of the Courtyard Manhattan/Midtown East and The Lodge of Sonoma Renaissance Resort & Spa, Marriott also contributed $800,000 and $400,000, respectively, to the hotels’ furniture, fixtures and equipment reserves. The $1.0 million in key money payments received from Marriott in connection with our acquisition of the Courtyard Manhattan/Fifth Avenue is recoverable in the event that we have not completed certain renovations by January 22, 2006 and Marriott terminates the management agreement in accordance with certain provisions of the management agreement. The $6.0 million in key money contributed by Marriott in connection with our acquisition of the Torrance Marriott, Oak Brook Hills Marriott Resort and SpringHill Suites Atlanta Buckhead is recoverable subject to a 10% reduction per year in the event that the applicable management agreement with Marriott terminates within 10 years and such termination is not a result of a default by Marriott. In addition, Marriott provided us with a cash flow guarantee for the Oakbrook Hills Marriott Resort for the fiscal year 2006 and 2007 operating cash flow. The guarantee provides that Marriott will fund the deficit of actual hotel operating income during fiscal years 2006 and 2007. The total guarantee obligation of Marriott is capped at $2.5 million.

 

Our relationship with Marriott has facilitated the acquisition of seven of our fourteen hotel properties, including the Marriott Griffin Gate Resort and the Lodge at Sonoma Renaissance Resort & Spa, each of which we acquired directly from Marriott. We believe that we will continue to benefit from this relationship.

 

Except where contractually or ethically prohibited, or where Marriott believes it would be damaging to existing Marriott relationships, Marriott provides us a “first look” at hotel property investment opportunities known to Marriott that are consistent with our stated business strategy. These hotel property investment opportunities are those upon which Marriott believes that it may have a significant influence on a potential sale. We believe we are Marriott’s preferred purchaser of full-service as well as urban select-service and urban extended-stay hotels in the United States, Canada and Mexico. We believe that Marriott currently views “first look” as meaning Marriott will approach us first and give us an opportunity to work with Marriott in connection with an investment. Whether the “first look” opportunity develops further will depend upon the circumstances of each investment. In order to continue to develop this relationship, except where contractually or ethically prohibited, we intend to provide Marriott with a “first look” at all hotel management opportunities that become known to us.

 

Neither we nor Marriott have entered into a binding agreement or commitment setting forth the terms of this relationship. Our investment sourcing relationship may be modified or terminated at any time by either party. We retain the right to utilize any property brand and any hotel management company. We believe that should we pursue any such opportunity, it will not affect our investment sourcing relationship with Marriott, so long as such an opportunity does not interfere with Marriott’s objectives for our investment sourcing relationship. On the

 

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other hand, Marriott has numerous longstanding relationships with other potential property owners and we understand that Marriott may work with other owners on any potential transaction.

 

Marriott’s only binding commitment with regard to this investment sourcing relationship is that until June 30, 2006, it will not enter into any written agreement or series of written agreements granting any third party the right to receive information from Marriott concerning opportunities to purchase full-service, urban select-service or urban extended-stay hotels in the United States, or in any region thereof, prior to such opportunities being presented to us. Our only binding commitment with regard to this relationship is that until June 30, 2006, we will not enter into a written agreement or series of written agreements granting any third party the right to receive information from us concerning potential opportunities to provide hotel management services for full-service, urban select-service or urban extended-stay hotels in the United States, or in any region thereof, prior to such opportunity being presented to Marriott. However, for any particular hotel, we are under no obligation to use Marriott as our hotel management company and we may invest in hotel properties that do not operate under one of Marriott’s brands.

 

Pursuant to this investment sourcing relationship, we have pursued, and intend to continue to pursue, hotel property investment opportunities referred to us by Marriott and we intend to continue to utilize Marriott as our preferred hotel management company. We believe that this strategy will benefit our stockholders because we believe that Marriott’s strong brands and excellent hotel management services have an extensive track record of providing its owners with a RevPAR premium over competitive brands.

 

Proven Acquisition Capability.    Our senior management team has established a broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, commercial real estate brokers and other key industry participants. These industry relationships have provided us with a valuable source of potential hotel property investment opportunities. Since our July 2004 private placement, we have acquired the following fourteen hotel properties, comprising 5,637 rooms:

 

    Courtyard Manhattan/Midtown East in New York, New York, acquired in November 2004 for approximately $74.3 million (sourced by Marriott and purchased from a private partnership);

 

    Torrance Marriott in Los Angeles, California, acquired in January 2005 for approximately $62.0 million (sourced by a broker and purchased from a public REIT);

 

    Salt Lake City Marriott Downtown in Salt Lake City, Utah, acquired in December 2004 for approximately $49.6 million (sourced by a broker and purchased from a public REIT);

 

    Marriott Griffin Gate Resort in Lexington, Kentucky, acquired in December 2004 for approximately $46.9 million (sourced by and purchased from Marriott);

 

    Bethesda Marriott Suites in Bethesda, Maryland, acquired in December 2004 for approximately $41.1 million (sourced by a broker and purchased from a private partnership);

 

    Courtyard Manhattan/Fifth Avenue in New York, New York, acquired in December 2004 for approximately $35.6 million (sourced by a broker and purchased from an institutional investment fund);

 

    The Lodge at Sonoma Renaissance Resort & Spa in Northern California, acquired in October 2004 for approximately $31.5 million (sourced by and purchased from Marriott);

 

    Renaissance Worthington in Fort Worth, Texas, Marriott Atlanta Alpharetta in Atlanta, Georgia, Frenchman’s Reef & Morning Star Marriott Beach Resort in St. Thomas, U.S. Virgin Islands and Marriott Los Angeles Airport in Los Angeles, California, collectively acquired in June 2005 for approximately $318.3 million, including pre-funded escrow amounts for capital improvements (sourced by our executive officers and purchased from a private partnership); and

 

    Vail Marriott Mountain Resort & Spa, acquired in June 2005 for approximately $64.4 million, including pre-funded escrow amounts for capital improvements (sourced by our executive officers and purchased from a public company).

 

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    SpringHill Suites Atlanta Buckhead, acquired in July 2005 for approximately $34.1 million (sourced by Marriott and purchased from a private partnership)

 

    Oak Brook Hills Marriott Resort, acquired in July 2005 for approximately $65.7 million (sourced by a broker and purchased from an institutional investment fund)

 

We believe that our ability to quickly identify, negotiate, finance and consummate acquisitions has positioned us as a preferred buyer of hotel properties.

 

Growth-Oriented Capital Structure.    On July 8, 2005, we entered into a three-year, $75.0 million senior secured revolving credit facility with Wachovia Bank, National Association, as administrative agent under the credit facility, and Citicorp North America, Inc. and Bank of America, N.A., as co-syndication agents under the credit facility. This facility may be expanded to $250.0 million at our election, subject to the approval of the lenders, to fund additional acquisitions and renovations and for general working capital and other corporate purposes. We maintain a target leverage ratio of 45% to 55% of our aggregate property investment and repositioning costs.

 

Our Business Objective and Strategies

 

Our principal business objective is to maximize stockholder value through a combination of dividends, growth in funds from operations and increases in net asset value. In order to achieve this objective, our key strategies are as follows:

 

    disciplined acquisition of hotel properties;

 

    aggressive asset management; and

 

    opportunistic hotel repositioning.

 

Disciplined Acquisition of Hotel Properties.    We will seek to create value by acquiring upper upscale and upscale hotel properties in geographically diverse locations, and to a lesser extent, premium limited service and extended stay hotels in urban locations, in accordance with our disciplined acquisition strategy. Our focus is on acquiring undermanaged or undercapitalized hotel properties at prices below replacement cost and that are located in markets where we expect demand growth will outpace new supply.

 

Aggressive Asset Management.    We intend to aggressively manage our hotel properties by continuing to employ value-added strategies (such as re-branding, renovating, or changing management) designed to increase the operating results and value of our hotel property investments. We will conduct improvements to certain of our initial properties designed to enhance the overall experience of hotel guests and increase RevPAR and asset value. For example, in certain hotels, we are planning the addition of new furniture and bedding, installation of granite vanities in bathrooms, and introduction of new concepts for food and beverage outlets, such as the conversion of a gift shop to a Starbuck’s outlet. We currently plan to invest approximately $33.5 million in 2005 and the first quarter of 2006 to renovate our initial hotels, including $27.0 million in capital that has been pre-funded into various escrow accounts and $25.9 million in 2005 and the first quarter of 2006 to renovate our recently acquired hotel properties, including $11.5 million in capital that has been pre-funded into various escrow accounts.

 

We do not operate our hotel properties, but we have structured, and intend to continue to structure, our hotel management agreements to allow us to closely monitor the performance of our hotels and to ensure, among other things, that our third-party managers: (i) implement an approved business and marketing plan, (ii) implement a disciplined capital expenditure program and (iii) establish and prudently spend appropriate furniture, fixtures and equipment reserves.

 

Capitalizing on Repositioning Opportunities.    We intend to seek opportunities to acquire hotel properties that will benefit from repositioning, including re-branding, renovating or changing management to increase the operating results and value of our hotel property investments. In this regard, we believe our investment sourcing relationship with Marriott will yield many of these opportunities.

 

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Hotel Industry Segments

 

Smith Travel Research, Inc. classifies the hotel industry into the following chain scales, as determined by each brand’s average system-wide daily rates: luxury, upper upscale, upscale, midscale with food and beverage, midscale without food and beverage, and economy. The category of “upper upscale” includes hotels such as Doubletree, Embassy Suites Hotels, Hilton, Hyatt, Marriott and Sheraton; the category of “upscale” includes hotels such as Courtyard by Marriott, SpringHill Suites by Marriott, Crowne Plaza, Hawthorn Suites, Hilton Garden Inn, Radisson, Residence Inn by Marriott and Wyndham; and the category of “midscale” includes hotels such as Four Points—Sheraton, Holiday Inn, Holiday Inn Express and Holiday Inn Select.

 

“Extended-stay” hotels are hotels generally designed to accommodate guests staying more than six nights and typically provide rooms with fully equipped kitchens, entertainment systems, office spaces with computer and telephone lines, access to fitness centers and other amenities. “Limited-service” hotels target budget-conscious travelers and therefore have fewer amenities, such as in-house food and beverage facilities.

 

Environmental Matters

 

Under various federal, state and local environmental laws and regulations, a current or previous owner, operator or tenant of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases or threats of releases at such property and may be held liable to a government entity or to third parties for property damage and for investigation, clean-up and monitoring costs incurred by such parties in connection with the actual or threatened contamination. These laws typically impose clean-up responsibility and liability without regard to fault, or whether or not the owner, operator or tenant knew of or caused the presence of the contamination. The liability under these laws may be joint and several for the full amount of the investigation, clean-up and monitoring costs incurred or to be incurred or actions to be undertaken, although a party held jointly and severally liable may obtain contributions from other identified, solvent, responsible parties of their fair share toward these costs. These costs may be substantial and can exceed the value of the property. The presence of contamination, or the failure to properly remediate contamination, on a property may adversely affect the ability of the owner, operator or tenant to sell or rent that property or to borrow funds using such property as collateral and may adversely impact our investment in that property.

 

Federal regulations require building owners and those exercising control over a building’s management to identify and warn, via signs and labels, of potential hazards posed by workplace exposure to installed asbestos-containing materials and potential asbestos-containing materials in their building. The regulations also set forth employee training, record keeping and due diligence requirements pertaining to asbestos-containing materials and potential asbestos-containing materials. Significant fines can be assessed for violation of these regulations. Building owners and those exercising control over a building’s management may be subject to an increased risk of personal injury lawsuits by workers and others exposed to asbestos-containing materials and potential asbestos-containing materials as a result of these regulations. The regulations may affect the value of a building containing asbestos-containing materials and potential asbestos-containing materials in which we have invested. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling or a release to the environment of asbestos-containing materials and potentially asbestos-containing materials and may provide for fines to, and for third parties to seek recovery from, owners or operators of real estate facilities for personal injury or improper work exposure associated with asbestos-containing materials and potential asbestos-containing materials.

 

Prior to closing any property acquisition, we obtain Phase I environmental assessments in order to attempt to identify potential environmental concerns at the properties. These assessments are carried out in accordance with an appropriate level of due diligence and will generally include a physical site inspection, a review of relevant federal, state and local environmental and health agency database records, one or more interviews with

 

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appropriate site-related personnel, review of the property’s chain of title and review of historic aerial photographs and other information on past uses of the property. We may also conduct limited subsurface investigations and test for substances of concern where the results of the Phase I environmental assessments or other information indicates possible contamination or where our consultants recommend such procedures. We cannot assure you that these assessments will discover every environmental condition that may be present on a property.

 

The 2002 Phase I of the Frenchman’s Reef Marriott Beach Resort property in St. Thomas, Virgin Islands identified twenty-one 55-gallon drums containing both hazardous and non-hazardous wastes. While there was no associated soil staining, fines may be imposed by the Virgin Islands Department of Planning and Natural Resources for labeling issues and improper disposal. The estimated cost of solely the clean-up is between $4,000 and $5,000. We will have no recourse under the purchase agreement against the seller of this property for any of the environmental liabilities at this property prior to our acquisition of the property.

 

Competition

 

We encounter strong competition for investments in hotel properties. The hotel industry is highly competitive and our hotel properties are subject to competition from other hotels for guests. Competition is based on a number of factors, including convenience of location, brand affiliation, price, range of services, guest amenities, and quality of customer service. Competition is specific to the individual markets in which our properties are located and will include competition from existing and new hotels operated under brands in the full-service, select-service and extended-stay segments. We believe that properties flagged with a Marriott brand will enjoy the competitive advantages associated with their operations under such brand. Marriott’s centralized reservation systems and national advertising, marketing and promotional services combined with the strong management expertise they provide should enable our properties to perform favorably in terms of both occupancy and room rates. We also believe that Marriott Rewards® will generate repeat guest business that might otherwise go to competing hotels. Increased competition would have a material adverse effect on occupancy, ADR and RevPAR or may require us to make capital improvements that we otherwise would not undertake, which may result in decreases in the profitability of our hotel properties.

 

We face competition for the acquisition of and investment in hotel properties from institutional pension funds, private equity investors, REITs, hotel companies and others who are engaged in the acquisition of hotels. Some of these entities have substantially greater financial and operational resources than we have and may have greater knowledge of the markets in which we seek to invest. This competition may reduce the number of suitable investment opportunities offered to us and increase the cost of acquiring our targeted hotel property investments. Although we expect that our investment sourcing relationship with Marriott will continue to provide us with a continuing source of investment opportunities, Marriott is under no binding commitment to provide us with any such opportunities, as described under “Our Business—Our Investment Sourcing Relationship With Marriott.”

 

Employees

 

We currently employ eleven full-time employees. We anticipate hiring a number of additional full-time employees. We believe that our relations with our employees are good. None of our employees is a member of any union; however, the employees of Marriott working at our Courtyard Manhattan/Fifth Avenue hotel are currently represented by a labor union and are subject to a collective bargaining agreement.

 

Legal Proceedings

 

We are not involved in any material litigation nor, to our knowledge, is any material litigation pending or threatened against us, other than routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and not expected to harm our business, financial condition or results of operations.

 

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On March 31, 2005, the New York Hotel Trades Council and Hotel Association of New York City, Inc. Pension Fund, or Fund, sent us a Notice of Demand for Payment of Withdrawal Liability under Section 4202 of ERISA, with regard to our acquisition of the Courtyard Manhattan/Fifth Avenue and the related transfer of management of the hotel to Marriott. The Fund assessed a withdrawal liability of $484,242 under Section 4201 of ERISA. On June 2, 2005, the Fund rescinded the Notice of Demand for Payment of Withdrawal Liability.

 

Regulation

 

Our properties must comply with Title III of the Americans with Disabilities Act, or ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.

 

Insurance

 

We carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy. We do not carry insurance for generally uninsured losses such as loss from riots, war or acts of God. In addition, we carry earthquake and terrorism insurance on our properties in an amount and with deductibles which we believe are commercially reasonable. Certain of the properties in our portfolio are located in areas known to be seismically active. See “Risk Factors—Risks Related to the Hotel Industry—Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our stockholders.”

 

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OUR PROPERTIES

 

Since our formation, we have acquired 14 hotel properties. The tables set forth below first contain information regarding our initial seven hotel properties and then our seven recently acquired hotel properties.

 

Our Initial Hotel Properties

 

Prior to the acquisitions of the Capital Hotel Investment Portfolio and Vail Marriott Mountain Resort & Spa in June 2005, and the Oak Brook Hills Marriott Resort and SpringHill Suites Atlanta Buckhead in July 2005, we owned seven hotel properties. All of these initial hotel properties are currently managed by Marriott. We believe that each of these properties is adequately covered by insurance. The following table sets forth certain operating information for each of our initial hotels. This information includes periods prior to our acquisition of these hotels:

 

Property


  

Location


   Month
Acquired


   Number of
Rooms(1)


   Average
Occupancy(2)


    ADR(2)

   RevPAR(2)

Courtyard Manhattan

/Midtown East

  

New York, New York

   11/04    307    89.2 %   $ 199.43    $ 177.85

Torrance Marriott

  

Los Angeles County,

California

   1/05    487    77.4       99.64      77.16

Salt Lake City Marriott

Downtown

  

Salt Lake City, Utah

   12/04    510    67.9       115.51      78.49

Marriott Griffin Gate

Resort

  

Lexington, Kentucky

   12/04    408    68.0       110.10      74.94

Bethesda Marriott Suites

  

Bethesda, Maryland

   12/04    274    74.6       153.74      114.74

Courtyard Manhattan/

Fifth Avenue

  

New York, New York

   12/04    189    89.3       140.96      125.88

The Lodge at Sonoma

Renaissance Resort & Spa

  

Sonoma, California

   10/04    182    65.1       187.34      122.03
              
                   

TOTALS/WEIGHTED AVERAGES

        2,357    75.0 %   $ 135.94    $ 101.90
              
                   

(1) As of December 31, 2004.
(2) For the fiscal year ended December 31, 2004.

 

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The following table sets forth information regarding our investment in each of our initial hotel properties:

 

Property


  Location

  Year
Opened


  Number
of
Rooms(1)


  Purchase
Price(2)


  Pre-Funded
Capital
Improvement
Escrows(3)


  Projected
Additional
Capital
Improvements(4)


  Total
Projected
Investment(5)


  Total
Projected
Investment
Per Room


Courtyard Manhattan/ Midtown East   New York,
New York
  1998   307   $ 74,318,000   $ 4,539,000   $ —     $ 78,857,000   $ 256,863

Torrance

Marriott

  Los
Angeles
County,
California
  1985   487     62,002,000     10,000,000     —       72,002,000     147,848
Salt Lake City Marriott Downtown   Salt Lake
City, Utah
  1981   510     49,584,000     3,761,000     500,000     53,845,000     105,578

Marriott

Griffin Gate

Resort

  Lexington,
Kentucky
  1981   408     46,887,000     2,955,000     —       49,842,000     122,162

Bethesda

Marriott

Suites

  Bethesda,
Maryland
  1990   274     41,062,000     830,000     4,000,000     45,892,000     167,489
Courtyard Manhattan/ Fifth Avenue   New York,
New York
  1990   189     35,623,000     4,117,000     2,000,000     41,740,000     220,847

The Lodge at Sonoma

Renaissance Resort & Spa

  Sonoma,
California
  2001   182     31,545,000     800,000     —       32,345,000     177,720
           
 

 

 

 

     

TOTALS/WEIGHTED AVERAGE

  2,357   $ 341,021,000   $ 27,002,000   $ 6,500,000   $ 374,523,000   $ 158,898
           
 

 

 

 

     

(1) As of December 31, 2004.
(2) Purchase price includes, for each hotel property, all amounts paid to the seller, assumed debt and amounts paid for working capital plus costs paid with respect to third-party professional fees in connection with our purchase, but it does not include costs related to mortgage debt used by us to finance the purchase of the hotel property or escrow accounts established for the pre-funded capital improvements.
(3) Pre-funded capital improvements are amounts already funded into various escrow accounts and include furniture, fixtures and equipment reserves and lender-required reserves.
(4) Represents projected capital improvement escrows scheduled to occur through the end of the first quarter of 2006 that have not been pre-funded into an escrow account.
(5) Total projected investment, for each hotel property, is the sum of the purchase price, pre-funded capital improvements and projected capital improvements.

 

Courtyard Manhattan/Midtown East

 

Location and Demand Generators:    The Courtyard Manhattan/Midtown East is located in Manhattan’s East Side, on Third Avenue between 52nd and 53rd Streets. Demand for the hotel is generated by nearby financial services and other firms located in Midtown Manhattan.

 

The Property:    We hold a fee simple interest in a commercial condominium unit, which includes a 47.725% undivided interest in the common elements in the 866 Third Avenue Condominium; the rest of the condominium is owned predominately (48.2%) by the building’s other major occupant, Memorial Sloan-Kettering. The hotel contains 307 guestrooms and occupies the lobby area on the 1st floor, all of the 12th-30th floors and its pro rata share of the condominium’s common elements. The hotel was converted from office use and had its grand opening in 1998 as a Courtyard by Marriott.

 

In 1998, the prior owners entered into a long-term management agreement with Marriott to have the hotel managed and operated as a Courtyard. Following the post-9/11 downturn in the New York City hotel market, the

 

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prior owners filed a Chapter 11 bankruptcy case in October 2003 with the intention of rejecting the Marriott hotel management agreement and converting the hotel into residential condominium units. After substantial litigation with Marriott, the owners and Marriott agreed to resolve their disputes by selling the hotel to Marriott. In November 2004, the bankruptcy court confirmed the proposed plan, which provided, among other things, for the sale of the hotel to Marriott for $75 million. During this time and prior to signing the purchase and sale agreement, Marriott worked exclusively with us to determine our level of interest in acquiring the hotel. As a result of these discussions, on the day of the real estate closing, Marriott assigned the purchase and sale agreement to us and we took title to the hotel directly from the prior owners. In addition, Marriott also contributed to us $2.5 million of non-recoverable key money in return for our agreement to enter into a new, long-term management agreement.

 

We believe that the hotel will benefit from continued improvement in the New York City hotel market.

 

We have budgeted $4.3 million for a complete guestroom and public space renovation in the first quarter of 2006, or $14,134 per room. We intend to target the higher end of the market as a result of many of these improvements. We believe that the improving hotel market in New York City and the planned capital improvements will position this hotel to take advantage of its location and continuing improvement in the hotel industry.

 

Additional property highlights include:

 

Guestrooms:

 

    307 guestrooms, including 8 suites.

 

Meeting Space:

 

    3 meeting rooms; 1,500 square feet of total meeting space.

 

Food and Beverage:

 

    East Side Café, with 82 seats.

 

    East Side Lounge, with 22 seats.

 

Other Amenities:

 

    Fitness Center.

 

Competition:    Competitor hotels include The Doubletree, The Crowne Plaza at the United Nations, The Roosevelt and Radisson. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

 

Operating and Occupancy Information

 

    Fiscal Year

   

First Fiscal Half

2005


 
    2000

    2001

    2002

    2003

    2004

   

Room Revenue

  $ 20,742,000     $ 16,513,000     $ 16,099,000     $ 14,898,000     $ 19,874,000     $ 9,223,641  

ADR

  $ 204.37     $ 176.31     $ 168.79     $ 161.67     $ 199.43     $ 203.88  

Occupancy %

    91.0 %     83.8 %     83.7 %     82.5 %     89.2 %     87.7 %

RevPAR

  $ 185.98     $ 147.77     $ 141.35     $ 133.32     $ 177.85     $ 178.84  

 

Torrance Marriott

 

Location and Demand Generators:    The Torrance Marriott is located adjacent to the Del Amo Fashion Center mall, one of the largest malls in America, approximately ten miles from Los Angeles International Airport and less than two miles from the Pacific Ocean in the South Bay area of Los Angeles County. The hotel benefits from the fact that hotel room supply growth in Los Angeles has remained at relatively low levels, averaging only 0.62 percent per year between 1992 and 2003.

 

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Torrance is a major automotive center. Three major Japanese automobile manufacturers, Honda, Nissan and Toyota, have their U.S. headquarters in the Torrance area and generate significant demand for the hotel. The hotel is also expected to benefit from the extensive renovation and expansion of the Del Amo Fashion Center mall, which was purchased by the Mills Corporation in 2003.

 

The Property:    We own a fee simple interest in the hotel. The hotel was completed in 1985 and includes 487 guestrooms, including 11 suites, within a 17-story building. The property includes over 700 parking spaces in a three-story parking deck adjacent to the hotel.

 

At the time of our acquisition, the hotel was managed by Marriott and owned by Host Marriott Corporation, or Host, which had the right to sell the hotel subject to a Marriott franchise agreement and terminate the Marriott management agreement. Marriott provided us with $3.0 million in key money as an inducement to enter into a long-term management agreement. The $3.0 million in key money is recoverable by Marriott, subject to a 10% reduction per year through 2014, in the event that the management agreement with Marriott terminates within 10 years and such termination is not a result of a default by Marriott. We successfully negotiated with Host to purchase both the Salt Lake City Marriott Downtown and the Torrance Marriott for a combined purchase price. We believe the Marriott key money was essential in our ability to win the bid for the two hotels because it allowed us to increase our bid for the properties.

 

We have developed an intensive capital improvement and repositioning plan for this hotel and plan to spend $10 million in 2005 and 2006, or almost $20,534 per room, to replace the guestroom softgoods, renovate the lobby, food and beverage outlets and meeting space, and convert the gift shop to a Starbuck’s outlet. We also see an opportunity to introduce new concepts for two of the property’s food and beverage outlets. We believe that our repositioning plan will allow this hotel to improve guest satisfaction, entice more group business, improve local catering sales and command higher rates.

 

Additional property highlights include:

 

Guestrooms:

 

    487 guestrooms, including 11 suites, 260 king rooms and 216 double/double rooms.

 

Meeting Space:

 

    Approximately 23,000 total square feet of indoor and outdoor meeting space;

 

    10,080 square foot Grand Ballroom and 19 meeting rooms; and

 

    7,000 square foot outdoor meeting pavilion.

 

Food and Beverage:

 

    Garden Court Restaurant;

 

    Pitcher’s Sports Bar; and

 

    Lobby Lounge.

 

Other Amenities:

 

    Indoor/Outdoor Pool;

 

    Children’s Pool;

 

    Fitness Center;

 

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    Jacuzzi;

 

    Car Rental Desk; and

 

    Barber/Beauty Shop.

 

Competition:    Competitor hotels include The Crowne Plaza Redondo Beach, Hilton Torrance, Doubletree Hotel Carson Civic Plaza and Marriott Manhattan Beach. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition. We believe the Torrance hotel market has been highly competitive, with the Redondo Beach Crowne Plaza and the Hilton Torrance being the primary competitors.

 

Operating and Occupancy Information

 

     Fiscal Year

   

First Fiscal Half

2005


 
     2000

    2001

    2002

    2003

    2004

   

Room Revenue

   $ 16,469,000     $ 15,837,000     $ 13,580,000     $ 13,171,000     $ 13,678,000     $ 6,622,430  

ADR

   $ 107.49     $ 107.71     $ 91.69     $ 90.76     $ 99.63     $ 103.81  

Occupancy %

     86.4 %     82.9 %     82.6 %     81.9 %     77.4 %     79.9 %

RevPAR

   $ 92.91     $ 89.34     $ 75.78     $ 74.30     $ 77.16     $ 82.95  

 

Salt Lake City Marriott Downtown

 

Location and Demand Generators:    The Salt Lake City Marriott Downtown is located in downtown Salt Lake City across from the Salt Palace Convention Center near Temple Square, 15 minutes from Salt Lake City Airport.

 

Demand for the hotel is generated primarily by the Convention Center, the Church of Jesus Christ of Latter-Day Saints, the University of Utah, government offices and nearby ski destinations. The hotel is connected to Crossroads Plaza Mall, which is expected to undergo a major reconstruction as part of a redevelopment that is expected to include the construction of up to 900 residential units. Moreover, the Crossroads Plaza Mall has recently signed Nordstrom’s to a new lease. We believe the hotel will also benefit from the planned establishment by the Church of Jesus Christ of Latter-Day Saints of a major university, with enrollment of up to 10,000 students, near the hotel.

 

The Property:    We hold ground lease interests in the hotel and the extension that connects the hotel to Crossroads Plaza Mall. The term of the ground lease for the hotel runs through 2056, inclusive of five ten-year renewal options. The term of the ground lease for the extension of the hotel (containing approximately 1,078 square feet) runs through 2017, inclusive of the one remaining ten-year renewal option. The Salt Lake City Marriott Downtown hotel was completed in 1981 and includes 510 guestrooms. In 2004, Host engaged real estate brokers to sell the Salt Lake City Marriott Downtown and Torrance Marriott. We negotiated with Host to purchase both hotels (which were originally marketed separately) for a combined purchase price. We assumed the existing hotel management agreement with Marriott in connection with the acquisition of this hotel.

 

Between 2000 and 2002, the previous owners of the hotel made approximately $9.4 million in capital expenditures, including the replacement of softgoods in the guestrooms and a refurbishment of the lobby, ballroom and public space, incurred in connection with the 2002 Olympic games.

 

Additional property highlights include:

 

Guestrooms:

 

    510 guestrooms, including 6 suites, 231 king rooms and 278 double/double rooms.

 

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Meeting Space:

 

    Approximately 22,300 total square feet of meeting space; and

 

    A 14,000 square foot Grand Ballroom.

 

Food and Beverage:

 

    Elevations Restaurant, with 132 seats;

 

    Pitcher’s Sports Bar, with 22 seats; and

 

    Destinations Coffee Shop.

 

Other Amenities:

 

    Indoor/Outdoor Pool;

 

    Fitness Center;

 

    Sauna; and

 

    Car Rental Desk.

 

Competition:    Competitor hotels include Hilton, Marriott City Center, Little America, Hotel Monaco, Sheraton and Grand America. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition. We believe the Salt Lake City market has recently been characterized by over-supply, leading to intense rate competition and resulting in lower RevPAR.

 

Operating and Occupancy Information

 

     Fiscal Year

   

First Fiscal Half

2005


 
     2000

    2001

    2002

    2003

    2004

   

Room Revenue

   $ 16,363,000     $ 13,917,000     $ 18,019,000     $ 14,504,000     $ 14,570,000     $ 7,195,297  

ADR

   $ 121.76     $ 116.79     $ 130.82     $ 118.55     $ 115.51     $ 119.62  

Occupancy %

     72.4 %     64.2 %     73.1 %     65.9 %     67.9 %     70.2 %

RevPAR

   $ 88.14     $ 74.97     $ 95.66     $ 78.13     $ 78.49     $ 83.98  

 

Marriott Griffin Gate Resort

 

Location and Demand Generators:    Marriott Griffin Gate Resort is located north of downtown Lexington, Kentucky. The hotel is near all the area’s major corporate office parks and regional facilities of a number of major companies such as IBM, Toyota, Lexel Corporation and Lexmark International. The hotel also is located in proximity to downtown Lexington, the University of Kentucky, the historic Keeneland Horse Track and the Kentucky Horse Park.

 

The Property.    The hotel is a 163-acre regional resort that contains three distinct components: the seven story main hotel and public areas, the Griffin Gate Golf Club, with the Rees Jones-designed 18-hole golf course, and The Mansion (which was originally constructed in 1854 and was Lexington’s first AAA 4-diamond restaurant). We own the fee interest in the hotel, The Mansion, and the Griffin Gate Golf Club generally; however, there is a ground lease interest under approximately 54 acres of the golf course. The ground lease runs through 2033 (inclusive of four five-year renewal options), and contains a buyout right beginning at the end of the term in 2013 and at the end of each five-year renewal term thereafter. We are the sub-sublessee under another minor ground lease of land adjacent to the golf course, with a term expiring in 2020. Rent for the entire term was $1.00 and has been paid in full.

 

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The hotel was originally opened in 1981. The original developer of the resort sold it to the hotel’s interim owner, which recapitalized the hotel in the 1990s and Marriott provided a guarantee on the first mortgage debt at that time. The interim owner did not invest sufficient capital in the hotel during its ownership period and the hotel’s operating results began to decline at the end of the 1990s. The deterioration in the hotel product and operating performance continued into the early part of this decade, with the hotel generating cash flows insufficient to support its debt service. In 2003, Marriott acquired the first mortgage. Later that same year, it negotiated with the interim owner and took title to the resort for nominal consideration. In 2003, Marriott initiated a major renovation and repositioning of the resort, with an approximate $10 million capital improvement plan. The renovation included a complete guestroom and guestroom corridor renovation, including an extensive renovation of the suites to more effectively yield higher priced business, as well as a renovation of the exterior facade. In addition, to better accommodate group business, Marriott built a permanent climate-controlled meeting pavilion and upgraded the elevators in order to move groups more efficiently.

 

Prior to our formation, Marriott engaged a real estate broker to market the hotel on its behalf. After our formation, Marriott agreed to withdraw the resort from the market and negotiate with us on an exclusive basis. We purchased the hotel from Marriott in December 2004.

 

We plan to complete the renovation plan in 2005 with an additional investment of approximately $3.0 million, or $7,243 per room. The final phase of the renovation will focus on the public space at the hotel, including renovating the interior of The Mansion, replacing the softgoods in the ballroom as well as renovating, repainting or refreshing the lobby, the atrium and the lounge. The renovation and repositioning plan are designed to allow the resort to once again gain its leading market position, improve the guest experience and attract more group meeting planners.

 

Additional property highlights include:

 

Guestrooms:

 

    387 guestrooms and 21 suites, including Presidential Suites. All guestrooms provide modern, high-end services, including high speed internet.

 

Meeting Space:

 

    13,000 square feet of meeting space.

 

Food and Beverage:

 

    19th Hole, a fast-food restaurant;

 

    JW Steakhouse;

 

    Griffin Gate Gardens, which provides casual American meals;

 

    Mansion at Griffin Gate, which provides upscale American cuisine;

 

    Pegasus Lounge;

 

    Top Deck Poolside Bar; and

 

    Starbucks.

 

Other Amenities

 

    Fitness Center;

 

    Spa;

 

    Indoor/Outdoor pool;

 

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    Tennis Courts;

 

    Playground;

 

    Car Rental Desk; and

 

    Gift Shop/Newsstand.

 

Competition:    Competitor hotels include Sheraton Suites, The Crowne Plaza, Embassy Suites of Lexington, Hilton Suites of Lexington Green, Hyatt Regency and Radisson Plaza Hotel. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition. We believe the Lexington hotel market has limited competitive supply, leading to less intense competition than in some of our other markets. We believe the hotel’s primary competitor for transient commercial business is the Embassy Suites of Lexington.

 

Operating and Occupancy Information

 

     Fiscal Year

   

First Fiscal Half

2005


 
     2000

    2001

    2002

    2003

    2004

   

Room Revenue

   $ 11,092,000     $ 9,806,000     $ 10,551,000     $ 10,667,000     $ 11,151,000     $ 5,194,648  

ADR

   $ 107.76     $ 103.66     $ 99.91     $ 103.53     $ 110.10     $ 119.54  

Occupancy %

     69.3 %     63.7 %     69.8 %     69.4 %     68.1 %     63.2 %

RevPAR

   $ 74.69     $ 66.03     $ 69.70     $ 71.83     $ 74.99     $ 75.60  

 

Bethesda Marriott Suites

 

Location and Demand Generators:    Bethesda Marriott Suites is located in the Rock Spring Corporate Office Park near downtown Bethesda, Maryland, with convenient access to Interstates 270 and 495 (the Beltway) and the I-270 Technology Corridor. Rock Spring Corporate Office Park contains several million feet of office space and includes companies such as Marriott, Host and Lockheed Martin Corp., as well as the National Institute of Health.

 

The Property:    We hold a ground lease interest in the property. The current term of the ground lease will expire in 2087. The hotel was completed in 1990 and includes 274 guestrooms, all of which are suites. The property includes a connected parking garage with 321 spaces. The property was acquired through the acquisition of all the partnership interests in the ground lessee.

 

The hotel previously was operated under a lease arrangement between the owner and Marriott that created negative tax implications for any purchaser that had elected to be treated as a REIT. During our due diligence period, we worked with Marriott to change the lease into a hotel management agreement consistent with our intention to qualify as a REIT. Although the economics of the lease generally were preserved, the new management agreement provides us with certain additional rights over personnel decisions, capital expenditures and budget approvals. As an inducement for Marriott to restructure its contractual relationship with the hotel, we agreed to advance the timing of the next guestroom renovation from 2006 to 2005.

 

We expect to spend approximately $4.8 million in capital expenditures in 2005, or $17,628 per room, for the refurbishment of guestrooms, to reposition the hotel property for higher-rated business.

 

Additional property highlights include:

 

Guestrooms:

 

    274 guestrooms, all of which are suites.

 

Meeting Space:

 

    Approximately 4,300 square feet of total meeting space.

 

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Food and Beverage:

 

    Democracy Grille; and

 

    Lobby Lounge.

 

Other Amenities:

 

    Indoor/Outdoor Pool;

 

    Fitness Center; and

 

    Gift Shop.

 

Competition:    Competitor hotels include Hyatt Regency Bethesda, Embassy Suites, Doubletree Hotel, Holiday Inn-Select Bethesda, Sheraton Four Points, Bethesda Marriott and Bethesda North Marriott. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

 

Operating and Occupancy Information

 

    Fiscal Year

   

First Fiscal Half

2005


 
    2000

    2001

    2002

    2003

    2004

   

Room Revenue

  $ 12,223,000     $ 10,713,000     $ 10,031,000     $ 10,918,000     $ 11,443,000     $ 5,661,572  

ADR

  $ 149.66     $ 153.76     $ 138.89     $ 144.65     $ 153.74     $ 169.10  

Occupancy %

    81.9 %     69.9 %     71.0 %     75.7 %     74.6 %     72.7 %

RevPAR

  $ 122.56     $ 107.41     $ 98.68     $ 109.47     $ 114.74     $ 122.99  

 

Courtyard Manhattan/Fifth Avenue

 

Location and Demand Generators:    The Courtyard Manhattan/Fifth Avenue is located on 40th Street, just off of Fifth Avenue in Midtown Manhattan, across the street from the New York Public Library. The hotel is situated in a convenient tourist and business location. It is within walking distance from Times Square, Broadway theaters, Grand Central Station, Rockefeller Center and the Empire State Building.

 

The Property.    We hold a ground lease interest in the hotel. The term of the ground lease expires in 2085, inclusive of one 49-year extension. The hotel opened in 1990 as a Journey’s End-branded hotel and has since changed brands a number of times. The hotel includes 189 guestrooms.

 

The prior owner of the hotel invested $3.7 million in 1999 to refurbish the hotel and convert it to a Clarion brand pursuant to a five-year agreement. Upon the end of that agreement, the hotel operated under the name Hotel 5A, a non-franchised brand. We believe the hotel’s lack of strong brand affiliation adversely impacted operating results. In 2004, the previous owner engaged a national brokerage firm to market the hotel for sale and, through our management team’s relationship with the broker, we learned about the opportunity to purchase this hotel before it was broadly marketed.

 

Between the time we learned of the opportunity to purchase the hotel and the bid date, we informed Marriott of this opportunity, and Marriott agreed to work with us on an exclusive basis to determine if the hotel was physically suitable to be converted to a Courtyard by Marriott hotel brand. The hotel was operating at a significant discount to the comparably located Courtyard Manhattan/Midtown East, located at 366 Third Avenue. The ADR at the hotel in 2004 was $58 lower than that of the Courtyard Manhattan/Midtown East in 2004. Prior to the bid date, we worked with Marriott to develop a significant rebranding, renovation and repositioning plan to convert the hotel to a Courtyard by Marriott and take advantage of the hotel’s excellent location and the strength

 

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of the Marriott brand. Marriott provided $1 million of key money to enter into a long-term hotel management agreement with Marriott. We submitted a bid, won the bid process and acquired the hotel in December 2004, and the hotel was re-branded as a Courtyard by Marriott in January 2005.

 

We expect to spend $6.1 million for capital improvements in 2005, or $32,275 per room, in connection with the re-branding, renovation and repositioning plan. The capital improvement plan includes a complete soft goods renovation of the guestrooms, purchasing new furniture and bedding for the guestrooms, renovation of the bathrooms with granite vanity tops, installation of a new exercise facility, construction of a boardroom meeting space and modifications to make the hotel more accommodating to persons with disabilities.

 

Additional property highlights include:

 

Guestrooms:

 

    189 guestrooms, averaging 184 square feet in size.

 

    In connection with the renovation, eight of the rooms will be combined into four suites, approximately 300 square feet in size, bringing the new room count to 185.

 

Meeting Space:

 

    A board room on the second level of the hotel will be added in 2005.

 

Food and Beverage:

 

    Salmon River Restaurant and Lounge, with access to the hotel lobby, is leased to an independent operator subject to a 10-year lease that expires in 2011, with a five-year renewal option thereafter. The tenant pays base rent and a percentage rent based on gross receipts.

 

Other Amenities:

 

    Fitness Center will be added in 2005; and

 

    Business library.

 

Competition:    Competitor hotels include The Mansfield, The Algonquin, Sheraton Russell, Jolly Hotel Madison and The Crowne Plaza. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition. We believe New York City is a highly competitive hotel market that has historically been fairly volatile, reflecting the overall business climate in New York City.

 

Operating and Occupancy Information

 

    Fiscal Year

   

First Fiscal Half

2005


 
    2000

    2001

    2002

    2003

    2004

   

Room Revenue

  $ 10,609,000     $ 7,625,000     $ 7,842,000     $ 7,134,000     $ 8,684,000     $ 4,934,379  

ADR

  $ 189.21     $ 155.44     $ 139.14     $ 129.11     $ 140.96     $ 189.31  

Occupancy %

    81.3 %     71.1 %     81.5 %     80.1 %     89.3 %     89.9 %

RevPAR

  $ 153.83     $ 110.53     $ 113.37     $ 103.41     $ 125.88     $ 170.27  

 

The Lodge at Sonoma Renaissance Resort & Spa

 

Location and Demand Generators:    The Lodge at Sonoma Renaissance Resort and Spa is located in the heart of the Sonoma Valley wine country, 45 miles from San Francisco, in the town of Sonoma, California.

 

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Numerous wineries are located within a short driving distance from the resort. The area is served by the Sacramento, Oakland and San Francisco airports. The resort is readily accessible by a variety of local, county, and state highways, including Highway 101. Leisure demand is generated by Sonoma Valley and Napa Valley wine country attractions. Group and business demand is primarily generated from companies located in San Francisco and the surrounding Bay Area, and some ancillary demand is generated from the local wine industry.

 

The Property:    We own a fee simple interest in the hotel, which is comprised of the main two-story Lodge building, including 76 guestrooms and 18 separate cottage buildings, containing the remaining 102 guestrooms and 4 suites. The Raindance Spa is located in a separate two-story building at the rear of the cottages.

 

The hotel was constructed for a total cost of approximately $53 million and opened in early 2001. The opening coincided with the decline in the hotel market in the San Francisco Bay Area market that began with the technology industry downturn and was exacerbated by the terrorist events of September 11, 2001. In connection with the initial construction of the resort, in addition to their minority membership interest in the owner of the hotel, Marriott issued a mezzanine loan with a lower priority of repayment to a senior loan. The original owners were unable to make any debt service payments on either the senior loan or the mezzanine loan. In addition to its interest as hotel manager, Marriott dedicated significant resources to work with the senior lender and owners of this resort to protect its financial interest as subordinate lender.

 

In 2004, Marriott negotiated and purchased the senior loan at a discount. Subsequently, Marriott purchased all of the outstanding equity from the original owners. We negotiated exclusively with Marriott to purchase the resort. In October 2004, we acquired the resort from Marriott for 60% of original construction cost. As the resort is still relatively new, no major capital expenditures are expected in the short term.

 

We plan to aggressively asset manage the resort. We expect that the resort will benefit from the recovering hotel market in the San Francisco Bay Area. We have met with Marriott’s property management team and collectively agreed to modify the marketing of the resort to attract small group business during the traditionally slow mid-week period. We believe this strategy will have a positive result on future operating results.

 

Additional property highlights include:

 

Guestrooms:

 

    182 guestrooms, including four suites, averaging 385 square feet in size. Most guestrooms have either a balcony or patio.

 

    King rooms and suites feature gas fireplaces.

 

Meeting Space:

 

    Approximately 22,000 square feet of total meeting and banquet space, including a 3,080 square-foot ballroom with a seating capacity of 290 and the separate Stone Building offering 2,304 square feet of additional banquet space.

 

Food and Beverage:

 

    Restaurant Carneros; and

 

    Fireside Coffee Bar & Gallery Lounge.

 

Spa:

 

    Raindance Spa, a 7,400 square foot full-service spa with 15 treatment rooms;

 

    Outdoor area featuring therapy pools and treatment cabanas; and

 

    Spa gift shop.

 

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Other Amenities:

 

    Outdoor Swimming Pool & Whirlpool;

 

    Health Club;

 

    Gift Shop; and

 

    Business Center.

 

Competition:    Competitor hotels include the Santa Rosa Hilton, Hyatt Vineyard Creek, Embassy Suites Napa, Sonoma Mission Inn, MacArthur Place and Doubletree Sonoma County. We compete with these hotels based on a number of factors, including location, brand, price, service and amenities, as well as property condition.

 

Operating and Occupancy Information

 

     Fiscal Year

   

First Fiscal Half

2005


 
     2001(1)

    2002

    2003

    2004

   

Room Revenue

   $ 5,031,000     $ 7,117,000     $ 7,626,000     $ 8,084,000     $ 3,669,901  

ADR

   $ 168.03     $ 180.00     $ 190.74     $ 187.34     $ 181.36  

Occupancy %

     48.9 %     58.6 %     60.4 %     65.1 %     66.2 %

RevPAR

   $ 82.11     $ 105.41     $ 115.12     $ 122.03     $ 120.03  

(1) The hotel opened on January 27, 2001.

 

Our Recently Acquired Hotel Properties

 

We used a portion of the net proceeds from our initial public offering to expand our initial portfolio by acquiring and investing in the Capital Hotel Investment Portfolio and Vail Marriott Mountain Resort & Spa on June 23, 2005 and June 24, 2005, respectively, for an aggregate purchase price, including pre-funded capital improvement escrows, of approximately $382.7 million. In addition, in July 2005, we acquired the Oak Brook Hills Marriott Resort and the SpringHill Suites Atlanta Buckhead. The following table sets forth information regarding these recently acquired hotels:

 

Property

  Location

  Number of
Rooms(1)


 

Average

Occupancy(2)


    ADR(2)

    RevPAR(2)

 
Renaissance Worthington   Fort Worth, Texas   504   73.0 %   $ 138.55     $ 101.15  
Marriott Atlanta Alpharetta   Atlanta, Georgia   318   59.9       121.20       72.59  
Frenchman’s Reef & Morning Star
Marriott Beach Resort
  St. Thomas, U.S. Virgin
Islands
  504   71.5       188.49       134.73  
Marriott Los Angeles Airport   Los Angeles, California   1,004   79.1       96.50       76.30  
Vail Marriott Mountain
Resort & Spa
  Vail, Colorado   346   60.0       188.81       113.38  
Oak Brook Hills Marriott Resort   Oak Brook, Illinois   384   49.1       121.95       59.93  
SpringHill Suites Atlanta
Buckhead
  Atlanta, Georgia   220   N.A. (3)     N.A. (3)     N.A. (3)
       
                     
TOTAL/WEIGHTED AVERAGES   3,280   68.9 %   $ 133.27     $ 91.85  
       
                     

(1) As of December 31, 2004.
(2) For the fiscal year ended December 31, 2004.
(3) Not applicable as the hotel opened on July 1, 2005 and therefore has no historical results.

 

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The following table sets forth additional information regarding our investment in each of our recently acquired hotels:

 

Property


  Year
Opened/
Renovated


  Number
of
Rooms(1)


  Purchase
Price(2)


   Pre-Funded
Capital
Improvement
Escrows(3)


   Projected
Additional
Capital
Improvements(4)


   Total
Projected
Investment(5)


   Total
Projected
Investment
Per Room


Renaissance Worthington   1981   504   $ 83,012,000    $ 874,000    $