MeriStar Hospitality Corporation Reports Fourth Quarter, 2004 Results
meristar.com
February 16, 2005
ARLINGTON, Va.,--February 16, 2005—MeriStar Hospitality Corporation (NYSE: MHX), one of the nation’s largest hotel real estate investment trusts (REIT), today announced financial results for the fourth quarter and year ended December 31, 2004.
RevPAR for the company’s comparable hotels in the fourth quarter rose 5.8 percent to $64.62 and for the full year 2004 rose 6.4 percent to $69.81, based on rooms not out-of-service due to renovations and the impact of the Florida hurricanes. The improvement resulted primarily from an 8.5 percent increase in average daily rate (ADR) to $101.64 in the fourth quarter, and a 5.0 percent increase in ADR to $100.28 for the full year 2004. Occupancy, based on rooms not out-of-service, decreased 1.6 percentage points to 63.6 percent in the fourth quarter, due in part to a strategy to displace lower-rated contract business, and increased 0.9 percentage points to 69.6 percent for the full year 2004.
“The continued increase in ADR is a strong signal that the hotel industry recovery is gaining momentum,” said Paul W. Whetsell, chairman and chief executive officer. “Business travel continues to increase, supported by strong leisure demand and inbound travel particularly in gateway markets and resorts. The ability to raise room rates has a positive impact on hotel operating margins, which improved by approximately 100 basis points in the fourth quarter over the prior year."
Whetsell noted that the company continued to upgrade its portfolio, completing approximately $45 million in renovations at its properties in the 2004 fourth quarter and $125 million for all of 2004. “We have made significant progress on our multi-year renovation program, with the vast majority of the more disruptive work in public spaces behind us. In 2005, we expect to spend $85 million on new projects at our properties in addition to completing approximately $15 million of projects under way at year end. Renovated properties already are showing the positive effects of the work we’ve done.” For example, the Crowne Plaza Chicago O’Hare, which was renovated and converted to the brand in 2004, receiving a completely new exterior, expansive landscaping, and remodeled lobby, produced a 12.7 percent RevPAR gain in the fourth quarter of 2004 versus the fourth quarter of 2003.
Results for the three months and full year ending December 31, 2004 and 2003, were as follows:
In millions, except per share data 4Q
2004 4Q
2003 Full Year
2004(b) Full Year
2003
Net loss $(17.7) $(62.1) $(96.3) $(388.9)
Net loss per diluted share $(0.20) $(0.97) $(1.19) $(7.62)
Total revenues from continuing operations $181.0 $180.6 $779.2 $757.6
Funds from operations (FFO)(a) $4.9 $(39.6) $10.4 $(297.8)
FFO per diluted share $0.06 $(0.59) $0.12 $(5.55)
Adjusted FFO(a) $7.3 $(3.2) $32.4 $20.2
Adjusted FFO per diluted share $0.08 $(0.05) $0.39 $0.37
Adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization and other items) (a) $40.6 $30.4 $164.0 $163.7
(a) FFO, Adjusted FFO, and Adjusted EBITDA are non-GAAP financial measures and should not be considered as alternatives to any measures of operating results under GAAP. See the Notes to Financial Information regarding these non-GAAP financial measures.
(b) The full year 2004 results include the impact of an equity compensation adjustment. The company’s subsidiary operating partnership's partnership agreement provides for Profits-Only OP Partnership Units, or POPs. Since July 2004, the company had planned for the dissolution of the plan, pursuant to which POPs are issued. All of the remaining outstanding POPs were eliminated during the fourth quarter. A substantial portion of this adjustment, which was recorded entirely in the third quarter due to a change in accounting, had already been expected to occur in 2004. Had the current accounting been applied from the original grant dates, and taking this adjustment in isolation, our net loss, FFO, adjusted FFO, and adjusted EBITDA would each have been lower for 2004 by $4.0 million. Our net loss, FFO, and adjusted FFO would each have been lower for 2004 by $0.05 per diluted share. See the note regarding the equity compensation adjustment in the Notes to Financial Information.
Total revenues from continuing operations for the fourth quarter 2004 were materially impacted by Florida property closures following the hurricanes. Revenue produced by the nine most significantly affected hurricane properties was less than 2.5 percent of total revenue in the fourth quarter of 2004, compared to 13.4 percent of total revenue in the fourth quarter of 2003. Fourth quarter 2004 operating costs for those properties were offset by insurance recoveries, before considering depreciation. The company expects to receive business interruption proceeds beyond cost recovery for the quarter, although such recoveries will not be recognized until future periods. Therefore, the company’s results reflected only depreciation expense from those properties in the fourth quarter of 2004.
Adjusted EBITDA grew 33.6 percent from $30.4 million in the fourth quarter 2003 to $40.6 million during the 2004 fourth quarter, despite having 19 fewer hotels at year end. The break-even results of the nine significantly affected hurricane properties were offset by the solid year-over-year growth at the company’s comparable hotels, the impact of the strong earnings from the Marriott Irvine and Ritz-Carlton Pentagon City acquisitions, and the contribution of the recent Radisson Lexington Avenue investment. In addition, the completion of the planned restructuring of its MIP investment enabled the company to resume full earnings recognition of the current return and receive its first payment on the accrued return since 2001. This restructuring allowed the company to recognize previously reserved returns, resulting in an incremental $4 million to adjusted EBITDA.
The company’s Washington, D.C. portfolio recorded strong performances, reporting an average RevPAR increase of 11.9 percent in the fourth quarter and an approximate 19 percent RevPAR increase in January 2005. “We continue to benefit from our significant presence in the Washington market,” Whetsell said.
Florida Hotels Update
Business continues to show exceptional growth in Florida, driven by strong leisure travel, favorable exchange rates, and the continued economic recovery. For example, the company’s two open Orlando hotels produced over 30 percent RevPAR gains in January 2005.
Whetsell stated that the company continues to make steady progress on the restoration work currently under way at the properties damaged by hurricanes that struck Florida in the fall, noting that eight of these properties were closed for most of the quarter and a ninth had a substantial number of rooms out of service. “We are diligently working to get these hotels up and running as quickly as possible. We are very bullish about the ability of our Florida properties to produce exceptional results, especially as hurricane-affected properties resume normal operations.”
Acquisitions and Dispositions
During the 2004 fourth quarter, MeriStar continued to make selective investments to seek solid returns with attractive growth potential, a key element of the company’s strategy to redefine its asset base. In October, the company acquired an interest in the landmark, 705-room Radisson Lexington Avenue Hotel in Midtown Manhattan. The $50 million structured investment includes a loan that will provide MeriStar with a $5.75 million cumulative annual preferred return and a 49.99 percent equity participation.
“This is an excellent property in one of the strongest markets in the country and it has already exceeded our expectations,” Whetsell said. “RevPAR in the fourth quarter grew 17.6 percent year-over-year, and we were able to report more than $800,000 of equity participation in our adjusted EBITDA.”
The Ritz-Carlton Pentagon City, which the company acquired in May, had a strong fourth quarter and full year, achieving RevPAR gains of 9.9 percent and 11.7 percent, respectively. The Marriott Irvine, acquired in June, began a complete guestroom renovation during the fourth quarter of 2004. The renovation, which includes such key guest areas as an expanded fitness center and concierge lounge, should position the hotel for strong performance in 2005.
The company sold three hotels in the fourth quarter, bringing the total to 21 dispositions in 2004 and an aggregate of 36 since January 2003. “We have essentially completed our non-core asset disposition program and reinvested those proceeds in strategic acquisitions, capital improvements to our existing portfolio, and debt repayments,” Whetsell remarked. “Over the past two years, we have reshaped our portfolio into a stronger group of hotels with higher growth potential and have positioned it to take greater advantage of the recovery in the lodging industry, which we have been experiencing.” Excluding the nine most significantly affected hurricane properties, RevPAR for the total year-end 2004 portfolio was 16.6 percent higher than the RevPAR for the total portfolio held at December 31, 2003.
Capital Structure
Donald D. Olinger, chief financial officer, noted that the company continued to improve its balance sheet in 2004. “We were able to reduce our borrowing costs by over 40 basis points year-over-year by completing an interest rate swap on our $303 million CMBS loan and placing low fixed-rate mortgages on our two hotel acquisitions this year.” The company also repurchased approximately $100 million in senior notes and $49 million in subordinated notes in 2004.
In January 2005, the company placed a 5.84 percent fixed-rate, 10-year, $38 million mortgage on the Hilton Crystal City hotel at National Airport. “Initially, the proceeds will be used to fund capital expenditures to repair hurricane damage to other properties due to the time lag in receiving insurance payments,” stated Olinger. “Ultimately, we will use the proceeds for selective investment opportunities or to pay down higher interest rate debt. We will continue to look for opportunities to improve our leverage ratios and credit statistics in 2005.”
2005 Outlook and Guidance
The company estimates 2005 RevPAR improvement of 7.5 percent to 8.5 percent on its comparable hotels and a 100 to 150 basis point increase in hotel operating margins. For the first quarter of 2005 the company expects RevPAR increases of 4.0 percent to 5.0 percent and hotel operating margin increases of 50 to 100 basis points. Total company revenue will continue to be impacted in the first quarter and full year 2005 by the closures of the hurricane-affected properties. Additionally, adjusted EBITDA and FFO results for the 2005 first quarter will be impacted by the timing of recognition of business interruption insurance for hurricane-affected properties. “We have comprehensive property and business interruption insurance which we expect to cover most of the losses resulting from the hurricanes,” Olinger added. “While it is difficult to predict the timing or exact amounts of recognition of the insurance claims during the year, we remain confident in our estimates of full year EBITDA.”
Current expected results for the first quarter and full year 2005 include:
Net loss of $(14) million to $(19) million for the first quarter and $(40) million to $(46) million for the full year;
Net loss per diluted share of $(0.16) to $(0.22) for the first quarter and $(0.46) to $(0.52) for the full year;
Adjusted FFO per diluted share(c) of $0.07 to $0.12 for the first quarter and $0.57 to $0.63 for the full year;
Adjusted EBITDA(c) of $40 million to $45 million for the first quarter and $188 million to $194 million for the full year.
(c) See reconciliations of net loss to FFO per diluted share and Adjusted FFO per diluted share and net loss to Adjusted EBITDA. Adjusted EBITDA, Adjusted FFO and FFO are non-GAAP financial measures that should not be considered as alternatives to any measures of operating results under GAAP. See the discussion regarding these non-GAAP financial measures in the Notes to Financial Information.
MeriStar will hold a conference call to discuss its fourth quarter results today, February 16, at 10 a.m. Eastern time. Interested parties may visit the company’s Web site at www.meristar.com and click on Investor Relations and then the webcast link.
Interested parties also may listen to an archived webcast of the conference call on the Web site, or may dial (800) 405-2236, reference number 11023031, to hear a telephone replay. The telephone replay will be available through midnight on Wednesday, February 23, 2005.
The company has provided additional information on the fourth quarter and full year results and more detail on its portfolio in the Supplemental Earnings Release Financial Information which can be found at meristar.com.
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