DRH_10Q_6.17.2011

Table of Contents


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 17, 2011
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-32514
DIAMONDROCK HOSPITALITY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
20-1180098
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
3 Bethesda Metro Center, Suite 1500, Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
(240) 744-1150
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
The registrant had 167,385,657 shares of its $0.01 par value common stock outstanding as of July 26, 2011.
 

Table of Contents
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the Fiscal Quarters ended June 17, 2011 and June 18, 2010 and the Periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010
 
 
Condensed Consolidated Statements of Cash Flows for the Periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Exhibit 10.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT


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Item I.
Financial Statements

DIAMONDROCK HOSPITALITY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 17, 2011 and December 31, 2010
(in thousands, except share amounts)
 
June 17, 2011
 
December 31, 2010
 
(Unaudited)
 
 
ASSETS
 
 
 
Property and equipment, at cost
$
2,901,026

 
$
2,468,289

Less: accumulated depreciation
(439,324
)
 
(396,686
)
 
2,461,702

 
2,071,603

Deferred financing costs, net
6,935

 
5,492

Restricted cash
75,812

 
51,936

Due from hotel managers
60,340

 
50,715

Note receivable
57,346

 
57,951

Favorable lease assets, net
43,825

 
42,622

Prepaid and other assets
75,232

 
50,089

Cash and cash equivalents
20,918

 
84,201

Total assets
$
2,802,110

 
$
2,414,609

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage debt
$
921,094

 
$
780,880

Senior unsecured credit facility
115,000

 

Total debt
1,036,094

 
780,880

Deferred income related to key money, net
20,564

 
19,199

Unfavorable contract liabilities, net
82,923

 
83,613

Due to hotel managers
37,408

 
36,168

Dividends declared and unpaid
13,549

 

Accounts payable and accrued expenses
87,827

 
81,232

Total other liabilities
242,271

 
220,212

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value; 200,000,000 shares authorized; 167,385,657 and 154,570,543 shares issued and outstanding at June 17, 2011 and December 31, 2010, respectively
1,674

 
1,546

Additional paid-in capital
1,706,887

 
1,558,047

Accumulated deficit
(184,816
)
 
(146,076
)
Total stockholders’ equity
1,523,745

 
1,413,517

Total liabilities and stockholders’ equity
$
2,802,110

 
$
2,414,609


The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIAMONDROCK HOSPITALITY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Quarters Ended June 17, 2011 and June 18, 2010 and
the Periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010
(in thousands, except per share amounts)

 
Fiscal Quarter Ended
 
Period From
 
 
 
 
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
June 17, 2011
 
June 18, 2010
 
 
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Rooms
$
111,866

 
$
95,730

 
$
191,184

 
$
167,378

Food and beverage
49,432

 
47,699

 
86,466

 
83,250

Other
8,207

 
7,696

 
14,122

 
13,324

Total revenues
169,505

 
151,125

 
291,772

 
263,952

Operating Expenses:
 
 
 
 
 
 
 
Rooms
28,534

 
24,458

 
51,243

 
44,530

Food and beverage
33,210

 
31,490

 
60,252

 
56,215

Management fees
6,987

 
5,482

 
10,389

 
8,554

Other hotel expenses
58,211

 
51,990

 
105,931

 
96,619

Depreciation and amortization
21,682

 
19,074

 
43,034

 
37,981

Hotel acquisition costs
1,904

 
337

 
2,159

 
337

Corporate expenses
4,373

 
3,560

 
8,448

 
6,911

Total operating expenses
154,901

 
136,391

 
281,456

 
251,147

Operating profit
14,604

 
14,734

 
10,316

 
12,805

Other Expenses (Income):
 
 
 
 
 
 
 
Interest income
(268
)
 
(286
)
 
(565
)
 
(367
)
Interest expense
12,340

 
11,089

 
23,483

 
19,215

Total other expenses
12,072

 
10,803

 
22,918

 
18,848

Income (loss) before income taxes
2,532

 
3,931

 
(12,602
)
 
(6,043
)
Income tax (expense) benefit
(3,088
)
 
(3,092
)
 
1,003

 
(1,462
)
Net (loss) income
$
(556
)
 
$
839

 
$
(11,599
)
 
$
(7,505
)
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share
$

 
$
0.01

 
$
(0.07
)
 
$
(0.06
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DIAMONDROCK HOSPITALITY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010
(in thousands)
 
Period From
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
 
 
(Unaudited)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net loss
$
(11,599
)
 
$
(7,505
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Real estate depreciation
43,034

 
37,981

Corporate asset depreciation as corporate expenses
39

 
70

Non-cash ground rent
3,221

 
3,566

Non-cash financing costs and debt premium as interest
764

 
457

Non-cash reversal of penalty interest

 
(3,134
)
Amortization of unfavorable contract liabilities
(852
)
 
(794
)
Amortization of deferred income
(403
)
 
(260
)
Stock-based compensation
2,301

 
1,915

Changes in assets and liabilities:
 
 
 
Prepaid expenses and other assets
(2,852
)
 
(1,368
)
Restricted cash
(2,794
)
 
(2,546
)
Due to/from hotel managers
(7,590
)
 
(11,538
)
Accounts payable and accrued expenses
(4,929
)
 
(3,083
)
Net cash provided by operating activities
18,340

 
13,761

Cash flows from investing activities:
 
 
 
Hotel capital expenditures
(21,345
)
 
(10,391
)
Hotel acquisitions
(366,792
)
 
(156,501
)
Purchase of mortgage loan

 
(60,282
)
Cash received from mortgage loan
605

 

Change in restricted cash
(15,762
)
 
(6,997
)
Purchase deposits
(22,300
)
 

Receipt of deferred key money
1,768

 

Net cash used in investing activities
(423,826
)
 
(234,171
)
Cash flows from financing activities:
 
 
 
Scheduled mortgage debt principal payments
(3,637
)
 
(2,934
)
Repurchase of common stock
(3,095
)
 
(3,961
)
Proceeds from sale of common stock, net
149,674

 
209,864

Proceeds from mortgage loan financing
100,000

 

Draw on senior unsecured credit facility
115,000

 

Payment of financing costs
(2,234
)
 
(198
)
Payment of cash dividends
(13,505
)
 
(4,323
)
Net cash provided by financing activities
342,203

 
198,448

Net decrease in cash and cash equivalents
(63,283
)
 
(21,962
)
Cash and cash equivalents, beginning of period
84,201

 
177,380

Cash and cash equivalents, end of period
$
20,918

 
$
155,418

Supplemental Disclosure of Cash Flow Information:
 
 
 

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Cash paid for interest
$
24,426

 
$
23,484

Cash paid for income taxes
$
629

 
$
642

Capitalized interest
$
548

 
$

Non-cash Financing Activities:
 
 
 
Assumption of mortgage debt
$
43,879

 
$

Unpaid dividends
$
13,549

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.


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DIAMONDROCK HOSPITALITY COMPANY

Notes to the Condensed Consolidated Financial Statements
(Unaudited)

1.
Organization

DiamondRock Hospitality Company (the “Company” or “we”) is a lodging-focused real estate company that owns a portfolio of 26 premium hotels and resorts as well as a senior mortgage loan secured by another hotel. Our hotels are concentrated in key gateway cities and in destination resort locations and most are operated under a brand owned by one of the leading global lodging brand companies (Marriott International, Inc. (“Marriott”), Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), or Hilton Worldwide (“Hilton”)). We are an owner, as opposed to an operator, of the 26 hotels in our portfolio. As an owner, we receive all of the operating profits or losses generated by our hotels after we pay fees to the hotel managers, which are based on the revenues and profitability of the hotels.

As of June 17, 2011, we owned 25 hotels that contained 11,651 rooms, located in the following markets: Atlanta, Georgia (3); Austin, Texas; Boston, Massachusetts; Charleston, South Carolina; Chicago, Illinois (2); Denver, Colorado; Fort Worth, Texas; Lexington, Kentucky; Los Angeles, California (2); Minneapolis, Minnesota; New York, New York (4); Oak Brook, Illinois; Orlando, Florida; Salt Lake City, Utah; Sonoma, California; Washington D.C.; St. Thomas, U.S. Virgin Islands; and Vail, Colorado, and we also own a senior mortgage loan secured by a 443-room hotel located in Chicago, Illinois. Subsequent to the end of our second fiscal quarter, we acquired the Courtyard Denver Downtown located in Denver, Colorado, our 26th hotel.

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, or subsidiaries of our operating partnership. The Company is the sole general partner of the operating partnership and currently owns, either directly or indirectly, all of the limited partnership units of the operating partnership.

2.
Summary of Significant Accounting Policies

Basis of Presentation

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, in the accompanying unaudited condensed consolidated financial statements. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2010, included in our Annual Report on Form 10-K filed on March 1, 2011.

In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of June 17, 2011, the results of our operations for our fiscal quarters ended June 17, 2011 and June 18, 2010 and the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, and our cash flows for the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010. Interim results are not necessarily indicative of full-year performance because of the impact of seasonal and short-term variations.

Our financial statements include all of the accounts of the Company and its subsidiaries in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Reporting Periods

The results we report in our condensed consolidated statements of operations are based on results of our hotels reported to us by our hotel managers. Our hotel managers use different reporting periods. Marriott, the manager of most of our properties, uses a fiscal year ending on the Friday closest to December 31 and reports 12 weeks of operations for each of the first three quarters and 16 or 17 weeks for the fourth quarter of the year for its domestic managed hotels. In contrast, Marriott, for its non-domestic hotels (including Frenchman’s Reef), Vail Resorts, manager of the Vail Marriott, Davidson Hotels & Resorts, manager of the Atlanta Westin North at Perimeter, Hilton Hotels Corporation, manager of the Conrad Chicago and Hilton Minneapolis, Westin Hotel Management, L.P., manager of the Westin Boston Waterfront Hotel, Alliance Hospitality Management, manager of the Hilton Garden Inn Chelsea/New York City, Sage Hospitality, manager of the JW Marriott Denver at Cherry Creek and the Courtyard Denver Downtown, and Highgate Hotels, manager of the Radisson Lexington Hotel New York, report results on a monthly basis. Additionally, as a REIT, we are required by U.S. federal tax laws to report results on a calendar year basis. As a result, we have

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adopted the reporting periods used by Marriott for its domestic hotels, except that our fiscal year always ends on December 31 to comply with REIT rules. Our first three fiscal quarters end on the same day as Marriott’s fiscal quarters but our fourth quarter ends on December 31 and the full year results, as reported in the statement of operations, always include the same number of days as the calendar year.

Two consequences of the reporting cycle we have adopted are: (1) quarterly start dates will usually differ between years, except for the first quarter which always commences on January 1, and (2) the first and fourth quarters of operations and year-to-date operations may not include the same number of days as reflected in prior years.

While the reporting calendar we adopted is more closely aligned with the reporting calendar used by the manager of most of our properties, one final consequence of the calendar is we are unable to report any results for Frenchman’s Reef, Vail Marriott, Atlanta Westin North at Perimeter, Conrad Chicago, Westin Boston Waterfront Hotel, Hilton Minneapolis, Hilton Garden Inn Chelsea/New York City, JW Marriott Denver at Cherry Creek, Courtyard Denver Downtown or Radisson Lexington Hotel New York for the month of operations that ends after our fiscal quarter-end because none of Westin Hotel Management, L.P., Hilton Hotels Corporation, Davidson Hotels & Resorts, Alliance Hospitality Management, Vail Resorts, Sage Hospitality, Highgate Hotels nor Marriott (with respect to Frenchman’s Reef) make mid-month results available to us. As a result, our quarterly results of operations include results from these hotels as follows: first quarter (January and February), second quarter (March to May), third quarter (June to August) and fourth quarter (September to December). While this does not affect full-year results, it does affect the reporting of quarterly results.

Property and Equipment

Investments in hotel properties, land, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets are recorded at fair value upon acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation is removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 40 years for buildings, land improvements, and building improvements and one to ten years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the 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 a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel’s estimated fair market value is recorded and an impairment loss recognized.

We will classify a hotel as held for sale in the period that we have made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing contingencies exist which could cause the transaction to not be completed in a timely manner. If these criteria are met, we will record an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and will cease recording depreciation expense. We will classify the loss, together with the related operating results, as discontinued operations on the statements of operations and classify the assets and related liabilities as held for sale on the balance sheet.

Note Receivable

We initially record acquired notes receivable at cost. Notes receivable are evaluated for collectability and if collectability of the original amounts due is in doubt, the value is adjusted for impairment. Our impairment analysis considers the anticipated cash receipts as well as the underlying value of the collateral. If collectability is in doubt, the note is placed in non-accrual status. No interest is recorded on such notes until the timing and amounts of cash receipts can be reasonably estimated. We record cash payments received on non-accrual notes receivable as a reduction in basis. We continually assess the current facts and circumstances to determine whether we can reasonably estimate cash flows. If we can reasonably estimate the timing and amount of cash flows to be collected, then income recognition becomes possible.


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Revenue Recognition

Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, golf sales, food and beverage sales, and other hotel department revenues, such as telephone and gift shop sales.

Earnings (Loss) Per Share

Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants or shares issuable in the event of conversion of operating partnership units. No adjustment is made for shares that are anti-dilutive during a period.

Stock-based Compensation

We account for stock-based employee compensation using the fair value based method of accounting. We record the cost of awards with service or market conditions based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.

We have elected to be treated as a REIT under the provisions of the Internal Revenue Code, which requires that we distribute at least 90% of our taxable income annually to our stockholders and comply with certain other requirements. In addition to paying federal and state taxes on any retained income, we may be subject to taxes on “built in gains” on sales of certain assets. Our taxable REIT subsidiaries will generally be subject to federal, state, local, and/or foreign income taxes.

In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests 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 existing 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.

We had no accruals for tax uncertainties as of June 17, 2011 and December 31, 2010.

Intangible Assets and Liabilities

Intangible assets or liabilities are recorded on non-market contracts assumed as part of the acquisition of certain hotels. We review the terms of agreements assumed in conjunction with the purchase of a hotel to determine if the terms are favorable or unfavorable compared to an estimated market agreement at the acquisition date. Favorable lease assets or unfavorable contract liabilities are recorded at the acquisition date and amortized using the straight-line method over the term of the agreement. We do not amortize intangible assets with indefinite useful lives, but we review these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired.

Straight-Line Rental Income and Expense

We record rental income and expense on leases that provide for minimum rental payments that increase in pre-established amounts over the remaining term of the lease on a straight-line basis.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of our note receivable and cash and cash equivalents. We perform periodic evaluations of the underlying hotel property securing the note receivable. While the note receivable is currently in default, the value of the underlying hotel exceeds our carrying value of

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the note. See further discussion in Note 5. We maintain cash and cash equivalents with various financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The state of the overall economy can significantly impact hotel operational performance and thus, impact our financial position. Should any of our hotels experience a significant decline in operational performance, it may affect our ability to make distributions to our stockholders and service debt or meet other financial obligations.

3.
Property and Equipment

Property and equipment as of June 17, 2011 (unaudited) and December 31, 2010 consists of the following (in thousands):

 
June 17, 2011
 
December 31, 2010
Land
$
342,345

 
$
241,145

Land improvements
7,994

 
7,994

Buildings
2,199,046

 
1,903,782

Furniture, fixtures and equipment
330,708

 
309,976

CIP and corporate office equipment
20,933

 
5,392

 
2,901,026

 
2,468,289

Less: accumulated depreciation
(439,324
)
 
(396,686
)
 
$
2,461,702

 
$
2,071,603


As of June 17, 2011, we had accrued capital expenditures of $3.5 million. As of December 31, 2010, we had accrued capital expenditures of $2.0 million. Construction in progress (CIP) is primarily as a result of the extensive ongoing renovation at the Frenchman's Reef & Morning Star Marriott Beach Resort.

4.
Favorable Lease Assets

In connection with the acquisition of certain hotels, we have recognized intangible assets for favorable ground leases and tenant leases. Our favorable lease assets as of June 17, 2011 (unaudited) and December 31, 2010 consist of the following (in thousands):
 
June 17, 2011
 
December 31, 2010
Boston Westin Waterfront Ground Lease
$
19,057

 
$
19,156

Boston Westin Waterfront — Lease Right
9,513

 
9,513

Minneapolis Hilton Ground Lease
6,025

 
6,059

Oak Brook Hills Marriott Resort Ground Lease
7,644

 
7,894

Radisson Lexington Restaurant Leases
1,586

 

 
$
43,825

 
$
42,622


The favorable lease assets are recorded at the acquisition date and amortized using the straight-line method over the remaining non-cancelable term of the lease agreement. Amortization expense for the period from January 1, 2011 to June 17, 2011 was approximately $0.4 million.

In connection with our acquisition of the Radisson Lexington on June 1, 2011, we recorded a $1.6 million favorable lease asset related to certain tenant leases at the hotel. We determined the value using a discounted cash flow model based on the

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favorable differences between the contractual lease payments and estimated market rents.

We own a favorable lease asset related to the right to acquire a leasehold interest in a parcel of land adjacent to the Westin Boston Waterfront Hotel for the development of a 320 to 350 room hotel (the “lease right”). The option expires in 2099. We do not amortize the lease right but review the asset for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired. No impairment loss was recorded in our fiscal quarters ended June 17, 2011 or June 18, 2010. As of June 17, 2011 and December 31, 2010, the carrying amount of the lease right was $9.5 million.

The U.S. GAAP fair value hierarchy assigns a level to fair value measurements based on inputs used: Level 1 inputs are quoted prices in active markets for identical assets and liabilities; Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly; or Level 3 inputs are unobservable inputs. The fair value of the lease right is a Level 3 measurement and is derived from a discounted cash flow model using the favorable difference between the estimated participating rents in accordance with the lease terms and the estimated market rents. The discount rate was estimated using a risk adjusted rate of return, the estimated participating rents were estimated based on a hypothetical completed 327-room hotel comparable to our Westin Boston Waterfront Hotel, and market rents were based on comparable long-term ground leases in the City of Boston. The methodology used to determine the fair value of the lease right is consistent with the methodology used since acquisition of the lease right.

5.
Note Receivable

On May 24, 2010, we acquired the $69.0 million senior mortgage loan secured by the 443-room Allerton Hotel in Chicago, Illinois for approximately $60.6 million. The Allerton loan matured in January 2010 and is currently in default. The Allerton loan accrues at an interest rate of LIBOR plus 692 basis points, which includes 5 percentage points of default interest. As of June 17, 2011, the Allerton loan had a principal balance of $69.0 million and unrecorded accrued interest (including default interest) of approximately $3.4 million. Foreclosure proceedings were initially filed in April 2010 and on May 5, 2011, the borrower under the senior mortgage loan placed the hotel in bankruptcy. We will continue to pursue our rights in the bankruptcy proceedings, but the outcome is uncertain. We evaluate the potential impairment of the carrying value of the Allerton loan based on the underlying value of the hotel and as of June 17, 2011, there is no impairment.

Recognition of interest income on the Allerton loan is dependent upon having a reasonable expectation about the timing and amount of cash payments expected to be collected from the borrower. Due to the uncertainty surrounding the timing and amount of cash payments expected, we placed the Allerton loan on non-accrual status. As of June 17, 2011, we have received default interest payments from the borrower of approximately $3.3 million, of which $0.6 million was received during the period from January 1, 2011 to June 17, 2011. Subsequent to June 17, 2011, we received $0.5 million in default interest payments. These payments have been recorded as a reduction of our basis in the Allerton loan.

6.
Capital Stock

Common Shares

We are authorized to issue up to 200,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends out of assets legally available for the payment of dividends when authorized by our board of directors.

Follow-On Public Offering. We completed a follow-on public offering of our common stock during the quarter ended March 25, 2011. We sold 12,418,662 shares of our common stock, including the underwriter’s option to purchase 1,418,662 additional shares, at an offering price of $12.07 per share. The net proceeds to us, after deduction of offering costs, were approximately $149.7 million.

Dividends. During the first fiscal quarter, our board of directors declared a cash dividend of $0.08 per share of common stock. The dividend was paid on April 7, 2011 to stockholders of record as of March 25, 2011. During the second fiscal quarter, our board of directors declared a cash dividend of $0.08 per share of common stock. The dividend was paid on June 27, 2011 to stockholders of record as of June 17, 2011.

Preferred Shares

We are authorized to issue up to 10,000,000 shares of preferred stock, $0.01 par value per share. Our board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions,

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limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of June 17, 2011 and December 31, 2010, there were no shares of preferred stock outstanding.

Operating Partnership Units

Holders of operating partnership units have certain redemption rights, which enable them to cause our operating partnership to redeem their units in exchange for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option for shares of our common stock on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or our stockholders. As of June 17, 2011 and December 31, 2010, there were no operating partnership units held by unaffiliated third parties.

7.
Stock Incentive Plans

We are authorized to issue up to 8,000,000 shares of our common stock under our 2004 Stock Option and Incentive Plan, as amended (the “Incentive Plan”), of which we have issued or committed to issue 3,184,724 shares as of June 17, 2011. In addition to these shares, additional shares of common stock could be issued related to the market stock unit awards as further described below and the stock appreciation rights issued in 2008. On May 6, 2011, we issued (i) 11,872 shares of common stock and (ii) 17,808 deferred stock units to our board of directors having an aggregate value of $325,000, based on the closing stock price for our common stock on such day.

Restricted Stock Awards

Restricted stock awards issued to our officers and employees generally vest over a 3-year period from the date of the grant based on continued employment. We measure compensation expense for the restricted stock awards based upon the fair market value of our common stock at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying condensed consolidated statements of operations. A summary of our restricted stock awards from January 1, 2011 to June 17, 2011 is as follows:
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2011
1,548,698

 
$
5.49

Granted
302,153

 
11.60

Additional shares from dividends
5,075

 
11.02

Forfeited
(1,818
)
 
4.80

Vested
(635,033
)
 
4.87

Unvested balance at June 17, 2011
1,219,075

 
$
7.36


The remaining share awards are expected to vest as follows: 212,766 shares during 2011, 685,227 shares during 2012, 220,369 during 2013, and 100,713 during 2014. As of June 17, 2011, the unrecognized compensation cost related to restricted stock awards was $5.8 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 26 months. For our fiscal quarters ended June 17, 2011 and June 18, 2010, we recorded $0.9 million and $0.7 million, respectively, of compensation expense related to restricted stock awards. For the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, we recorded $1.7 million and $1.4 million, respectively, of compensation expense related to restricted stock awards.

Market Stock Units

We have awarded our executive officers market stock units (“MSUs”). MSUs are restricted stock units that vest 3 years from the date of grant. Each executive officer is granted a target number of MSUs (the “Target Award”). The actual number of shares of common stock issued to each executive officer at the vesting date is equal to the Target Award plus an additional number of shares of common stock to reflect dividends that would have been paid during the Performance Period on the Target Award multiplied by the percentage of total stockholder return over the Performance Period. The total stockholder return is based on the 30-trading day average closing price of our common stock calculated on the vesting date plus dividends paid and the 30-trading day average closing price of our common stock on the date of grant. There will be no payout of shares of our common stock if the total stockholder return percentage on the vesting date is less than 50% of the target return. The maximum payout to an executive

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officer under an MSU award is equal to 150% of the Target Award. A summary of our MSUs from January 1, 2011 to June 17, 2011 is as follows:
 
Number of
Units
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2011
84,854

 
$
9.87

Granted
72,599

 
13.43

Additional units from dividends
1,143

 
$
11.02

Unvested balance at June 17, 2011
158,596

 
$
11.51


The fair values were determined using a Monte Carlo simulation. As of June 17, 2011, the unrecognized compensation cost related to the MSUs was $1.3 million and is expected to be recognized on a straight-line basis over a weighted average period of 29 months. We recorded approximately $139,000 and $64,000 of compensation expense, respectively, related to the MSUs during the fiscal quarters ended June 17, 2011 and June 18, 2010. For the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, we recorded $229,000 and $86,000, respectively, of compensation expense related to market stock units.

8.
Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders that has been adjusted for dilutive securities, by the weighted-average number of common shares outstanding including dilutive securities.

The following is a reconciliation of the calculation of basic and diluted earnings (loss) per share (in thousands, except share and per share data):
 
Fiscal Quarter Ended
 
Period from
 
 
 
 
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
June 17, 2011
 
June 18, 2010
 
 
Basic Earnings (Loss) per Share Calculation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(556
)
 
$
839

 
$
(11,599
)
 
$
(7,505
)
Weighted-average number of common shares outstanding—basic
167,404,379

 
137,759,886

 
165,701,061

 
132,724,158

Basic earnings (loss) per share
$

 
$
0.01

 
$
(0.07
)
 
$
(0.06
)
 
 
 
 
 
 
 
 
Diluted Earnings (Loss) per Share Calculation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(556
)
 
$
839

 
$
(11,599
)
 
$
(7,505
)
Weighted-average number of common shares outstanding—basic
167,404,379

 
137,759,886

 
165,701,061

 
132,724,158

Unvested restricted common stock

 
953,594

 

 

Unexercised SARs

 

 

 

Unvested MSUs

 
92,830

 

 

Weighted-average number of common shares outstanding—diluted
167,404,379

 
138,806,310

 
165,701,061

 
132,724,158

Diluted earnings (loss) per share
$

 
$
0.01

 
$
(0.07
)
 
$
(0.06
)

We did not include the following shares in our calculation of diluted earnings per share as they would be anti-dilutive:

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Fiscal Quarter
 
Period from
 
 
 
 
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
June 17, 2011
 
June 18, 2010
 
 
Unvested restricted common stock
663,457

 

 
747,280

 
987,069

Unexercised SARs

 

 

 

Shares related to unvested MSUs
171,515

 

 
171,515

 
92,830

Total
834,972

 

 
918,795

 
1,079,899


9.
Debt

The following table sets forth information regarding the Company’s debt as of June 17, 2011 (unaudited), in thousands:
Property
 
Principal
Balance
 
Interest Rate
 
 
 
 
 
Courtyard Manhattan / Midtown East
 
$
42,476

 
8.81%
Marriott Salt Lake City Downtown
 
30,962

 
5.50%
Courtyard Manhattan / Fifth Avenue
 
51,000

 
6.48%
Renaissance Worthington
 
55,942

 
5.40%
Frenchman’s Reef & Morning Star Marriott Beach Resort
 
60,103

 
5.44%
Marriott Los Angeles Airport
 
82,600

 
5.30%
Orlando Airport Marriott
 
58,694

 
5.68%
Chicago Marriott Downtown Magnificent Mile
 
215,684

 
5.975%
Renaissance Austin
 
83,000

 
5.507%
Renaissance Waverly
 
97,000

 
5.503%
Hilton Minneapolis
 
99,859

 
5.464%
JW Marriott Denver at Cherry Creek
 
42,321

 
6.470%
Debt premium
 
1,453

 
 
Total mortgage debt
 
921,094

 
 
 
 
 
 
 
Senior unsecured credit facility
 
115,000

 
LIBOR + 2.25% (2.45% at June 17, 2011)
Total debt
 
$
1,036,094

 
 
Weighted-Average Interest Rate
 
 
 
5.47%

Mortgage Debt

We have incurred limited recourse, property specific mortgage debt in conjunction with certain of our hotels. In the event of default, the lender may only foreclose on the pledged assets; however, in the event of fraud, misapplication of funds or other customary recourse provisions, the lender may seek payment from us.

As of June 17, 2011, 13 of our 25 hotel properties were secured by mortgage debt, including the $100 million mortgage that is held on our senior unsecured credit facility. Our mortgage debt contains certain property specific covenants and restrictions, including minimum debt service coverage ratios that trigger “cash trap” provisions as well as restrictions on incurring additional debt without lender consent. During the fiscal quarter ended June 17, 2011, we satisfied the requirements to allow the lender to release the $0.8 million funds held under the cash trap on our Courtyard Manhattan/Midtown East mortgage. We are currently in compliance with the financial covenants of our mortgage debt.

On April 15, 2011, we closed on a $100 million loan secured by a mortgage on the Hilton Minneapolis. The loan has a 10-year term, bears interest at an annual fixed interest rate of 5.464%, amortizes on a 25-year schedule and is non-recourse, subject only to standard recourse exceptions.

On May 19, 2011, in connection with our acquisition of the JW Marriott Denver at Cherry Creek, we assumed a $42.4 million loan secured by a mortgage on the hotel. The loan bears an annual fixed interest rate equal to 6.47%, amortizes on a 25-year

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schedule and matures on July 1, 2015. We reviewed the terms of the mortgage loan in conjunction with the hotel purchase accounting and concluded that the interest rate was above current market. Accordingly, we recorded a $1.5 million debt premium to record the debt at fair value as of the acquisition date. The debt premium will be amortized over the remaining life of the loan to interest expense.

Subsequent to the end of our second fiscal quarter, in connection with our acquisition of the Courtyard Denver Downtown, we assumed a $27.2 million loan secured by a mortgage on the hotel. The loan bears an annual fixed interest rate equal to 6.26%, amortizes on a 30-year schedule and matures on August 5, 2012. We will review the terms of the loan in conjunction with our purchase accounting to determine whether the loan terms are consistent with current market.

In connection with the ongoing renovation and repositioning project at the Frenchman’s Reef & Morning Star Marriott Beach Resort, we received consent for the project from the lender of the mortgage loan secured by this hotel. In connection with receiving the consent, we were required to deposit $3.4 million into a reserve account for debt service during the renovation project and to establish a lender-held reserve for the project.

Senior Unsecured Credit Facility

On June 2, 2011, we amended and restated our $200.0 million unsecured credit facility, which now expires in August 2014. The maturity date of the facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain other customary conditions. We also have the right to increase the amount of the facility up to $400 million with lender approval. Interest is paid on the periodic advances under the facility at varying rates, based upon LIBOR, plus an agreed upon additional margin amount. The applicable margin is based upon the Company’s ratio of net indebtedness to EBITDA, as follows:

Ratio of Net Indebtedness to EBITDA
 
Applicable Margin
Less than 4.00 to 1.00
 
2.25
%
Greater than or equal to 4.00 to 1.00 but less than 5.00 to 1.00
 
2.50
%
Greater than or equal to 5.00 to 1.00 but less than 5.50 to 1.00
 
2.75
%
Greater than or equal to 5.50 to 1.00 but less than 6.00 to 1.00
 
3.00
%
Greater than or equal to 6.00 to 1.00
 
3.25
%

In addition to the interest payable on amounts outstanding under the facility, we are required to pay an amount equal to 0.40% of the unused portion of the facility if the unused portion of the facility is greater than 50% or 0.30% if the unused portion of the facility is less than or equal to 50%.

The facility contains various corporate financial covenants. A summary of the most restrictive covenants is as follows:
 
 
 
Actual at
 
Covenant
 
June 17,
2011
Maximum leverage ratio(1)
60%
 
45.3%
Minimum fixed charge coverage ratio(2)
1.50x
 
2.1x
Minimum tangible net worth(3)
$1.8 billion
 
$1.96 billion
_____________________________
(1)
Leverage ratio is total indebtedness, as defined in the credit agreement which includes our commitment on the Time Square development hotel, divided by total asset value, defined in the credit agreement as a) total cash and cash equivalents plus b) the value of our owned hotels based on (i) until March 31, 2012, appraised values and (ii) after March 31, 2012, hotel net operating income divided by an 8.5% capitalization rate, and (c) the book value of the Allerton loan.
(2)
Fixed charge coverage ratio is Adjusted EBITDA, defined in the credit agreement as EBITDA less FF&E reserves, for the most recently ending 12 fiscal months, to fixed charges, defined in the credit agreement as interest expense, all regularly scheduled principal payments and payments on capitalized lease obligations, for the same most recently ending 12 fiscal month period.
(3)
Tangible net worth, as defined in the credit agreement, is (i) total gross book value of all assets, exclusive of depreciation and amortization, less intangible assets, total indebtedness, and all other liabilities, plus (ii) 85% of net proceeds from future equity issuances.

The facility requires us to maintain a specific pool of unencumbered borrowing base properties. The unencumbered borrowing base assets are subject, among other restrictions, to the following limitations and covenants:

A minimum of 5 properties with an unencumbered borrowing base value, as defined, of not less than $250 million.

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The unencumbered borrowing base must include the Westin Boston Waterfront, the Conrad Chicago and the Vail Marriott Mountain Resort and Spa. The Conrad Chicago and the Vail Marriott Mountain Resort and Spa may be released from the unencumbered borrowing base upon lender approval and certain conditions.

In connection with the closing of the Hilton Minneapolis mortgage loan in April 2011, we received lender approval to release the Company’s subsidiaries owning the Hilton Minneapolis as guarantors under the facility.

On May 24, 2011, we borrowed $115.0 million under the facility to fund a portion of our acquisition of the Radisson Lexington Hotel New York. In conjunction with the acquisition, the seller's $100.0 million mortgage secured by the hotel was assigned to us and we added the mortgage as security to the facility. We have the ability to repay the $100.0 million and release the mortgage as security for the facility at any time.

As of June 17, 2011, we had $115.0 million in borrowings outstanding under the facility and the Company's ratio of net indebtedness to EBITDA was 5.9x. Accordingly, interest on our borrowings under the facility will be based on LIBOR plus 300 basis points for our third fiscal quarter. We incurred interest and unused credit facility fees on the facility of $0.5 million and $0.1 million for our fiscal quarters ended June 17, 2011 and June 18, 2010, and $0.7 million and $0.2 million for the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, respectively. Subsequent to the end of our second quarter, we borrowed an additional $15 million under the facility to fund a portion of our acquisition of the Courtyard Denver Downtown.


10.
Acquisitions

Times Square Development

On January 18, 2011, we entered into a purchase and sale agreement to acquire, upon completion, a hotel property under development on West 42nd Street in Times Square, New York City. Upon completion by the third-party developer, the hotel is expected to contain approximately 285 guest rooms and the contractual purchase price is approximately $128 million, or approximately $450,000 per guest room. If certain required permits, approvals and consents are obtained, the number of guest rooms could be increased to approximately 400 guest rooms, which would result in the contractual purchase price increasing to approximately $178 million, or $445,000 per guest room. The purchase and sale agreement is for a fixed-price, which varies only by total guest rooms built and the completion date for the hotel, and we are not assuming any construction risk (including not assuming the risk of construction cost overruns). We currently expect that the development of the hotel will take approximately 24 to 30 months with an anticipated opening date in 2013.

Upon entering into the purchase and sale agreement, we made a $20.0 million deposit with a third-party escrow agent. Upon the completion of certain construction milestones, we will be required to make an additional deposit of $5.0 million. If certain permits, approvals and consents necessary for the hotel to contain more than 250 guest rooms are obtained, we will be required to make an additional deposit equal to $45,000 per guest room for each guest room in excess of 250. All deposits will be interest bearing. We will forfeit our deposits if we do not close on the acquisition of the hotel upon substantial completion of construction, unless the seller fails to meet certain conditions, including substantial completion of the hotel within a specified time frame and construction of the hotel within the contractual scope.

JW Marriott Denver at Cherry Creek

On May 19, 2011, we acquired the 196-room JW Marriott Denver at Cherry Creek located in Denver, Colorado for approximately $74.2 million. We funded the acquisition with corporate cash of $30.3 million and the assumption of a $42.4 million mortgage loan with a fair value of approximately $43.9 million. We reviewed the terms of the mortgage loan in conjunction with the hotel purchase accounting and concluded the interest rate of the loan to be above current market. Accordingly, we recorded a $1.5 million debt premium that will be amortized into interest expense over the remaining life of the loan.

We retained the existing hotel manager, Sage Hospitality, under a new 5-year management agreement, which may be renewed for an additional 5 years upon mutual consent. The management agreement provides for a base management fee of 2.25% to 3.25% of gross revenues and an incentive management fee of 10% to 15% of hotel operating profit above an owner's priority, both depending on the performance of the hotel and determined in accordance with the terms of the management agreement. The hotel remains a JW Marriott hotel under a new15-year franchise agreement with Marriott. The franchise fees are 6.0% of gross rooms revenue and 3.0% of food and beverage revenue.

Radisson Lexington

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On June 1, 2011, we acquired the 712-room Radisson Lexington Hotel located in New York City for approximately $336.8 million. The acquisition was funded with corporate cash and a $115.0 million draw on our senior unsecured credit facility. We retained the existing hotel manager, Highgate Hotels, under a new 10-year management agreement, which may be renewed for an additional 5 years by the manager if the hotel meets certain financial performance hurdles. The management agreement provides for a base management fee of 2.5% of gross revenues during the first year and 3.0% of gross revenues thereafter. The agreement also provides for an incentive management fee of 20% of hotel operating profit above an owner's priority determined in accordance with the terms of the management agreement. We assumed the existing franchise agreement with Radisson, which (i) provides for a franchise fee of 2.75% of gross rooms revenue and (ii) gives us an option for termination during two 60-day windows, the first of which begins on March 1, 2012, for a termination fee. We are currently assessing the optimal brand strategy for the hotel.

The majority of the hotel's food and beverage outlets are leased to third party tenants. We reviewed the terms of the tenant leases in conjunction with the hotel purchase accounting and concluded that the terms of three of the leases are more favorable to us than a current market tenant lease. Accordingly, we recorded a $1.6 million favorable lease asset that will be amortized over the remaining term of each lease. We concluded that the terms of two of the leases have terms that are unfavorable to us compared to a current market tenant lease and have recorded an unfavorable contract liability of $0.2 million that will be amortized over the remaining term of each lease.

Courtyard Denver Downtown

Subsequent to the end of our second fiscal quarter, we acquired the 177-room Courtyard Denver Downtown located in Denver, Colorado for approximately $46.0 million.  The acquisition was funded with corporate cash, a $15 million million draw on our credit facility, and the assumption of a $27.2 million mortgage loan.  We retained the existing hotel manager, Sage Hospitality, under a new 5-year management agreement, which may be renewed for an additional 5 years upon mutual consent.   The management agreement provides for a base management fee of 2% to 3% of gross revenues, and an incentive management fee of 10% to 15% of hotel operating profit above an owner's priority, both depending on the performance of the hotel and determined in accordance with the terms of the management agreement. The hotel remains a Courtyard hotel under a new 16-year franchise agreement with Marriott. The franchise fee is 5.5% of gross room revenue.  

The preliminary allocation of fair value to the acquired assets and liabilities of the hotels acquired as of June 17, 2011, which may be adjusted upon receipt of all information necessary for the finalization of appraisals is as follows (in thousands):
 
 
JW Marriott Denver
 
Radisson Lexington
Land
 
$
9,200

 
$
92,000

Building
 
63,321

 
229,807

Furnitures, fixtures and equipment
 
1,600

 
13,400

Total fixed assets
 
74,121

 
335,207

Favorable lease assets
 


1,586

Unfavorable lease liabilities
 


(161
)
Environmental remediation liability
 


(592
)
Net other assets and liabilities
 
79

 
725

Total
 
$
74,200

 
$
336,765


The acquired properties are included in our results of operations based on their respective dates of acquisition. The following unaudited pro forma results of operations reflect these transactions as if each had occurred on January 1, 2010. We believe all significant adjustments necessary to reflect the effects of acquisitions have been made; however, a preliminary estimate of the fair value of the assets acquired and the liabilities assumed was made, and we will finalize the recorded amounts after all information is obtained. The pro forma information is not necessarily indicative of the results that actually would have occurred nor does it intend to indicate future operating results.

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Fiscal Quarter Ended
 
Period from
 
June 17, 2011
 
June 18, 2010
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
Revenues
$
186,625


$
184,404


$
316,737


$
313,550

 







Net income (loss)
888


4,403


(12,282
)

(6,892
)
 







Earnings (loss) per share - Basic and Diluted
$
0.01


$
0.03


$
(0.07
)

$
(0.05
)




11.
Fair Value of Financial Instruments

The fair value of certain financial assets and liabilities and other financial instruments as of June 17, 2011 (unaudited) and December 31, 2010, in thousands, are as follows:
 
As of June 17,
2011
 
As of December 31,
2010
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Note receivable
$
57,346

 
$
40,500

 
$
57,951

 
$
40,500

Debt
$
1,036,094

 
$
1,053,936

 
$
780,880

 
$
794,900


We estimate the fair value of our mortgage debt by discounting the future cash flows of each instrument at estimated market rates. We estimate the fair value of our note receivable by discounting the future cash flows related to the note at estimated market rates. The carrying value of our other financial instruments approximates fair value due to the short-term nature of these financial instruments.

12.
Commitments and Contingencies

Litigation

Except as described below, we are not involved in any material litigation nor, to our knowledge, is any material litigation pending or threatened against us. We are involved in routine litigation arising out of the ordinary course of business, all of which is expected to be covered by insurance and is not expected to have a material adverse impact on our financial condition or results of operations.

We hold the senior mortgage loan secured by the Allerton Hotel, located in downtown Chicago, Illinois. The loan matured in January 2010 and is in default. On May 5, 2011, the borrower under the loan filed for bankruptcy protection in the Northern District of Illinois under chapter 11 of Title 11 of the U.S. Code, 11 U.S.C. §§ 101 et seq., as amended.  The senior mortgage loan is secured by substantially all of the assets of the borrower, including, without limitation, the Allerton Hotel. The filing of the bankruptcy case had the effect of, among other things, automatically staying the foreclosure proceedings that we had previously filed against the borrower.  While we intend to continue to vigorously pursue our rights in the bankruptcy case, it is too early in the process to determine the likelihood of potential outcomes.

In addition, certain employees at the Los Angeles Airport Marriott Hotel and certain employees at other hotels in the vicinity of the Los Angeles Airport, have brought a claim against the Company and Marriott and other LAX area hotel owners and operators alleging that these hotels did not comply with an ordinance adopted by the Los Angeles City Council governing payment of service charges to certain employees at these hotels. The litigation is in the discovery phase. We cannot presently determine the likelihood of the outcome or amount of potential loss, if any.

Performance Termination Provisions Under Management Agreements

Our management agreements provide us with termination rights upon a hotel’s failure to meet certain financial performance criteria. Our termination rights may, in certain cases, be extinguished if the manager of the hotel elects to cure the failure by making a cure payment. Based on our forecasts and the hotels’ budgets, the Orlando Airport Marriott and Oak Brook Hills Marriott Resort

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are likely to fail to satisfy their performance termination criteria, which will give us the right to terminate the management agreements for these hotels, subject to the managers’ right to cure.

If we elect to terminate a hotel manager under the performance termination provisions we will evaluate the most appropriate action plan for the hotel. This action plan could include disposition of the hotel, rebranding the hotel, or maintaining the existing hotel brand with an independent hotel manager.

The Conrad Chicago failed the performance criteria under our management agreement with Hilton. Hilton elected not to make a cure payment to continue to manage the hotel. On May 17, 2011, we entered into a termination agreement with Hilton, which allows us to notify Hilton, with 30-day written notice, of a termination date on or prior to December 31, 2011. If termination does not occur on or prior to December 31, 2011, the existing management agreement remains in effect. At the termination date, we are required to pay a $1.0 million termination fee, reflecting partial repayment of key money provided by Hilton when it entered into the management agreement. Upon execution of the termination agreement with Hilton, we concluded that the $1.0 million repayment of key money to Hilton was probable and, accordingly, we accrued a liability during the second fiscal quarter.

Income Taxes

We had no accruals for tax uncertainties as of June 17, 2011 and December 31, 2010. As of June 17, 2011, all of our federal income tax returns and state tax returns for the jurisdictions in which our hotels are located remain subject to examination by the respective jurisdiction tax authorities.


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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risk factors discussed herein and other factors discussed from time to time in our periodic filings with the Securities and Exchange Commission. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.

Overview

We are a lodging-focused real estate company that, as of July 26, 2011, owns a portfolio of 26 premium hotels and resorts that contain 11,828 guestrooms as well as a senior mortgage loan secured by another hotel. We are an owner, as opposed to an operator, of the 26 hotels in our portfolio. As an owner, we receive all of the operating profits or losses generated by our hotels after we pay fees to the hotel managers, which are based on the revenues and profitability of the hotels.

Our vision is to be the premier allocator of capital in the lodging industry. Our mission is to deliver long-term stockholder returns through a combination of dividends and long-term capital appreciation. Our strategy is to utilize disciplined capital allocation and focus on acquiring, owning, and measured dispositions of high quality, branded lodging properties in North America with superior long-term growth prospects in markets with high barriers-to-entry for new supply. In addition, we are committed to enhancing the value of our platform by being open and transparent in our communications with investors, monitoring our corporate overhead and following sound corporate governance practices.

Consistent with our strategy, we continue to focus on opportunistically investing in premium full-service hotels and, to a lesser extent, premium urban limited-service hotels located throughout North America. Our portfolio of 26 hotels is concentrated in key gateway cities and in destination resort locations. All but one of our hotels are operated under a brand owned by one of the leading global lodging brand companies (Marriott International, Inc. (“Marriott”), Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”) or Hilton Worldwide (“Hilton”)).

We differentiate ourselves from our competitors because of our adherence to three basic principles:

high-quality urban- and destination resort-focused branded hotel real estate;

conservative capital structure; and

thoughtful asset management.

High Quality Urban and Destination Resort Focused Branded Real Estate

As of July 26 ,2011, we own 26 premium hotels and resorts in North America. These hotels and resorts are primarily categorized as upper upscale as defined by Smith Travel Research and are generally located in high barrier-to-entry markets with multiple demand generators.

Our properties are concentrated in five key gateway cities (New York City, Los Angeles, Chicago, Boston and Atlanta) and in destination resort locations (such as the U.S. Virgin Islands and Vail, Colorado). We believe that gateway cities and destination resorts will achieve higher long-term growth because they are attractive business and leisure destinations. We also believe that these locations are better insulated from new supply due to relatively high barriers-to-entry, including expensive construction costs and limited prime hotel development sites.

We believe that higher quality lodging assets create more dynamic cash flow growth and superior long-term capital appreciation.

In addition, a core tenet of our strategy is to leverage global hotel brands. We strongly believe in the value of powerful global

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brands because we believe that they are able to produce incremental revenue and profits compared to similar unbranded hotels. Dominant global hotel brands typically have very strong reservation and reward systems and sales organizations, and all but one of our hotels are operated under a brand owned by one of the top global lodging brand companies (Marriott, Starwood, Hilton) and all but six of our hotels are managed by the brand company directly. Generally, we are interested in owning hotels that are currently operated under, or can be converted to, a globally recognized brand. We would, however, consider owning non-branded hotels in certain top-tier markets or unique markets if the returns on such hotels would be higher than if the hotels were operated under a globally recognized brand.

Conservative Capital Structure

Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Other than borrowings under our $200 million senior unsecured credit facility, our outstanding debt is fixed interest rate mortgage debt with no near-term maturities. We have a preference to maintain a significant portion of our portfolio as unencumbered assets in order to provide balance sheet flexibility. In addition, to the extent that we incur additional debt, our preference is limited recourse secured mortgage debt. We expect that our strategy will enable us to maintain a balance sheet with a prudent amount of debt throughout all phases of the lodging cycle. We believe that it is not prudent to increase the inherent risk of a highly cyclical business by maintaining a highly levered capital structure.

We prefer a relatively simple but efficient capital structure. We have not invested in joint ventures and have not issued any operating partnership units or preferred stock. We endeavor to structure our hotel acquisitions so that they will not overly complicate our capital structure; however, we will consider a more complex transaction if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.

Thoughtful Asset Management

We believe that we are able to create significant value in our portfolio by utilizing our management team’s extensive experience and our innovative asset management strategies. Our senior management team has an established broad network of hotel industry contacts and relationships, including relationships with hotel owners, financiers, operators, project managers and contractors and other key industry participants.

As the economic recovery continues, we will explore strategic options to maximize the growth of our revenue and profitability. We continue to focus our hotel managers on minimizing the increases in our property-level operating expenses and we continue to maintain reasonable corporate expenses. We are also continuing to work closely with our managers to optimize the mix of business at our hotels in order to maximize potential revenue.

We use our broad network of hotel industry contacts and relationships to maximize the value of our hotels. Under the federal income tax rules governing REITs, we are required to engage a hotel manager that is an eligible independent contractor through one of our subsidiaries to manage each of our hotels pursuant to a management agreement. Our philosophy is to negotiate management agreements that give us the right to exert significant influence over the management of our properties, annual budgets and all capital expenditures (to the extent permitted under the REIT rules), and then to use those rights to continually monitor and improve the performance of our properties. We cooperatively partner with the managers of our hotels in an attempt to increase operating results and long-term asset values at our hotels. In addition to working directly with the personnel at our hotels, our senior management team also has long-standing professional relationships with our hotel managers’ senior executives, and we work directly with these senior executives to improve the performance of our portfolio.

We believe we can create significant value in our portfolio through innovative asset management strategies such as rebranding, renovating and repositioning. We are committed to regularly evaluating our portfolio to determine if we can employ these value-added strategies at our hotels.

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 U.S. GAAP, as well as other financial information that is not prepared in accordance with U.S. 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 hotels, groups of hotels 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;

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Average Daily Rate (or ADR);

Revenue per Available Room (or RevPAR);

Earnings Before Interest, Income Taxes, Depreciation and Amortization (or EBITDA); and

Funds From Operations (or FFO).

Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an 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. ADR and RevPAR include only room revenue. Room revenue comprised approximately 66% of our total revenues for our fiscal quarter ended June 17, 2011 and for the period from January 1, 2011 to June 17, 2011, and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.

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 our hotels' global brands.

We also use EBITDA and FFO as measures of the financial performance of our business. See “Non-GAAP Financial Matters.”

Our Hotels

The following table sets forth certain operating information for each of our owned hotels as of June 17, 2011 for the period from January 1, 2011 to June 17, 2011. The operating information presented below assumes we owned our 2011 and 2010 acquisitions since January 1, 2010.


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Property (2)
 
Location
 
Number of
Rooms
 
Occupancy (%)
 
ADR($)
 
RevPAR($)
 
% Change
from 2010
RevPAR
Chicago Marriott
 
Chicago, Illinois
 
1,198

 
62.9
%
 
$
189.57

 
$
119.19

 
3.2
%
Los Angeles Airport Marriott
 
Los Angeles, California
 
1,004

 
84.0
%
 
105.19

 
88.36

 
5.3
%
Hilton Minneapolis (1)
 
Minneapolis, Minnesota
 
821

 
68.1
%
 
130.59

 
88.97

 
5.6
%
Radisson Lexington Hotel New York (1)
 
New York, New York
 
712

 
94.0
%
 
170.71

 
160.45

 
7.1
%
Westin Boston Waterfront Hotel (1)
 
Boston, Massachusetts
 
793

 
64.7
%
 
185.47

 
120.00

 
1.2
%
Renaissance Waverly Hotel
 
Atlanta, Georgia
 
521

 
67.0
%
 
130.69

 
87.55

 
3.8
%
Salt Lake City Marriott Downtown
 
Salt Lake City, Utah
 
510

 
60.8
%
 
126.18

 
76.75

 
5.6
%
Renaissance Worthington
 
Fort Worth, Texas
 
504

 
71.8
%
 
166.72

 
119.78

 
4.5
%
Frenchman’s Reef & Morning Star Marriott Beach Resort (1)
 
St. Thomas, U.S. Virgin Islands
 
502

 
82.1
%
 
253.11

 
207.72

 
(8.0%)

Renaissance Austin Hotel
 
Austin, Texas
 
492

 
66.7
%
 
144.45

 
96.39

 
5.1
%
Torrance Marriott South Bay
 
Los Angeles County, California
 
487

 
78.4
%
 
105.87

 
83.01

 
0.2
%
Orlando Airport Marriott
 
Orlando, Florida
 
485

 
81.5
%
 
104.61

 
85.23

 
11.4
%
Marriott Griffin Gate Resort
 
Lexington, Kentucky
 
409

 
57.4
%
 
128.31

 
73.60

 
0.5
%
Oak Brook Hills Marriott Resort
 
Oak Brook, Illinois
 
386

 
49.4
%
 
111.74

 
55.18

 
8.8
%
Atlanta Westin North at Perimeter (1)
 
Atlanta, Georgia
 
372

 
70.0
%
 
108.56

 
75.95

 
4.3
%
Vail Marriott Mountain Resort & Spa (1)
 
Vail, Colorado
 
344

 
62.7
%
 
278.73

 
174.76

 
1.2
%
Marriott Atlanta Alpharetta
 
Atlanta, Georgia
 
318

 
68.4
%
 
134.19

 
91.77

 
15.1
%
Courtyard Manhattan/Midtown East
 
New York, New York
 
312

 
80.5
%
 
241.91

 
194.68

 
7.4
%
Conrad Chicago (1)
 
Chicago, Illinois
 
311

 
78.8
%
 
170.74

 
134.60

 
20.1
%
Bethesda Marriott Suites
 
Bethesda, Maryland
 
272

 
66.5
%
 
175.60

 
116.80

 
4.5
%
JW Marriott Denver at Cherry Creek (1)
 
Denver, Colorado
 
196

 
67.8
%
 
224.86

 
152.39

 
3.9
%
Courtyard Manhattan/Fifth Avenue
 
New York, New York
 
185

 
83.7
%
 
243.45

 
203.69

 
1.9
%
The Lodge at Sonoma, a Renaissance Resort & Spa
 
Sonoma, California
 
182

 
64.7
%
 
189.95

 
122.93

 
17.8
%
Hilton Garden Inn Chelsea/New York City (1)
 
New York, New York
 
169

 
90.1
%
 
187.66

 
169.09

 
10.4
%
Renaissance Charleston
 
Charleston, South Carolina
 
166

 
84.1
%
 
176.19

 
148.26

 
13.4
%
TOTAL/WEIGHTED AVERAGE
 
 
 
11,651

 
71.7
%
 
$
158.35

 
$
113.46

 
4.1
%
____________________
(1)
These hotels report operations on a calendar month and year basis. The table above includes the operations for the period from January 1, 2011 to May 31, 2011 for these hotels.

(2)
The table excludes the 177-room Courtyard Denver Downtown located in Denver, Colorado, which was acquired on July 22, 2011.

2011 Highlights

Times Square Development. On January 18, 2011, we entered into a purchase and sale agreement to acquire, upon completion, a hotel property under development on West 42nd Street in Times Square, New York City. Upon completion by the third party developer, the hotel is expected to contain approximately 285 guest rooms and the contractual purchase price is approximately $128 million, or approximately $450,000 per guest room. If certain required permits, approvals and consents are obtained, the number of guest rooms could be increased to approximately 400 guest rooms, which would result in the contractual purchase price increasing to approximately $178 million, or $445,000 per guest room. The purchase and sale agreement is for a fixed-price, which varies only by total guest rooms built and the completion date for the hotel, and we are not assuming any construction risk (including not assuming the risk of construction cost overruns). We currently expect that the development of the hotel will take approximately 24 to 30 months with an anticipated opening date in 2013.

Upon entering into the purchase and sale agreement, we made a $20.0 million deposit with a third-party escrow agent. Upon the completion of certain construction milestones, we will be required to make an additional deposit of $5.0 million. If certain permits, approvals and consents necessary for the hotel to contain more than 250 guest rooms are obtained, we will be required to make an additional deposit equal to $45,000 per guest room for each guest room in excess of 250. All deposits will be interest bearing. We will forfeit our deposits if we do not close on the acquisition of the hotel upon substantial completion of construction, unless the seller fails to meet certain conditions, including substantial completion of the hotel within a specified time frame and construction of the hotel within the contractual scope.

Follow-on Public Offering. We completed a follow-on public offering of our common stock during the fiscal quarter ended

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March 25, 2011. We sold 12,418,662 shares of our common stock, including the underwriter’s option to purchase 1,418,662 additional shares, at an offering price of $12.07 per share. The net proceeds to us, after deduction of offering costs, were approximately $149.7 million.

Hilton Minneapolis Mortgage Loan. On April 15, 2011, we closed on a $100 million loan secured by a mortgage on the Hilton Minneapolis. The loan has a 10-year term, bears interest at an annual fixed interest rate of 5.464%, amortizes on a 25-year schedule and is non-recourse, subject only to standard recourse exceptions. We used the proceeds from the loan to fund a portion of our acquisition of the Radisson Lexington.

Acquisition of the JW Marriott Denver at Cherry Creek. On May 19, 2011, we acquired the 196-room JW Marriott Denver at Cherry Creek located in Denver, Colorado for approximately $74.2 million. We funded the acquisition with corporate cash and the assumption of a $42.4 million mortgage loan. The mortgage loan bears interest at a fixed rate of 6.47% and matures in July 2015. We retained the existing hotel manager, Sage Hospitality, under a new 5-year management agreement, which may be renewed for an additional 5 years upon mutual consent. The management agreement provides for a base management fee of 2.25% to 3.25% of gross revenues and an incentive management fee of 10% to 15% of hotel operating profit above an owner's priority, both depending on the performance of the hotel and determined in accordance with the terms of the management agreement. The hotel remains a JW Marriott hotel under a new 15-year franchise agreement with Marriott. The franchise fees are 6.0% of gross rooms revenue and 3.0% of food and beverage revenue.

Acquisition of the Radisson Lexington Hotel New York. On June 1, 2011, we acquired the 712-room Radisson Lexington Hotel located in New York City for approximately $336.8 million. The acquisition was funded with corporate cash and a $115.0 million draw on our senior unsecured credit facility. We retained the existing hotel manager, Highgate Hotels, under a new 10-year management agreement, which may be renewed for an additional 5 years at the manager's option upon meeting certain financial performance hurdles. The management agreement provides for a base management fee of 2.5% of gross revenues during the first year and 3.0% of gross revenues thereafter. The agreement also provides for an incentive management fee of 20% of hotel operating profit above an owner's priority determined in accordance with the terms of the management agreement. We assumed the existing franchise agreement with Radisson, which provides an option for termination during two 60-day windows, the first of which begins on March 1, 2012, for a termination fee. We are currently assessing the optimal brand strategy for the hotel.

Acquisition of the Courtyard Denver Downtown. Subsequent to the end of our second fiscal quarter, we acquired the 177-room Courtyard Denver Downtown located in Denver, Colorado for purchase price of $46.0 million.  The acquisition was funded with corporate cash, a $15 million draw on our credit facility, and the assumption of a $27.2 million mortgage loan. The loan bears an annual fixed interest rate equal to 6.26%, amortizes on a 30-year schedule and matures on August 5, 2012. We retained the existing hotel manager, Sage Hospitality, under a new 5-year management agreement, which may be renewed for an additional 5 years with mutual consent. The management agreement provides for a base management fee of 2% to 3% of gross revenues, and an incentive management fee of 10% to 15% of hotel operating profit above an owner's priority, both depending on the performance of the hotel and determined in accordance with the terms of the management agreement.  The hotel remains a Courtyard hotel under a new 16-year franchise agreement with Marriott. The franchise fee is 5.5% of gross room revenue.
  
Credit Facility Amendment. On June 2, 2011, we amended our $200.0 million unsecured credit facility to reduce the interest rate spread, lower certain fees and extend the term for an additional year.

Results of Operations

Comparison of our Fiscal Quarter Ended June 17, 2011 to our Fiscal Quarter Ended June 18, 2010

Our net loss for our fiscal quarter ended June 17, 2011 was $0.6 million compared to net income of $0.8 million for our fiscal quarter ended June 18, 2010.

Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels. Our total revenues increased $18.4 million from $151.1 million for our fiscal quarter ended June 18, 2010 to $169.5 million for our fiscal quarter ended June 17, 2011. This increase includes amounts that are not comparable quarter-over-quarter as follows:

$12.4 million increase from the Hilton Minneapolis, which was purchased on June 16, 2010.
$3.0 million increase from the Renaissance Charleston, which was purchased on August 6, 2010.
$3.2 million increase from the Hilton Garden Inn Chelsea, which was purchased on September 8, 2010.
$0.7 million increase from the JW Marriott Denver at Cherry Creek, which was purchased on May 19, 2011.

Individual hotel revenues for our fiscal quarters ended June 17, 2011 and June 18, 2010, respectively, consist of the following

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(in millions):
 
Fiscal Quarter Ended
 
 
 
June 17, 2011
 
June 18, 2010
 
% Change
Chicago Marriott
$
23.7

 
$
23.4

 
1.3
 %
Westin Boston Waterfront Hotel (1)
18.7

 
19.4

 
(3.6
)
Hilton Minneapolis (1)
12.4

 

 
100.0

Los Angeles Airport Marriott
12.3

 
11.1

 
10.8

Frenchman’s Reef & Morning Star Marriott Beach Resort (1)
10.8

 
15.6

 
(30.8
)
Renaissance Worthington
7.5

 
8.1

 
(7.4
)
Renaissance Waverly Hotel
6.6

 
6.1

 
8.2

Courtyard Manhattan/Midtown East
6.5

 
6.0

 
8.3

Marriott Griffin Gate Resort
6.4

 
6.2

 
3.2

Renaissance Austin Hotel
6.3

 
6.9

 
(8.7
)
Conrad Chicago (1)
6.1

 
5.2

 
17.3

Oak Brook Hills Marriott Resort
5.6

 
5.4

 
3.7

Vail Marriott Mountain Resort & Spa (1)
5.2

 
5.6

 
(7.1
)
Salt Lake City Marriott Downtown
5.1

 
4.8

 
6.3

Torrance Marriott South Bay
5.0

 
5.0

 

Orlando Airport Marriott
4.4

 
4.1

 
7.3

Bethesda Marriott Suites
4.3

 
3.8

 
13.2

Atlanta Westin North at Perimeter (1)
4.2

 
4.2

 

The Lodge at Sonoma, a Renaissance Resort & Spa
4.0

 
3.5

 
14.3

Courtyard Manhattan/Fifth Avenue
3.9

 
3.7

 
5.4

Marriott Atlanta Alpharetta
3.6

 
3.0

 
20.0

Hilton Garden Inn Chelsea/New York City (1)
3.2

 

 
100.0

Renaissance Charleston
3.0

 

 
100.0

JW Marriott Denver at Cherry Creek (2)
0.7

 

 
100.0

Total
$
169.5

 
$
151.1

 
12.2
 %

(1)
These hotels report operations on a calendar month and year basis. Our fiscal quarters ended June 17, 2011 and June 18, 2010 include the months of March, April, and May for these hotels.

(2)
The JW Marriott Denver at Cherry Creek was acquired on May 19, 2011 and reports on a calendar month and yearly basis. The fiscal quarter ended June 17, 2011 includes the operations of the hotel from May 19, 2011 to May 31, 2011.

The following pro forma key hotel operating statistics for our hotels for our fiscal quarters ended June 17, 2011 and June 18, 2010, respectively, include the prior year operating statistics for the prior year period comparable to our 2011 ownership period.
 
Fiscal Quarter Ended
 
 
 
June 17, 2011
 
June 18, 2010
 
% Change
Occupancy %
74.7
%
 
73.3
%
 
1.4 percentage points
ADR
$
162.87

 
$
159.07

 
2.4
%
RevPAR
$
121.61

 
$
116.63

 
4.3
%

The increase in ADR is attributable to an increase in pricing power and a change in mix between our primary customer segments that resulted in an increase in higher-rated business transient business. Revenue from the business transient segment, traditionally the most profitable segment for hotels, increased 9.3% from the prior year. Group revenue was flat to the prior year. Although the group room nights declined from the prior year, this was offset by an increase in the group ADR. As of the end of our second fiscal quarter, our group revenue booking pace was 2.1% higher than at the same time last year and is showing growth in both ADR and occupancy.

Food and beverage revenues increased $1.7 million from the comparable period in 2010, which is partially due to $5.1 million of revenues from our 2010 and 2011 acquisitions. The increase from our acquisitions is partially offset by a decrease of $3.4

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million at our comparable hotels driven primarily by lower banquet revenue due to lower group room nights, and to a lesser extent lower outlet revenue. Also contributing to the decrease was the partial closure of Frenchman's Reef during the quarter for the renovation project. Other revenues, which primarily represent spa, golf, parking and attrition and cancellation fees, increased $0.5 million, which is primarily due to $0.5 million of revenues from our 2010 and 2011 acquisitions.

Hotel operating expenses. Hotel operating expenses consist primarily of operating expenses of our hotels, including non-cash ground rent expense. Our hotel operating expenses increased $13.5 million, or 11.9 percent, from $113.4 million for our fiscal quarter ended June 18, 2010 to $126.9 million for our fiscal quarter ended June 17, 2011.

The operating expenses for our fiscal quarters ended June 17, 2011 and June 18, 2010 consists of the following (in millions):
 
Fiscal Quarter Ended
 
 
 
June 17,
2011
 
June 18,
2010
 
%
Change
Rooms departmental expenses
$
28.5

 
$
24.5

 
16.3
 %
Food and beverage departmental expenses
33.2

 
31.5

 
5.4

Other departmental expenses
4.6

 
4.4

 
4.5

General and administrative
14.2

 
13.1

 
8.4

Utilities
6.2

 
5.7

 
8.8

Repairs and maintenance
7.8

 
6.8

 
14.7

Sales and marketing
12.9

 
11.0

 
17.3

Base management fees
5.5

 
4.1

 
34.1

Incentive management fees
1.5

 
1.4

 
7.1

Property taxes
6.5

 
6.5

 

Other fixed charges
2.5

 
2.2

 
13.6

Ground rent—Contractual
1.8

 
0.4

 
350.0

Ground rent—Non-cash
1.7

 
1.8

 
(5.6
)
Total hotel operating expenses
$
126.9

 
$
113.4

 
11.9
 %

The increase in hotel operating expenses includes amounts that are not comparable quarter-over-quarter as follows:
$8.7 million increase from the Hilton Minneapolis, which was purchased on June 16, 2010.
$1.7 million increase from the Renaissance Charleston, which was purchased on August 6, 2010.
$1.7 million increase from the Hilton Garden Inn Chelsea, which was purchased on September 8, 2010.
$0.5 million increase from the JW Marriott Denver, which was purchased on May 19, 2011.

The remaining increase in operating expenses of $0.9 million at our comparable hotels is due primarily to higher rooms departmental expenses and support costs, specifically repairs and maintenance and sales and marketing expenses. This increase at our comparable hotels is partially offset by a $1.7 million decrease in property taxes as a result of a number of successful multi-year real estate tax appeals as well as lower real estate tax assessments at certain hotels. The increase in contractual ground rent noted in the table above is attributable to our acquisition of the Hilton Minneapolis in June 2010, which is subject to a ground lease.

Base management fees are calculated as a percentage of total revenues and incentive management fees are based on the level of operating profit at certain hotels. The increase in base management fees is due to the impact of our 2010 and 2011 acquisitions, the overall increase in revenues at our comparable hotels and a $1.0 million termination fee accrual for the Conrad Chicago. The Conrad Chicago failed the performance criteria under our management agreement with Hilton. Hilton elected not to make a cure payment to continue to manage the hotel. On May 17, 2011, we entered into a termination agreement with Hilton, which allows us to notify Hilton, with 30-day written notice, of a termination date on or prior to December 31, 2011. If termination does not occur on or prior to December 31, 2011, the existing management agreement remains in effect. At the termination date, we are required to pay a $1.0 million termination fee, reflecting partial repayment of key money provided by Hilton when it entered into the management agreement. Upon execution of the termination agreement with Hilton, we concluded that the $1.0 million repayment of key money to Hilton was probable and, accordingly, we accrued a liability during the second fiscal quarter. The increase in incentive management fees from the comparable period in 2010 is due to the increased profit at certain of our hotels and a higher number of hotels earning an incentive management fee in 2011 as compared to 2010.

Depreciation and amortization. Depreciation and amortization is recorded on our hotel buildings over 40 years for the

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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. Our depreciation and amortization expense increased $2.6 million from the second fiscal quarter in 2010 to the second fiscal quarter in 2011. This increase includes amounts that are not comparable for the year-over-year quarters as follows:

$1.7 million increase from the Minneapolis Hilton, which was purchased on June 16, 2010.
$0.3 million increase from the Renaissance Charleston, which was purchased on August 6, 2010.
$0.4 million increase from the Hilton Garden Inn Chelsea, which was purchased on September 8, 2010.
$0.1 million increase from the JW Marriott Denver, which was purchased on May 19, 2011.
$0.4 million increase from the Radisson Lexington, which was purchased on June 1, 2011.

Corporate expenses. Our corporate expenses increased $0.8 million, from $3.6 million for our fiscal quarter ended June 18, 2010 to $4.4 million for our fiscal quarter ended June 17, 2011. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. The increase in corporate expenses is due primarily to higher employee-related expenses due to additional employees being hired in late 2010 and 2011.

Hotel acquisition costs. We incurred $1.9 million of hotel acquisition costs during the quarter ended June 17, 2011 associated with the acquisition of the JW Marriott Denver at Cherry Creek and Radisson Lexington Hotel New York. We incurred acquisition costs of $0.3 million during the fiscal quarter ended June 18, 2010 related to the acquisition of the Hilton Minneapolis.

Interest expense. Our interest expense was $12.3 million and $11.1 million for our fiscal quarters ended June 17, 2011 and June 18, 2010, respectively. The increase in interest expense is primarily attributable to our recent mortgage financing on the Hilton Minneapolis, the mortgage loan assumed in our acquisition of the JW Marriott Denver at Cherry Creek, and the outstanding borrowings on our credit facility in conjunction with our acquisition of the Radisson Lexington Hotel New York.

The interest expense for our fiscal quarter ended June 17, 2011 was comprised of mortgage debt ($11.8 million), amortization of deferred financing costs ($0.4 million), and interest and unused fees on our credit facility ($0.4 million), which is partially offset by capitalized interest of $0.3 million. The interest expense for our fiscal quarter ended June 18, 2010 was comprised of mortgage debt ($10.8 million), amortization of deferred financing costs ($0.2 million) and interest and unused facility fees on our credit facility ($0.1 million). As of June 17, 2011, we had property-specific mortgage debt outstanding on twelve of our hotels. All of our mortgage debt is fixed-rate secured debt bearing interest at rates ranging from 5.30 percent to 8.81 percent per year. As of June 17, 2011, we had $115 million of outstanding borrowings on our credit facility bearing an interest rate of 2.45%. Our weighted-average interest rate on all debt as of June 17, 2011 was 5.47 percent.

Interest income. Interest income was $0.3 million for our fiscal quarters ended June 18, 2010 and June 17, 2011.

Income taxes. We recorded an income tax expense of $3.1 million for our fiscal quarters ended June 17, 2011 and June 18, 2010. The second quarter 2011 income tax expense includes $3.0 million of income tax expense incurred on the $7.5 million pre-tax income of our taxable REIT subsidiary, or TRS, and $0.1 million of state franchise taxes. The second quarter 2010 income tax expense includes $2.1 million of income tax expense incurred on the $5.3 million pre-tax income of our TRS for our fiscal quarter ended June 18, 2010, foreign income tax expense of $0.9 million related to the taxable REIT subsidiary that owns Frenchman’s Reef and $0.1 million of state franchise taxes. The decrease in foreign tax expense is primarily attributable to the extension of the USVI tax agreement in late 2010, which reduced the income tax rate from 37.4% to 7.1%.

Comparison of the Period from January 1, 2011 to June 17, 2011 to the Period from January 1, 2010 to June 18, 2010

Our net loss for the period from January 1, 2011 to June 17, 2011 was $11.6 million compared to $7.5 million for the period from January 1, 2010 to June 18, 2010.

Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels. Our total revenues increased $27.8 million from $264.0 million for the period from January 1, 2010 to June 18, 2010 to $291.8 million for the period from January 1, 2011 to June 17, 2011. This increase includes amounts that are not comparable period-over-period as follows:

$18.6 million increase from the Hilton Minneapolis, which was purchased on June 16, 2010.
$5.1 million increase from the Renaissance Charleston, which was purchased on August 6, 2010.
$4.5 million increase from the Hilton Garden Inn Chelsea, which was purchased on September 8, 2010.
$0.7 million increase from the JW Marriott Denver, which was purchased on May 19, 2011.

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Individual hotel revenues for our fiscal quarters ended June 17, 2011 and June 18, 2010, respectively, consist of the following (in millions):
 
Period from
 
 
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
% Change
 
 
 
Chicago Marriott
$
36.1

 
$
35.5

 
1.7
 %
Westin Boston Waterfront Hotel (1)
25.0

 
26.4

 
(5.3
)
Los Angeles Airport Marriott
24.6

 
23.4

 
5.1

Frenchman’s Reef & Morning Star Marriott Beach Resort (1)
20.4

 
26.3

 
(22.4
)
Hilton Minneapolis (1)
18.6

 

 
100.0

Renaissance Worthington
15.9

 
16.0

 
(0.6
)
Renaissance Austin Hotel
14.1

 
13.9

 
1.4

Renaissance Waverly Hotel
14.0

 
14.0

 

Vail Marriott Mountain Resort & Spa (1)
11.7

 
12.2

 
(4.1
)
Courtyard Manhattan/Midtown East
10.7

 
10.0

 
7.0

Orlando Airport Marriott
10.4

 
9.6

 
8.3

Salt Lake City Marriott Downtown
9.8

 
9.9

 
(1.0
)
Marriott Griffin Gate Resort
9.8

 
10.0

 
(2.0
)
Torrance Marriott South Bay
9.7

 
9.5

 
2.1

Oak Brook Hills Marriott Resort
8.2

 
8.3

 
(1.2
)
Conrad Chicago (1)
8.2

 
7.1

 
15.5

Bethesda Marriott Suites
7.3

 
6.8

 
7.4

Marriott Atlanta Alpharetta
7.2

 
6.5

 
10.8

Atlanta Westin North at Perimeter (1)
6.7

 
6.6

 
1.5

The Lodge at Sonoma, a Renaissance Resort & Spa
6.6

 
5.7

 
15.8

Courtyard Manhattan/Fifth Avenue
6.5

 
6.3

 
3.2

Renaissance Charleston
5.1

 

 
100.0

Hilton Garden Inn Chelsea/New York City (1)
4.5

 

 
100.0

JW Marriott Denver at Cherry Creek (2)
0.7

 

 
100.0

Total
$
291.8

 
$
264.0

 
10.5
 %

(1)
These hotels report operations on a calendar month and year basis. The table above includes the operations for the period from January 1, 2011 to May 31, 2011 and January 1, 2010 to May 31, 2010, respectively, for these hotels.

(2)
The JW Marriott Denver at Cherry Creek was acquired on May 19, 2011 and reports on a calendar month and yearly basis. The table above includes the operations of the hotel from May 19, 2011 to May 31, 2011.

The following pro forma key hotel operating statistics for our hotels for the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, respectively, include the prior year operating statistics for the prior year period comparable to our 2011 ownership period.
 
Period from
 
 
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
% Change
 
 
 
Occupancy %
70.3
%
 
69.7
%
 
0.6 percentage points
ADR
$
156.36

 
$
152.03

 
2.8
%
RevPAR
$
110.00

 
$
105.90

 
3.9
%

The increase in ADR is attributable to an increase in pricing power and a change in mix between our primary customer

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segments that resulted in a shift away from the leisure and other business to higher-rated business transient business. Revenue from the business transient segment, traditionally the most profitable segment for hotels, increased 10.3% from the prior year. Group revenue was flat to the prior year. Although the group room nights declined from the prior year, this was offset by an increase in the group ADR. As of the end of the second quarter, our group revenue booking pace was 2.1% higher than at the same time last year and is showing growth in both ADR and occupancy.

Food and beverage revenues increased $3.2 million from the comparable period in 2010 due to $7.8 million of revenues from our 2010 and 2011 acquisitions, partially offset by a decrease of $4.6 million at our comparable hotels driven by both lower banquet revenue and lower outlet revenue. The lower banquet and outlet revenue is primarily attributable to the lower group room nights. Also contributing to the decrease was the partial closure of Frenchman's Reef during the period for the renovation project. Other revenues, which primarily represent spa, golf, parking and attrition and cancellation fees, increased $0.8 million, which is due to $1.1 million of revenues from our 2010 and 2011 acquisitions and lower attrition and cancellation fees at our comparable hotels.

Hotel operating expenses. Hotel operating expenses consist primarily of operating expenses of our hotels, including non-cash ground rent expense. Our hotel operating expenses increased $21.9 million, or 10.6 percent, from $205.9 million for the period from January 1, 2010 to June 18, 2010 to $227.8 million for the period from January 1, 2011 to June 17, 2011.

The operating expenses for the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, respectively, consists of the following (in millions):
 
Period from
 
 
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
%
Change
 
 
 
Rooms departmental expenses
$
51.2

 
$
44.5

 
15.1
 %
Food and beverage departmental expenses
60.3

 
56.2

 
7.3

Other departmental expenses
8.4

 
8.0

 
5.0

General and administrative
26.2

 
24.1

 
8.7

Utilities
11.6

 
10.7

 
8.4

Repairs and maintenance
14.6

 
12.8

 
14.1

Sales and marketing
22.7

 
19.4

 
17.0

Base management fees
8.7

 
7.1

 
22.5

Incentive management fees
1.7

 
1.5

 
13.3

Property taxes
11.7

 
12.7

 
(7.9
)
Other fixed charges
4.4

 
4.4

 

Ground rent—Contractual
3.1

 
0.9

 
244.4

Ground rent—Non-cash
3.2

 
3.6

 
(11.1
)
Total hotel operating expenses
$
227.8

 
$
205.9

 
10.6
 %

The increase in hotel operating expenses includes amounts that are not comparable period-over-period as follows:

$13.6 million increase from the Hilton Minneapolis, which was purchased on June 16, 2010.
$3.2 million increase from the Renaissance Charleston, which was purchased on August 6, 2010.
$2.6 million increase from the Hilton Garden Inn Chelsea, which was purchased on September 8, 2010.
$0.5 million increase from the JW Marriott Denver, which was purchased on May 19, 2011.

The remaining increase in operating expenses of $2.0 million at our comparable hotels is due primarily to higher rooms departmental expenses and support costs, specifically repairs and maintenance and sales and marketing expenses. Property taxes decreased as a result of a number of successful multi-year real estate tax appeals as well as lower real estate tax assessments at certain hotels. The increase in contractual ground rent noted in the table above is attributable to our acquisition of the Hilton Minneapolis in June 2010, which is subject to a ground lease.

Base management fees are calculated as a percentage of total revenues and incentive management fees are based on the level of operating profit at certain hotels. The increase in base management fees is due to the impact of our 2010 and 2011 acquisitions, the overall increase in revenues at our comparable hotels and a $1.0 million termination fee accrual for the Conrad Chicago. The Conrad Chicago failed the performance criteria under our management agreement with Hilton. Hilton elected not

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to make a cure payment to continue to manage the hotel. On May 17, 2011, we entered into a termination agreement with Hilton, which allows us to notify Hilton, with 30-day written notice, of a termination date on or prior to December 31, 2011. If termination does not occur on or prior to December 31, 2011, the existing management agreement remains in effect. At the termination date, we are required to pay a $1.0 million termination fee, reflecting partial repayment of key money provided by Hilton when it entered into the management agreement. Upon execution of the termination agreement with Hilton, we concluded that the $1.0 million repayment of key money to Hilton was probable and, accordingly, we accrued a liability during the second fiscal quarter. The increase in incentive management fees from the comparable period in 2010 is due to the increased profit at certain of our hotels and a higher number of hotels earning an incentive management fee in 2011 as compared to 2010.

Depreciation and amortization. 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. Our depreciation and amortization expense increased $5.1 million from the period from January 1, 2010 to June 18, 2010 to the period from January 1, 2011 to June 17, 2011 . This increase includes amounts that are not comparable for the year-over-year as follows:

$3.4 million increase from the Minneapolis Hilton, which was purchased on June 16, 2010.
$0.7 million increase from the Renaissance Charleston, which was purchased on August 6, 2010.
$0.8 million increase from the Hilton Garden Inn Chelsea, which was purchased on September 8, 2010.
$0.1 million increase from the JW Marriott Denver, which was purchased on May 19, 2011.
$0.4 million increase from the Radisson Lexington, which was purchased on June 1, 2011.

Corporate expenses. Our corporate expenses increased $1.5 million, from $6.9 million for the period from January 1, 2010 to June 18, 2010 to $8.4 million for the period from January 1, 2011 to June 17, 2011. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. The increase in corporate expenses is due primarily to higher employee-related expenses due to additional employees being hired in late 2010 and 2011.

Hotel acquisition costs. We incurred $2.2 million of hotel acquisition costs during the the period from January 1, 2011 to June 17, 2011 associated with the acquisition of the Times Square development hotel, JW Marriott Denver and Radisson Lexington. We incurred acquisition costs of $0.3 million during the period from January 1, 2010 to June 18, 2010 related to the acquisition of the Hilton Minneapolis.

Interest expense. Our interest expense was $23.5 million and $19.2 million for the period from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, respectively. The increase in interest expense is attributable to the reversal of the $3.1 million of penalty interest accrual during the first quarter of 2010, related to the event of default on the Frenchman’s Reef mortgage loan which was partially offset by interest on our recent mortgage financing on the Hilton Minneapolis, the mortgage loan assumed in conjunction with our acquisition of the JW Marriott Denver, and the outstanding borrowings on our credit facility.

The interest expense for the period from January 1, 2011 to June 17, 2011 was comprised of mortgage debt ($22.5 million), amortization of deferred financing costs ($0.8 million), and interest and unused fees on our credit facility ($0.7 million), which is partially offset by capitalized interest of $0.5 million. The interest expense for the period from January 1, 2010 to June 18, 2010 was comprised of mortgage debt ($18.5 million), amortization of deferred financing costs ($0.5 million) and interest and unused facility fees on our credit facility ($0.2 million). As of June 17, 2011, we had property-specific mortgage debt outstanding on twelve of our hotels. All of our mortgage debt is fixed-rate secured debt bearing interest at rates ranging from 5.30 percent to 8.81 percent per year. As of June 17, 2011, we had $115 million of outstanding borrowings on our credit facility bearing an interest rate of 2.45%. Our weighted-average interest rate on all debt as of June 17, 2011 was 5.47 percent.

Interest income. Interest income increased $0.2 million from $0.4 million for the period from January 1, 2010 to June 18, 2010 to $0.6 million for the period from January 1, 2011 to June 17, 2011. The increase is due to our corporate cash balances being slightly higher in 2011, as well as the interest rates earned on corporate cash having increased slightly since 2010.

Income taxes. We recorded an income tax benefit of $1.0 million for the period from January 1, 2011 to June 17, 2011 and income tax expense of $1.5 million for the period from January 1, 2010 to June 18, 2010. The 2011 income tax benefit includes a $1.2 million income tax benefit incurred on the $3.1 million pre-tax loss of our taxable REIT subsidiary, or TRS, offset by foreign income tax expense of $50,000 incurred on the $0.7 million of pre-tax income of the taxable REIT subsidiary that owns Frenchman’s Reef and state franchise taxes of $0.2 million. The 2010 income tax expense includes a $1.0 million income tax benefit incurred on the $2.4 million pre-tax loss of our TRS for the period from January 1, 2010 to June 18, 2010, foreign income tax expense of $2.3 million related to the taxable REIT subsidiary that owns Frenchman’s Reef and $0.2 million of state franchise taxes. The decrease in foreign tax expense is primarily attributable to the extension of the USVI tax agreement in late 2010, which reduced

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the income tax rate from 37.4% to 7.1%.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to fund distributions to our stockholders to maintain our REIT status as well as to pay for operating expenses and other expenditures directly associated with our hotels, including capital expenditures, funding of the renovation escrow account, and scheduled debt payments of interest and principal. We currently expect that our available cash flows generally provided through net cash provided by hotel operations, existing cash balances and, if necessary, short-term borrowings under our credit facility, will be sufficient to meet our short-term liquidity requirements. Some of our mortgage debt agreements contain “cash trap” provisions that are triggered when the hotel’s operating results fall below a certain debt service coverage ratio. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, expansions and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity or debt securities and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives.

Our Financing Strategy

Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Other than borrowings under our $200 million senior unsecured credit facility, our outstanding debt is fixed interest rate mortgage debt with no near-term maturities. We have a preference to maintain a significant portion of our portfolio as unencumbered assets in order to provide balance sheet flexibility. In addition, to the extent that we incur additional debt, our preference is limited recourse secured mortgage debt. This strategy enables us to maintain a balance sheet with a prudent amount of debt. We believe that it is not prudent to increase the inherent risk of a highly cyclical business by maintaining a highly levered capital structure.

We prefer a relatively simple but efficient capital structure. We have not invested in joint ventures and have not issued any operating partnership units or preferred stock. We endeavor to structure our hotel acquisitions so that they will not overly complicate our capital structure; however, we will consider a more complex transaction if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.

We believe that we maintain a reasonable amount of debt. On April 15, 2011, we closed on a new $100 million loan secured by a mortgage on the Hilton Minneapolis. On May 19, 2011, in connection with our acquisition of the JW Marriott Denver at Cherry Creek, we assumed a $42.4 million mortgage loan secured by the hotel. Subsequent to the end of the second quarter, in connection with our acquisition of the Courtyard Denver Downtown, we assumed a $27.2 million loan secured by a mortgage on the hotel. As of June 17, 2011, we have $1.0 billion of debt outstanding with a weighted average interest rate of 5.47% and a weighted average maturity date of approximately 4.9 years. We currently have 12 hotels unencumbered by debt.

Short-Term Borrowings

Other than borrowings under our senior unsecured credit facility, we do not utilize short-term borrowings to meet liquidity requirements. We borrowed $115.0 million under our senior unsecured credit facility during the second fiscal quarter ended June 17, 2011 to partially fund the acquisition of the Radisson Lexington Hotel New York. In addition, the loan we assumed in conjunction with our acquisition of the Courtyard Denver Downtown matures in approximately 12 months.

Senior Unsecured Credit Facility

On June 2, 2011, we amended and restated our $200.0 million unsecured credit facility, which now expires in August 2014. The maturity date of the facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain other customary conditions. We also have the right to increase the amount of the facility up to $400 million with lender approval. Interest is paid on the periodic advances under the facility at varying rates, based upon LIBOR, plus an agreed upon

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additional margin amount. The applicable margin is based upon the Company’s ratio of net indebtedness to EBITDA, as follows:
Ratio of Net Indebtedness to EBITDA
 
Applicable Margin
Less than 4.00 to 1.00
 
2.25
%
Greater than or equal to 4.00 to 1.00 but less than 5.00 to 1.00
 
2.50
%
Greater than or equal to 5.00 to 1.00 but less than 5.50 to 1.00
 
2.75
%
Greater than or equal to 5.50 to 1.00 but less than 6.00 to 1.00
 
3.00
%
Greater than or equal to 6.00 to 1.00
 
3.25
%

In addition to the interest payable on amounts outstanding under the facility, we are required to pay an amount equal to 0.40% of the unused portion of the facility if the unused portion of the facility is greater than 50% or 0.30% if the unused portion of the facility is less than or equal to 50%.

The facility contains various corporate financial covenants. A summary of the most restrictive covenants is as follows:
 
 
 
Actual at
 
Covenant
 
June 17,
2011
Maximum leverage ratio(1)
60%
 
45.3%
Minimum fixed charge coverage ratio(2)
1.50x
 
2.1x
Minimum tangible net worth(3)
$1.8 billion
 
$1.96 billion
_____________________________
(1)
Leverage ratio is total indebtedness, as defined in the credit agreement which includes our commitment on the Times Square development hotel, divided by total asset value, defined in the credit agreement as a) total cash and cash equivalents plus b) the value of our owned hotels based on (i) until March 31, 2012, appraised values and (ii) after March 31, 2012, hotel net operating income divided by an 8.5% capitalization rate, and (c) the book value of the Allerton loan.
(2)
Fixed charge coverage ratio is Adjusted EBITDA, defined in the credit agreement as EBITDA less FF&E reserves, for the most recently ending 12 fiscal months, to fixed charges, defined in the credit agreement as interest expense, all regularly scheduled principal payments and payments on capitalized lease obligations, for the same most recently ending 12 fiscal month period.
(3)
Tangible net worth, as defined in the credit agreement, is (i) total gross book value of all assets, exclusive of depreciation and amortization, less intangible assets, total indebtedness, and all other liabilities, plus (ii) 85% of net proceeds from future equity issuances.

The facility requires us to maintain a specific pool of unencumbered borrowing base properties. The unencumbered borrowing base assets are subject, among other restrictions, to the following limitations and covenants:

A minimum of five properties with an unencumbered borrowing base value, as defined, of not less than $250 million.

The unencumbered borrowing base must include the Westin Boston Waterfront, the Conrad Chicago and the Vail Marriott Mountain Resort and Spa. The Conrad Chicago and the Vail Marriott Mountain Resort and Spa may be released from the unencumbered borrowing base upon lender approval and certain conditions.

In connection with the closing of the Hilton Minneapolis mortgage loan in April 2011, we received lender approval to release the Company’s subsidiaries owning the Hilton Minneapolis as guarantors under the facility.

On May 24, 2011 we borrowed $115.0 million under the facility to fund a portion of our acquisition of the Radisson Lexington Hotel New York. In conjunction with the acquisition, we were assigned the seller's $100.0 million mortgage secured by the hotel and the mortgage was added as security to the facility. We have the ability to repay the $100.0 million and release the mortgage as security for the facility at any time.

As of June 17, 2011, we had $115.0 million in borrowings outstanding under the facility and the Company's ratio of net indebtedness to EBITDA was 5.9x. Accordingly, interest on our borrowings under the facility will be based on LIBOR plus 300 basis points. We incurred interest and unused credit facility fees on the facility of $0.5 million and $0.1 million for our fiscal quarters ended June 17, 2011 and June 18, 2010, and $0.7 million and $0.2 million for the periods from January 1, 2011 to June 17, 2011 and January 1, 2010 to June 18, 2010, respectively. Subsequent to the end of our second quarter, we borrowed an additional $15 million under the facility to fund a portion of our acquisition of the Courtyard Denver Downtown.

Sources and Uses of Cash


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Our principal sources of cash are net cash flow from hotel operations, borrowings under mortgage debt and our credit facility and the proceeds from our equity offerings. Our principal uses of cash are acquisitions of hotel properties and notes, debt service, capital expenditures, operating costs, corporate expenses and dividends. As of June 17, 2011, we had $20.9 million of unrestricted corporate cash and $75.8 million of restricted cash.

Our net cash provided by operations was $18.3 million for the period from January 1, 2011 to June 17, 2011. Our cash from operations generally consists of the net cash flow from hotel operations offset by cash paid for corporate expenses, cash paid for interest, funding of lender escrow reserves and other working capital changes.

Our net cash used in investing activities was $423.8 million for the period from January 1, 2011 to June 17, 2011 primarily as a result of the deposit on the to-be-developed hotel in Time Square ($20.0 million), the acquisitions of the JW Marriott Denver and Radisson Lexington ($366.8 million) the funding of a renovation escrow account for the Frenchman’s Reef renovation project ($24.5 million). In addition, we made certain capital expenditures at Frenchman's Reef and our other hotels and funded restricted cash reserves for capital expenditures.

Our net cash provided by financing activities was $342.2 million for the period from January 1, 2011 to June 17, 2011 primarily as a result of $149.7 million of proceeds from our follow-on equity offering, $100.0 million of proceeds from our Hilton Minneapolis mortgage loan and a $115.0 million draw on our credit facility, partially offset by $13.5 million of dividend payments and $2.2 million paid for financing costs and $3.1 million paid to repurchase shares for employee taxes.

Dividend Policy

We intend to distribute to our stockholders dividends at least equal to our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our TRS and TRS lessees, which are all 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.

The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including our financial performance, restrictions under applicable law and our current and future loan agreements, our debt service requirements, our capital expenditure requirements, the requirements for qualification as a REIT under the Code and other factors that our board of directors may deem relevant from time to time.

During our first fiscal quarter, our board of directors declared a cash dividend of $0.08 per share of common stock. The dividend was paid on April 7, 2011 to stockholders of record as of March 25, 2011. During our second fiscal quarter, our board of directors declared a cash dividend of $0.08 per share of common stock. The dividend was paid on June 27, 2011 to stockholders of record as of June 17, 2011.

Capital Expenditures

The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement funds to cover, among other things, the cost of replacing and repairing furniture and fixtures at our hotels. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement fund under the applicable management or franchise agreement. As of June 17, 2011, we have set aside $45.1 million for capital projects in property improvement funds, which are included in restricted cash. Funds held in property improvement funds for one hotel are typically not permitted to be applied to any other property.

Although we significantly curtailed capital expenditures at our hotels in the last several years, we continue to benefit from the extensive capital investments made from 2006 to 2008, during which time many of our hotels were fully renovated. During 2011, we plan to commence or complete approximately $65 million of capital improvements, approximately $40 million of which will be funded from corporate cash and the remainder from reserves held by our manager. Our estimated 2011 capital expenditures include approximately $37 million for the 2011 portion of the Frenchman’s Reef capital investment program ($31.7 million from corporate cash and existing property reserves and $5.3 million from Marriott). We spent approximately $21.3 million on capital improvements during the period from January 1, 2011 to June 17, 2011.

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We are continuing to execute on the comprehensive $45 million capital investment program at Frenchman’s Reef. The majority of the renovation and repositioning program commenced in early May 2011 when two of the resort’s four buildings (representing approximately 300 guestrooms) closed. During the project, we expect material renovation disruption to operations resulting from the partial closure.

We are funding the majority of the renovation and repositioning program from available corporate cash and, if necessary, borrowings under our credit facility. Marriott has contributed $5.3 million to the program, demonstrating its commitment to Frenchman’s Reef. In addition to funding from Marriott and existing escrow reserves, we expect our total cash expenditure to be approximately $35 million over the next two years. During the first quarter we deposited $29.8 million into a renovation escrow account, of which $5.3 million was contributed by Marriott, and is classified as restricted cash.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Non-GAAP Financial Measures

We use the following two non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) EBITDA and (2) FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP.

EBITDA represents net (loss) income 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. In addition, covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.
 
Fiscal Quarter Ended
 
Period from
 
June 17, 2011
 
June 18, 2010
 
January 1, 2011 to June 17, 2011
 
January 1, 2010 to June 18, 2010
 
 
 
 
 
(in thousands)
Net (loss) income
$
(556
)
 
$
839

 
$
(11,599
)