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Eagle Hospitality Properties Trust 10-Q 2005
FORM 10-Q
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2005

 

Commission file number: 001-32279

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

(Exact name of registrant specified in its charter)

 

Maryland   55-0862656
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

 

100 E. RiverCenter Blvd., Suite 480, Covington, KY

(Address of principal executive office)

 

41011

(Zip Code)

 

(859) 581-5900

(Registrant’s telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class


   Outstanding as of
August 11, 2005


Common stock, $.01 par value

   17,360,690

8 ¼% Series A Cumulative Redeemable Preferred Shares, $.01 par value

   4,000,000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange Act).  Yes ¨  No x

 



Table of Contents

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

 

QUARTERLY REPORT FOR THE PERIOD ENDED JUNE 30, 2005

 

TABLE OF CONTENTS

 

          Page

PART I

    
ITEM 1.    Financial Statements     
Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004    3
Consolidated and Combined Statements of Operations for the Three Months Ended June 30, 2005 and 2004 (unaudited)    4
Consolidated and Combined Statements of Operations for the Six Months Ended June 30, 2005 and 2004 (unaudited)    5
Consolidated Statement of Owners’ Equity for the Six Months Ended June 30, 2005 (unaudited)    6
Consolidated and Combined Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (unaudited)    7
ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    15
ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk    26
ITEM 4.    Controls and Procedures    26

PART II

    
ITEM 1.    Legal Proceedings    26
ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds    26
ITEM 3.    Defaults Upon Senior Securities    26
ITEM 4.    Submission of Matters to a Vote of Security Holders    26
ITEM 5.    Other Information    27
ITEM 6.    Exhibits    27
SIGNATURES    28

 

Exhibit 31.1    302 Certification by CEO
Exhibit 31.2    302 Certification by CFO
Exhibit 32.1    906 Certification by CEO
Exhibit 32.2    906 Certification by CFO

 

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Table of Contents

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

CONSOLIDATED BALANCE SHEETS

 

AS OF JUNE 30, 2005 AND DECEMBER 31, 2004

($000’s Omitted)

 

     (Unaudited)        
    

June 30,

2005


    December 31,
2004


 
ASSETS                 

Cash and cash equivalents

   $ 20,338     $ 15,661  

Restricted cash - real estate escrows

     2,480       1,536  

Restricted replacement reserves

     6,551       8,704  

Accounts receivable, net

     4,382       2,437  

Inventories

     602       454  

Deferred income taxes

     1,707       —    

Deferred franchise fees and loan fees, net

     2,019       505  

Prepaid expenses and other assets

     621       2,848  

Investment in hotel properties, net

     394,660       220,239  
    


 


Total assets

   $ 433,360     $ 252,384  
    


 


LIABILITIES AND OWNERS’ EQUITY                 

LIABILITIES:

                

Mortgage notes payable

   $ 215,656     $ 107,316  

Other long term debt

     48       58  

Related party debt

     —         23,391  

Capital lease obligations

     128       30  

Accounts payable

     1,645       1,564  

Due to affiliates

     179       1,088  

Dividends and distributions payable

     4,084       —    

Accrued expenses

     7,461       4,269  

Income tax payable

     217       —    

Advance deposits

     990       476  
    


 


Total liabilities

   $ 230,408     $ 138,192  
    


 


Minority interest

     14,723       17,035  

OWNERS’ EQUITY

                

Preferred stock, $0.01 par value, 10,000,000 shares authorized, 8.25% Series A - 4,000,000 issued and outstanding at June 30, 2005 and none at December 31, 2004

   $ 40     $ —    

Common stock, $0.01 par value, 100,000,000 shares authorized, 17,361,540 and 17,358,573 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively

     174       174  

Additional paid-in capital

     196,907       100,487  

Accumulated other comprehensive income

     15       22  

Deferred compensation

     (2,306 )     (3,623 )

(Dividends in excess of accumulated earnings) retained earnings

     (6,601 )     97  
    


 


Total owners’ equity

   $ 188,229     $ 97,157  
    


 


Total liabilities and owners’ equity

   $ 433,360     $ 252,384  
    


 


 

See notes to consolidated and combined financial statements

 

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Table of Contents

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC. AND PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004

(unaudited, 000’s Omitted, except per share amounts)

 

    

The Company

2005


   

The Predecessor

2004


 

Revenues:

                

Rooms department

   $ 20,343     $ 14,608  

Food and beverage department

     7,216       4,994  

Lease income

     45       —    

Other operating departments

     1,164       875  
    


 


Total revenue

     28,768       20,477  

Expenses:

                

Rooms department

     4,913       3,564  

Food and beverage department

     4,189       3,035  

Other operating departments

     581       454  

Selling, general and administrative expense

     9,050       6,761  

Depreciation and amortization

     3,110       2,205  

Corporate general and administrative

     1,267       —    

Stock-based compensation

     656       —    
    


 


Total operating expenses

     23,766       16,019  
    


 


Net Operating Income

     5,002       4,458  
    


 


Interest expense

     (2,338 )     (2,907 )

Interest income

     151       45  

Other (expense) income - net

     (17 )     13  
    


 


Income before minority interest and provision for income taxes

     2,798       1,609  
    


 


Income tax expense

     5       —    

Minority interest expense

     612       —    
    


 


Net income

   $ 2,181     $ 1,609  

Distributions to preferred shareholders

     (413 )     —    
    


 


Net income available to common shareholders

   $ 1,768     $ 1,609  

Unrealized loss on marketable securities

     (4 )     (91 )

Effect of interest rate swap

     —         283  
    


 


COMPREHENSIVE INCOME

   $ 1,764     $ 1,801  
    


 


Basic income per share

   $ 0.10          

Fully diluted income per share

   $ 0.10          

Weighted average basic shares outstanding

     17,361          

Weighted average fully diluted shares outstanding

     23,355          

 

See notes to consolidated and combined financial statements

 

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Table of Contents

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC. AND PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004

(unaudited, 000’s Omitted, except per share amounts)

 

     The Company
2005


    The Predecessor
2004


 

Revenues:

                

Rooms department

   $ 35,998     $ 27,782  

Food and beverage department

     12,476       9,732  

Lease income

     45       —    

Other operating departments

     1,952       1,553  
    


 


Total revenue

     50,471       39,067  

Expenses:

                

Rooms department

     8,881       6,828  

Food and beverage department

     7,770       6,132  

Other operating departments

     1,073       878  

Selling, general and administrative expense

     16,866       13,606  

Depreciation and amortization

     5,752       4,384  

Corporate general and administrative

     2,369       —    

Stock-based compensation

     1,335       —    
    


 


Total operating expenses

     44,046       31,828  
    


 


Net Operating Income

     6,425       7,239  
    


 


Interest expense

     (4,477 )     (5,782 )

Interest income

     264       82  

Other (expense) income - net

     (42 )     15  
    


 


Income before minority interest and provision for income taxes

     2,170       1,554  
    


 


Income tax benefit

     1,490       —    

Minority interest expense

     834       —    
    


 


Net income

   $ 2,826     $ 1,554  

Distributions to preferred shareholders

     413       —    
    


 


Net income available to common shareholders

   $ 2,413     $ 1,554  

Unrealized loss on marketable securities

     (15 )     (79 )

Effect of interest rate swap

     —         536  
    


 


COMPREHENSIVE INCOME

   $ 2,398     $ 2,011  
    


 


Basic income per share

   $ 0.14          

Fully diluted income per share

   $ 0.14          

Weighted average basic shares outstanding

     17,361          

Weighted average fully diluted shares outstanding

     23,355          

 

See notes to consolidated and combined financial statements

 

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Table of Contents

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENT OF OWNERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2005

(unaudited, $000’s Omitted)

 

    

Preferred

Stock


  

Common

Stock


  

Additional

Paid-In Capital


   

Unearned

Compensation


   

Unrealized

Gain/(Loss)


   

Dividends in

Excess of

Accumulated
Earnings


    Total

 

Balance at December 31, 2004

   $ —      $ 174    $ 100,487     $ (3,623 )   $ 22     $ 97     $ 97,157  

Issuance of preferred shares

     40      —        96,625       —         —         —         96,665  

Common dividends paid, $0.35 per share

     —        —        —         —         —         (6,076 )     (6,076 )

Common dividends declared, $0.175 per share

                                           (3,035 )     (3,035 )

Preferred dividends paid, $0.103 per share

                                           (413 )     (413 )

Issuance of restricted shares

     —        —        18       (18 )     —         —         —    

Amortization of deferred compensation

     —        —        —         1,335       —         —         1,335  

Adjustment to opening balance sheet

     —        —        (223 )     —         —         —         (223 )

Unrealized loss on investments

     —        —        —         —         (7 )     —         (7 )

Net income

     —        —        —         —         —         2,826       2,826  
    

  

  


 


 


 


 


Balance at June 30, 2005

   $ 40    $ 174    $ 196,907     $ (2,306 )   $ 15     $ (6,601 )   $ 188,229  
    

  

  


 


 


 


 


 

See notes to consolidated and combined financial statements

 

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Table of Contents

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

Six months ended June 30, 2005 and 2004 (unaudited)

($000’s Omitted)

 

    

The Company

2005


   

The Predecessor

2004


 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income

   $ 2,826     $ 1,554  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Deferred income taxes

     (1,707 )        

Depreciation

     5,642       4,064  

Deferred loan fees and franchise rights

     (272 )     261  

Amortization of unearned compensation

     1,335       —    

Minority interest

     834       —    

Changes in assets and liabilities:

                

Restricted cash

     1,202       (2,122 )

Accounts receivables

     (1,096 )     (618 )

Inventory, prepaid expenses, and other assets

     1,026       (112 )

Due to affiliates

     (909 )     —    

Accounts payable, accrued expenses and advance deposits

     3,092       1,622  
    


 


Net cash provided by operating activities

   $ 11,973     $ 4,649  

CASH FLOWS FROM INVESTING ACTIVITIES:

                

Acquisition of hotel properties

   $ (172,952 )   $ —    

Capital expenditures

     (7,082 )     (1,353 )

Purchase of investments

     —         752  
    


 


Net cash used in investing activities

   $ (180,034 )   $ (601 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Proceeds from financing

   $ 157,000     $ —    

Debt principal payments

     (48,670 )     (1,744 )

Proceeds from preferred stock offering

     100,000       —    

Cost of preferred stock offering

     (3,335 )     —    

Proceeds from affiliate financing

     —         556  

Payment of related party loan

     (23,391 )     (214 )

Payment on capital lease obligations

     (57 )     (100 )

Payments of preferred stock dividends

     (413 )     —    

Payments of common stock dividends and distributions

     (8,173 )     (1,010 )

Adjustments to opening balance sheet

     (223 )     —    
    


 


Net cash provided by (used in) financing activities

   $ 172,738     $ (2,512 )
    


 


NET INCREASE IN CASH AND CASH EQUIVALENTS

   $ 4,677     $ 1,536  

CASH AND CASH EQUIVALENTS, beginning of year

     15,661       1,199  
    


 


CASH AND CASH EQUIVALENTS, end of period

   $ 20,338     $ 2,735  
    


 


 

See notes to consolidated and combined financial statements

 

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Table of Contents

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2005 (unaudited)

 

1. BACKGROUND

 

Eagle Hospitality Properties Trust, Inc., a Maryland corporation (together with its subsidiaries “Eagle” or “Company”), is a self-advised real estate investment trust (“REIT”) formed to pursue investment opportunities in the full-service and all-suites hotel industry. As of June 30, 2005, Eagle owned a 100% interest in eleven hotels and a 49% interest in one other hotel (Embassy Suites Hotel Cincinnati-RiverCenter).

 

Our operating partnership, EHP Operating Partnership, L.P. (“EHP OP” or the “operating partnership”), was organized as a limited partnership under the laws of the state of Maryland. Eagle is the sole general partner of and currently owns approximately 74% of the limited partnership units in EHP OP. Limited partners (including certain of our officers and directors) own the remaining operating partnership units. After one year, limited partners may generally redeem each unit for the cash value of one share of our common stock or, at our sole option, one share of common stock.

 

Formation and Significant Events

 

Eagle commenced its operations effective as of October 1, 2004 when it completed its initial public offering (“IPO”) and acquired a 100% interest in eight hotels and a 49% percent interest in one other hotel (Embassy Suites Hotel Cincinnati–RiverCenter), all of which were previously owned or controlled by Corporex Companies LLC (“Corporex” or “Predecessor”). Because we have the right and obligation to acquire the remaining 51% interest in the entity that owns the Embassy Suites Hotel Cincinnati-RiverCenter from William P. Butler, Eagle’s Chairman, no later than January 31, 2006 in exchange for 427,485 operating partnership units, the assets, liabilities and operations of such entity are included in our consolidated financial statements in accordance with the provisions in Financial Interpretation Number 46(R) (“FIN 46(R)”).

 

On February 24, 2005, Eagle purchased the Embassy Suites Phoenix-Scottsdale, for $33.0 million in cash and debt.

 

On June 23, 2005, Eagle purchased the Hilton Glendale in Glendale, CA, for $79.8 million in cash.

 

On June 28, 2005, Eagle purchased the Embassy Suites San Juan Hotel and Casino in Isla Verde Carolina, Puerto Rico, for $60.0 million in cash.

 

Taxable REIT Subsidiaries

 

EHP TRS Holding Co., Inc. (“EHP TRS”), our taxable REIT subsidiary, was incorporated as a Maryland corporation. Each of our hotel properties, except the Embassy Suites San Juan Hotel, is leased to a wholly owned subsidiary of EHP TRS, which engages independent hotel management companies, such as Commonwealth Hotels, Inc. (“Commonwealth Hotels”), to manage and operate the hotels under management contracts. Lease revenue from EHP TRS and its wholly owned subsidiaries is eliminated in consolidation. Under applicable REIT tax rules, neither we nor our operating partnership can directly undertake the daily management activities of our hotels. Therefore, our principal source of funds will be dependent on EHP TRS’s ability to generate cash flow from the operation of the hotels. EHP TRS will pay income taxes at regular corporate rates on its taxable income. The Embassy Suites San Juan is leased to an unaffiliated lessee and the only income that we recognize in relation to this hotel is the lease income paid by the lessee.

 

2. BUSINESS COMBINATIONS

 

On February 24, 2005, we completed the acquisition of the 270-room Embassy Suites Phoenix-Scottsdale for $33.0 million. This acquisition was funded through a combination of cash and the proceeds from a $22.1 million three-year, full recourse loan having an interest rate of 215 basis points over 30-day LIBOR that is collateralized by the hotel. This hotel is managed by Commonwealth Hotels.

 

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On June 23, 2005, we completed the acquisition of the 351-room Hilton Glendale in Glendale California (“Hilton Glendale”) for $79.8 million. This acquisition was funded through a combination of cash and the proceeds from a $53.1 million bridge loan. The bridge loan was repaid on July 7, 2005 with the proceeds from a $53.1 million seven-year, interest only loan having a fixed interest rate of 5.21%. This hotel is managed by Hilton Hotels Corporation.

 

On June 28, 2005, we completed the acquisition of the 299-room Embassy Suites San Juan Hotel and Casino in Isla Verde Carolina, Puerto Rico for $60.0 million. This acquisition was funded with existing cash. This hotel is managed by Hilton Hotels Corporation.

 

The accompanying consolidated financial statements include the results of the acquired hotels since the dates of acquisition. The purchase prices were the result of an arms’ length negotiations, and Eagle did not assign any value to goodwill or other intangible assets. However, the purchase price allocation is preliminary and subject to further internal review. Additional adjustments are unlikely to have a material impact.

 

The following pro forma selected financial data for Eagle and the Predecessor was derived in accordance with Statement of Financial Accounting Standards No. 141 (“FAS 141”). The selected financial data, in accordance with FAS 141, assumes that the acquisitions of the Embassy Suites Hotel Phoenix-Scottsdale, Hilton Glendale and Embassy Suites San Juan occurred on January 1, 2004, as opposed to the actual acquisition dates. ($000s, except earnings per share):

 

Three Months Period Ending


  

The Company

June 30, 2005


  

The Predecessor

June 30, 2004


Net Revenues

   $ 35,170    $ 29,164

Net Income Available to Common Shareholders

     1,545      1,426

Earnings per share – basic

   $ 0.09    $ 0.08

Six Months Period Ending


  

The Company

June 30, 2005


  

The Predecessor

June 30, 2004


Net Revenues

   $ 65,015    $ 57,921

Net Income Available to Common Shareholders

     3,724      3,393

Earnings per share – basic

   $ 0.21    $ 0.20

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The consolidated financial statements presented herein include all of the accounts of Eagle beginning with its commencement of operations on October 1, 2004. Prior to that time, this report includes the combined financial statements of the Predecessor. Included in this consolidation are the Eagle’s operating entities (TRS), the limited liability companies that own the hotel properties and EHP OP. In accordance with FIN 46(R), also included in the consolidation are all activities and balances relating to the Embassy Suites Hotel Cincinnati-RiverCenter in which Eagle owns a 49% interest. Under FIN 46(R), Eagle is deemed to be the primary beneficiary of this variable interest entity. Eagle is obligated to acquire the remaining 51% of this hotel property for 427,485 operating units no later than January 31, 2006. For the periods prior to Eagle’s ownership, the statements are presented on a combined basis as a result of common ownership and control. All significant intercompany accounts and transactions among the consolidated and combined entities have been eliminated in the consolidated and combined financial statements.

 

These financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Eagle believes that all adjustments, consisting of normal recurring adjustments and accruals, considered necessary for a fair presentation have been included. In addition, Eagle’s operations have historically been seasonal as certain properties experience higher occupancy rates during the different months of the year. This seasonality pattern can be expected to cause fluctuations in Eagle’s operating results. Consequently, operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

 

Revenue Recognition — Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible.

 

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If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made. The lease income generated by the lease on the Embassy Suites San Juan is recognized as earned.

 

Investment in Hotel Properties — The initial nine hotel properties are stated at the Predecessor’s historical cost, plus an approximate $42.5 million minority interest partial step-up recorded upon formation of Eagle on October 1, 2004, related to the acquisition of minority interest from unaffiliated parties related to seven of the initial properties. Improvements and additions which extend the life of the property are capitalized and depreciated over the estimated useful life.

 

Impairment of Investment in Hotel Properties — Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable (i.e., the future undiscounted cash flows for the hotel are projected to be less than the net book value of the hotel). We test for impairment in several situations, including when current or projected cash flows are less than historical cash flows, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, and when events or changes in circumstances indicate that a hotel’s net book value may not be recoverable. In the evaluation of the impairment of our hotels, we make many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures, and fair values, including consideration of capitalization rates, discount rates, and comparable selling prices. To date, no such impairment charges have been recognized. If an asset were deemed to be impaired, we would record an impairment charge for the amount the property’s net book value exceeds its fair value.

 

Stock-Based Compensation — Eagle accounts for stock-based compensation using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” In connection with Eagle’s formation, Eagle established the 2004 Long-Term Incentive Plan (the “LTIP”). Upon consummation of the IPO and subsequent exercise of the underwriters’ over-allotment, Eagle issued a total of 441,200 shares of unvested restricted stock to its executives, directors, and certain employees of Eagle, the Predecessor and its affiliates, which includes 208,332 shares of common stock issued to Corporex under the SAA (as defined herein). An additional 23,800 shares of restricted stock have been issued under the LTIP in 2005. 20,833 shares were canceled in April, 2005 upon the resignation of our former chief financial officer for personal reasons. Of the 444,167 shares issued, 206,666 vest over five years and 237,501 vest over one year. Such shares are charged to compensation expense on a straight-line basis based upon the market price at the time of issuance. Eagle recognized compensation expense of approximately $1.3 million related to these restricted shares during the period ended June 30, 2005. Under the LTIP, Eagle may issue a variety of performance-based stock awards, including nonqualified stock options. At June 30, 2005, Eagle had approximately 550,000 remaining shares available for future issuance under the LTIP.

 

The LTIP was adopted by the board of directors and approved by stockholders prior to the initial public offering. The purpose of the incentive plan is to promote Eagle’s success and enhance the value of Eagle’s common stock by linking the personal interests of participants to those of the stockholders, and by providing such persons with an incentive to achieve outstanding performance.

 

The incentive plan authorizes the governance and compensation committee and Eagle’s board of directors upon approval to grant awards to employees, officers, consultants (including, but not limited to, Corporex and its employees) and directors.

 

A table depicting the pro forma adjustments relating to the adoption of FAS 123(R) is not presented as there is no material impact expected to occur as a result of the adoption of this policy.

 

Segments — Eagle presently operates in one business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refers to owning hotels through either acquisition or new development. The Predecessor also only operated within the direct hotel investments segment.

 

4. PREFERRED STOCK OFFERING

 

On June 13, 2005, the Company closed an underwritten public offering of 4,000,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock (“Preferred Shares”). The Preferred Shares have a liquidation value of $25.00 and will be redeemable at the option of the Company on or after June 14, 2010. The annual

 

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distribution for the Preferred Shares will be $2.0625 per share. Dividends on the Preferred Shares will be payable quarterly in arrears on the last calendar day of March, June, September and December.

 

The net proceeds of the public offering of the Preferred Shares were $96.7 million, after underwriters discounts and other offering expenses. The proceeds were used in the acquisitions of the Hilton Glendale and the Embassy Suites San Juan, as well as for other general corporate and working capital purposes.

 

5. EARNINGS PER SHARE

 

Basic earnings per share is based on the weighted average number of common shares outstanding during the period whereas diluted earnings per share adjusts the weighted average shares outstanding for the effect of all dilutive securities. For the three month and six month periods ended June 30, 2005 the weighted average basic and diluted common shares outstanding were as follows (000s):

 

    

Three months ended,

June 30, 2005


  

Six months ended,

June 30, 2005


Basic weighted average shares outstanding

   17,361    17,361

Operating partnership units

   5,994    5,994
    
  

Diluted weighted average shares outstanding

   23,355    23,355

 

6. MINORITY INTEREST

 

Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Net income (loss) is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period. Upon formation of Eagle on October 1, 2004, Eagle issued 5,566,352 units of limited partnership interest to affiliates, plus another 427,485 partnership units are to be issued no later than January 31, 2006 in exchange for the remaining 51% of the Embassy Suites Hotel Cincinnati–RiverCenter. This total of 5,993,837 of partnership units represents an approximate minority interest ownership of 26%. Beginning October 1, 2005, each unit of limited partnership interest, excluding the 427,485 unissued partnership units relating to the Embassy Suites Hotel Cincinnati–RiverCenter, may be redeemed for the cash value of one share of our common stock or, at our sole option, one share of common stock.

 

7. DEBT

 

Eagle’s mortgage notes payable as of June 30, 2005 are as follows:

 

Properties Collateralized


   Amount ($000s)

    Interest Rate

 

Cincinnati Landmark Marriott, Embassy Suites Hotel Cleveland/Rockside and Embassy Suites Hotel Tampa Airport/Westshore

   $ 58,000     5.43 %

Embassy Suites Hotel Cincinnati-River Center

     14,119     8.48 %

Hyatt Regency Rochester

     15,941     7.28 %
    


 

Fixed Debt

     88,060     6.25 %

Cincinnati Landmark Marriott, Embassy Suites Hotel Cleveland/Rockside and Embassy Suites Hotel Tampa Airport/Westshore

     23,800     5.09 %

Hilton Glendale

     53,100 +   5.06 %

Embassy Suites Hotel Phoenix-Scottsdale

     22,100     5.49 %

Embassy Suites Hotel Columbus/Dublin

     16,369     6.21 %

Chicago Marriott Southwest at Burr Ridge

     12,227     7.59 %
    


 

Variable Debt

     127,596     5.53 %
    


 

Total Debt and Wgt Avg Cost of Debt

   $ 215,656     5.83 %
    


 

LIBOR 30-day rate at 6/30/05

           3.34 %

 

* All variable rate debt is based upon the LIBOR 30-day rate

 

+ The loan on the Hilton Glendale was a bridge loan that was repaid on July 7, 2005 with the proceeds from a $53.1 million 7-year, interest only loan having a fixed interest rate of 5.21%

 

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Total debt maturities, including capital lease obligations, as of June 30, 2005 were as follows ($000s):

 

2005

   $ 53,994 *

2006

     30,326  

2007

     2,959  

2008

     28,851  

2009

     7,126  

Thereafter

     92,576  
    


Total

   $ 215,832  
    


 

* The 2005 amount includes a bridge loan for $53.1 million used to fund a portion of the purchase price to acquire the Hilton Glendale which was repaid with the proceeds from by a $53.1 million seven-year, interest only loan on July 7, 2005.

 

8. RELATED PARTY TRANSACTIONS

 

Hotel Management Agreements - Nine of our hotels are subject to management agreements with Commonwealth Hotels. Under these agreements, Eagle is obligated to pay monthly management fees equal to 2.50% of gross revenues in 2005, 2.75% in 2006, and 3.00% of gross revenues in 2007 and the years thereafter. Incentive fees may also be earned upon meeting certain net operating income thresholds. These management agreements have ten-year terms, with a renewal option for one additional five-year period. If Eagle terminates a management agreement on any of the properties prior to its expiration, due to sale of the property, Eagle may be required to pay a substantial termination fee. Eagle’s Chairman is the majority shareholder in Commonwealth Hotels. Management fees earned by Commonwealth Hotels for the three months and six months, respectively, ending June 30, 2005 were $0.7 million and $1.3 million. The management fees expensed by the Predecessor for the three months and six months, respectively, ending June 30, 2004 were $0.5 million and $1.1 million. At June 30, 2005 and December 31, 2004, Eagle owed Commonwealth Hotels $0.2 and $0.3 million in management fees payable, respectively.

 

Strategic Alliance Agreement – Eagle has entered into a Strategic Alliance Agreement (“SAA”) with Corporex and affiliated parties. The SAA provides Eagle with the right of first refusal for development opportunities with Corporex and affiliates, as well as a non-compete clause for markets in which we own or have an investment. The agreement expires October 1, 2014. Corporex received 208,332 shares of common stock in conjunction with the SAA. The shares vest October 1, 2005. In the period ending June 30, 2005, Eagle incurred approximately $1.0 million in expense as a result of the amortization of these shares.

 

Related Party Debt – As of December 31, 2004, Eagle had a loan from Corporex, secured by the Embassy Suites Hotel Cleveland/Rockside, with a balance of $23.4 million (the “Corporex Loan”). On February 18, 2005, Eagle obtained an $81.8 million secured loan from the Prudential Insurance Company of America (the “Prudential Loan”). Eagle used part of the proceeds from the Prudential Loan to retire the $23.4 million Corporex Loan. In connection with the Corporex Loan, Eagle incurred interest expense for the related party debt of $0.2 million in the period ending June 30, 2005. The Predecessor incurred interest expense for related party debt of $0.2 million and $0.5 million for the three months and six months, respectively, ending June 30, 2004.

 

Transition Services – From October 1, 2004 through December 31, 2005, Eagle has agreed to make its Chief Executive Officer, Mr. Blackham, available to provide certain consulting and advisory transition services to Corporex in areas unrelated to our core business. Eagle is compensated $10 per month for providing these services. In the three month and six month periods ending June 30, 2005, Eagle earned $30 and $60, respectively, related to this agreement.

 

Leased Office Space - Eagle’s headquarters are located in an office building that is owned by Eagle’s Chairman and affiliates, a limited partnership in which Eagle’s Chairman and Chief Executive Officer is a limited partner. We entered into a lease for this office space subsequent to our IPO at terms approximating the fair market value. We are obligated to pay $0.6 million in rent over a ten-year period, or on average, approximately $5 per month. The expense of this lease is being recognized on a straight-line basis. In addition to the rent payments, we

 

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will also be subject to a common area maintenance fee allocation related to this office space. Eagle believes the lease payments do not exceed market value.

 

9. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES

 

On March 31, 2005, Eagle declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on April 14, 2005, to holders of record as of April 6, 2005. The total amount of the dividends paid to holders of our common stock was $3.0 million and $1.1 million was paid to holders of operating partnership units.

 

On June 17, 2005, Eagle declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on July 15, 2005, to holders of record as of June 30, 2005. The total amount of the dividends paid to holders of our common stock was $3.0 million and $1.1 million was paid to holders of operating partnership units. This dividend is shown as “Dividends Payable” on the June 30, 2005 Balance Sheet. During the six month period ended June 30, 2004, the Predecessor paid $1.0 million in partner distributions.

 

On June 17, 2005, Eagle declared a prorated quarterly dividend of $0.103125 per 8.25% Series A Cumulative Redeemable Preferred Share for the period from June 13, 2005 to June 30, 2005 to holders of record as of June 20, 2005. The total amount of dividends paid to holders of the preferred shares was $0.4 million and was paid on June 30, 2005.

 

Interest paid by Eagle during the three months and six months, respectively, ended June 30, 2005 was $2.2 million and $4.3 million. Interest paid by the Predecessor during the three months and six months, respectively, ended June 30, 2004 was $2.9 million and $5.8 million.

 

During the year to date period ended June 30, 2005, Eagle granted 24 shares of restricted stock, valued at $221, under its LTIP and cancelled 20 shares of restricted stock due to the resignation of our former chief financial officer for personal reasons, valued at $203.

 

10. INCOME TAXES

 

The Company had an income tax expense of $5 for the three months ending June 30, 2005 and income tax benefit of $1.5 million for the six months ending June 30, 2005

 

The Company intends to elect to be taxed as a REIT under the Internal Revenue Code. As long as we maintain our status as a REIT, we generally will not be subject to federal or state income taxes on our net income to the extent we distribute our net income to our stockholders. However, we will be subject to tax at normal corporate rates on net income or capital gains not distributed to stockholders, and we may be subject to state income and franchise taxes. However, our TRS is be subject to federal and state income and franchise taxation on its taxable income.

 

The components of the corresponding income tax expense and benefit were as follows ($000s):

 

    

Three months ended

June 30, 2005


  

Six months ended

June 30, 2005


Federal:

             

Current

   $ —      $ —  

Deferred

     212      1,707

State and local:

             

Current

   $ 217    $ 217

Deferred

     —        —  

 

At December 31, 2004, the Company fully reserved the net deferred tax asset of approximately $0.4 million due to the limited operational history of the Company. However, with the acquisitions and updated tax planning forecast, the Company now believes this valuation unnecessary with the expectation that this asset will be realizable within the next five years. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

 

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11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company in the first annual reporting period beginning after June 15, 2005. Adoption is not expected to have a material effect on the Company.

 

12. COMMITMENTS AND CONTINGENCIES

 

Restricted Cash — Under certain existing mortgage loan agreements, Eagle is obligated to escrow payments for insurance, real estate taxes and 4% of gross revenue of certain properties for capital improvements.

 

Contingent Consideration — At the time we acquired our initial hotels, we agreed to make earn-out payments totaling in the aggregate up to 833,333 additional operating partnership units, which may be payable to the original contributors of the Embassy Suites Hotel Columbus/Dublin, the Embassy Suites Hotel Cleveland/Rockside and the Embassy Suites Hotel Denver-International Airport only if certain operating measurements are achieved on any trailing 12-month basis within three years from the contribution.

 

Franchise Fees — All of our hotels, except the Hyatt Regency Rochester, operate under franchise agreements. In conjunction with these franchise agreements, Eagle is obligated to pay the franchisors royalty fees between 4% and 6% of gross room revenue, and under certain agreements, fees for marketing, reservations, and other related activities aggregating between 1% and 4% of gross room revenue. In addition, the Marriott hotels are obligated to pay between 2% and 3% for food and beverage revenues. Franchise fees are included in hotel expenses in the accompanying consolidated and combined statements of operations.

 

Litigation — We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

 

Taxes — Under tax indemnification agreements with the contributors of certain initial hotels, Eagle has agreed to provide tax indemnification, which would range between $45 million and $75 million, to the original contributors against certain tax consequences of a sale. We have agreed to pay the contributor’s tax liability with respect to gain allocated to the contributor under Section 704(C) of the Internal Revenue Code if we dispose of a property contributed by the contributor in a taxable transaction during a “protected period”, which continues until the earlier of: a) October 1, 2014, or b) the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of property to our operating partnership.

 

13. COMPREHENSIVE INCOME

 

For the three months and six months, respectively, ended June 30, 2005, comprehensive income was $1.8 million and $2.4 million. As of June 30, 2005 and December 31, 2004 Eagle’s accumulated other comprehensive income was $15 and $22, respectively. The change in accumulated other comprehensive income was entirely due to Eagle’s unrealized gains on its marketable securities.

 

14. SUBSEQUENT EVENTS

 

On July 7, 2005, Eagle closed a $53.1 million seven-year, interest only loan with KeyBank at a fixed rate of 5.21%. This loan is secured by the 351-room Hilton Glendale in Glendale, California. The proceeds from this loan were used to repay the $53.1 million bridge loan.

 

On July 25, 2005, Eagle announced that the Audit Committee of the Board of Directors has selected Ernst & Young LLP as the Company’s independent registered public accounting firm, commencing with its fiscal quarter ending June 30, 2005. The Company emphasized that the change is not the result of any disagreements or dissatisfaction with the work of its former outside audit firm, Grant Thornton LLP.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

We make forward-looking statements throughout this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. Statements regarding the following subjects are forward-looking by their nature:

 

    Our business and investment strategy;

 

    Our projected operating results;

 

    Our ability to obtain future financing arrangements;

 

    Our understanding of our competition;

 

    Market trends;

 

    Projected capital expenditures; and

 

    The impact of technology on our operations and business

 

The forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our common stock. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

 

    the factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2004, including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” “Business,” and “Properties;”

 

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

 

    changes in our business or investment strategy;

 

    availability, terms, and deployment of capital;

 

    availability of qualified personnel;

 

    changes in our industry and the market in which we operate, interest rates, or the general economy; and

 

    The degree and nature of our competition.

 

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When we use the words “will likely result,” “may,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

RESULTS OF OPERATIONS

 

OVERVIEW

 

Eagle Hospitality Properties Trust, Inc., a Maryland corporation (together with its subsidiaries “Eagle” or “Company”), is a self-advised real estate investment trust (“REIT”) formed to pursue investment opportunities in the full-service and all-suites hotel industry. As of June 30, 2005, Eagle owned a 100% interest in 11 hotels and a 49% interest in one other hotel (Embassy Suites Hotel Cincinnati-RiverCenter).

 

SECOND QUARTER AND YEAR TO DATE HIGHLIGHTS AND OUTLOOK FOR THE REMAINDER OF 2005

 

Refer to the “Results of Operations” section below for discussion of our three months and six months ended June 30, 2005 results compared to the results for the same periods of 2004.

 

In the hotel industry most categories of operating costs do not vary directly with the volume of sales, the exceptions being franchise, management, credit card fees and the costs of the food and beverages served. Because of this operating leverage, changes in sales volume disproportionately impacts operating results. Room revenue is the most important category of revenue and drives other revenue categories such as food and beverage and telephone. There are three key performance indicators used in the hotel industry to measure room sales:

 

    Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

 

    Average Daily Rate (ADR), which is total room revenue divided by the number of rooms sold; and

 

    RevPAR (revenue per available room), which is the product of the occupancy percentage and ADR.

 

During the quarter, due to a strengthening economy and the maturation of certain of our hotels, our portfolio saw RevPAR increase by 15.6%, from $75.05 for the second quarter of 2004 to $86.79 for the second quarter of 2005 for eight of our hotels that were operational during the second quarter of 2004. For the six month period ending June 30, 2005, our portfolio saw RevPAR increase by 10.2%, to $78.65 from $71.37 for the same period in 2004 for those eight hotels. This increase was the result of increases in both the occupancy percentage and room rates.

 

On January 10, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on February 1, 2005 to holders of record as of January 18, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

 

On February 18, 2005, we finalized an $81.8 million five-year, non-recourse loan with Prudential. This loan involves both a fixed-rate and floating-rate component with $58.0 million fixed at an interest rate of 5.43% and the remainder having a variable interest rate of 175 basis points over 30-day LIBOR. Approximately $68 million of the proceeds were used to paydown $4.0 million of the loan for the Embassy Suites Columbus/Dublin and to retire the loans for the Cincinnati Landmark Marriott, the Embassy Suites Hotel Cleveland/Rockside (related party loan from Corporex) and the Embassy Suites Hotel Denver-International Airport. This credit facility is subject to certain financial covenants and is collateralized by the Cincinnati Landmark Marriott, the Embassy Suites Hotel Cleveland/Rockside, and the Embassy Suites Hotel Tampa-Airport/Westshore. With this facility, 54% of our outstanding mortgage debt is at fixed interest rates. This reduces our risk to interest rate fluctuations.

 

On February 24, 2005, we completed the acquisition of the 270-room Embassy Suites Hotel Phoenix-Scottsdale for $33.0 million in cash. In connection with this acquisition, Eagle finalized a $22.1 million three year, full recourse loan having an interest rate of 215 basis points over 30-day LIBOR that is collateralized by the that hotel. The proceeds of this loan were used to pay for this acquisition and the remainder of the purchase price was paid from existing cash. This hotel is managed by Commonwealth Hotels.

 

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On March 31, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on April 14, 2005 to holders of record as of April 6, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

 

On June 13, 2005, the Company closed an underwritten public offering of 4,000,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock (“Preferred Shares”). The Preferred Shares have a liquidation value of $25.00 and will be redeemable at the option of the Company on or after June 14, 2010. The annual distribution for the Preferred Shares will be $2.0625 per share. Dividends on the Preferred Shares will be payable quarterly in arrears on the last calendar day of March, June, September and December.

 

The net proceeds of the public offering of the Preferred Shares were $96.7 million, after underwriters discounts and other offering expenses. The proceeds were used in the acquisitions of the Hilton Glendale and the Embassy Suites Hotel San Juan, as well as for other general corporate and working capital purposes.

 

On June 17, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on July 15, 2005 to holders of record as of June 30, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

 

On June 23, 2005, we completed the acquisition of the 351-room Hilton Glendale in Glendale, California for $79.8 million. This acquisition was funded through a combination of cash and the proceeds from a $53.1 million bridge loan. The bridge loan was repaid on July 7, 2005 with the proceeds from a $53.1 million seven-year, interest only loan having a fixed interest rate of 5.21%. This hotel is managed by Hilton Hotels Corporation.

 

On June 27, 2005, we closed on a bridge loan secured by the Hilton Glendale. This bridge loan was repaid on July 7, 2005, with the proceeds from a $53.1 million seven-year, interest only loan having a fixed interest rate of 5.21%.

 

On June 28, 2005, we completed the acquisition of the 299-room Embassy Suites San Juan Hotel and Casino in Isla Verde Carolina, Puerto Rico for $60.0 million. This acquisition was funded by existing cash. This hotel is managed by Hilton Hotels Corporation.

 

The outlook for the remainder of 2005 is uncertain; however, management is currently optimistic that third and fourth quarters of 2005 will show increases in revenues and net income, for the following reasons:

 

    Improved market conditions.

 

    The Chicago Marriott Southwest at Burr Ridge which opened in August 2004 is seeing improvement in its occupancy percentage.

 

    Capital expenditure projects that are expected to be completed in the third quarter at the Embassy Suites Hotel Cincinnati-RiverCenter, the Embassy Suites Hotel Tampa-Airport/Westshore and the Hilton Cincinnati Airport.

 

This foregoing forward-looking statement is subject to risks and uncertainties. For more information, see the introductory paragraphs of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located on page 15.

 

CRITICAL ACCOUNTING POLICIES

 

There were no changes to the critical accounting policies and estimates made by management in the three months ended June 30, 2005. For a more detailed description of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our 2004 Annual Report on Form 10-K.

 

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FINANCIAL CONDITION

 

June 30, 2005 Compared to December 31, 2004

 

Total mortgage debt increased from $130.7 million (including $23.4 million of related-party mortgage debt) to $215.7 million, or 65.0%, as a result of the $22.1 million loan that financed the acquisition of the Embassy Suites Hotel Phoenix-Scottsdale (“Embassy Suites Phoenix”), the $81.8 million Prudential Loan and the $53.1 million loan related to the acquisition of the Hilton Glendale. The proceeds of the Prudential Loan were used to pay down approximately $71 million of existing mortgage debt (including all of the related-party mortgage debt) and to provide cash towards the completion of the acquisition of the Embassy Suites Phoenix.

 

Total assets increased $181.0 million, largely the result of the hotel acquisitions.

 

The unrestricted cash balance increased $4.7 million from December 31, 2004. This increase is largely the result of the net proceeds of $96.6 million from the preferred offering, offset by the cash expended on the hotel acquisitions. Another $8.6 million in dividends and distributions paid were paid in the first six months of 2005. Additionally, $7.1 million was used toward capital improvements at our existing hotels.

 

RESULTS OF OPERATIONS

 

Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

 

(000’s)   

The Company

2005


  

The Predecessor

2004


Total Revenue

   $ 28,768    $ 20,477

Operating Expense

     23,766      16,019

Net Operating Income

     5,002      4,458

Net Income(Loss) Available to Common Shareholder’s

     1,768      1,609

 

Revenue. Total revenues increased $8.3 million, or 40.5%, from $20.5 million in the second quarter of 2004 to $28.8 million in the second quarter of 2005. $5.3 million of the increase was related to the Chicago Marriott Southwest at Burr Ridge, which opened in August 2004, and the hotels acquired in 2005. The Cincinnati Landmark Marriott and the Hyatt Regency Rochester accounted for another $1.4 million of the revenue increase. RevPAR increased by 20.8% at these two hotels from $81.57 in the second quarter of 2004 to $98.52 for the second quarter of 2005. Corporate group travel accounted for the majority of the increase at the Cincinnati Landmark Marriott while conventions were the primary driver for the increase at the Hyatt Regency Rochester.

 

For the eight hotels owned and operational during the second quarter of 2004, RevPAR increased from $75.05 to $86.79 for the second quarter of 2005, or 15.6%. The increased RevPAR is largely due to the increases at the Cincinnati Landmark Marriott and the Hyatt Regency Rochester mentioned above, but all of our hotels saw RevPAR increases that ranged from 5.4% to 27.6%.

 

Operating Expenses. Hotel operating expenses before depreciation and amortization, corporate expenses and stock based compensation expense increased by $4.9 million, from $13.8 million during the second quarter of 2004, to $18.7 million in 2005, or 35.5%. Of this increase, $3.6 million was related to the Chicago Marriott Southwest at Burr Ridge, which did not open until August 2004 and the other hotel acquisitions. The remainder of the increase was largely due to items that vary directly with revenues, such as franchise, management and credit card fees. Due to revised brand linens standards, there was an increase of approximately $0.2 million incurred in linen purchases in the second quarter of 2005, as compared to the second quarter of 2004.

 

Operating Income. Total operating income increased by $0.5 million to $5.0 million in the second quarter of 2005 from $4.5 million during the second quarter of 2004. The increase of 11.1% was the result of a combination of operating income generated by the new acquisitions and the Chicago Marriott Southwest at Burr Ridge in the amount of $1.0 million and large increases at many of our existing hotels due to increased RevPAR, most notably, a combined increase of $0.5 million, or 114%, at the Hyatt Regency Rochester and Embassy Suites Hotel Denver-International Airport. Somewhat offsetting these increases were $1.3 million of corporate expense in the second quarter of 2005 (the Predecessor did not have a parent-type function) and $0.7 million related to the amortization of stock-based compensation. There was also increased depreciation expense of $0.3 million at the existing hotels due to the $42.5 million minority interest partial step-up recorded upon formation of the Company on October 1, 2004, related to the acquisition of minority interest from unaffiliated parties in connection with seven of the initial properties.

 

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Depreciation and Amortization Expense. Total depreciation and amortization expense increased by $0.9 million, or 40.9%, from $2.2 million in the second quarter of 2004 to $3.1 million during the same period in 2005. $0.6 million, or 66.7%, of the increase is related to the depreciation for the Chicago Marriott Southwest at Burr Ridge and the Embassy Suites Phoenix. Also contributing to the increase was $0.3 million on the minority interest partial step-up.

 

Interest Expense. Total interest expense decreased in the second quarter 2005 by approximately $0.6 million, or 20.7%, to $2.3 million from $2.9 million in 2004. During the fourth quarter of 2004, approximately $76 million of debt was retired (including $21.4 million in related-party debt), largely resulting in the decrease. To an extent this interest expense decrease was offset by the expense incurred on the loans related to the Embassy Suites Phoenix and the Hilton Glendale.

 

Income Tax Benefit. A net income tax expense of $5 was booked for the three month period ending June 30, 2005. This was the result of an expense of approximately $0.2 million recognized for state income taxes for the property-owning limited liability companies (“LLCs”) located in Kentucky. This expense was mostly offset by a $0.2 million income tax benefit due to the net loss during the quarter by the TRS. Due to the ownership structure in place at the time, the Predecessor recorded no income tax benefit during the period ending June 30, 2004.

 

As of June 30, 2005, the Company had a deferred tax asset of $1.7 million due to prior and current year losses by the TRS. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

 

Minority Interest. Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Income is allocated to minority interest based on the weighted average percentage ownership during the quarter. For the three month period ending June 30, 2005, the weighted average percentage of the limited partners’ ownership was 25.7%. As a result of this ownership percentage, the portion of the income earned during the quarter by the Company and allocated to the minority interest was $0.6 million. Due to the ownership structure of the Predecessor the concept of minority interest did not exist.

 

Distributions to Preferred Shareholders. During the three month period ended June 30, 2005, the Company made distributions in the amount of the $0.4 million related to the Series A Preferred Shares. These shares were issued as the result of a public offering that closed on June 13, 2005. There were no Preferred Shares issued by the Predecessor, therefore, there were no similar distributions in the prior year.

 

Net Income Available to Common Shareholders. The net income available to common shareholders of approximately $1.8 million in the second quarter of 2005 represented an increase of approximately $0.2 million, 12.5%, over the $1.6 million produced in the second quarter of 2004. The significant differentiating items between the two years were the net income produced by the acquired hotels, most notably, the Embassy Suites Phoenix, the reduced interest expense, the increased income generated by our existing hotels and offset by corporate expense, amortization of stock-based compensation, the minority interest allocation and the preferred share distribution.

 

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

 

(000’s)   

The Company

2005


  

The Predecessor

2004


Total Revenue

   $ 50,471    $ 39,067

Operating Expense

     44,046      31,828

Net Operating Income

     6,425      7,239

Net Income(Loss) Available to Common Shareholder

     2,413      1,554

 

Revenue. Total revenues increased $11.4 million, or 29.2%, from $39.1 million in the first six months of 2004 to $50.5 million in the first six months of 2005. $8.0 million of the increase was related to the Chicago Marriott Southwest Hotel at Burr Ridge, which opened in August 2004, and the hotels acquired in 2005. Our remaining hotels all experienced revenue improvements as compared to 2004. These improvements ranged from 4.2% to 20.0%, with the largest improvement seen at the Hilton Cincinnati Airport. The increase at this hotel is largely attributable to the airline and corporate group business.

 

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For the eight hotels owned and operational for the six months of 2004, RevPAR increased from $71.37 to $78.65 for the six months of 2005, or 10.2%. The increased RevPAR is largely due to the increases at the two hotels mentioned above, but all of our hotels saw RevPAR increases that ranged from 6.6% to 24.2%.

 

Operating Expenses. Hotel operating expenses before depreciation and amortization, corporate expenses and stock based compensation expense increased by $7.4 million, from $27.4 million during the first six months of 2004, to $34.8 million in 2005, or 27.0%. Of this increase, $5.6 million was related to the Chicago Marriott Southwest at Burr Ridge, which did not open until August 2004 and the other hotel acquisitions. The remainder of the increase was largely due to items that vary directly with revenues, such as franchise, management and credit card fees. Due to revised brand linens standards, there was an increase of approximately $0.2 million incurred in linen purchases in 2005, as compared to 2004.

 

Operating Income. Total operating income decreased by $0.8 million to $6.4 million for the first six months of 2005 from $7.2 million during the second quarter of 2004. The decrease of 11.1% was the result of $2.4 million of corporate expense incurred in 2005 (the Predecessor did not have a parent-type function) and $1.3 million relating to the amortization of stock-based compensation. There was also increased depreciation expense of $0.6 million at the existing hotels due to the $42.5 million minority interest partial step-up recorded upon formation of the Company on October 1, 2004, related to the acquisition of minority interest from unaffiliated parties in connection with seven of the initial properties.

 

Somewhat offsetting these increased expenses were the operating income generated by the new acquisitions in the amount of $1.4 million and large increases at many of our existing hotels due to increased RevPAR, most notably, a combined increase of $0.8 million, or 109%, at the Hyatt Regency Rochester and Embassy Suites Hotel Denver-International Airport.

 

Depreciation and Amortization Expense. Total depreciation and amortization expense increased by $1.4 million, or 31.8%, from $4.4 million for the first six months of 2004 to $5.8 million during the same period in 2005. $1.0 million, or 71.4%, of the increase is related to the depreciation for the Chicago Marriott Southwest at Burr Ridge and the Embassy Suites Phoenix. Also contributing to the increase was $0.6 million on the minority interest partial step-up. Somewhat reducing this increase was a reduction of expense related to the amortization of deferred loan fees in 2005 as compared to 2004.

 

Interest Expense. Total interest expense decreased in the first six months of 2005 by approximately $1.3 million, or 22.4%, to $4.5 million from $5.8 million in 2004. During the fourth quarter of 2004, approximately $76 million of debt was retired (including $21.4 million in related-party debt), largely resulting in the decrease. To an extent this interest expense decrease was offset by the expense incurred on the loans related to the Embassy Suites Phoenix and the Hilton Glendale.

 

Income Tax Benefit. An income tax benefit of $1.5 million was booked during the six month period ending June 30, 2005. $1.3 million of this benefit was due to the net loss during the year by the TRS and $0.4 million was the result of the reversal of a deferred tax asset valuation reserve. Providing a slight offset to the tax benefit was $0.2 million of state income tax expense for certain of our LLCs. Due to the ownership structure in place at the time, the Predecessor recorded no income tax benefit during the period ending June 30, 2004.

 

As of June 30, 2005, the Company had a deferred tax asset of $1.7 million due to prior and current year’s losses by the TRS. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

 

Minority Interest. Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Income is allocated to minority interest based on the weighted average percentage ownership during the quarter. For the six month period ending June 30, 2005, the weighted average percentage of the limited partners’ ownership was 25.7%. As a result of this ownership percentage, the portion of the income earned during the quarter by the Company and allocated to the minority interest was $0.8 million. Due to the ownership structure of the Predecessor the concept of minority interest did not exist.

 

Distributions to Preferred Shareholders. During the first six months of 2005, the Company made distributions in the amount of the $0.4 million related to the Series A Preferred Shares. These shares were issued as

 

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the result of a public offering that closed on June 13, 2005. There were no Preferred Shares issued by the Predecessor, therefore, there were no similar distributions in the prior year.

 

Net Income Available to Common Shareholders. The net income available to common shareholders of approximately $2.4 million for the first six months of 2005 represented an increase of $0.8 million, or 50.0% as compared to $1.6 million generated during the same period for 2004. The increase was largely due to the net income produced by the acquired hotels, most notably, the Embassy Suites Phoenix, the reduced interest expense, the increased income generated by our existing hotels and offset by corporate expense, amortization of stock-based compensation, the minority interest allocation and the preferred share distribution.

 

NON-GAAP FINANCIAL MEASURES

 

FUNDS FROM OPERATIONS

 

The White Paper on Funds From Operations (“FFO”) approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of previously depreciated operating real estate assets and extraordinary items as defined by GAAP, plus certain non-GAAP items such as real estate related depreciation and amortization, and after adjustment for any minority interest deriving from unconsolidated entities and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required primary GAAP presentations, has improved the understanding of operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted earnings for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income (loss), which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies.

 

We compute FFO in accordance with our interpretation of standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income as an indication of our financial performance or to cash flow from operating activities as determined by GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. FFO may include funds that may not be available for the Company’s discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties.

 

The following is a reconciliation between net income and FFO for the three months and six months ended June 30, 2005 and 2004, respectively (in thousands):

 

NET INCOME TO FFO RECONCILIATION

 

    

The Company

Q2 2005


   

The Predecessor

Q2 2004


Net income(loss) before minority interest

   $ 2,793     $ 1,609

Preferred Dividends

   $ (413 )   $ —  

Real estate related depreciation

     3,027       1,885
    


 

FFO

   $ 5,407     $ 3,494
    


 

FFO per share - fully diluted

   $ 0.23        
    


     

Weighted average common shares outstanding

     17,361,000        

Operating partnership units

     5,993,837        
    


     

Fully diluted weighted average shares outstanding

     23,354,837        
    


     

 

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NET INCOME TO FFO RECONCILIATION

 

    

The Company

Six Months 2005


   

The Predecessor

Six Months 2004


Net income(loss) before minority interest

   $ 3,660     $ 1,554

Preferred Dividends

   $ (413 )   $ —  

Real estate related depreciation

     5,628       4,064
    


 

FFO

   $ 8,875     $ 5,618
    


 

FFO per share - fully diluted

   $ 0.38        
    


     

Weighted average common shares outstanding

     17,361,000        

Operating partnership units

     5,993,837        
    


     

Fully diluted weighted average shares outstanding

     23,354,837        
    


     

 

EBITDA

 

EBITDA herein is defined as net income (loss) before interest expense, taxes, depreciation and amortization. We believe that EBITDA is helpful to investors and management as a measure of the performance of the Company because it provides an indication of the operating performance of the properties within the portfolio and is not impacted by the capital structure of the REIT. EBITDA does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income as an indication of our financial performance or to cash flow from operating activities as determined by GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. EBITDA may include funds that may not be available for the Company’s discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties.

 

The following is a reconciliation between net income and EBITDA for the three months and six months ended June 30, 2005 and 2004, respectively (in thousands, except per share amounts):

 

NET INCOME TO EBITDA RECONCILIATION

 

   The Company
Q2 2005


   The Predecessor
Q2 2004


Net income available to common shareholders

   $ 1,768    $ 1,609

Minority interest

     612      —  

Depreciation and amortization

     3,110      2,205

Interest expense

     2,338      2,907

Distributions to preferred shareholders

     413      —  

Income tax expense

     5      —  
    

  

EBITDA

   $ 8,246    $ 6,721
    

  

 

NET INCOME TO EBITDA RECONCILIATION

 

     The Company
Six Months 2005


    The Predecessor
Six Months 2004


Net income available to common shareholders

   $ 2,413     $ 1,554

Minority interest

     834       —  

Depreciation and amortization

     5,752       4,384

Interest expense

     4,477       5,782

Distributions to preferred shareholders

     413       —  

Income tax benefit

     (1,490 )     —  
    


 

EBITDA

   $ 12,399     $ 11,720
    


 

 

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Key Hotel Operating Statistics

 

The following table illustrates key operating statistics of our portfolio for the three months and six months ended June 30, 2005:

 

Three Months Ending June 30,   

The Company

2005


   

The Predecessor

2004


 

9 hotels

                

Room revenues

   $ 18,805     $ 16,250  

RevPAR (1)

   $ 85.78     $ 74.13  

Occupancy

     73.1 %     67.9 %

Average daily rate (2)

   $ 117.35     $ 109.15  

Hotel EBITDA

   $ 9,222     $ 7,016  

 

Six Months Ending June 30,   

The Company

2005


   

The Predecessor

2004


 

9 hotels

                

Room revenues

   $ 35,622     $ 32,184  

RevPAR (1)

   $ 81.67     $ 73.41  

Occupancy

     69.1 %     65.6 %

Average daily rate (2)

   $ 118.27     $ 111.92  

Hotel EBITDA

   $ 16,122     $ 13,436  

 

(1) RevPar is defined as the product of the occupancy percentage and ADR.

 

(2) Average daily rate is defined as total room revenue divided by the number of rooms sold.

 

(3) EBITDA herein is defined as net income (loss) before interest expense, taxes, depreciation, amortization, and preferred dividends.

 

For comparative purposes this schedule includes the Embassy Suites Phoenix, which was acquired on February 24, 2005, for the entire three months and six months ending June 30, 2005 and 2004, but excludes the Chicago Marriott Southwest at Burr Ridge for all periods as this property did not open until August 2004. This schedule also excludes the Hilton Glendale and Embassy Suites San Juan, which were acquired in June 2005.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our principal source of funds to meet our cash requirements, including distributions to stockholders, is our share of the operating partnership’s cash flow. The operating partnership’s principal source of revenue will be the cash flow provided by the hotel operations.

 

Below is a comparison of the cash flows for the six months ended June 30, 2005 and 2004, respectively. (000’s):

 

    

The Company

2005


   

The Predecessor

2004


 

Net cash provided by operating activities

   $ 11,973     $ 4,649  

Net cash used in investing activities

     (180,034 )     (601 )

Net cash provided by (used in) financing activities

     172,738       (2,512 )
    


 


Net increase in cash and cash equivalents

   $ 4,677     $ 1,536  
    


 


 

Cash flow from hotel operations is subject to all operating risks common to the hotel industry, including:

 

    Competition for guests from other hotels;

 

    Adverse effects of general and local economic conditions;

 

    Dependence on demand from business and leisure travelers, which may fluctuate and be seasonal;

 

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    Increases in energy costs, airline fares, and other expenses related to travel, which may deter traveling;

 

    Increases in operating costs related to inflation and other factors, including wages, benefits, insurance, and energy;

 

    Overbuilding in the hotel industry, especially in particular markets; and

 

    Actual or threatened acts of terrorism and actions taken against terrorists, which often cause public concern about travel safety.

 

Recurring capital expenditures and debt service are the most significant short-term liquidity requirements. During the remainder of 2005, we expect capital expenditures will be substantially funded by our replacement reserve accounts.

 

We expect to set aside 4% of future hotel revenues (5% with respect to the Hyatt Regency Rochester) in our replacement reserve accounts to fund capital expenditures. We have begun capital expenditure programs at the Embassy Suites Hotel Cincinnati-RiverCenter, the Embassy Suites Hotel Tampa-Airport/Westshore, the Embassy Suites Hotel Phoenix and the Hilton Cincinnati Airport. These projects are in process and we expect them to be completed during the third quarter of 2005.

 

We may seek to negotiate additional credit facilities, replacement credit facilities, or we may issue debt instruments. Any debt incurred or issued by us may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate, and be subject to such other terms as the Board of Directors considers prudent. However, we cannot assure you that we would be able to obtain such financings on favorable terms, if at all.

 

We have considered our short-term (defined as one-year or less) liquidity needs and the adequacy of our estimated cash flow from operations and other expected liquidity sources to meet these needs. We expect our principal short-term liquidity needs will be to fund normal recurring expenses, debt service requirements, and any distributions on our outstanding common shares, Series A Preferred Shares and operating partnership units. We anticipate that these needs will be met with cash flows provided by operating activities and proceeds from additional financings.

 

We expect to meet long-term (defined as greater than one year) liquidity requirements such as property acquisitions, scheduled debt maturities, major renovations, development projects and other nonrecurring capital improvements utilizing cash flow from operations, additional debt financings and preferred or common equity offerings. We expect to acquire additional hotel properties as suitable opportunities arise.

 

Capital Projects

 

During the three months and six months ended June 30, 2005, Eagle spent approximately $3.3 million and $7.1 million, respectively, on capital improvements. Most of these expenditures, totaling $2.4 million and $6.0 million, respectively, for the three months and six months ending June 30, 2005, were made at the Embassy Suites Hotel Cincinnati-RiverCenter, the Embassy Suites Hotel Tampa-Airport/Westshore and the Hilton Cincinnati Airport.

 

Throughout the remainder of 2005 we expect to make approximately $2.5 in capital expenditures at the Hyatt Regency Rochester. We anticipate that these expenditures will be funded from existing restricted cash reserves controlled by the hotel manager. Also, over the next six to nine months we will plan to make capital improvements at the acquired hotels due to change of ownership requirements of approximately $5.2 million.

 

Given the relative youth of our other hotels, we have no other short-term plans or requirements that require us to make material capital expenditures at our hotels.

 

Off Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements. Because we have the right and obligation to acquire the remaining 51% interest in the entity that owns the Embassy Suites Hotel Cincinnati-RiverCenter no later than

 

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Table of Contents

January 31, 2006 in exchange for 427,485 operating partnership units, the assets, liabilities and operations of such entity are included in our consolidated financial statements as required by FIN 46(R).

 

We have elected to be taxed as a REIT commencing with our taxable year ended December 31, 2004. To qualify as a REIT, we will be required to make annual distributions to our stockholders of at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction and by excluding net capital gain and which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles). The amount, timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our directors, and no assurance can be given that our distribution policy will not change in the future. Our ability to pay distributions to our stockholders will depend, in part, upon the management of our properties by our independent hotel managers. Distributions to our stockholders will generally be taxable to our stockholders as ordinary income; however, because a portion of our investments will be equity ownership interests in hotels, which will result in depreciation and non-cash charges against our income, a portion of our distributions may constitute a tax-free return of capital. To the extent not inconsistent with maintaining our REIT status, our TRS may retain any after-tax earnings.

 

Subsequent Events

 

On July 7, 2005, Eagle closed a $53.1 million seven-year, interest only loan with KeyBank at a fixed rate of 5.21%. This loan is secured by the 351-room Hilton Glendale in Glendale, California.

 

On July 25, 2005, Eagle announced that the Audit Committee of the Board of Directors has selected Ernst & Young LLP as the Company’s independent registered public accounting firm, commencing with its fiscal quarter ending June 30, 2005. The Company emphasized that the change is not the result of any disagreements or dissatisfaction with the work of its former outside audit firm, Grant Thornton LLP.

 

Inflation

 

We rely entirely on the performance of our properties and the ability of the properties’ managers to increase revenues to keep pace with inflation. Hotel operators can generally increase room rates rather quickly, but competitive pressures may limit their ability to raise rates faster than inflation. Our general and administrative costs, such as real estate and personal property taxes, property and casualty insurance, and utilities are also subject to inflationary pressures.

 

Seasonality

 

Virtually all of our properties’ operations are subject to the peaks and valleys associated with seasonal occupancy. The seasonality pattern nevertheless can be expected to cause fluctuations in our revenue. We anticipate that our cash flow from the operation of the properties will be sufficient to enable us to make quarterly distributions to maintain our REIT status. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in revenue, we expect to utilize other cash on hand or borrowings to make required distributions. However, we cannot make any assurances that we will make distributions in the future.

 

Geographic Concentration

 

Three of our hotels are located in the Northern Kentucky/Greater Cincinnati, Ohio metropolitan area. Economic and real estate conditions in this area significantly affect our revenues. Business layoffs, downsizing, industry slowdowns, demographic changes and other similar factors may adversely affect the economic climate in this locale. Any resulting oversupply or reduced demand for hotels in the area would adversely affect revenues and net income.

 

Competition and Other Economic Factors

 

Our hotels are located in developed areas that contain other hotel properties. The future occupancy, average daily rate and RevPAR of any hotel could be materially and adversely affected by an increase in the number of or quality of the competitive hotel properties in its market area. Competition could also affect the quality and quantity of future investment opportunities, and our ability to sell existing properties.

 

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Table of Contents

As a portion of the lodging industry’s sales are based upon business, commercial and leisure travel, changes in general economic conditions, demographics, or changes in local business economics, could affect these and other travel segments. This may affect demand for rooms, which would affect hotel revenues.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates. As a result of a Hilton Glendale refinancing on July 8, 2005 and other debt refinancing and additional financing, our variable rate debt dropped to $74.5 million, or approximately 35%, of our mortgage debt as of June 30, 2005, versus approximately $100.2 million, or approximately 77%, at December 31, 2004. We feel this repositioning of our debt provides an increased level of insulation from market fluctuation.

 

We have entered into both variable and fixed rate debt arrangements to allow us to optimize the balance of using variable rate debt versus fixed rate debt. The weighted average interest rate of our variable rate debt and total debt as of July 7, 2005 was 5.87% and 5.86%, respectively.

 

We do not believe that changes in market interest rates will have a material impact on the performance or fair value of our hotel portfolio because the value of our hotel portfolio is based primarily on the operating cash flow of the hotels, before interest expense charges. However, a change of 1/4% in the index rate to which our variable rate debt is tied would change our annual interest expense incurred by $0.2 million, based upon the balances and loans outstanding at July 7, 2005.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of June 30, 2005, an evaluation was performed under the supervision and with the participation of the principal executive and financial officers regarding to the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)). Based upon the evaluation, they concluded that our disclosure controls and procedures were effective in ensuring that material information required to be disclosed in this Quarterly Report was recorded, processed, summarized and reported on a timely basis.

 

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2005 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of any ultimate liability with respect to these actions will not materially affect our financial position, results of operations or liquidity.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

On May 20, 2005, the Company held its Annual Meeting of Shareholders. The matters on which the shareholders voted, in person or by proxy, were:

 

    for the election of members of the Board of Directors to serve until the 2006 Annual Meeting of Shareholders and until their successors are duly elected and qualified;

 

    the ratification of the appointment of Grant Thornton LLP as independent auditors of the Company for the fiscal year ending December 31, 2005.

 

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Table of Contents

Election of Board of Directors:

 

Director


   Votes For

   Votes Against

   Votes Withheld

William P. Butler

   15,649,619    0    455,421

J. William Blackham

   15,819,518    0    285,421

Robert J. Kohlhepp

   15,816,493    0    288,547

Frank C. McDowell

   15,816,493    0    288,547

Louis D. George

   15,821,993    0    283,047

Thomas R. Engel

   15,821,993    0    283,047

Thomas E. Costello

   15,784,514    0    320,526

Thomas E. Banta

   15,820,844    0    284,196

Paul S. Fisher

   15,820,393    0    284,647

 

Ratification of Appointment of Independent Auditors:

 

Votes For


   Votes Against

   Votes Withheld

16,069,882    31,458    3,700

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a) Exhibits

 

No.

  

Description


3    Articles of Amendment and Restatement (including all amendments or articles supplementary thereto).
10.1    Purchase Agreement dated as of May 11, 2005 between EHP Glendale, LLC and Hilton Glendale, L.P., as amended.
10.2    Agreement of Purchase and Sale dated as of April 28, 2005 between Eagle Hospitality Properties Trust, Inc. and E.S. Hotel Isla Verde, S.E., as amended.
10.3    Underwriting Agreement dated as of June 8, 2005 among A.G. Edwards & Sons, Inc., Wachovia Capital Markets, LLC, as the representatives of the several underwriters, the Company and EHP Operating Partnership, L.P., incorporated herein by reference from Exhibit 10 to the current report on Form 8-K dated June 8, 2005.
10.4    Loan Agreement dated as of July 7, 2005 between EHP Glendale, LLC and KeyBank National Association.
31.1    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

 

27


Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

By:   /s/ J. William Blackham
    J. William Blackham
    President and Chief Executive Officer

DATED: AUGUST 11, 2005

By:   /s/ Raymond D. Martz
    Raymond D. Martz
   

Chief Financial Officer, Secretary and Treasurer

(Principal Accounting Officer)

DATED: AUGUST 11, 2005

 

28

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