Seasonality
Our hotels’ operations historically have been seasonal. The hotels located in Florida experience their highest occupancy in the first quarter, while the remaining hotels maintain their highest occupancy rates during the second and third quarters. This seasonality pattern can be expected to cause fluctuations in our quarterly operating results and cash flow received from hotel operations.
Hotel Managers
As of March 2, 2006, the hotels in our portfolio were managed by the following entities:
| Number | ||||
| Manager | of Hotels | |||
|
Boykin Management Company Limited Liability Company
(“BMC”)
|
20 | |||
|
Concord Hospitality Enterprises (“Concord”)
|
1 | |||
| 21 | ||||
BMC. Robert W. Boykin (our Chairman of the Board and Chief Executive Officer) and his brother, John E. Boykin, control BMC. BMC has continued the over 40-year hotel operation and management business of Boykin Management Company and its affiliates (the “Boykin Group”). The Boykin Group has capabilities in all phases of development and management of hotel and resort properties. BMC currently manages 28 hotel properties located throughout the United States, including the 20 hotels owned by us. BMC’s subsidiaries which provide services to us include an interior design business and a hotel and restaurant food, beverage, supply and equipment purchasing business.
BMC and its owners, who have a substantial interest in the Partnership, have interests that conflict with our interests in connection with the structuring and enforcement of the management agreements and other agreements between us and BMC and in connection with activities that may maximize profits for BMC without necessarily benefiting us. The following factors align the interests of BMC and its owners with our interests to address these conflicts of interest:
| • | BMC’s owners have retained their equity interests in the Partnership; | |
| • | Our corporate charter documents require that our independent directors shall make all determinations to be made on behalf of Boykin Lodging Company with respect to the relationships or opportunities that represent a conflict of interest for any officer or director of Boykin Lodging Company; | |
| • | Any affiliate of the Boykin Group, including Robert W. Boykin and John E. Boykin, will conduct all hotel acquisition, development and ownership activities only through Boykin Lodging Company, other than the acquisition through inheritance of the Miami Hampton Inn by Robert W. Boykin and John E. Boykin, for which the initial development by William J. Boykin, their father, was approved by our Board of Directors; | |
| • | BMC is entitled to receive incentive management fees with respect to certain hotels it manages for us if the hotel operating performance exceeds benchmarks set forth in the terms of each management agreement; | |
| • | A portion of BMC’s corporate-level senior executive team’s compensation is based upon the performance of our hotels; and | |
| • | BMC has a deferred compensation plan for its corporate-level senior executives under which the value of each award is based on, and fluctuates with, the value of our common shares. |
Concord. Concord is a privately owned hotel investment and management company based in Raleigh, North Carolina. Concord was formed to acquire, develop and manage both full and limited-service hotel properties. Concord owns and operates hotels under franchise agreements with such franchisors as Marriott ® , Radisson ® , Hilton ® , Residence Inn ® and Hampton Inn ® .
Terms of the Management Agreements
BMC managed 19 of the 20 hotels that we had an ownership interest in as of December 31, 2005. The following is a summary of the material terms of the BMC management agreements (the “Management Agreements”) and is qualified in its entirety by reference to the Form of Management Agreement, which was filed as an exhibit to our Current Report on Form 8-K, filed on January 14, 2002.
The Management Agreements have the material terms described below:
| • | Duration/ Termination. As of December 31, 2005, the Management Agreements had remaining terms ranging from one to approximately eight years. We have the right to terminate 18 of the Management Agreements upon 90 days’ advance written notice without having to pay any damages or a termination fee or penalty. For the nineteenth hotel, if the management agreement is terminated by us prior to October 23, |
| 2006, the termination fee will be two times the actual management fees paid in calendar year 2005. If the management agreement is terminated by us after October 23, 2006, the termination fee will be equal to the management fees paid for the previous full calendar year. | ||
| • | Management Fees. Most of the Management Agreements provide for base and incentive management fees. The Management Agreements have base fees which range from 1.5% to 3% of total revenues. All of the Management Agreements have incentive management fees payable to BMC based upon the applicable hotel reaching specified financial performance standards. | |
| • | Operating and Other Expenses. All of the Management Agreements provide that we are responsible for all operating expenses associated with the hotels. In addition, we are responsible to either pay directly or reimburse the operator for all other expenses relating to the hotel including, without limitation, real estate taxes, insurance premiums and debt service. | |
| • | Indemnification. All of the Management Agreements provide that we will hold the operator harmless from and against all liabilities, losses, claims, damages, costs and expenses that arise from or in connection with (a) the performance of the operator’s services under the agreement, (b) any act or omission (whether or not willful, tortious, or negligent) by us or any third party, or (c) any other occurrence related to the hotel, except for events that result from (i) the fraud, willful misconduct or gross negligence of the operator or (ii) the breach by the operator of any provision of the agreement. | |
| • | Events of Default. Events of default include (a) failure to make any payment required by the agreement, (b) failure to observe or perform any term or provision after 30 days’ notice to cure, and (c) failure of either party to perform in accordance with an applicable franchise agreement. |
Joint Ventures with Third Party Hotel Operators
As of December 31, 2005, we had one joint venture with a third party operator to align the hotel operator’s economic interests with our economic interests.
| Boykin Ownership | JV Ownership | |||||||||||||
| Name of Joint Venture | JV Partner | Percentage | Percentage | Hotel Owned Under Joint Venture | ||||||||||
|
BoyCon, L.L.C.
|
Concord | 50 | % | 50 | % | Meadowlands-Lyndhurst Courtyard by Marriott |
Compliance with Federal, State and Local Laws
Our hotels must comply with Title III of the Americans with Disabilities Act (the “ADA”) to the extent that they are ”public accommodations” or ”commercial facilities” as defined in the ADA. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants.
Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the substances. Other laws impose on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment. Failure to comply with applicable requirements could complicate our ability to operate or sell an affected property and could subject us to monetary penalties, costs required to achieve compliance and potential liability to third parties. We may be potentially liable for such costs or claims in connection with the ownership and operation of our current hotels and hotels we may acquire in the future.
Employees
As of March 2, 2006, we had 18 employees. These employees perform, directly or through the Partnership, various acquisition, development, redevelopment and corporate management functions. All persons employed in the daily operations of the hotels are employees of the management companies that the taxable REIT subsidiaries have contracted with to operate the hotels.
Executive Officers of the Registrant
Our executive officers are elected and serve at the discretion of the Board of Directors until their successors are duly chosen and qualified, and are as follows:
| Name | Age | Position | ||||
|
Robert W. Boykin
|
56 | Chairman of the Board and Chief Executive Officer | ||||
|
Richard C. Conti
|
55 | President and Chief Operating Officer | ||||
|
Shereen P. Jones
|
44 |
Executive Vice President, Chief Financial and Investment Officer |
||||
|
Russ C. Valentine
|
60 | Senior Vice President, Acquisitions | ||||
|
Andrew C. Alexander
|
42 | Senior Vice President and General Counsel |
The following is a biographical summary of the business experience of our executive officers.
Robert W. Boykin has served as our Chief Executive Officer since our formation. He served as the President and Chief Executive Officer of Boykin Management Company from 1985 until November 1996. He served as Boykin Management Company’s Executive Vice President from 1981 until 1985.
Richard C. Conti has served as our Chief Operating Officer since May 1998. In January 2001, Mr. Conti was promoted to President and Chief Operating Officer. Prior to joining us, Mr. Conti was a Principal and Director with Coopers & Lybrand L.L.P. Mr. Conti was responsible for Coopers & Lybrand L.L.P.’s hospitality consulting practice in the Midwest and has been involved in the hospitality industry for over 25 years. Mr. Conti has worked closely with many of the leaders in the industry and brings significant industry knowledge and contacts.
Shereen P. Jones has served as our Executive Vice President, Chief Financial and Investment Officer since February 2002. She also serves as our Treasurer. Prior to joining Boykin, she was with Credit Suisse First Boston in New York where she was Director and Global Head of Hospitality Investment Banking, spearheading the development of its lodging investment banking practice. Previously, she spent seven years with Lehman Brothers, serving most recently as Senior Vice President and head of its Real Estate, Lodging and Gaming Mergers & Acquisitions practice. Prior to joining Lehman, she was Vice President, Corporate Finance, for Oppenheimer & Co. and Kidder, Peabody & Co.
Russ C. Valentine joined us in June 1999 as our Senior Vice President, Acquisitions. Prior to joining us, Mr. Valentine served as Senior Vice President of Acquisitions for American General Hospitality, a real estate investment trust that was based in Dallas, Texas. Mr. Valentine played a significant role in American General’s successful acquisition program from 1990 to 1998. For over 25 years, Mr. Valentine has worked for major consulting, investment banking, and hotel organizations.
Andrew C. Alexander became our Vice President-Corporate Counsel in July 1997 and was promoted to Senior Vice President and General Counsel in June 1999. From July 1995 until July 1997, Mr. Alexander served as Vice President-Corporate Counsel of Renaissance Hotel Group, N.V., a publicly traded hotel company. From September 1989 until July 1995, Mr. Alexander was an attorney at the law firm of Calfee, Halter & Griswold, LLP.
There are no arrangements or understandings known to us between any executive officer and any other person pursuant to which any executive officer was elected to office. There is no family relationship between any of our directors or executive officers and any other director or executive officer.
Corporate Governance
We believe that the composition, structure and performance of our Board of Directors provide us a strong corporate governance function and the partnership interest and share ownership of our officers and directors serve to align the interests of our management with our shareholders’ interests. In addition, the terms of our arrangements with BMC serve to minimize conflicts of interest and to align the interests of BMC with the interests of Boykin and its shareholders.
Our articles of incorporation and corporate governance guidelines require that a majority of our directors be independent. Under the New York Stock Exchange’s listing standards, a majority of our Board qualifies as independent. Our articles of incorporation also require that any determination to be made by our Board in connection with any matter presenting a conflict of interest for any officer of Boykin, or for any Boykin director who is not an independent director, be made by our independent directors.
We have made available on our website at www.boykinlodging.com copies of the charters of the audit, compensation and corporate governance and nominating committees of the Board of Directors, our code of ethics and our corporate governance guidelines. Copies of these documents are available in print to any shareholder who requests them. Requests should be sent to Boykin Lodging Company, Guildhall Building, Suite 1500, 45 W. Prospect Avenue, Cleveland, Ohio, 44115, Attn: Investor Relations.
(d) Financial Information About Geographic Areas
All of our operations are conducted in the United States.
(e) Available Information
We maintain a website at www.boykinlodging.com . We make available free of charge on our website our filings with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with the Securities and Exchange Commission.
Item 1A. Risk Factors
If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected. Additional risks and uncertainties not discussed herein may also impair our operations.
Risks Related to the Hotel Industry
Public reaction to acts of terrorism or military action could affect our cash flow. We are subject to disruptions in the lodging industry that would likely result from terrorist attacks (actual or threatened) or military action affecting the United States. The uncertainty that would result from these events would likely increase the public’s reluctance to travel, which could adversely affect our operations.
Competition, economic conditions and similar factors affecting us and the hotel industry generally could affect our performance. Our hotels are subject to all operating risks common to the hotel industry. These risks include:
| • | Competition for guests from other hotels based upon brand affiliations, room rates offered including those via internet wholesalers and distributors, customer service, location and the condition and upkeep of each hotel in general and in relation to other hotels in their local market; | |
| • | Adverse effects of general and local economic conditions; | |
| • | Dependence on demand from business and leisure travelers, which may fluctuate and be seasonal; | |
| • | Increases in energy costs, airline fares, and other expenses related to travel, which may deter travel; | |
| • | Weather-related issues; | |
| • | Impact of financial difficulties of the airline industry and potential reduction in airline service on the demand for our hotel rooms and the collectibility of our outstanding receivables from the airlines; | |
| • | Increases in operating costs attributable to inflation and other factors, such as energy and labor costs at the hotels; and | |
| • | Overbuilding in the hotel industry, especially in individual markets. |
The need to make unexpected capital expenditures could adversely affect our cash flow. Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of furniture, fixtures and equipment. If necessary capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures. We may also acquire hotels in the future that require significant renovation.
Hotel investments are generally illiquid, and we may not be able to sell our hotels when it is economically advantageous to do so. Hotel investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in accordance with our strategies or in response to economic or other conditions. In addition, provisions of the Internal Revenue Code of 1986, as amended, limit a REIT’s ability to sell its properties in some situations when it may be economically advantageous to do so.
Risks Related to Our Operations
The profitability of our hotels depends on the performance of the hotel management companies. The profitability of our hotels depends largely upon the ability of the management companies to generate revenues at our hotels in excess of their operating expenses. The failure of the management companies to manage the hotels effectively would adversely affect our cash flow received from hotel operations. Before January 1, 2002, our cash flow consisted primarily of lease payments from lessees. Our lessees were legally bound to make minimum lease payments even when such payments exceeded the cash flow from the hotel. Since implementing our taxable REIT subsidiary (“TRS”) structure on January 1, 2002, the responsibility and risks associated with making the minimum lease payments has shifted to lessees owned by the Partnership. Therefore, we have effectively assumed the risks associated with operating shortfalls at our hotels.
Our performance is dependent upon the performance of BMC . BMC currently manages 20 of our hotels. We are therefore dependent to a large degree on the operating performance of BMC. Changes in management at these hotels or at other hotels in the future could result in temporary service disruptions at the affected hotels, which could in turn affect their operating and financial performance.
We are subject to conflicts of interest involving our Chairman and Chief Executive Officer. Our Chairman and Chief Executive Officer, Robert W. Boykin, and his brother, John E. Boykin, own BMC and therefore derive benefits from BMC’s management of 20 of our hotels. Accordingly, Mr. Boykin has and will continue to have conflicts of interest with us. He had conflicts of interest in connection with our January 2002 TRS transaction and in connection with the structuring of the management agreements for the hotels currently managed by BMC. He will have similar conflicts on renewal of those agreements and in connection with future management agreements and other transactions that we may enter into with BMC. Conflicts of interest may also arise in connection with BMC’s management of our hotels. Under certain circumstances, actions taken and decisions made by BMC to maximize its profits will not necessarily benefit us. Additionally, a subsidiary of BMC provides design services to us for a fee and also receives a portion of the fees we pay to an independent purchasing agent. Mr. Boykin may have conflicts of interest with respect to our procurement of design services and capital goods. Another subsidiary of BMC provides purchasing to us for a fee. Additionally, the sale of certain of our hotels may result in different and more adverse tax consequences to Mr. Boykin than would be experienced by Boykin and our public shareholders, and he could seek to influence us not to sell a hotel even though that sale might otherwise be financially advantageous to us and our public shareholders. Our articles of incorporation provide that our independent directors are to make all determinations to be made on our behalf with respect to the relationships or opportunities that represent a conflict of interest for any of our officers or directors.
The covenants in our credit agreements may restrict our range of operating activities, and we are subject to refinancing risks. We have a senior secured credit facility that enables us to borrow up to $100.0 million, based upon borrowing base availability, and a term loan with an original balance of $130.0 million which is secured by certain of our hotel properties. Our secured credit facility requires us, among other things, to maintain a minimum net worth, a coverage ratio of EBITDA to debt service, coverage of EBITDA to debt service and fixed charges, and a maximum leverage ratio and places limitations on our common share distributions. There is no assurance that we will be able to continue to meet the financial covenants of the secured credit facility. In addition, our secured term loan limits our ability to sell certain hotel properties. These credit arrangements may limit our ability to sell certain hotels whose disposition might be desirable for strategic or financial purposes.
There can be no assurance that we will be able to renew our credit arrangements upon maturity on favorable terms or at all. Further, if we are unable to make payments on or to refinance indebtedness secured by our properties, the properties could be foreclosed upon with a consequent loss to us of income and asset value.
A portion of our borrowings bear interest at a variable rate, as may other indebtedness we incur in the future. Accordingly, increases in market interest rates could increase our debt service requirements, which could adversely affect our cash flow.
We are subject to risks associated with development, redevelopment and acquisitions of hotels. New and continued development projects and hotel acquisitions are subject to a number of risks, including:
| • | the availability of acceptable financing; | |
| • | competition with other entities for investment opportunities; | |
| • | acquired properties’ failure to achieve anticipated operating results; | |
| • | construction costs of a property exceeding original estimates; |
| • | delays in construction and renovation projects; | |
| • | overruns with respect to the cost of improvements to bring acquired properties to the requisite standards; and | |
| • | the expenditure of funds on, and the devotion of management time to, transactions that may not come to fruition. |
We are subject to the risks associated with investments through our joint ventures. Any joint venture investment involves risks such as the possibility that the co-venturer may seek relief under federal or state insolvency laws, or have economic or business interests or goals that are inconsistent with our business interests or goals. While the bankruptcy or insolvency of our co-venturer generally should not disrupt the operations of the joint venture, we could be forced to purchase the co-venturer’s interest in the joint venture or the interest could be sold to a third party. Additionally, we have a joint venture in which we have a non-controlling interest and we may enter into similar joint ventures in the future. If we do not have control over a joint venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities than ours. It may also be difficult for us to exit a joint venture that we do not control after an impasse. In addition, a joint venture partner may be unable to meet its economic or other obligations and we may be required to or find it necessary to fulfill those obligations.
Obligations imposed by our franchise agreements could affect us adversely. Most of our hotels are subject to franchise or license agreements. The continuation of a franchise or license agreement is generally subject to specified operating standards. Action or inaction on our part or by any of our hotel managers could result in our failure to meet those standards, which could result in the loss of the franchise. A franchisor also could condition the continuation of a franchise on the completion of capital improvements that we determine are too expensive or otherwise unwarranted in light of general economic conditions or the operating results or prospects of the affected hotel. In that event, we may elect to allow the franchise agreement to lapse. In any case, the loss of a franchise agreement could have a material adverse effect upon the operations or the underlying value of the hotel covered by the agreement because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor, or because of penalties payable upon early termination of the agreement. Additionally, the franchise agreements may place restrictions on the transfer or sale of assets or make such transfers or sales economically infeasible.
Our insurance may not be adequate to cover certain risks. We continue to carry comprehensive liability, fire, flood, earthquake, terrorism and business interruption policies that insure us against losses within policy specification and insurance limits that we believe are reasonable. There are certain types of risks, generally of a catastrophic nature, that may be uninsurable or are not economically insurable or certain coverages that we currently carry may become uneconomical or unavailable in the future. Should an uninsured loss or a loss in excess of insured limits occur, we could lose our investment in the affected hotel as well as the anticipated future cash flow from that hotel, while remaining obligated for any mortgage indebtedness or other financial obligations related to that hotel.
The costs of complying with laws and regulations could adversely affect our cash flow. Our hotels must comply with Title III of the Americans with Disabilities Act (the “ADA”) to the extent that they are ”public accommodations” or ”commercial facilities” as defined in the ADA. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. If changes in these laws involve substantial expenditures or must be made on an accelerated basis, our cash flow could be adversely affected.
Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the substances. Other laws impose on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment. Failure to comply with applicable requirements could complicate our ability to operate or sell an affected property and could subject us to monetary penalties, costs required to achieve compliance and potential liability to third parties. We may be potentially liable for such costs or claims in connection with the ownership and operation of our current hotels and hotels we may acquire in the future. We have not been notified by any governmental authority of, nor are we aware of, any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our hotels. Nonetheless, it is possible that material environmental contamination or conditions exist, or could arise in the future, in the hotels or on the land upon which they are located.
We have and will continue to incur costs for systems, staffing and third party services in maintaining compliance with federal laws and regulations addressing corporate governance issues, including the Sarbanes-Oxley Act of 2002, and with the listing requirements of the New York Stock Exchange.
We bear the risk of the timely completion of the Captiva Villas project. In each sales contract for the sale of a Captiva Villas unit, Captiva Villas Development LLC, our consolidated subsidiary and the developer of Captiva Villas, guarantees that it will complete construction of the condominium unit within two years following the date of the sales contract unless such failure is due to circumstances beyond the control of the developer which constitute impossibility of performance under Florida law. The first sales contract for a Captiva Villas unit was entered into in July of 2004. Twenty-one of the outstanding contracts were entered into in 2004 and six were entered into in the first quarter of 2005. Currently, the developer anticipates that the project will be substantially complete in the first quarter of 2007. The developer has potential liability to purchasers whose units are not completed within the two year time period. A purchaser could make a claim for damages and rescission of their sales contract.
We may fail to qualify as a REIT and we may incur tax liability as a result. Commencing with our taxable year ended December 31, 1996, we have operated as a REIT under the Code. The federal income tax laws governing REITs are complex. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, no assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the rules applicable to us with respect to our qualification as a REIT or the federal income tax consequences of such qualification.
If we were to fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification was lost. As a result, the cash available for distribution to shareholders, including the holders of preferred shares, could be reduced or eliminated for each of the years involved.
We may be subject to the adverse effect of REIT distribution requirements. We intend to continue to make distributions to our shareholders to comply with the requirement that we distribute to our shareholders each year at least 90% of our net taxable income (excluding any net capital gain). Our income consists primarily of our share of the income of the Partnership. Our cash available for distribution consists primarily of cash distributions from the Partnership. Differences in timing between taxable income and receipt of cash available for distribution and the seasonality of our hotels could require us, through the Partnership, to borrow funds on a short-term basis in order to meet the distribution requirement or to liquidate investments on disadvantageous terms. In certain cases, dividends paid during the immediately subsequent year may be applied to the prior year’s dividends paid deduction; however, an excise tax may be applicable based on the timing of such distributions.
Our ownership limit may discourage takeover attempts. In order to maintain our REIT status our articles of incorporation limit ownership of our common shares and preferred shares. In order for us to maintain our qualification as a REIT, not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals. Our articles prohibit ownership of more than 9% of the common shares and ownership of more than 9% of any class of preferred shares by any single shareholder, with certain exceptions. Accordingly, a holder of depositary shares may be prohibited from increasing his or her holdings of depositary shares to the extent such shares represent more than 9% of the preferred shares. Our Board of Directors may waive this restriction if evidence satisfactory to it and to our tax counsel is presented showing that ownership in excess of this limit will not jeopardize our status as a REIT. Generally, prohibiting any shareholder from owning more than 9% of the common shares or of any class of preferred shares may discourage a change in control of our company or limit the opportunity for shareholders to receive a premium for their shares that may otherwise exist. We also have a shareholder rights plan that may have the same effects.
Item 1B. Unresolved Staff Comments
None
