| BOYKIN LODGING CO 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 |
| 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 |
| 6 _________________________________________________________________ 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 |
| 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 dlra100dtta0 million, based upon borrowing base availability, and a term loan with an original balance of dlra130dtta0 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; 7 _________________________________________________________________ • 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 |
| 8 _________________________________________________________________ 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 90prca of our net taxable income (excluding any net capital gain) |
| 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 50prca in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals |
| Our articles prohibit ownership of more than 9prca of the common shares and ownership of more than 9prca 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 9prca 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 9prca 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 |