| LASALLE HOTEL PROPERTIES Item 1A Risk Factors Additional Factors that May Affect Future Results The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered |
| The risks and uncertainties described below are not the only ones the Company faces |
| Additional risks and uncertainties not presently known to the Company or that it may currently deem immaterial also may impair its business operations |
| If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected |
| 6 ______________________________________________________________________ The Company’s return on its hotels depends upon the ability of the lessees and the hotel operators to operate and manage the hotels |
| To maintain its status as a REIT, the Company is not permitted to operate any of its hotels |
| As a result, the Company is unable to directly implement strategic business decisions with respect to the operation and marketing of its hotels, such as decisions with respect to the setting of room rates, repositioning of a hotel, food and beverage prices and certain similar matters |
| Although the Company consults with the lessees and hotel operators with respect to strategic business plans, the lessees and hotel operators are under no obligation to implement any of the Company’s recommendations with respect to such matters |
| Thus, even if the Company believes its hotels are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, revenue per available room, average daily rates or operating profits, the Company may not have sufficient rights under its hotel operating agreements to enable it to force the hotel operator to change its method of operation |
| The Company generally can only seek redress if a hotel operator violates the terms of the applicable operating agreement, and then only to the extent of the remedies provided for under the terms of the agreement |
| Some of the Company’s operating agreements have lengthy terms and may not be terminable by the Company before the agreement’s expiration |
| In the event that the Company is able to and does replace any of its hotel operators, the Company may experience significant disruptions at the affected hotels, which may adversely affect its ability to make distributions to its shareholders |
| The Company’s performance and its ability to make distributions on its shares are subject to risks associated with the hotel industry |
| Competition for guests, increases in operating costs, dependence on travel and economic conditions could adversely affect the Company’s cash flow |
| The Company’s hotels are subject to all operating risks common to the hotel industry |
| These risks include: • competition for guests and meetings from other hotels including competition and pricing pressure from internet wholesalers and distributors; • increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increased room rates; • labor strikes, disruptions or lockouts that may impact operating performance; • 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 negatively affect traveling; • terrorism, terrorism alerts and warnings, military actions such as the engagement in Iraq, and SARs, pandemics or other medical events which may cause decreases in business and leisure travel; and • adverse effects of weak general and local economic conditions |
| These factors could adversely affect the ability of the lessees (including the Company’s taxable-REIT subsidiary lessees) to generate revenues and to make rental payments to the Company |
| Unexpected capital expenditures could adversely affect the Company’s cash flow |
| Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of furniture, fixtures and equipment |
| Under the terms of its leases, the Company is obligated to pay the cost of certain capital expenditures at the hotels, including new brand standards, and to pay for periodic replacement or refurbishment of furniture, fixtures and equipment |
| If capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures |
| In addition, the Company has acquired hotels that are undergoing or will undergo significant renovation and may acquire additional hotels in the future that require significant renovation |
| Renovations of hotels involve numerous risks, including the possibility of environmental problems, construction cost overruns and delays, the effect on current demand, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels |
| 7 ______________________________________________________________________ The Company’s obligation to comply with financial covenants in its senior unsecured credit facility and mortgages on some of its hotel properties could restrict its range of operating activities |
| The Company has a senior unsecured credit facility with a syndicate of banks, which provides for a maximum borrowing of up to dlra300dtta0 million |
| The senior unsecured facility matures on June 9, 2008 and has a one-year extension option |
| The Company’s credit facility contains financial covenants that could restrict its ability to incur additional indebtedness or make distributions on its shares |
| The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, net worth and total funded indebtedness; it also contains financial covenants that, assuming no continuing defaults, allow the Company to make shareholder distributions that, when combined with the distributions to shareholders in the three immediately preceding fiscal quarters, do not exceed the greater of (i) 90prca of the funds from operations from the preceding four-quarter rolling period or (ii) the greater of (a) the amount of distributions required for the Company to maintain its status as a REIT or (b) the amount required to ensure that the Company will avoid imposition of an excise tax for failure to make certain minimum distributions on a calendar-year basis |
| Availability under the credit facility may be reduced by hotel financing that the Company obtains outside the credit facility |
| The credit facility financial covenants could adversely affect the Company’s financial condition |
| LHL has a senior unsecured credit facility with US Bank National Association, which provides for a maximum borrowing of up to dlra25dtta0 million |
| The senior unsecured credit facility matures on June 9, 2008 |
| The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, minimum tangible net worth and total funded indebtedness |
| The Sheraton Bloomington Hotel Minneapolis South, Westin City Center Dallas, Le Montrose Suite Hotel, San Diego Paradise Point Resort, Indianapolis Marriott Downtown, Hilton Alexandria Old Town, Hilton San Diego Gaslamp Quarter, Westin Copley Place and the University Tower Hotel are each mortgaged to secure payment of indebtedness aggregating approximately dlra489dtta7 million as of December 31, 2005 |
| The Harborside Hyatt Conference Center & Hotel is mortgaged to secure payment of principal and interest on bonds with an aggregate par value of approximately dlra42dtta5 million |
| In addition, the joint venture that owns the Chicago Marriott Downtown in which the Company holds a non-controlling 9dtta9prca equity interest is mortgaged to secure payment of indebtedness of dlra140dtta0 million |
| The Company’s pro rata share of the loan is approximately dlra13dtta9 million |
| If the Company is unable to meet mortgage payments, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company |
| From time to time, the Company may mortgage additional hotels to secure payment of additional indebtedness |
| The Company’s performance is subject to real estate industry conditions and the terms of its leases |
| Because real estate investments are illiquid, the Company may not be able to sell hotels when desired |
| Real estate investments generally cannot be sold quickly |
| The Company may not be able to vary its portfolio promptly in response to economic or other conditions |
| In addition, provisions of the Code limit a REIT’s ability to sell properties in some situations when it may be economically advantageous to do so |
| Liability for environmental matters could adversely affect the Company’s financial condition |
| As an owner of real property, the Company is subject to various federal, state and local laws and regulations relating to the protection of the environment that may require a current or previous owner of real estate to investigate and clean-up hazardous or toxic substances at a property |
| These laws often impose such liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability is not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner |
| Persons who arrange for the disposal or treatment of hazardous or toxic substances at a facility, whether or not such facility is owned or operated by the person, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility |
| Even if more than one person were responsible for the contamination, each person covered by the environmental laws may be held responsible for the entire amount of clean-up costs incurred |
| 8 ______________________________________________________________________ Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials |
| These laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials |
| In connection with ownership (direct or indirect) of its hotels, the Company may be considered an owner or operator of properties with asbestos-containing materials |
| Having arranged for the disposal or treatment of contaminants, the Company may be potentially liable for removal, remediation and other costs, including governmental fines and injuries to persons and property |
| The costs of compliance with the Americans with Disabilities Act and other government regulations could adversely affect the Company’s cash flow |
| Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations are required to meet certain federal requirements related to access and use by disabled persons |
| A determination that the Company is not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants |
| If the Company is required to make substantial modifications to its hotels, whether to comply with ADA or other government regulation such as building codes or fire safety regulations, its financial condition, results of operations and ability to make shareholder distributions could be adversely affected |
| Certain leases and management agreements may constrain the Company from acting in the best interests of shareholders or require it to make certain payments |
| The Harborside Hyatt Conference Center & Hotel, the San Diego Paradise Point Resort, Indianapolis Marriott Downtown, Hilton San Diego Resort and one of two golf courses, the Pines, at Seaview Resort and Spa are each subject to a ground lease with a third-party lessor |
| The Westin Copley Place is subject to a long term air rights lease with a third party lessor and requires no payments through maturity |
| The ground leases for the Indianapolis Marriott Downtown and the Pines golf course at Seaview Resort and Spa are each for one dollar per year |
| In order for the Company to sell any of these hotels or to assign its leasehold interest in any of these ground leases, it must first obtain the consent of the relevant third-party lessor |
| A parking lot at the Sheraton Bloomington Hotel Minneapolis South is also subject to a ground lease with a third-party lessor; third-party lessor consent is required to assign the leasehold interest unless the assignment is in conjunction with the sale of the hotel |
| Accordingly, if the Company determines that the sale of any of these hotels or the assignment of its leasehold interest in any of these ground leases is in the best interest of its shareholders, the Company may be prevented from completing such a transaction if it is unable to obtain the required consent from the relevant lessor |
| In some instances, the Company may be required to obtain the consent of the hotel operator or franchisor prior to selling the hotel |
| Typically, such consent is only required in connection with certain proposed sales, such as if the proposed purchaser is engaged in the operation of a competing hotel or does not meet certain minimum financial requirements |
| Hotels where operator approval of certain sales may be required include the Chicago Marriott Downtown and Harborside Hyatt Conference Center & Hotel |
| The Westin City Center Dallas is a unit of a commercial condominium complex and is subject to a right of first refusal in favor of the owner of the remaining condominium units |
| The Hilton San Diego Gaslamp Quarter is a unit of a commercial condominium complex and is not subject to a right of first refusal by the owner of the remaining condominium units |
| In addition, the Company is subject to certain rights of first refusal or similar rights with respect to the following hotels: LaGuardia Airport Marriott and Seaview Resort and Spa |
| The Company is subject to a franchisor’s right of first offer with respect to the Hilton Alexandria Old Town, Hilton San Diego Gaslamp Quarter, and Hilton San Diego Resort |
| If the Company determines to terminate a lease with a third-party lessee (other than in connection with a default by such lessee), it may be required to pay a termination fee calculated based upon the value of the lease |
| Increases in interest rates may increase the Company’s interest expense |
| As of December 31, 2005, approximately dlra87dtta5 million of aggregate indebtedness (15dtta2prca of total indebtedness) was subject to variable interest rates |
| The aggregate indebtedness balance includes the Company’s 9 ______________________________________________________________________ dlra14dtta3 million pro rata portion of indebtedness relating to the Company’s joint venture investment in the Chicago Marriott Downtown hotel |
| An increase in interest rates could increase the Company’s interest expense and reduce its cash flow and may affect its ability to make distributions to shareholders and to service its indebtedness |
| The Company has operated (and intends to so operate in the future) so as to qualify as a REIT under the Code beginning with its taxable year ended December 31, 1998 |
| Although management believes that the Company is organized and operated in a manner to so qualify, no assurance can be given that the Company will qualify or remain qualified as a REIT If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates |
| Moreover, unless entitled to relief under certain statutory provisions, the Company also will be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost |
| This treatment would cause the Company to incur additional tax liabilities and would significantly impair the Company’s ability to service indebtedness, and reduce the amount of cash available to make new investments or to make distributions on its common shares of beneficial interest and preferred shares |
| New legislation, enacted October 22, 2004, contained several provisions applicable to REITs, including provisions that could provide relief in the event the Company violates certain provisions of the Internal Revenue Code that otherwise would result in its failure to qualify as a REIT The Company cannot assure that these relief provisions would apply if the Company failed to comply with the REIT qualification laws |
| Even if the relief provisions do apply, the Company would be subject to a penalty tax of at least dlra50cmam000 for each disqualifying event in most cases |
| Property ownership through partnerships and joint ventures could limit the Company’s control of those investments |
| Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that its co-investors might become bankrupt, might at any time have different interests or goals from those of the Company, and may take action contrary to the Company’s instructions, requests, policies or objectives, including its policy with respect to maintaining its qualification as a REIT Other risks of joint venture investments include an impasse on decisions, such as a sale, because neither the Company’s co-investors nor the Company would have full control over the partnership or joint venture |
| There is no limitation under the Company’s organizational documents as to the amount of funds that may be invested in partnerships or joint ventures |
| Tax consequences upon a sale or refinancing of properties may result in conflicts of interest, and a hotel sale or refinancing may trigger tax indemnification obligations |
| Holders of units of limited partnership interest in the Operating Partnership or co-investors in properties not owned entirely by the Company may suffer different and more adverse tax consequences than the Company upon the sale or refinancing of properties |
| The Company may have different objectives from these co-investors and unitholders regarding the appropriate pricing and timing of any sale or refinancing of these properties |
| While the Company, as the sole general partner of the Operating Partnership, has the exclusive authority as to whether and on what terms to sell or refinance each property owned solely by the Operating Partnership, one of its trustees who has interests in units of limited partnership interest may seek to influence the Company not to sell or refinance the properties, even though such a sale might otherwise be financially advantageous to it, or may seek to influence the Company to refinance a property with a higher level of debt |
| In addition, [in one case] the Company has agreed to indemnify the sellers of a hotel acquired by the Company against certain tax consequences if the Company sells the hotel before a specific date |
| The Company could agree to additional similar tax indemnification obligations in connection with future acquisitions |
| These obligations may make it costly for the Company to sell the affected hotel during the indemnification period |
| 10 ______________________________________________________________________ The Company may not have enough insurance |
| The Company carries comprehensive liability, fire, flood, earthquake, extended coverage and business interruption policies that insure it against losses with policy specifications and insurance limits that the Company believes are reasonable |
| There are certain types of losses, such as losses from environmental problems or terrorism, that management may not be able to insure against or may decide not to insure against since the cost of insuring is not economical |
| The Company may suffer losses that exceed its insurance coverage |
| Further, market conditions, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance |
| The Company’s organizational documents and agreements with its executives and applicable Maryland law contain provisions that may delay, defer or prevent change of control transactions and may prevent shareholders from realizing a premium for their shares |
| The Company’s trustees serve staggered three-year terms, the trustees may only be removed for cause and remaining trustees may fill board vacancies |
| The Company’s Board of Trustees is divided into three classes of trustees, each serving staggered three-year terms |
| In addition, a trustee may only be removed for cause by the affirmative vote of the holders of a majority of the Company’s outstanding common shares |
| The Company’s declaration of trust and bylaws also provide that a majority of the remaining trustees may fill any vacancy on the Board of Trustees and further effectively provide that only the Board of Trustees may increase or decrease the number of persons serving on the Board of Trustees |
| These provisions preclude shareholders from removing incumbent trustees, except for cause after a majority affirmative vote, and filling the vacancies created by such removal with their own nominees |
| The Company’s Board of Trustees may approve the issuance of shares with terms that may discourage a third party from acquiring the Company |
| The Board of Trustees has the power under the declaration of trust to classify any of the Company’s unissued preferred shares, and to reclassify any of the Company’s previously classified but unissued preferred shares of any series from time to time, in one or more series of preferred shares, without shareholder approval |
| The issuance of preferred shares could adversely affect the voting power, dividend and other rights of holders of common shares and the value of the common shares |
| The Company’s declaration of trust prohibits ownership of more than 9dtta8prca of the common shares or 9dtta8prca of any series of preferred shares |
| To qualify as a REIT under the Internal Revenue Code, no more than 50prca of the value of the Company’s outstanding shares may be owned, directly or under applicable attribution rules, by five or fewer individuals (as defined to include certain entities) during the last half of each taxable year |
| The Company’s declaration of trust generally prohibits direct or indirect ownership by any person of (i) more than 9dtta8prca of the number or value (whichever is more restrictive) of the outstanding common shares or (ii) more than 9dtta8prca of the number or value (whichever is more restrictive) of the outstanding shares of any class or series of preferred shares |
| Generally, shares owned by affiliated owners will be aggregated for purposes of the ownership limitation |
| Any transfer of shares that would violate the ownership limitation will result in the shares that would otherwise be held in violation of the ownership limit being designated as “shares-in-trust” and transferred automatically to a charitable trust effective on the day before the purported transfer or other event giving rise to such excess ownership |
| The Maryland Business Combination Statute applies to the Company |
| A Maryland “business combination” statute contains provisions that, subject to limitations, prohibit certain business combinations between the Company and an “interested stockholder” (defined generally as any person who beneficially owns 10prca or more of the voting power of the Company’s shares or an affiliate thereof) for five years after the most recent date on which the shareholder becomes an interested stockholder, and thereafter impose special shareholder voting requirements on these combinations |
| The Board of Trustees may choose to subject the Company to the Maryland Control Share Act |
| A Maryland law known as the “Maryland Control Share Act” provides that “control shares” of a company (defined 11 ______________________________________________________________________ as shares which, when aggregated with other shares controlled by the acquiring shareholder, entitle the shareholder to exercise one of three increasing ranges of voting power in electing trustees) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by the company’s shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares |
| The Company’s bylaws currently provide that the Company is not subject to these provisions |
| However, the Board of Trustees, without shareholder approval, may repeal this bylaw and cause the Company to become subject to the Maryland Control Share Act |
| Other provisions of the Company’s organization documents may delay or prevent a change of control of the Company |
| Among other provisions, the Company’s organizational documents provide that the number of trustees constituting the full Board of Trustees may be fixed only by the trustees and that a special meeting of shareholders may not be called by holders of common shares holding less than a majority of the outstanding common shares entitled to vote at such meeting |
| The Company’s executive officers have agreements that provide them with benefits in the event of a change in control of the Company |
| The Company entered into agreements with its executive officers that provide them with severance benefits if their employment ends under certain circumstances within one year following a “change in control” of the Company (as defined in the agreements) or if the executive officer resigns for “good reason” (as defined in the agreements) |
| These benefits could increase the cost to a potential acquiror of the Company and thereby prevent or deter a change in control of the Company that might involve a premium price for the common shares or otherwise be in the interests of the Company’s shareholders |