10-K 1 bee-20121231x10k.htm 10-K BEE-2012.12.31-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________
FORM 10-K
 ___________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-32223
  _________________________
STRATEGIC HOTELS & RESORTS, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
33-1082757
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
200 West Madison Street, Suite 1700, Chicago, Illinois
 
60606-3415
(Address of principal executive offices)
 
(Zip Code)
  _______________________________
Registrant’s telephone number, including area code: (312) 658-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Name of each exchange on which registered
Common Stock ($0.01 par value per share)
  
New York Stock Exchange
8.50% Series A Cumulative Preferred Stock ($0.01 par value per share)
  
New York Stock Exchange
8.25% Series B Cumulative Preferred Stock ($0.01 par value per share)
  
New York Stock Exchange
8.25% Series C Cumulative Preferred Stock ($0.01 par value per share)
  
New York Stock Exchange
  _______________________________
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $1.16 billion as of June 29, 2012, the last business day of the registrant's most recently completed second fiscal quarter (based on the closing sale price of the common stock on the New York Stock Exchange on such date).
The number of shares of common stock ($0.01 par value per share) of the registrant outstanding as of February 27, 2013 was 204,308,710.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this annual report on Form 10-K incorporates information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the close of the registrant’s fiscal year.




STRATEGIC HOTELS & RESORTS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012
INDEX
 
 
 
PAGE
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
ITEM 10.
ITEM 11.
ITEM 12
ITEM 13.
ITEM 14.
 
 
ITEM 15.
 
 
This report contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Fairmont®, Four Seasons®, Hyatt®, InterContinental®, JW Marriott®, Loews®, Marriott®, Michael Jordan's Steak House®, Renaissance®, Ritz-Carlton®, and Westin®. None of the owners of these trademarks, their affiliates or any of their respective officers, directors, agents or employees has or will have any liability or responsibility for any financial statements, projections, other financial information or other information contained in this report.




DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
On one or more occasions, we may make statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events. All statements other than statements of historical facts included or incorporated by reference in this annual report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “targets,” “will,” “will continue,” “will likely result” or other comparable expressions or the negative of these terms identify forward-looking statements. Forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. We caution that while we make such statements in good faith and we believe such statements are based on reasonable assumptions, including without limitation, management’s examination of historical operating trends, data contained in records and other data available from third parties, we cannot assure you that our projections will be achieved.
Our actual results may differ significantly from any results expressed or implied by these forward-looking statements. Some, but not all, of the factors that might cause such a difference include, but are not limited to:
the factors discussed in this report set forth in Item 1A under the section titled “Risk Factors”;
the effects of the recent global economic recession upon business and leisure travel and the hotel markets in which we invest;
our liquidity and refinancing demands;
our ability to obtain or refinance maturing debt;
our ability to maintain compliance with covenants contained in our debt facilities;
stagnation or deterioration in economic and market conditions, particularly impacting business and leisure travel spending in the markets where our hotels operate and in which we invest, including luxury and upper upscale product;
general volatility of the capital markets and the market price of our shares of common stock;
availability of capital;
our ability to dispose of properties in a manner consistent with our investment strategy and liquidity needs;
hostilities and security concerns, including future terrorist attacks, or the apprehension of hostilities, in each case that affect travel within or to the United States, Mexico, Germany, England or other countries where we invest;
difficulties in identifying properties to acquire and completing acquisitions;
our failure to maintain effective internal control over financial reporting and disclosure controls and procedures;
risks related to natural disasters;
increases in interest rates and operating costs, including insurance premiums and real property taxes;
contagious disease outbreaks, such as the H1N1 virus outbreak;
delays and cost-overruns in construction and development;
marketing challenges associated with entering new lines of business or pursuing new business strategies;
our failure to maintain our status as a real estate investment trust, or REIT;
changes in the competitive environment in our industry and the markets where we invest;
changes in real estate and zoning laws or regulations;
legislative or regulatory changes, including changes to laws governing the taxation of REITs;

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changes in generally accepted accounting principles, policies and guidelines; and
litigation, judgments or settlements.
Any forward-looking statement speaks only as of the date on which such statement is made. New factors emerge from time to time and it is not possible for management to predict all such factors. We do not intend, and disclaim any duty or obligation, to update or revise any industry information or forward-looking statements set forth in this annual report on Form 10-K to reflect new information, future events or otherwise, except as required by law. Readers are urged to carefully review and consider the various disclosures made in this annual report on Form 10-K and in our other documents filed with the Securities and Exchange Commission, or the SEC, that attempt to advise interested parties of the risks and other factors that may affect our business, prospects and results of operations and financial condition.

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PART I
 
ITEM 1.    BUSINESS.
Overview
Strategic Hotels & Resorts, Inc., or SHR, was incorporated in Maryland in January 2004 to acquire and asset-manage upper upscale and luxury hotels that are subject to long-term management contracts. The terms upper upscale and luxury are classifications of hotels by brand that are defined by Smith Travel Research, an independent provider of lodging industry statistical data. We completed our initial public offering in June 2004. Our accounting predecessor, Strategic Hotel Capital, L.L.C., was founded in 1997. We own interests in or lease our properties through our investment in Strategic Hotel Funding, L.L.C., our operating partnership, which we refer to herein as SH Funding, and its subsidiaries.
We operate as a self-administered and self-managed real estate investment trust, or REIT, managed by our board of directors and executive officers and conduct our operations through our direct and indirect subsidiaries including SH Funding. We are the managing member of SH Funding and hold approximately 99% of its membership units as of February 27, 2013.
As of February 27, 2013, we:
wholly own or lease 14 hotels, have 53.5% and 51.0% interests in affiliates that each own one hotel where we asset manage such hotels, and have 50.0% and 36.4% interests in, and act as asset manager for, two unconsolidated affiliates that each own one hotel;
own land held for development including:
20.5 acres of oceanfront land adjacent to our Four Seasons Punta Mita Resort, Nayarit, Mexico and 60.0 acres of oceanfront land near the Four Seasons Punta Mita Resort;
a 20,000 square-foot parcel of land on the ocean in Santa Monica, California adjacent to our Loews Santa Monica Beach Hotel entitled for development and residential units; and
a 31% interest in an unconsolidated affiliate with two unaffiliated parties that is developing the fractional ownership program known as the Four Seasons Residence Club Punta Mita.
We do not operate any of our hotels directly; instead we employ internationally known hotel management companies to operate them for us under management contracts or operating leases. Our existing hotels are operated under the widely-recognized upper upscale and luxury brands of Fairmont®, Four Seasons®, Hyatt®, InterContinental®, JW Marriott®, Loews®, Marriott®, Ritz-Carlton® and Westin®. The Hotel del Coronado is operated by a specialty management company, KSL Resorts.
We seek to maximize asset values and operating results through asset management. Although we have no imperative to grow, we will opportunistically seek to acquire additional properties that meet our disciplined investment criteria.
As used in this report, references to “we”, “our”, “us”, and “the Company” are references to SHR together, except as the context otherwise requires, with its consolidated subsidiaries, including SH Funding.
Business Strategy
We are a preeminent owner of upper upscale and luxury branded hotels located primarily in North America with select international hotels. Our strategy involves the acquisition of hotels with strong underlying real estate values, adding value through the application of our management’s superior asset management skills, identifying redevelopment opportunities to enhance cash flow and value, and opportunistic dispositions of hotels upon completion of our value enhancement and cash flow generating strategies.
Acquisition Strategy
One of our core competencies is a diligent approach to acquisitions that includes continuous research-based selection of target markets and individual properties. We target upper upscale and luxury hotels in select urban and resort markets, including major business centers and leisure destinations, with strong growth characteristics and high barriers to entry. We believe that the upper upscale and luxury hotel sector is an extremely attractive sector for long-term investment, especially considering the supply constraints characteristic of that sector.

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Asset Management Strategy
We believe that we can enhance our cash flow and earnings growth through expert asset management, which we expect will ultimately generate increased operating margins and higher investment returns. Our value-added asset management strategy has the following general components:
Working in partnership with the hotel management companies that operate our hotels, we build an asset management approach to enhance the cash flow and value of our properties. We have multi-property relationships with a select group of hotel management companies that in our opinion have strong brand recognition, superior marketing capabilities, management depth and an ability to work with our team to create efficient operations. We improve hotel operating performance through the application of value-added programs involving consumer and market research, competitive benchmarking, technology upgrades and systems development and upgrades.
We provide rigorous oversight of our properties and the hotel management companies that operate them to ensure the alignment of the hotel management companies’ and our interests and to monitor the hotel management companies’ and our compliance with the management contracts relating to our properties. Typically, this oversight allows us to maximize operating margins and enhance property values.
Redevelopment Strategy
A component of our value creation strategy is to create incremental sources of income from our properties through thoughtfully executed and consumer market research based redevelopment.
Our current strategy includes capital investments, which give us a competitive portfolio in excellent physical condition that management believes can provide relative outperformance during the current recovery cycle. We have planned a variety of property investment programs with the goal of enhancing the cash flow growth of our portfolio through the careful execution of these plans.
Disposition Strategy
We recycle capital for future investments through opportunistic dispositions. We would consider the disposition of all or part of our investment in a property in circumstances where we believe our asset management strategy has maximized the property’s value, the proceeds of the disposition are unusually attractive, the market in which the property is located is declining or static, or competition in the market requires substantial capital investment that will not generate returns that meet our criteria.
Proceeds from dispositions would generally be intended to be reinvested in redevelopment activities in our existing portfolio, the acquisition of additional hotel properties where the application of our life cycle-based investment strategy can begin again, or enhancement of our balance sheet.
We continually undertake a comprehensive review of our assets against sources of capital in the marketplace with the objective of seeking strategies to sell assets in order to supplement our liquidity position.
Competition
The hotel industry is highly competitive and the hotels in which we invest are subject to competition from other hotels for guests. Competition is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services, guest amenities or accommodations offered and quality of customer service. Competition is often specific to the individual markets in which our properties are located and includes competition from existing and new hotels operated under brands in the upper upscale and luxury segments. Increased competition could have a material adverse effect on the occupancy rate, average daily room rate and room revenue per available room of our hotels or may require us to make capital improvements that we otherwise would not have to make, which may result in decreases in our profitability.
Because our hotels operate in the upper upscale and luxury segment of the market, we face increased competition from providers of less expensive accommodations, such as limited service hotels or independent owner-managed hotels, during periods of economic downturn when leisure and business travelers become more sensitive to room rates. As a result, there is pressure to lower average daily rates during such periods to compete for these guests.
We face competition from institutional pension funds, private equity investors, other REITs and numerous local, regional and national owners in each of our markets. Some of these entities may have substantially greater financial resources and may be able to accept more risk than we can prudently manage. Competition may generally reduce the number of suitable

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investment opportunities offered to us and increase the bargaining power of property owners seeking to sell their properties to us.
Seasonality
For information relating to the seasonality of our business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Seasonality” on page 54 of this Form 10-K.
Employees
As of February 27, 2013, we had 35 full-time and four part-time corporate employees. We believe that our relations with our employees are good. None of our corporate employees are unionized.
Environmental
Environmental consultants retained by us or our lenders have conducted environmental site assessments on many of our properties. These environmental assessments often relied on older environmental assessments prepared in connection with a prior financing or acquisition. The lenders did not conduct environmental assessments on our European properties, although older environmental assessments or building engineering surveys exist for these properties. The environmental assessments are designed to evaluate the potential for environmental contamination on properties, but these assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties.
Although the environmental assessments that have been conducted with respect to certain of our properties disclose certain conditions on our properties and the use of hazardous substances in operation and maintenance activities that could pose a risk of environmental contamination or liability, we are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial position, results of operations or cash flows. See “Item 1A. Risk Factors—Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations” and “Item 1A. Risk Factors—The presence of any environmental conditions at our properties could result in remediation and other costs and liabilities and adversely affect our financial condition and results of operations.”
Insurance
Our management believes that our properties are adequately covered by insurance, subject to the risks described under “Item 1A. Risk Factors,” including, among others, the factors described under “Uninsured and underinsured losses could adversely affect our financial condition and results of operations, which may affect our ability to make distributions to our stockholders.” We are responsible for arranging the insurance for most of our hotels, although in certain cases, the hotel management companies that operate our hotels assume responsibility for arranging insurance under the relevant management agreement. The majority of our properties are covered by blanket insurance policies, which cover multiple properties. In the event that these blanket policies are drawn on to cover certain losses on certain properties, the amount of insurance coverage available under such policies could thereby be reduced and could be insufficient to cover the remaining properties’ insurable risks.
REIT Structure
Subject to certain limitations, REITs may own, directly or indirectly, up to 100% of the stock of a taxable REIT subsidiary, or TRS, that can engage in businesses prohibited to a REIT. Thus, hotel REITs may own TRSs that lease hotels from the REIT, rather than requiring the lessee to be a separate, unaffiliated party. However, hotels leased to a TRS must be managed by an unaffiliated third party. The TRS provisions are complex and impose several conditions on the use of TRSs. No more than 25% of a REIT’s assets may consist of securities of TRSs, and no more than 25% of a REIT’s assets may consist of non-qualifying assets, including securities of TRSs and other taxable subsidiaries. The rent and the lease terms between the REIT and the TRS must be at arm's length and comparable to the market. In addition, REITs may generally not own more than 10% of the voting power or value of a corporation that is not treated as a TRS.
Ownership of Hotels
Where we have an ownership interest in a hotel, the entity through which we hold such ownership interest (a Strategic Ownership Entity) will generally lease the hotel to one of our TRSs and the TRS will enter into a management agreement with an independent third party for such party to operate the hotel. A lease between a Strategic Ownership Entity and one of our TRSs (an Affiliate Lease) provides for the TRS to pay to the Strategic Ownership Entity a base rent plus a percentage rent (as more fully described below). An Affiliate Lease must contain economic terms that are similar to a lease between unrelated

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parties or the Strategic Ownership Entity may have to pay a 100% penalty tax on some of the payments it receives from our TRS under such Affiliate Lease.
Each Affiliate Lease has a non-cancelable term of three to five years, subject to earlier termination upon the occurrence of certain contingencies such as damage or destruction that renders the hotel unsuitable for our TRS’ use and occupancy, condemnation or our sale or disposition of the hotel.
During the term of each Affiliate Lease, our TRS is obligated to pay a fixed annual base rent and a percentage rent to the applicable Strategic Ownership Entity. Percentage rent is calculated by multiplying fixed percentages by gross room revenues and other revenues, subject to certain adjustments. Percentage rent is paid quarterly. Base rent accrues and is paid monthly. Base rents and percentage rents are adjusted annually for changes in the consumer price index or similar indices.
Fixed charges, including real estate and personal property taxes, capital expenditures and a reserve for capital expenditures are obligations of the lessor under our Affiliate Lease. Our TRSs are required to pay rent, all costs and expenses and all utility and other charges incurred in the operation of the hotels we own. The party responsible for maintaining insurance on a property is dependent on the specific lease.
Third Party Lease Agreements
We are the tenant under a lease with a third-party landlord for the Marriott Hamburg. We are also the tenant under ground leases with third-party landlords where we lease the land for the Marriott Lincolnshire Resort and the Marriott London Grosvenor Square hotel. Additionally, an unconsolidated affiliate is a tenant under a ground lease for a parcel of land that is part of the Fairmont Scottsdale Princess hotel property. The remaining life on the initial terms of these third party leases range from eight to 99 years. These third party lease agreements require us to make annual rental payments comprised of a minimum rental amount (subject to indexation) and may also include additional rent comprised of a percentage of hotel operating profit, less minimum rent.
Hotel Management Agreements
Most of our hotels are managed and operated by third parties pursuant to management agreements entered into between our TRSs and hotel management companies. These management agreements generally provide for the payment of base management fees within a range of 1.0% to 4.0% of revenues, as defined in the applicable agreements. In addition, an incentive fee may be paid if certain criteria are met. Certain of the management agreements also provide for the payment by us of advisory fees or license fees. The remaining terms (not including renewal options) of these management agreements range from less than one year to 30 years. A management agreement with one of our operators typically has the terms described below.
Operational services. The manager has exclusive authority to supervise, direct and control the day-to-day operation and management of the hotel, including establishing all room rates, processing reservations, procuring inventories, supplies and services, and preparing public relations, publicity and marketing plans for the hotel.
Compensation of manager. The manager receives compensation in the form of a base management fee and an incentive management fee, typically calculated as percentages of gross revenues and operating profits, respectively. In some cases, the incentive management fee is paid only after we have received a certain level of income.
Executive supervision and management services. The manager supervises all managerial and other employees for the hotel, reviews the operation and maintenance of the hotel, prepares reports, budgets and projections and provides other administrative and accounting support services to the hotel. In some cases, we maintain authority to approve the appointment of the hotel’s general manager.
Chain services. Our management agreements require the managers to furnish chain services that are generally made available to other hotels managed by such operators. Such services include: (1) the development and operation of computer systems and reservation services, (2) management and administrative services, (3) marketing and sales services, (4) human resources training services and (5) such additional services as may from time to time be more efficiently performed on a national, regional or group level.
Working capital. Our management agreements typically require us to maintain working capital for a hotel and to fund the cost of fixed asset supplies such as linens and other similar items. We are also responsible for providing funds to meet the cash needs for the hotel operations if at any time the funds available from hotel operations are insufficient to meet the financial requirements of the hotel.
Furniture, fixtures and equipment replacements. Our management agreements generally provide that once each year the manager will prepare a list of furniture, fixtures and equipment to be acquired and certain routine repairs to

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be performed in the next year and an estimate of the funds that are necessary, subject to our review and approval. In addition, we are required to provide to the manager all necessary furniture, fixtures and equipment for the operation of a hotel (including funding any required furniture, fixtures and equipment replacements). For purposes of funding the furniture, fixtures and equipment replacements, a specified percentage of the gross revenues of the hotel is deposited by the manager in a separate account (typically 4.0% to 5.0%).
Building alterations, improvements and renewals. Our management agreements generally require the manager to prepare an annual estimate of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements to the structural, mechanical, electrical, heating, ventilating, air conditioning, plumbing and vertical transportation elements of a hotel. In addition to the foregoing, the management agreements generally provide that the manager may propose such changes, alterations and improvements to the hotel as are required by reason of laws or regulations or, in the manager’s reasonable judgment, to keep the hotel in a safe, competitive and efficient operating condition.
Sale of the hotel. Most of our management agreements limit our ability to sell, lease, or otherwise transfer a hotel unless the transferee is not a competitor of the manager, and unless the transferee assumes the related management agreement and meets specified other conditions.
Service marks. During the term of our management agreements, the service mark, symbols and logos currently used by the manager may be used in the operation of the hotel. Any right to use the service marks, logo and symbols and related trademarks at a hotel will terminate with respect to that hotel upon termination of the management agreement with respect to such hotel.
JW Marriott Essex House Hotel performance guarantee. A provision of this management agreement, entered into with an affiliate of Marriott, requires that Marriott provide the Company with a limited performance guarantee that will ensure, subject to certain limitations, a target level of net operating profit. The guarantee period began on September 17, 2012 and will continue through the earlier of (a) December 31, 2020, (b) the date at which the maximum guarantee has been funded, or (c) the termination of the management agreement.
We lease one of our hotels, the Marriott Hamburg, pursuant to a lease agreement whereby rent is paid by the hotel management company that operates the hotel, as lessee, to us for an amount equal to a fixed base rent plus a specified percentage of profits in excess of the base rent. Otherwise, the terms of the lease are similar to the terms of our management contracts described above.
Code of Business Conduct and Ethics and Corporate Governance Documents
We have adopted a code of business conduct and ethics that applies to all of our employees, directors and officers, including our principal executive officer, principal financial officer and principal accounting officer. This code of business conduct and ethics is designed to comply with SEC regulations and New York Stock Exchange, or NYSE, corporate governance rules related to codes of conduct and ethics and is posted on our corporate website at www.strategichotels.com. We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions granted to directors and specified officers, on our website within four business days following the date of such amendment or waiver. In addition, our corporate governance guidelines and charters for our audit, compensation and corporate governance and nominating committees are also posted on our corporate website. Copies of our code of business conduct and ethics, our corporate governance guidelines and our committee charters are also available free of charge upon request directed to Corporate Secretary, Strategic Hotels & Resorts, Inc., 200 West Madison Street, Suite 1700, Chicago, Illinois 60606.
Geographic and Business Segment Information
For information with respect to revenues from and our long-lived assets located in different geographic areas, refer to “Item 8. Financial Statements and Supplementary Data—19. Geographic and Business Segment Information.”
Where to Find More Information
We maintain a website at www.strategichotels.com. Through our website, we make available, free of charge, our annual proxy statement, 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 Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains these reports at www.sec.gov.

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ITEM 1A.    RISK FACTORS.
In addition to the information and factors discussed elsewhere in this annual report on Form 10-K, including our consolidated financial statements and the related notes, the factors disclosed below could cause our actual results to differ materially from those projected in any forward-looking statements and could affect our future financial performance.
Risks related to our business
The U.S. and other financial markets have recently been in turmoil and the U.S. and other economies in which we operate are in the midst of a slow but fragile economic recovery and highly volatile stock market climate, which continue to negatively impact our operations and our liquidity.
The U.S. and other financial markets have recently experienced extreme dislocations and a severe contraction in available liquidity globally as important segments of the credit markets were impaired. Global financial markets were disrupted by, among other things, volatility in securities prices, ratings downgrades and declining valuations, and this disruption has been acute in real estate related markets. This disruption has led to a decline in business and consumer confidence and increased unemployment and has precipitated an economic recession around the globe. As a consequence, owners and operators of commercial real estate, including hotels and resorts, may experience a stagnation or further declines of business and real estate values in the United States or elsewhere and continuing liquidity constraints as lenders may be unwilling or unable to originate new credit on commercially reasonable terms, or at all, and the capital markets may be otherwise unavailable. We are unable to predict the likely duration of the slow, but fragile economic recovery and highly volatile stock market climate and the effects they may have on our business, financial condition and results of operations.
We incurred losses in the past five fiscal years due to the recent economic downturn, and we may continue to incur losses in the future.
We incurred net losses of $58.3 million, $4.9 million, $230.8 million, $246.4 million and $317.5 million for our 2012, 2011, 2010, 2009 and 2008 fiscal years, respectively. The recent economic downturn has negatively impacted business and leisure travel. A further decline in economic conditions will likely produce continued losses. There can be no assurance that we will resume profitable operations and generate net income for our stockholders in the near term or at all.
Our financial covenants may adversely affect our financial position, results of operations and liquidity.
The agreement governing our bank credit facility and certain other agreements include financial and other covenants that must be met for us to remain in compliance with those agreements. Those agreements also contain customary restrictions, requirements and other limitations, including restrictions on our ability to incur additional indebtedness. Importantly, our bank credit facility contains financial covenants that must be met, including the maintenance of stipulated minimum levels of tangible net worth and fixed charge coverage, and maximum levels of leverage and borrowing base availability. Availability under our bank credit facility is based on, among other factors, the lesser of the calculation of 1.2 times debt service coverage based on the greater of the in-place interest rate or 7.0% debt constant for the borrowing base assets or a 60% advance rate against the appraised value of the borrowing base assets. The actual interest rate on our bank credit facility is LIBOR plus 3.00%, which equates to 3.21% as of December 31, 2012. Our ability to borrow under our bank credit facility is subject to compliance with these financial and other covenants, and our ability to comply with these covenants will be impacted by, among other things, any deterioration in our operations brought on by the recent economic downturn, potential further declines in our property values, additional borrowings to maintain our liquidity and fund our capital and financing obligations, and security concerns impacting travel to Mexico.
Our available capacity under the bank credit facility and compliance with financial covenants in future periods will depend substantially on the financial results of our hotels and resorts, and in particular, the results of the borrowing base assets, which include the Four Seasons Punta Mita Resort, Marriott Lincolnshire Resort, Ritz-Carlton Half Moon Bay and Ritz-Carlton Laguna Niguel hotels. The recent operating results of the Four Seasons Punta Mita Resort in Mexico has been negatively impacted by security concerns impacting travel to Mexico, as well as the recent economic downturn. If these negative conditions persist, the financial results of our hotels and resorts deteriorate, or if our property values decline, the maximum availability under the bank credit facility may decline to a level below our short-term borrowing needs. If that were to occur, outstanding borrowings exceeding the maximum availability under the bank credit facility would need to be repaid to avoid a default under the bank credit facility, absent an amendment or waiver. If we are unable to borrow under our bank credit facility or to refinance existing indebtedness, we may be prevented from funding our working capital needs.
In the event that the slow, but fragile economic recovery stalls and negative economic conditions worsen and our business significantly deteriorates, we may be required to take further steps to acquire the funds necessary to satisfy our short-term cash

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needs, including possibly liquidating some of our assets on terms that would be less attractive than would be obtainable after conditions in the economy, the credit markets and the hotel markets improve. If negative conditions worsen, our business deteriorates further and we do not achieve a successful disposition of assets or increase our liquidity through alternative channels or modify or obtain a waiver to certain terms of our bank credit facility, we may breach one or more of our financial covenants or the maximum availability under the bank credit facility may fall below our short-term borrowing needs. A default under the bank credit facility would allow the lenders to declare all amounts outstanding under the facility to become due and payable. Additionally, such an acceleration event would allow for acceleration of the interest rate swaps (with a termination cost of $53.9 million as of December 31, 2012).
In addition, our lenders, including the lenders participating in our bank credit facility, may have suffered losses related to their lending and other financial relationships, especially because of the general weakening of the economy and increased financial instability of many borrowers (and may suffer additional losses if negative conditions worsen and the economy deteriorates further). As a result, lenders may become less able or unwilling to allow us to draw down on our bank credit facility and/or we may be unable to obtain other financing on favorable terms or at all. Our financial condition and results of operations would be adversely affected if we were unable to draw funds under our bank credit facility because of a lender default or if we were unable to obtain other financing.
We have substantial debt, a portion of which is variable-rate debt, and upon maturity, we plan to refinance with new debt, which may not be available when required on optimal terms or at all.
We have a substantial amount of outstanding indebtedness, a portion of which bears interest at a variable-rate, and to the extent available, we may borrow additional variable-rate debt under our bank credit facility. When we seek to refinance our outstanding indebtedness, our interest expense may increase. Increases in interest rates on our existing variable-rate indebtedness, or on new indebtedness we incur when refinancing our existing indebtedness, would increase our interest expense, which could harm our cash flow and our ability to pay distributions. As of December 31, 2012, we had total debt of $1.32 billion, and, including the effect of interest rate swaps, approximately 74.8% of our total debt had fixed interest rates.
Our significant debt may negatively affect our business and financial results, including:
requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which reduces the amounts available for distributions to our stockholders and funds available for operations, capital expenditures, future business opportunities and other purposes;
making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions;
limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and
requiring us to dispose of properties to make required payments of interest and principal.
Since we anticipate that our internally generated cash will be adequate to repay only a portion of our indebtedness prior to maturity, we expect that we will be required to repay debt through refinancings and/or equity offerings. The amount of our existing indebtedness may adversely affect our ability to repay debt through refinancings. See the discussion under the subheading “Debt Maturity:” in Note 10 of the Notes to our Consolidated Financial Statements included in Item 8 of Part II of this annual report on Form 10-K for quantified information regarding our debt maturities as of December 31, 2012. There can be no assurance that we will be able to refinance our debt with new borrowings or raise capital through the sale of equity. If we are unable to refinance or restructure our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of our properties on disadvantageous terms, or forfeit the property securing such indebtedness, which might result in losses to us and which might adversely affect cash available for distributions to our stockholders. Alternatively, any debt we may arrange may carry a higher rate of interest or the shares we issue in any equity offering may require a higher rate of dividends or other dilutive terms. As a result, certain growth initiatives could prove more costly or not economically feasible. A failure to retain or refinance our bank credit facility or to add new or replacement debt facilities could have a material adverse effect on our business, financial condition and results of operations.

The $425.0 million mortgage debt related to the Hotel Del Coronado matures March 8, 2013.  We own a 36.4% interest in an unconsolidated affiliate that owns this hotel.  There can be no assurance that we and our partner will be able to refinance or restructure this indebtedness or cure or receive a waiver for an event of default if one were to occur. If this occurs, our affiliate may be forced to forfeit the property or seek legal protection from creditors, both of which could result in losses to us and which would adversely impact cash available for distributions.


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We also could incur additional debt in connection with future acquisitions of real estate. We may, in some instances, to the extent available, borrow under our bank credit facility or borrow new funds to acquire properties. In addition, we may incur mortgage debt by obtaining loans secured by a portfolio of some or all of the real estate properties we acquire. If necessary or advisable, we may also borrow funds to satisfy the requirement that we distribute to stockholders at least 90% of our annual REIT taxable income or to ensure otherwise that we maintain our qualification as a REIT for U.S. federal income tax purposes.
Our working capital and liquidity reserves may not be adequate to cover all of our cash needs and we may have to obtain financing from either affiliated or unaffiliated sources. The recent financial market turmoil and economic recession have severely contracted available liquidity and therefore sufficient financing may not be available or, if available, may not be available on reasonable terms. Additional borrowings for working capital purposes will increase our interest expense, and therefore may harm our financial condition and results of operations.
Our organizational documents do not limit the amount of indebtedness that we may incur. To the extent we become more leveraged, the resulting increase in our debt service obligations would reduce cash available for distributions to our stockholders and could adversely affect our ability to make payments on our outstanding indebtedness and harm our financial condition.
The uncertain environment in the lodging industry and the economy generally will continue to impact our financial results and growth.
With the economic recovery appearing to be slow and fragile, it is unclear whether the lodging industry, which prior to 2008 had experienced a period of sustained growth, will stagnate or decline. Negative publicity regarding luxury hotels and resorts and decreases in airline capacity could also reduce demand for our hotel rooms. Accordingly, our financial results and growth could be harmed if the economic climate does not continue to improve or becomes worse.
We own primarily upper upscale and luxury hotels and resorts, and the upper upscale and luxury segments of the lodging market are highly competitive and generally subject to greater volatility than other segments of the market, which could negatively affect our profitability.
The upper upscale and luxury segments of the hotel business are highly competitive. Our hotels and resorts compete on the basis of location, room rates and quality, service levels, reputation and reservations systems, among many other factors. There are many competitors in our hotel chain scale segments, and many of these competitors have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and room revenue at our hotels and resorts, which would harm our operations. Over-building in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. We also face competition from nationally recognized hotel brands with which we are not associated. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale and luxury hotels and resorts when compared to other classes of hotels and resorts.
The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our properties and harm our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. The difficulty in selling an asset is exacerbated by the dislocation in the debt and equity markets currently being experienced.
In addition, hotel properties may not readily be converted to alternative uses if they were to become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements and as a result our ability to sell the property would be limited. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly harm our financial condition and results of operations.
Certain of our long-lived assets, intangible assets, investments in unconsolidated affiliates and goodwill have in the past become impaired and may become impaired in the future.
We periodically review each of our hotels and resorts and any related goodwill for possible impairment. Based on the results of these analyses, in fiscal year 2012 we wrote off $14.6 million to impairment losses to reduce the carrying value of

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long-lived assets to their estimated fair values and in fiscal year 2010 we wrote off $141.9 million to impairment losses to reduce the carrying values of long-lived assets and investments in unconsolidated affiliates on our balance sheet to their estimated fair values. Our other hotels and related goodwill may become impaired, or our hotels which have previously become impaired may become further impaired, in the future, which may adversely affect our financial condition and results of operations.
We rely to a significant extent on our president and chief executive officer, Mr. Raymond L. Gellein, Jr., the loss of whom could have a material adverse effect on our business.
Our continued success will depend to a significant extent on the efforts and abilities of our president and chief executive officer, Mr. Raymond L. Gellein, Jr. Mr. Gellein has served as our president and chief executive officer since November 2012 and has served as our chairman of the board since August 2010. Mr. Gellein is an experienced hotel industry senior executive and operator. As chairman of the board, president and chief executive officer, Mr. Gellein is actively engaged in our management and determines our strategic direction, especially with regard to our operational, financing, acquisition and disposition activities. Mr. Gellein’s departure could have a material adverse effect on our operations, financial condition and operating results.
The geographic concentration of our hotels in California makes us more susceptible to an economic downturn or natural disaster in that state.
As of February 27, 2013, seven of the hotels and resorts we own were located in California, the greatest concentration of our portfolio of properties in any state. California has been historically at greater risk to certain acts of nature, such as fire, floods and earthquakes, than other states, and has also been subject to a more pronounced economic downturn than other states. It is also possible that a change in California laws applicable to hotels and resorts and the lodging industry may have a greater impact on us than a change in comparable laws in another jurisdiction where we have hotels and resorts. Accordingly, our business, financial condition and results of operations may be particularly susceptible to a natural disaster, downturn or changes in the California economy.
We have suspended the payment of dividends on our common stock and have suspended the payment of dividends on our preferred stock in the past.
In November 2008, we suspended payment of our dividend on our shares of common stock. We can provide no assurance as to when we will resume paying dividends on our common stock, if ever. In addition, in the past, we suspended the quarterly dividend to holders of shares of our 8.50% Series A Cumulative Redeemable Preferred Stock, 8.25% Series B Cumulative Redeemable Preferred Stock and 8.25% Series C Cumulative Redeemable Preferred Stock, which we collectively refer to herein as our Outstanding Preferred Stock. We can provide no assurance that we will not suspend the payment of quarterly dividends on our Outstanding Preferred Stock in the future. Pursuant to the Articles Supplementary governing our Outstanding Preferred Stock, if we do not pay quarterly dividends on our Outstanding Preferred Stock for six quarters, whether or not consecutive, the size of our board of directors will be increased by two and the holders of our Outstanding Preferred Stock will have the right to elect two additional directors to our board.
If we fail to maintain effective internal control over financial reporting and disclosure controls and procedures in the future, we may not be able to accurately report our financial results, which could have an adverse effect on our business.
If our internal control over financial reporting and disclosure controls and procedures are not effective, we may not be able to provide reliable financial information. If we discover deficiencies in our internal controls, we will make efforts to remediate these deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or in their remediation. Any failure to maintain effective controls in the future could adversely affect our business or cause us to fail to meet our reporting obligations. Such non-compliance could also result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements. In addition, perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts and others could be adversely affected.
Rising operating expenses and costs of capital improvements could reduce our cash flow, earnings before interest expense, taxes, depreciation and amortization (EBITDA) and funds available for future distributions.
Our properties are subject to operating risks common to the lodging industry in general. If a property’s occupancy or room rates drop to the point where its revenues are insufficient to cover its operating expenses, then we could be required to spend additional funds for that property’s operating expenses. Our properties are continually subject to increases in real estate and other tax rates, wages and benefits, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which may reduce our cash flow, EBITDA and funds available for future distributions to our stockholders.

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Our hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. Some of these capital improvements are mandated by health, safety or other regulations. These capital improvements may give rise to (i) a possible shortage of available cash to fund capital improvements, (ii) the possibility that financing for these capital improvements may not be available to us on affordable terms and (iii) uncertainties as to market demand or a loss of market demand after capital improvements have begun. The costs of these capital improvements could adversely affect our financial condition and amounts available for distributions to our stockholders.
Our business and operating results depend in large part upon the performance of third-party hotel management companies that manage our hotels and resorts.
Our hotels and resorts are managed by third-party hotel management companies pursuant to management agreements or, with respect to the Marriott Hamburg hotel, the lease applicable to that property. Therefore, our business and operating results depend in large part upon the performance of these hotel management companies under these management agreements.
Under the terms of these management agreements, the third-party hotel managers control the daily operations of our hotels and resorts. We do not have the authority to require any hotel or resort to be operated in a particular manner or to govern any particular aspect of the daily operations of any hotel (for instance, setting room rates). Thus, even if we believe our hotels and resorts are being operated inefficiently or in a manner that does not result in satisfactory occupancy rates, net revenue per available room or average daily rate, we may not be able to force the hotel management companies in question to change their methods of operation of our hotels and resorts. Additionally, in the event that we need to replace any hotel management company, we may be required by the terms of the applicable management agreement to pay a substantial termination fee and may experience disruptions at any affected hotel. The effectiveness of the hotel management companies in managing our hotels and resorts will, therefore, significantly affect the revenues, expenses and value of our hotels and resorts. Occasionally, we have discovered accounting and other errors at some of our properties relating to the improper recording of income statement expenses, misstated inventories and other items apparently caused by poor accounting practices and oversight. In the event our third-party hotel management companies are not able to implement and maintain appropriate accounting or other controls with respect to our properties, our business, results of operations and financial condition could be adversely affected.
Additionally, the hotel management companies that operate our hotels and resorts and their affiliates own, operate, or franchise properties other than our properties, including properties that directly compete with our properties. Therefore, a hotel management company may have different interests than our own with respect to short-term or long-term goals and objectives, including interests relating to the brand under which such hotel management company operates. Such differences may be significant depending upon many factors, including the remaining term of the applicable management agreement, trade area restrictions with respect to competitive practices by the hotel management company or its affiliates or differing policies, procedures or practices. Any of these factors may adversely impact the operation and profitability of a hotel or resort, which could harm our financial condition and results of operations.
All revenues generated at our hotels and resorts, including credit card receivables, are deposited by the payors into accounts maintained and controlled by the relevant hotel management company, which pays operating and other expenses for the relevant hotel (including real and personal property taxes), pays itself management fees in accordance with the terms of the applicable management agreement and makes deposits into any reserve funds required by the applicable management agreement. In the event of a bankruptcy or insolvency involving a hotel management company, there is a risk that the payment of operating and other expenses for the relevant hotel and payment of revenues to us may be delayed or otherwise impaired. The bankruptcy or insolvency of a hotel management company may significantly impair its ability to provide services required under the management agreement.
Certain of the employees at our hotels and resorts are covered by collective bargaining agreements and labor disputes may disrupt operations or increase costs at our hotels and resorts.
Our hotel management companies act as employer of the hotel-level employees. At certain of our hotels, these employees are covered by collective bargaining agreements. At the current time, the collective bargaining agreement at our Loews Santa Monica Beach Hotel has expired. At this time, we cannot predict when or whether a new agreement will be reached and what the impact of prolonged negotiations could be. If an agreement is reached, or if any of our hotels not currently operating under a collective bargaining agreement enters into one, such agreement may cause us to incur additional expenses related to our employees, thereby reducing our profits and impacting our financial results negatively. Additionally, if an agreement is not reached and there are labor disputes, including strikes, operations at our hotel could suffer due to the diversion of business to other hotels or increased costs of operating the hotel during such a labor dispute, thereby impacting our financial results negatively.

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The outbreak of a pandemic disease, such as the H1N1 virus, has had and may in the future have an adverse impact on our financial results.
An outbreak of a pandemic disease, such as the H1N1 virus, has had and may in the future have a significant adverse impact on travel and the lodging industry. As a consequence, our financial results of operations may be adversely effected.
Our renovation and development activities are subject to timing, budgeting and other risks.
We are in the process of renovating several of our properties and expect to continue similar activities in the future, as well as develop and redevelop certain properties. These renovation, development, and redevelopment activities and the pursuit of acquisition and other corporate opportunities expose us to certain risks, including those relating to:
construction delays or cost overruns that may increase project costs and, as a result, make the project uneconomical;
displacement in revenue during the period of renovation;
defects in design or construction that may result in additional costs to remedy or require all or a portion of a property to be closed during the period required to rectify any such situation;
the failure to complete construction of a property on schedule;
insufficient occupancy rates at a completed project impeding our ability to pay operating expenses or achieve targeted rates of return on investment;
the incurrence of acquisition and/or predevelopment costs in connection with projects that are delayed or not pursued to completion;
natural disasters such as earthquakes, hurricanes, floods or fires that could adversely impact a project;
receipt of zoning, occupancy, building, land-use or other required governmental permits and authorizations; and
governmental restrictions on the nature or size of a project or timing of completion.
In the case of an unsuccessful project, we may be required to write off capitalized costs associated with the project and such write-offs may be significant and adversely affect our financial condition and results of operations.
We face competition for the acquisition of real estate properties.
We compete with institutional pension funds, private equity investors, other REITs, owner-operators of hotels and resorts and others who are engaged in real estate investment activities that focus on the acquisition of hotels and resorts. These competitors may drive up the price we must pay for real estate property, other assets or other companies we seek to acquire or may succeed in acquiring those real estate properties, other assets or other companies themselves. In addition, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater resources, may be willing to pay more or may have a more compatible operating philosophy. In addition, the number of entities competing for suitable investment properties may increase in the future. This would result in increased demand for these real estate properties, other assets or other companies and therefore increase the prices required to be paid for them. If we pay higher prices for real estate properties, other assets or other companies, our profitability may be reduced. Also, future acquisitions of real property, other assets or other companies may not yield the returns we expect and, if financed using our equity, may result in stockholder dilution. We also may not be successful in identifying or consummating acquisitions and investments in unconsolidated affiliates on satisfactory terms. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for intangible assets. We also may incur significant expenses in connection with acquisition or other corporate opportunities we pursue but do not consummate.
Investing through partnerships or unconsolidated affiliates decreases our ability to manage risk.
In addition to acquiring or developing hotels and resorts directly, we have from time to time invested, and expect to continue to invest in hotels and ancillary businesses, as a partner. Partners in unconsolidated affiliates often have shared control over the operation of the assets. Therefore, investments in unconsolidated affiliates may involve risks such as the possibility that the partner in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a partner might subject hotels, resorts and businesses owned by the unconsolidated affiliate to additional risk. We may be unable to take action without the approval of our partners in the unconsolidated affiliate, and alternatively, our partners in the unconsolidated affiliate

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could take actions binding on the unconsolidated affiliate without our consent. Additionally, should a partner in the unconsolidated affiliate become bankrupt, we could become liable for our partner’s share of the unconsolidated affiliate’s liabilities.
Our business and operations would suffer in the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.
Cyber security risks and cyber incidents could adversely affect our business and disrupt operations.
The hospitality industry is under increasing attack by cyber-criminals in the United States and other jurisdictions in which we operate. These attacks can be deliberate attacks or unintentional events that could cause interruptions or delays in our business, loss of data, or render our management companies unable to process reservations. Accordingly, an extended interruption in the ability of any system to function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.
While we carry property and business operation interruption insurance, we may not be sufficiently compensated for all losses we may incur. These losses include not only a loss of revenues but also potential reputational damage to the brands which manage our hotels, our brand and litigation, fines or regulatory action against us. Furthermore, we may also incur substantial remediation costs to repair system damage as well as satisfy liabilities for stolen assets or information that may further reduce our profits.
Risks related to the lodging and real estate industries
A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including those described elsewhere herein as well as the following:
increased competition from new supply or existing hotel properties in our markets, which would likely adversely affect occupancy and revenues at our hotels and resorts;
dependence on business, commercial and leisure travelers and tourism;
dependence on group and meeting/conference business;
increases in energy costs, airline bankruptcies, airline strikes or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists;
risks generally associated with the ownership of hotel properties and real estate, as we discuss in more detail below;
general economic and business conditions affecting the lodging and travel industry, both nationally and locally, including a prolonged U.S. recession;
increases in operating costs due to inflation, labor costs (including the impact of unionization), workers’ compensation and health-care related costs, utility costs, insurance and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates;
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances; and
adverse effects of international market conditions, which may diminish the desire for leisure travel or the need for business travel, as well as national, regional and local economic and market conditions in which our hotels and resorts operate and where our customers live.
These factors could have an adverse effect on our financial condition and results of operations, which may affect our ability to make distributions to our stockholders.

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Uninsured and underinsured losses could adversely affect our financial condition and results of operations, which may affect our ability to make distributions to our stockholders.
Various types of catastrophic losses, such as losses due to wars, terrorist acts, earthquakes, floods, hurricanes or pollution or other environmental matters generally are either uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. Although our earthquake insurance coverage is limited, as of February 27, 2013, seven of our hotels and resorts were located in California, which has been historically at a greater risk for certain acts of nature (such as fire, floods and earthquakes) than other states. Our InterContinental Miami hotel and Four Seasons Punta Mita Resort are located in areas that are prone to hurricanes and/or floods.
In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. In the event of a significant loss that is covered by insurance, our deductible may be high and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position in the damaged or destroyed property.
Certain events, such as Hurricanes Katrina and Rita in 2005, have historically made it more difficult and expensive to obtain property and casualty insurance, including coverage for windstorm, flood and earthquake damage, and such events could occur again. We may encounter difficulty in obtaining or renewing property insurance, including coverage for windstorm, flood and earthquake damage, or casualty insurance on our properties at the same levels of coverage, under similar terms and in a timely manner due to a lack of capacity in the insurance markets or a lack of availability of such insurance at commercially reasonable rates. Insurance we would be able to obtain may be more limited and for some catastrophic risks (e.g., earthquake, flood, windstorm and terrorism) may not be generally available to fully cover potential losses. Even if we would be able to obtain new policies with desired levels and with limitations, we cannot be sure that we would be able to obtain such insurance at premium rates that are commercially reasonable or that there would not be gaps in our coverage. If we did not obtain adequate insurance on our properties for certain risks or in a timely manner, it would expose us to uninsured losses and could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments which require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of our properties.
We obtain terrorism insurance to cover any property damage caused by any terrorism act under a separate stand-alone policy of insurance, and also have terrorism insurance under our general liability program and in our program for directors’ and officers’ coverage. We may not be able to recover fully under our existing terrorism insurance for losses caused by some types of terrorist acts, and federal terrorism legislation does not ensure that we will be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels in the future. Insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) effective December 26, 2007. While TRIPRA will reimburse insurers for losses resulting from nuclear, radiological, biological and chemical perils, TRIPRA does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. Any damage related to war and to nuclear, biological and chemical incidents, therefore, is excluded under our policies. TRIPRA is due to expire on December 31, 2014. There is no guaranty that terrorism insurance will be readily available or affordable before or after expiration of the TRIPRA in December 2014 or that TRIPRA will not be modified or repealed. As a result of the above, there remains uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.
We derive revenues from outside the United States, which subjects us to different legal, monetary and political risks, as well as currency exchange risks, and may cause unpredictability in our cash flows.
A portion of our investments are in hotel properties located outside the United States. International investments and operations generally are subject to various political and other risks that are different from and in addition to those for U.S. investments and operations, including:
enactment of laws prohibiting or restricting the foreign ownership of property;
laws restricting us from removing profits earned from activities within the country to the United States (i.e., nationalization of assets located within a country);

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changes in laws, regulations and policies, including land use, zoning and environmental laws, and in real estate and other tax rates;
exchange rate fluctuations;
change in the availability, cost and terms of mortgage funds resulting from varying national economic policies or changes in interest rates;
high administrative costs; and
terrorism, war or civil unrest.
Unfavorable legal, regulatory, economic or political changes such as those described above could adversely affect our financial condition and results of operations.
The threat of terrorism has historically adversely affected the lodging industry generally and these adverse effects may worsen if there are further terrorist events.
The threat of terrorism has historically caused a significant decrease in hotel occupancy and average daily rates due to disruptions in business and leisure travel patterns and concerns about travel safety. Future terrorist acts, terrorism alerts or outbreaks of hostilities could have a negative effect on travel and on our business.
Seasonal variations in revenue at our hotels and resorts can be expected to cause quarterly fluctuations in our revenues.
Revenues for hotels and resorts in tourist areas generally are substantially greater during tourist season than other times of the year. To the extent that cash flows from operations are insufficient during any quarter, due to seasonal fluctuations in revenues, we may have to enter into short-term borrowings to fund operations, pay interest expense or make distributions to our stockholders.
We consider acquisition opportunities in the ordinary course of our business; we face competition in the acquisition of properties and properties that we acquire may not perform as anticipated.
In the ordinary course of our business and when our liquidity position permits, we consider strategic acquisitions. The acquisition of properties involves risks, including the risk that the acquired property will not perform as anticipated and the risk that any actual costs for rehabilitating, repositioning, renovating and improving identified in the pre-acquisition process will exceed estimates. There is, and it is expected that there will continue to be, significant competition for acquisitions that meet our investment criteria as well as risks associated with obtaining financing for acquisition activities.
Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations.
Our properties are subject to various U.S. federal, state and local environmental laws. Under these laws, courts and government agencies have the authority to require us, as owner of a contaminated property, to clean up the property, even if the contamination pre-dated our ownership of the property or we did not know of or were not responsible for the contamination. These laws may also force a party who owned a property at the time of its contamination, but no longer owns the property, to be responsible for the cleanup. In addition to the costs of clean-up, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. These laws can also impose liability on parties that arrange for the disposal of wastes at an offsite property that becomes contaminated.
In addition, some of these environmental laws can restrict the use of a property and place conditions on various activities. An example would be laws that require a business using hazardous substances on a property (such as swimming pool and lawn care chemicals) to manage them carefully and to notify local officials that the chemicals are being used. Failure to comply with these laws could result in fines and penalties or expose us to third-party liability.
From time to time, the United States Environmental Protection Agency, or EPA, designates certain sites affected by hazardous substances as Superfund sites. Superfund sites can cover large areas, affecting many different parcels of land. The EPA may choose to pursue parties regardless of their actual contribution to the contamination. The Los Angeles Marriott Burbank Airport hotel, which we sold in September 2006, is located within a Federal Superfund site. The area was designated as a Superfund site because groundwater underneath the area is contaminated. We have not been named, and do not expect to be named, as a party responsible for the clean-up of the groundwater contamination; however, there can be no assurance regarding potential future developments concerning this site.

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The presence of any environmental conditions at our properties could result in remediation and other costs and liabilities and adversely affect our financial condition and results of operations.
We have reviewed environmental reports prepared by our consultants and consultants retained by our lenders at various times, which disclose certain conditions on our properties and the use of hazardous substances in operation and maintenance activities that could pose a risk of environmental contamination or impose liability on us. At some facilities these include on-site dry cleaning operations, petroleum storage in underground storage tanks, past tank removals and the known or suspected presence of asbestos, mold or thorium.
The costs to clean up a contaminated property or defend against a related claim or to comply with environmental laws could be material and could adversely affect the funds available for distributions to our stockholders. Future laws or regulations may impose material environmental liabilities on us, the current environmental condition of our properties may be affected by the condition of the properties in the vicinity of our properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us and currently unknown environmental liabilities related to our properties may be identified.
If we are not in compliance with the Americans with Disabilities Act of 1990, we may face significant costs to modify our properties and/or be subject to fines.
Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages. If we are required to make substantial modifications to our hotels and resorts, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and ability to make distributions to our stockholders could be adversely affected. One of our subsidiaries is currently defending a lawsuit related to the access and use by disabled persons at the Ritz-Carlton Half Moon Bay hotel. We can make no assurance about the outcome of this lawsuit.
Risks related to our organization and structure
Provisions of our organizational documents may limit the ability of a third party to acquire control of our company and may depress our stock price.
In order for us to maintain our status as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, actually or constructively, by five or fewer individuals at any time during the last half of each taxable year. To make sure that we will not fail to qualify as a REIT under this test, subject to some exceptions, our charter prohibits any individual from owning beneficially or constructively more than 9.8% of the value of outstanding shares of our stock or more than 9.8% of the value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock. Any attempt to own or transfer shares of our capital stock in excess of the ownership limit without the consent of our board of directors will be void, and could result in the shares being automatically transferred to a charitable trust. This ownership limitation may prevent an acquisition of control of our company by a third party without our board of directors’ grant of an exemption from the ownership limitation, even if our stockholders believe the change of control is in their interest.
Our charter authorizes our board of directors to cause us to issue up to 350,000,000 shares of common stock and up to 150,000,000 shares of preferred stock. Additionally, our charter authorizes our board of directors to amend our charter without stockholder approval to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of our stock that we have authority to issue, to classify or reclassify any unissued shares of common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of our company, including transactions at a premium over the market price of our stock, even if stockholders believe that a change of control is in their interest.
Our charter permits the removal of a director only upon the affirmative vote of two-thirds of the votes entitled to be cast, generally in the election of directors, and provides that vacancies may only be filled by a majority of the remaining directors. Our bylaws require advance notice of a stockholder’s intention to nominate directors or present business for consideration by stockholders at an annual meeting of our stockholders. These provisions may delay, defer or prevent a transaction or change in control that involves a premium price for our common stock or that for other reasons may be desired by our stockholders.
Provisions of Maryland law and our shareholder rights plan may limit the ability of a third party to acquire control of our company.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the

17


holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares, including:
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special super majority stockholder voting requirements on these combinations;
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) 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 our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares; and
“unsolicited takeover” provisions of Maryland law permit our board of directors, without stockholder approval, to implement a classified board as well as impose other restrictions on the ability of a third party to acquire control.
We have opted out of the control share provisions of the MGCL pursuant to a provision in our bylaws. However, we may, by amendment to our bylaws, become subject to the control share provisions of the MGCL in the future.
On November 12, 2012, we also extended a shareholder rights plan, commonly known as a poison pill anti-takeover device, through November 30, 2013 to deter hostile or coercive attempts to acquire us. Under the plan, if any person or group acquires more than 20% of our common stock without approval of the board of directors under specified circumstances, our other stockholders have the right to purchase shares of our common stock, or shares of the acquiring company, at a substantial discount to the public market price. This plan makes an acquisition not approved by our board of directors much more costly to a potential acquirer, which may deter a potential acquisition.
You have limited control as a stockholder regarding any changes we make to our policies.
Our board of directors approves our major policies, including our investment objectives, financing, growth and distributions. Our board of directors may amend or revise these and other policies without a vote of our stockholders. This means that our stockholders will have limited control over changes in our policies.
Tax risks
If we fail to maintain our status as a REIT, our distributions will not be deductible by us, and our income will be subject to U.S. federal taxation, reducing our earnings available for distribution.
We currently qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, which we refer to herein as the Tax Code. The requirements for this qualification, however, are complex and require annual distributions to our stockholders tied to our taxable income (irrespective of available cash from operations), quarterly asset tests and diversity of stock ownership rules. If we fail to meet these requirements, our distributions to our stockholders will not be deductible by us and we will have to pay a corporate U.S. federal level tax on our income. This would substantially reduce our cash available to pay distributions to our stockholders. In addition, such a tax liability might cause us to borrow funds, liquidate some of our investments or take other steps, which could negatively affect our results of operations. Moreover, if our REIT status is terminated because of our failure to meet a technical REIT requirement or if we voluntarily revoke our election, we would be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost.
Even if we maintain our status as a REIT, we may become subject to U.S. federal, state, local or foreign taxes on our income or property reducing our earnings available for distribution.
Even if we maintain our status as a REIT, we may become subject to U.S. federal income and other taxes and state and local taxes. For example, if we have net income from a “prohibited transaction,” that income will be subject to a 100% tax. A “prohibited transaction” is, in general, the sale or other disposition of inventory or property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on that income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of that tax liability. In addition, the REIT rules impose

18


various taxes and penalties on transactions with taxable REIT subsidiaries that are determined not to be priced at an arm’s length, and on a REIT that has to avail itself of certain cure provisions in the Tax Code for the failure to meet all of the REIT qualification requirements. We cannot assure you that we will be able to continue to satisfy the REIT requirements, or that it will be in our best interests to continue to do so.
We may also be subject to state and local taxes on our income or property, either directly or at the level of our operating partnerships or at the level of the other companies through which we indirectly own our assets. Foreign countries impose taxes on our hotels and resorts and our operations within their jurisdictions. We may not fully benefit from a foreign tax credit against our U.S. federal income tax liability for the foreign taxes we pay. As a result, our foreign taxes may reduce our income and available cash flow from our foreign hotels and resorts, which, in turn, could reduce our ability to make distributions to our stockholders.
Certain of our entities, including our foreign entities, are subject to corporate income taxes. Consequently, these entities are subject to potential audit. There can be no assurance that certain tax positions the entities have taken will not be challenged by taxing authorities and if the challenge is successful, could result in increased tax expense, which could be material.
If the leases of our hotels and resorts to our taxable REIT subsidiaries, or Affiliate Leases, are not respected as true leases for federal income tax purposes, we would fail to maintain our status as a REIT.
To continue to qualify as a REIT, we must satisfy two gross income tests under which specified percentages of our gross income must be certain types of passive income, such as rent. The rent paid pursuant to our Affiliate Leases will only qualify for purposes of the gross income tests if such Affiliate Leases are respected as true leases for U.S. federal income tax purposes and are not treated as service contracts, transfers between unconsolidated affiliates or some other type of arrangement. If our Affiliate Leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
Our taxable REIT subsidiaries, or TRSs, are subject to special rules that may result in increased taxes.
The REIT has to pay a 100% penalty tax on certain payments that it receives from a TRS if the economic arrangements between the REIT and the TRS are not comparable to similar arrangements between unrelated parties. The Internal Revenue Service, or IRS, may successfully assert that the economic arrangements of any of our inter-company transactions, including our Affiliate Leases, are not comparable to similar arrangements between unrelated parties.
We may be required to pay a penalty tax upon the sale of a hotel.
The U.S. federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current laws, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a hotel (or other property) constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors or the IRS may successfully assert that one or more of our sales are prohibited transactions; consequently, we may be required to pay a penalty tax if we have gains on any such transactions.
Dividends payable by REITs do not qualify for the reduced tax rates applicable to certain dividends.
The maximum federal tax rate for certain dividends payable to domestic stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for this reduced rate. Although this legislation does not directly adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular qualified corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less competitive than investments in stock of non-REIT corporations that pay dividends, which could adversely affect the comparative value of the stock of REITs, including our common stock.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities.
To remain qualified as a REIT for federal income tax purposes, we must continually satisfy requirements and tests under the tax law concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego or limit attractive business or investment opportunities. For example, we may not lease to our TRS any hotel where gaming or wagering activities are conducted. Therefore, compliance with the REIT requirements may hinder our ability to operate solely to maximize profits.

19


ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
Offices. We lease our headquarters located at 200 West Madison Street, Suite 1700, Chicago, Illinois 60606.
Property Overview and Performance. The following table presents certain information related to our hotel properties. All of the hotel properties in the following table relate to our one reportable business segment, hotel ownership.
 
 
 
 
 
 
 
Year Ended December 31, 2012(1)
 
% Change 2012 – 2011(2)
Hotel
Location
 
Date
Acquired
 
Number of
Rooms
 
Average
Occupancy
 
Average
Daily Rate
 
RevPAR
 
Total
RevPAR
 
RevPAR
 
Total
RevPAR
Fee Simple Property Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Westin St. Francis(*)
San Francisco, CA
 
6/2006
 
1,195

 
82.4
%
 
$
230.81

 
$
190.10

 
$
306.26

 
7.8
 %
 
3.6
 %
InterContinental Chicago(*)
Chicago, IL
 
4/2005
 
792

 
77.5
%
 
$
193.97

 
$
150.32

 
$
256.49

 
5.5
 %
 
9.8
 %
Hotel del Coronado(3)
Coronado, CA
 
1/2006
 
757

 
65.7
%
 
$
378.90

 
$
248.74

 
$
506.10

 
3.4
 %
 
2.3
 %
Fairmont Chicago(*)
Chicago, IL
 
9/2005
 
687

 
67.7
%
 
$
218.57

 
$
147.97

 
$
243.32

 
5.0
 %
 
2.9
 %
Fairmont Scottsdale Princess(4)
Scottsdale, AZ
 
9/2006
 
649

 
64.7
%
 
$
224.70

 
$
145.34

 
$
325.35

 
3.4
 %
 
5.2
 %
InterContinental Miami(*)
Miami, FL
 
4/2005
 
641

 
78.5
%
 
$
169.12

 
$
132.67

 
$
234.25

 
15.6
 %
 
15.6
 %
JW Marriott Essex House Hotel(5)(*)
New York, NY
 
9/2012
 
509

 
80.2
%
 
$
480.47

 
$
385.31

 
$
527.55

 
0.7
 %
 
(2.9
)%
Hyatt Regency La Jolla(6)(*)
La Jolla, CA
 
7/1999
 
419

 
75.0
%
 
$
165.38

 
$
123.97

 
$
229.79

 
7.2
 %
 
6.5
 %
Ritz-Carlton Laguna Niguel(7)
Dana Point, CA
 
7/2006
 
396

 
63.5
%
 
$
376.81

 
$
239.26

 
$
512.82

 
15.7
 %
 
14.6
 %
Loews Santa Monica Beach Hotel(*)
Santa Monica, CA
 
3/1998
 
342

 
86.3
%
 
$
322.49

 
$
278.17

 
$
404.85

 
7.6
 %
 
5.0
 %
Ritz-Carlton Half Moon Bay(7)
Half Moon Bay, CA
 
8/2004
 
261

 
65.6
%
 
$
391.87

 
$
257.09

 
$
607.41

 
5.8
 %
 
4.0
 %
Four Seasons Washington, D.C.(*)
Washington, D.C.
 
3/2006
 
222

 
69.7
%
 
$
527.77

 
$
367.90

 
$
752.85

 
(2.9
)%
 
(1.2
)%
Four Seasons Silicon Valley
East Palo Alto, CA
 
3/2011
 
200

 
73.8
%
 
$
319.14

 
$
235.36

 
$
443.42

 
15.7
 %
 
14.2
 %
Four Seasons Punta Mita Resort(7)
Punta Mita, Mexico
 
2/2001
 
173

 
41.5
%
 
$
650.37

 
$
269.61

 
$
522.75

 
(6.8
)%
 
(2.3
)%
Four Seasons Jackson Hole
Teton Village, WY
 
3/2011
 
124

 
59.4
%
 
$
543.99

 
$
323.10

 
$
767.79

 
9.1
 %
 
11.0
 %
Ground Lease Property Interest
Marriott Lincolnshire Resort(7)
Lincolnshire, IL
 
9/1997
 
389

 
59.6
%
 
$
125.81

 
$
74.98

 
$
229.55

 
16.1
 %
 
(0.2
)%
Marriott London Grosvenor Square(*)
London, England
 
8/2006
 
237

 
83.9
%
 
$
390.17

 
$
327.22

 
$
440.97

 
7.0
 %
 
4.5
 %
Leasehold Property Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marriott Hamburg(8)
Hamburg, Germany
 
6/2000
 
278

 
81.8
%
 
$
183.97

 
$
150.53

 
$
207.43

 
(8.1
)%
 
(10.2
)%
Total
 
 
 
 
8,271

 
72.6
%
 
$
269.32

 
$
195.40

 
$
360.08

 
5.4
 %
 
4.4
 %
(1)
The table includes statistical information only for our period of ownership.
(2)
The year-over-year comparisons are calculated using full year results which may include prior ownership periods.
(3)
We indirectly have a 36.4% interest in the unconsolidated affiliate that owns this property, which is subject to a mortgage. See “Item 8. Financial Statements and Supplementary Data—7. Investment in Unconsolidated Affiliates” for further detail.
(4)
We indirectly have a 50.0% interest in the unconsolidated affiliate that owns this property, which is subject to a mortgage. The unconsolidated affiliate has a ground lease interest in one land parcel at this property. See “Item 8. Financial Statements and Supplementary Data—7. Investment in Unconsolidated Affiliates” for further detail.
(5)
We own a 51.0% controlling interest in an affiliate that owns this property. See “Item 8. Financial Statements and Supplementary Data—6. Variable Interest Entity” for further detail.
(6)
We own a 53.5% controlling interest in an affiliate that owns this property. See “Item 8. Financial Statements and Supplementary Data—11. Equity and Distribution Activity” for further detail.
(7)
These properties are borrowing base assets under our bank credit facility, which are subject to mortgages.

20


(8)
This property was originally acquired on the date indicated in the table but was subsequently sold to a third party and leased back to us in a transaction that is more fully described under “Item 8. Financial Statements and Supplementary Data—9. Operating Lease Agreements.”
(*)
These properties are subject to mortgages as more fully described under “Item 8. Financial Statements and Supplementary Data—10. Indebtedness.”
Principal Terms of Management Agreements. Of our hotel properties, 17 are subject to management agreements with third party hotel managers and one is subject to a lease agreement with a third party hotel manager. For the management agreements, the principal terms are described below:
Base Management Fees. Our agreements generally provide for the payment of base management fees between 1.0% and 4.0% of the applicable hotel’s revenues, as determined in the agreements.
Incentive Management Fees. Our agreements generally provide the opportunity for the hotel manager to earn incentive management fees, which are typically a percentage of a hotel’s profit for the year. In certain instances, a level of return to us or performance of the hotel is required before a hotel manager is entitled to an incentive fee. Additionally, notwithstanding the specific formulas for the incentive fee calculations in the agreements, in certain instances, the incentive management fee to be earned by the hotel manager is capped.
Terms. As of December 31, 2012, the remaining terms of the management agreements, not including renewal options, range from less than one year to 30 years and average 13 years. Generally, we do not have the right to exercise renewal options for the agreements. Instead, the term of an agreement either renews automatically, unless the hotel manager provides notice of termination, or is otherwise renewable within the discretion of the hotel manager.
Services. The agreements require the hotel managers to furnish the hotels with certain services, which include on-site management and may include central training, advertising and promotion, national reservations systems, payroll and accounting services and such additional services as needed. We are responsible for payment of the operating expenses related to the hotel.
Annual Budget. The agreements require the hotel manager to prepare and implement annual budgets, subject to our review and approval.
Ability to Terminate. The agreements generally are not subject to early termination by us unless certain conditions exist, including the failure of the hotel manager to satisfy yearly performance-related criteria in 14 of our agreements.
Working Capital. Our agreements typically require us to maintain working capital for the related hotel. We are also responsible for providing funds to meet the cash needs for the hotel operations if at any time the funds available from the hotel operations are insufficient to meet the financial requirements of the hotel.
Furniture, Fixtures and Equipment Reserves. We are required to provide to the hotel manager all of the necessary furniture, fixtures and equipment for the operations of the hotel. Our agreements generally provide that between 4.0% and 5.0% of revenues of the hotel be reserved by the manager or deposited into a separate account held by us each year.
Sale of Hotel. Generally, our agreements limit our ability to sell, lease or otherwise transfer each hotel unless the transferee is not a competitor of the manager, assumes the management agreement, and meets other specified conditions.
JW Marriott Essex House Hotel Performance Guarantee. A provision of this management agreement, entered into with an affiliate of Marriott, requires that Marriott provide the Company with a limited performance guarantee that will ensure, subject to certain limitations, a target level of net operating profit. The guarantee period began on September 17, 2012 and will continue through the earlier of (a) December 31, 2020, (b) the date at which the maximum guarantee has been funded, or (c) the termination of the management agreement.
Mortgage Debt Pertaining to Our Properties. For information relating to the mortgage debt pertaining to our properties, refer to “Item 8. Financial Statements and Supplementary Data—10. Indebtedness—Mortgages and Other Debt Payable.”

21


ITEM 3.    LEGAL PROCEEDINGS.
We are not involved in any material litigation, and, to our knowledge, there is no material litigation threatened against us, other than routine litigation arising in the ordinary course of business or which is expected to be covered by insurance.
ITEM 4.    MINE SAFETY DISCLOSURES.
Not applicable.

22


PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed and traded on the NYSE under the symbol “BEE”. As of February 27, 2013, the number of registered holders of record of our common stock was 70.
The following table sets forth the high and low sale prices for our common stock as reported on the NYSE composite transaction tape and the per share cash dividends declared on our common stock for the period January 1, 2011 through December 31, 2012.
 
2012 Per Share of Common Stock
 
2011 Per Share of Common Stock
 
Market Price    
 
Dividend
Paid
 
Market Price    
 
Dividend
Paid
High    
 
Low    
 
High    
 
Low    
 
First Quarter
$
6.83

 
$
5.38

 
$

 
$
6.92

 
$
5.23

 
$

Second Quarter
7.01

 
5.68

 

 
7.14

 
5.93

 

Third Quarter
6.70

 
5.68

 

 
7.62

 
4.05

 

Fourth Quarter
6.58

 
5.44

 

 
5.84

 
3.76

 

Year
$
7.01

 
$
5.38

 
$

 
$
7.62

 
$
3.76

 
$

We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles) to our stockholders to comply with REIT provisions of the Tax Code. If necessary for REIT qualification purposes, we may need to distribute any taxable income in cash or by a special dividend. Our dividend policy is subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend on our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant.
On November 4, 2008, our board of directors elected to suspend the quarterly dividend to holders of shares of common stock. Our board of directors has continued the suspension of the quarterly dividend to holders of shares of our common stock as a measure to preserve liquidity due to the uncertainty in the economic environment. Our board of directors will continue to evaluate the dividend policy in light of the REIT provisions of the Tax Code, restrictions under the bank credit facility, and the overall economic climate.
For a description of restrictions on the payment of dividends, see “Item 8. Financial Statements and Supplementary Data—10. Indebtedness—Bank Credit Facility.”
Equity Compensation Plan Information
There are 9,700,000 shares of common stock authorized for issuance under our Second Amended and Restated 2004 Incentive Plan (the Amended and Restated Plan). As of December 31, 2012, there have been 1,691,042 securities issued into common stock. The following table sets forth certain information with respect to securities authorized and available for issuance under the Amended and Restated Plan as of December 31, 2012.
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
 
Weighted average exercise
price of outstanding
options, warrants and
rights
(b)
 
Number of securities
remaining available for
future issuance under the
Amended and Restated
Plan (excluding securities
reflected in column a)
(c)
Equity compensation plans approved by security holders:
 
 
 
 
4,472,108

Stock options
669,797

 
$
20.40

 
 
Restricted stock units
2,867,053

 
N/A

 
 
Equity compensation plans not approved by security holders(1):
1,301,476

 
N/A

 

Total
4,838,326

 
 
 
4,472,108


23


(1)
On June 29, 2011, SHR and its former president and chief executive officer, Laurence S. Geller, entered into the Strategic Hotels & Resorts, Inc. Value Creation Plan Normal Unit Distributions Deferral Election and Deferral Program, or the Deferral Program. Pursuant to the Deferral Program, Mr. Geller elected to defer up to 50% of his share of the Normal Distribution Amount (as defined below) payable pursuant to SHR's Value Creation Plan and to have such Normal Distribution Amount instead be converted into stock units payable in SHR's common stock under the Deferral Program, or Deferral Program Stock Units, on the basis of the fair market value of a share of SHR common stock at the time the Normal Distribution Amount would otherwise have been paid. Each Deferral Program Stock Unit will be converted on a one-for-one basis into a share of SHR common stock on June 3, 2013 or, if earlier, upon a change of control of SHR. During 2012, Mr. Geller earned 1,301,476 Deferral Program Stock Units in connection with the distribution of his share of the Normal Distribution Amount under the Value Creation Plan. In accordance with Mr. Geller's separation agreement, dated November 2, 2012, Mr. Geller's Deferral Program Stock Units outstanding will settle in accordance with the terms of the Deferral Program. See "Item 8. Financial Statements and Supplementary Data—13. Share-Based Employee Compensation Plans—Deferral Program" for information on the Deferral Program.


24


ITEM 6.    SELECTED FINANCIAL DATA.
The following sets forth our selected consolidated financial and operating information on a historical basis. The following information should be read together with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto, which are included in “Item 8. Financial Statements and Supplementary Data.”
 
Years Ended December 31,
 
2012
 
2011(1)
 
2010(1)
 
2009(1)
 
2008(1)(2)
 
(In thousands, except per share data)
Operating Data:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Rooms
$
446,760

 
$
410,315

 
$
362,559

 
$
343,891

 
$
445,244

Food and beverage
273,857

 
267,194

 
238,762

 
216,982

 
293,344

Other hotel operating revenue
82,922

 
80,907

 
79,981

 
89,525

 
97,316

Lease revenue
4,778

 
5,422

 
4,991

 
4,858

 
5,387

Total revenues
808,317

 
763,838

 
686,293

 
655,256

 
841,291

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Rooms
124,896

 
114,087

 
105,142

 
100,642

 
114,445

Food and beverage
199,573

 
192,028

 
171,279

 
160,252

 
202,641

Other departmental expenses
211,981

 
207,664

 
199,336

 
193,699

 
218,606

Management fees
24,984

 
24,719

 
22,911

 
23,386

 
32,336

Other hotel expenses
56,842

 
53,808

 
48,781

 
52,385

 
57,154

Lease expense
4,580

 
4,865

 
4,566

 
4,752

 
4,953

Depreciation and amortization
103,464

 
112,062

 
130,601

 
130,955

 
109,532

Impairment losses and other charges
18,843

 

 
141,858

 
99,740

 
277,917

Corporate expenses
31,857

 
39,856

 
34,692

 
23,910

 
24,800

Total operating costs and expenses
777,020

 
749,089

 
859,166

 
789,721

 
1,042,384

Operating income (loss)
31,297

 
14,749

 
(172,873
)
 
(134,465
)
 
(201,093
)
Interest expense
(75,489
)
 
(86,447
)
 
(86,285
)
 
(93,929
)
 
(79,993
)
Equity in (losses) earnings of unconsolidated affiliates
(13,485
)
 
(9,215
)
 
13,025

 
1,718

 
2,810

Loss from continuing operations
(57,726
)
 
(106,424
)
 
(265,311
)
 
(231,296
)
 
(288,376
)
(Loss) income from discontinued operations, net of tax
(535
)
 
101,572

 
34,511

 
(15,137
)
 
(29,110
)
Net loss
(58,261
)
 
(4,852
)
 
(230,800
)
 
(246,433
)
 
(317,486
)
Net loss attributable to the noncontrolling interests in SHR’s operating partnership
184

 
29

 
1,687

 
3,129

 
4,065

Net loss (income) attributable to the noncontrolling interests in consolidated affiliates
2,771

 
(383
)
 
(1,938
)
 
(641
)
 
(3,870
)
Preferred shareholder dividends
(24,166
)
 
(18,482
)
 
(30,886
)
 
(30,886
)
 
(30,886
)
Net loss attributable to SHR common shareholders
(79,472
)
 
(23,688
)
 
(261,937
)
 
(274,831
)
 
(348,177
)
Loss from continuing operations attributable to SHR common shareholders per share—basic
(0.40
)
 
(0.70
)
 
(2.41
)
 
(3.45
)
 
(4.25
)
Loss from continuing operations attributable to SHR common shareholders per share—diluted
(0.40
)
 
(0.70
)
 
(2.41
)
 
(3.45
)
 
(4.25
)
Cash dividends declared per common share

 

 

 

 
0.72


25


 
As of the Years Ended December 31,
 
2012
 
2011(1)
 
2010(1)
 
2009(1)
 
2008(1)(2)
 
(In thousands, except statistical data)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
2,406,417

 
$
2,086,689

 
$
2,162,316

 
$
2,598,143

 
$
2,909,167

Long-term debt obligations
1,322,297

 
1,050,385

 
1,146,281

 
1,648,197

 
1,672,690

Total liabilities
1,597,969

 
1,419,686

 
1,511,922

 
2,003,258

 
2,093,095

Noncontrolling interests in SHR’s operating partnership
5,463

 
4,583

 
5,050

 
2,717

 
5,330

Noncontrolling interests in consolidated affiliates
95,657

 
8,222

 
25,082

 
23,188

 
27,203

SHR’s shareholders’ equity
707,328

 
654,198

 
620,262

 
568,980

 
783,539

Statistical Data:
 
 
 
 
 
 
 
 
 
Number of hotels at the end of the year excluding unconsolidated affiliates
16

 
15

 
15

 
16

 
18

Number of rooms at the end of the year excluding unconsolidated affiliates
6,856

 
6,356

 
6,873

 
7,245

 
7,590

Average occupancy rate
74.1
%
 
72.2
%
 
69.5
%
 
66.8
%
 
72.3
%
(1)
We sold one hotel property in 2011, one hotel property in 2010, two hotel properties in 2009, and one hotel property in 2008. The operations of these hotels are included as discontinued operations in the operating data above for all years presented.
(2)
The table presents certain selected historical financial data which has been updated to reflect the impact of the retrospective application of new accounting guidance related to noncontrolling interests and convertible debt instruments.

26


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis is based primarily on the consolidated financial statements of Strategic Hotels & Resorts, Inc. (SHR) and its subsidiaries for the years presented and should be read together with the notes thereto contained in this annual report on Form 10-K. Terms employed herein as defined terms, but without definition, have meanings set forth in the notes to the financial statements (see “Item 8. Financial Statements and Supplementary Data”).
Overview
We were incorporated in Maryland in January 2004 to acquire and asset-manage upper upscale and luxury hotels (as defined by Smith Travel Research). Our accounting predecessor, Strategic Hotel Capital, L.L.C. (SHC LLC), was founded in 1997. We made an election to be taxed as a real estate investment trust (REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the Tax Code). On June 29, 2004, we completed our initial public offering (IPO) of our common stock. Prior to the IPO, 21 hotel interests were owned by SHC LLC. Concurrent with and as part of the transactions relating to the IPO, a reverse spin-off distribution to shareholders separated SHC LLC into two companies, a new, privately-held SHC LLC, with interests, at that time, in seven hotels and SHR, a public entity with interests, at that time, in 14 hotels. See “Item 8. Financial Statements and Supplementary Data—1. General” for the hotel interests owned or leased by us as of December 31, 2012.
We operate as a self-administered and self-managed REIT, which means that we are managed by our board of directors and executive officers. A REIT is a legal entity that holds real estate interests and, through payments of dividends to stockholders, is permitted to reduce or avoid federal income taxes at the corporate level. To continue to qualify as a REIT, we cannot operate hotels; instead we employ internationally known hotel management companies to operate our hotels under management contracts. We conduct our operations through our direct and indirect subsidiaries including our operating partnership, Strategic Hotel Funding, L.L.C. (SH Funding), which currently holds substantially all of our assets. We are the managing member of SH Funding and hold approximately 99% of its membership units as of December 31, 2012. We manage all business aspects of SH Funding, including the sale and purchase of hotels, the investment in such hotels and the financing of SH Funding and its assets.
Throughout this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, references to “we”, “our”, “us”, and “the Company” are references to SHR together, except as the context otherwise requires, with its consolidated subsidiaries, including SH Funding.
When presenting the U.S. dollar equivalent amount for any amounts expressed in a foreign currency, the U.S. dollar equivalent amount has been computed based on the exchange rate on the date of the transaction or the exchange rate prevailing on December 31, 2012, as applicable, unless otherwise noted.
Key Indicators of Operating Performance
We evaluate the operating performance of our business using a variety of operating and other information that includes financial information prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) such as total revenues, operating income (loss), net income (loss), and earnings per share, as well as non-GAAP financial information. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels, and/or our business as a whole. Key indicators that we evaluate include average daily occupancy, average daily rate (ADR), revenue per available room (RevPAR), and Total RevPAR, which are more fully discussed under “—Factors Affecting Our Results of Operations—Revenues.” We also evaluate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), Comparable EBITDA, Funds from Operations (FFO), FFO-Fully Diluted, and Comparable FFO as supplemental non-GAAP measures to GAAP performance measures. We provide a more detailed discussion of the non-GAAP financial measures under “—Non-GAAP Financial Measures.”
Outlook
The lodging industry began its recovery in the first quarter of 2010, after one of the worst downturns in its history. Luxury demand, in which our portfolio has the highest concentration of assets, has experienced positive RevPAR growth beginning with the week of February 20, 2010, following 96 consecutive weeks of negative RevPAR growth. RevPAR and occupancy gains continued in the fourth quarter of 2012, primarily driven by improved demand in transient business and increases in average room rates.

27


The fourth quarter of 2012 represented the twelfth consecutive quarter of demand growth and eleventh consecutive quarter of RevPAR growth and profit margin expansion for our Same Store North American portfolio. Same Store Assets (see “- Total Portfolio and Same Store Assets Definitions” below) located in North America, which excludes hotels owned through unconsolidated affiliates and those owned for less than five quarters, gained 1.5 percentage points in occupancy, driven by a 6.6% increase in transient room nights, partially offset by a 3.3% decrease in group room nights compared to the quarter ended December 31, 2011. ADR at our North American Same Store Assets increased 2.9% in the fourth quarter of 2012 as a result of a 2.9% increase in transient rate and a 1.6% increase in group rate, compared to the fourth quarter of 2011. For the quarter ended December 31, 2012, RevPAR in this portfolio increased 5.2% and Total RevPAR increased 3.2%, compared to the quarter ended December 31, 2011.
Our total United States portfolio of 14 hotels includes our unconsolidated affiliates at the Hotel del Coronado and Fairmont Scottsdale Princess hotel and excludes the JW Marriott Essex House Hotel, which we acquired on September 14, 2012. We believe that providing the operating results on this portfolio, as well as the results of our Same Store Assets, is a better reflection of the operating trends of our business. For the year ended December 31, 2012, RevPAR for our total United States portfolio increased 7.0%, driven by a 4.9% increase in ADR and a 1.4 percentage point increase in occupancy, compared to the year ended December 31, 2011.
The performance of our asset in Mexico, the Four Seasons Punta Mita Resort, has lagged the recovery of the rest of our portfolio as the hotel continues to be impacted by broad based security concerns in Mexico. For the year ended December 31, 2012, occupancy at the Four Seasons Punta Mita Resort declined by 3.3 percentage points, leading to a 6.8% decline in RevPAR, compared to the year ended December 31, 2011.
As we assess lodging supply and demand dynamics looking forward, we are optimistic about the long-term prospects for a robust and sustained recovery, particularly in the product niche and markets in which we own assets. However, in the near-term we remain cautious given the current backdrop of global macroeconomic uncertainty. Group bookings pace remains our best forward indicator of demand. For our total North American portfolio of hotels, which includes the 14 hotels in our total United States portfolio and the Four Seasons Punta Mita Resort, definite group room nights for 2013 as of January 31, 2013 are up 6.6% compared to the same time last year and are booked at 3.9% higher rates. New supply in the luxury and upper upscale segments remains very well contained in our markets and the current significant gap between hotel trading values and replacement costs bodes favorably for very limited supply growth into the future.
During the lodging downturn we implemented hotel specific contingency plans designed to reduce costs and maximize efficiency at each hotel. These include, but are not limited to, adjusting variable labor, eliminating certain fixed labor, and reducing the hours of room service operations and other food and beverage outlets. We believe the cost structures of our hotels have been fundamentally redesigned to sustain many of the cost reductions, even during periods of rising lodging demand. Therefore, we are optimistic that improving lodging demand will lead to increases in ADR and drive significant profit margin expansion throughout our portfolio.
Balance Sheet Restructuring
Since the beginning of 2010, we have been in the process of restructuring our balance sheet to decrease our leverage, improve both our short-term and long-term liquidity, and address our near-term debt maturities. This restructuring has been multifaceted and has included asset sales, equity issuances, and recapitalization and refinancing transactions on many of our assets as summarized below:
We issued an aggregate of 128.3 million shares of common stock in a private offering, two public offerings and in connection with the purchase of assets, raising $657.9 million of new equity.
We tendered for and retired our 3.50% Exchangeable Senior Notes (Exchangeable Notes) totaling $180.0 million.
We tendered for and purchased approximately 3.2 million shares of preferred stock totaling $86.1 million.
We sold our interests in the InterContinental Prague, the Paris Marriott Champs Elysees (Paris Marriott), and BuyEfficient, L.L.C. (BuyEfficient) generating net proceeds of $72.6 million.
We recapitalized our investments in the Hotel del Coronado and the Fairmont Scottsdale Princess hotels and restructured the debt on those properties, reducing our pro-rata share of the debt on these assets from $463.5 million to $212.3 million.
We first extended and then replaced our bank credit facility with a new $300.0 million credit facility (which also includes a $100.00 million accordion feature) with an initial maturity date of June 30, 2014, with an option to extend for an additional year, subject to certain conditions.

28


We refinanced $847.0 million of property level mortgage debt scheduled to mature in 2011 and 2012 with new mortgage debt of $877.8 million, with initial maturity dates ranging from 2014 to 2021 (and 2016 to 2021 assuming extension options are exercised).
As a result of these transactions, our total consolidated debt decreased from $1.6 billion at December 31, 2009 to $1.3 billion as of December 31, 2012. As of December 31, 2012, we had approximately $11.3 million of available corporate level cash, not including restricted cash and cash currently held by the hotels, and we had $146.0 million outstanding borrowings on our $300.0 million bank credit facility and $18.5 million in letters of credit outstanding.
European Strategy
We previously announced our intention to exit our assets in Europe in an orderly process designed to maximize proceeds. Since that time, we sold the Renaissance Paris Hotel LeParc Trocadero (Renaissance Paris), the InterContinental Prague and our leasehold interest in the Paris Marriott. Our remaining European assets are the Marriott London Grosvenor Square hotel and our leasehold interest in the Marriott Hamburg hotel. We continue to opportunistically explore options to exit these investments and still intend to be North American-centric with respect to any new acquisitions.
Four Seasons Jackson Hole Hotel
In the third quarter of 2012, we hired a hotel brokerage firm to advise us on the marketing and sale of the Four Seasons Jackson Hole hotel. The formal process to sell this hotel has been suspended while we evaluate other disposition alternatives.
Factors Affecting Our Results of Operations
The table below summarizes the changes to our consolidated hotel properties and rooms as of December 31, 2012, 2011 and 2010:
 
2012
 
2011
 
2010
Hotels
 
 
 
 
 
Number of hotels, beginning of year
15

 
15

 
16

Acquisitions
1

 
2

 

Dispositions

 
(1
)
 
(1
)
Recapitalization of property(a)

 
(1
)
 

Number of hotels, end of year
16

 
15

 
15

Rooms
 
 
 
 
 
Number of rooms, beginning of year
6,356

 
6,873

 
7,245

Acquisitions
509

 
324

 

Dispositions

 
(192
)
 
(372
)
Recapitalization of property(a)

 
(649
)
 

Number of rooms, end of year
6,865

 
6,356

 
6,873

(a)
On June 9, 2011, we completed a recapitalization transaction that changed our ownership interest in the Fairmont Scottsdale Princess hotel. See“—Off-Balance Sheet Arrangements—Fairmont Scottsdale Princess Venture” for further description of this transaction.
Acquisition of Interests in Consolidated Properties. During the years ended December 31, 2012 and 2011, we acquired interests in the following consolidated properties and paid net purchase prices, including proration adjustments related to assets and liabilities of the hotels, as shown below:
Hotel
Date Acquired
 
Net Purchase Price
(in millions)
JW Marriott Essex House Hotel(a)
September 14, 2012
 
$
350.3

Four Seasons Silicon Valley and Four Seasons Jackson Hole(b)
March 11, 2011
 
$
92.4

InterContinental Chicago(c)
June 24, 2011
 
$
90.2


29


(a) In connection with the closing of the hotel acquisition, we entered into joint venture agreements with affiliates of KSL Capital Partners, LLC (Essex House Hotel Venture) to fund the equity portion of the purchase price. We have a 51% controlling interest in the Essex House Hotel Venture and serve as managing member and asset manager.
(b) We acquired the Four Seasons Silicon Valley and the Four Seasons Jackson Hole hotels in exchange for an aggregate of 15.2 million shares of our common stock at a price of $6.08 per share based on our March 11, 2011 common share closing price.
(c) We acquired the remaining 49.0% interest in the InterContinental Chicago hotel, previously owned by our partner in the consolidated affiliate, giving us 100% ownership of the InterContinental Chicago hotel. As part of the transaction, we also acquired an additional 2.5% ownership interest in the Hyatt Regency La Jolla hotel, increasing our controlling interest in the hotel to 53.5%. Total consideration included the issuance of approximately 10.8 million shares of our common stock at a price of $6.51 per share based on the June 24, 2011 common share closing price, $19.4 million of cash, which includes working capital, and post-closing adjustments of $0.5 million.
Sale of Interests in Consolidated Properties. During the years ended December 31, 2012, 2011, and 2010, we sold our interests in the following consolidated properties and received net sales proceeds, after proration adjustments related to assets and liabilities of the hotels and closing costs, as shown below:
Hotel
Date Sold
 
Net Sales Proceeds
(in millions)
Paris Marriott(a)
April 6, 2011
 
$
60.0

InterContinental Prague(b)
December 15, 2010
 
$
3.6

(a)
We sold our leasehold interest in the Paris Marriott hotel for consideration of €29.2 million ($41.6 million). As part of the transaction, we received an additional €13.5 million ($18.9 million) related to the release of the security deposit and other closing adjustments, of which €1.6 million ($2.0 million) was received in the second quarter of 2012.
(b)
Approximate consideration received of €106.1 million ($141.4 million) included the assignment of the hotel’s third party debt and the interest rate swap liability related to the third party indebtedness.
Unconsolidated Affiliates. On February 4, 2011, we completed a recapitalization transaction that changed our ownership interest in the Hotel del Coronado. See “—Off-Balance Sheet Arrangements – Hotel and North Beach Ventures and Hotel del Coronado Venture” for further description of this transaction. On December 17, 2012, we increased our ownership interest in the Hotel del Coronado to 36.4%.
On June 9, 2011, we completed a recapitalization transaction that changed our ownership interest in the Fairmont Scottsdale Princess hotel. See“—Off-Balance Sheet Arrangements – Fairmont Scottsdale Princess Venture” for further description of this transaction.
On January 21, 2011, we sold our 50.0% interest in BuyEfficient for $9.0 million and recognized a gain of $2.6 million.
Total Portfolio and Same Store Asset Definitions. We define our Total Portfolio as properties that we wholly or partially own or lease and whose operations are included in our consolidated operating results. The Total Portfolio excludes all sold properties and assets held for sale, if any, included in discontinued operations.
We present certain information about our hotel operating results on a comparable hotel basis, which we refer to as our Same Store analysis. We define our Same Store Assets as those hotels (a) that are owned or leased by us, and whose operations are included in our consolidated operating results and (b) for which we reported operating results throughout the entire reporting periods presented.
Our Same Store Assets for purposes of the comparison of the years ended December 31, 2012 and 2011 exclude the JW Marriott Essex House Hotel, the Four Seasons Silicon Valley hotel, the Four Seasons Jackson Hole hotel, unconsolidated affiliates, and all sold properties and assets held for sale, if any, included in discontinued operations. Our Same Store Assets for purposes of the comparison of the years ended December 31, 2011 and 2010 exclude the Four Seasons Silicon Valley hotel, the Four Seasons Jackson Hole hotel, unconsolidated affiliates, and all sold properties and assets held for sale, if any, included in discontinued operations.
We present these results of Same Store Assets because we believe that doing so provides useful information for evaluating the period-to-period performance of our hotels and facilitates comparisons with other hotel REITs and hotel owners.

30


In particular, these measures assist in distinguishing whether increases or decreases in revenues and/or expenses are due to operations of the Same Store Assets or from acquisition or disposition activity.
Revenues. Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue for the years ended December 31, 2012, 2011 and 2010 consisted of:
 
Total Portfolio
% of Total Revenues
 
Same Store Assets
%  of Total Revenues
 
2012
 
2011
 
2010
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
 
 
Rooms
55.3
%
 
53.7
%
 
52.8
%
 
55.3
%
 
54.5
%
Food and beverage
33.9
%
 
35.0
%
 
34.8
%
 
34.6
%
 
34.9
%
Other hotel operating revenue
10.2
%
 
10.6
%
 
11.7
%
 
9.4
%
 
9.8
%
Lease revenue
0.6
%
 
0.7
%
 
0.7
%
 
0.7
%
 
0.8
%
Total revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue.
Food and beverage revenue. Occupancy, local catering and banquet events are the major drivers of food and beverage revenue.
Other hotel operating revenue. Other hotel operating revenue consists primarily of cancellation fees, spa, telephone, parking, golf course, Internet access, space rentals, retail and other guest services and is also driven by occupancy.
Lease revenue. We sublease our interest in the Marriott Hamburg to a third party and earn annual base rent plus additional rent contingent on the hotel meeting performance thresholds.
Changes in our revenues are most easily explained by performance indicators that are used in the hotel real estate industry:
average daily occupancy;
ADR, which stands for average daily rate, is equal to rooms revenue divided by the number of occupied rooms;
RevPAR, which stands for revenue per available room, is equal to rooms revenue divided by the number of rooms available; and
Total RevPAR, which stands for total revenue per available room, is equal to the sum of rooms revenue, food and beverage revenue and other hotel operating revenue, divided by the number of rooms available.
We generate a significant portion of our revenue from two broad categories of customers, transient and group.
Our transient customers include individual or group business and leisure travelers that occupy fewer than 10 rooms per night. Transient customers accounted for approximately 60.4%, 57.5% and 57.2% of the rooms sold during the years ended December 31, 2012, 2011 and 2010, respectively. We divide our transient customers into the following subcategories:
Transient Leisure—This category generates the highest room rates and includes travelers that receive published rates offered to the general public that do not have access to negotiated or discounted rates.
Transient Negotiated—This category includes travelers, who are typically associated with companies and organizations that generate high volumes of business, that receive negotiated rates that are lower than the published rates offered to the general public.
Our group customers include groups of 10 or more individuals that occupy 10 or more rooms per night. Group customers accounted for approximately 39.6%, 42.5% and 42.8% of the rooms sold during the years ended December 31, 2012, 2011 and 2010, respectively. We divide our group customers into the following subcategories:
Group Association—This category includes group bookings related to national and regional association meetings and conventions.

31


Group Corporate—This category includes group bookings related to corporate business.
Group Other—This category generally includes group bookings related to social, military, education, religious, fraternal and youth and amateur sports teams.
Fluctuations in revenues, which, for our domestic hotels, historically have been correlated with changes in the United States gross domestic product (U.S. GDP), are driven largely by general economic and local market conditions, which in turn affect levels of business and leisure travel. Guest demographics also affect our revenues. During 2011 and 2012, demand at our hotels increased significantly, despite tepid U.S. GDP growth, which we believe reflects the relative strength of our primary customer demographics, particularly U.S. based corporations and affluent transient travelers. While hotel demand has improved, occupancy and ADR metrics for our hotels remain below prior peak periods.
In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases unless the supply growth is offset by an equal or greater increase in demand. One reason we target upper upscale and luxury hotels in select urban and resort markets, including major business centers and leisure destinations, is because they tend to be in locations that have greater supply constraints such as lack of available land, high development costs, long development and entitlement lead times, and brand trade area restrictions that prevent the addition of a certain brand or brands in close proximity. Nevertheless, our hotels are not insulated from competitive pressures and our hotel operators will lower room rates to compete more aggressively for guests in periods when occupancy declines.
For purposes of calculating our Total Portfolio RevPAR for the years ended December 31, 2012, 2011 and 2010, we exclude unconsolidated affiliates, discontinued operations, and the Marriott Hamburg because we sublease the operations of the hotel and only record lease revenue. Same Store Assets RevPAR is calculated in the same manner as Total Portfolio RevPAR but also excludes the Four Seasons Silicon Valley and the Four Seasons Jackson Hole hotels for the years ended December 31, 2012 and 2011 and excludes the JW Marriott Essex House Hotel for the year ended December 31, 2012. These methods for calculating RevPAR each period are consistently applied through the remainder of this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and should be taken into consideration wherever RevPAR results are disclosed.
Hotel Operating Expenses. Our hotel operating expenses for the years ended December 31, 2012, 2011 and 2010 consisted of the costs and expenses to provide hotel services, including:
 
Total Portfolio % of Total Hotel Operating Expenses
 
Same Store Assets % of Total Hotel Operating Expenses
 
2012
 
2011
 
2010
 
2012
 
2011
Hotel Operating Expenses:
 
 
 
 
 
 
 
 
 
Rooms
20.2
%
 
19.3
%
 
19.2
%
 
20.4
%
 
19.8
%
Food and beverage
32.3
%
 
32.4
%
 
31.3
%
 
32.6
%
 
32.9
%
Other departmental expenses
34.3
%
 
35.0
%
 
36.4
%
 
34.2
%
 
34.4
%
Management fees
4.0
%
 
4.2
%
 
4.2
%
 
4.1
%
 
4.1
%
Other hotel expenses
9.2
%
 
9.1
%
 
8.9
%
 
8.7
%
 
8.8
%
Total hotel operating expenses
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Rooms expense. Occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.
Food and beverage expense. Occupancy, local catering and banquet events are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.
Other departmental expenses. Other departmental expenses consist of general and administrative, marketing, repairs and maintenance, utilities and expenses related to earning other operating revenue.
Management fees. We pay base and incentive management fees to our hotel operators. Base management fees are computed as a percentage of revenue. Incentive management fees are incurred when operating profits exceed levels prescribed in our management agreements.
Other hotel expenses. Other hotel expenses consist primarily of insurance costs and property taxes.

32


Salaries, wages and related benefits are included within the categories of hotel operating expenses described above and represented approximately 48.9%, 48.4% and 48.1% of the Total Portfolio total hotel operating expenses for the years ended December 31, 2012, 2011 and 2010, respectively.
Most categories of variable operating expenses, such as utilities and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs and expenses while increases in RevPAR attributable to increases in ADR typically only result in increases in limited categories of operating costs and expenses, such as management fees charged by our operators, which are based on hotel revenues. Thus, changes in ADR have a more significant impact on operating margins.
Lease Expense. As a result of the sale-leaseback transaction of the Marriott Hamburg hotel, we record lease expense in our statements of operations. In conjunction with the sale-leaseback transaction, we also recorded a deferred gain, which is amortized as an offset to lease expense.
Corporate Expenses. Corporate expenses include payroll and related costs, professional fees, travel expenses, office rent, and acquisition costs.
Recent Events. In addition to the changes to the consolidated hotel properties and unconsolidated affiliates noted above, we expect that the following events will cause our future results of operations to differ from our historical performance:
Preferred Stock Tender Offers. In December 2011, we completed tender offers to purchase a portion of our outstanding preferred stock. The results of the tender offers are as follows:
 
Number of Shares
Validly Tendered and
Accepted for  Purchase
 
Purchase Price
(Per Share)
8.50% Series A Cumulative Redeemable Preferred Stock
340,609

 
$
26.70

8.25% Series B Cumulative Redeemable Preferred Stock
984,625

 
$
26.50

8.25% Series C Cumulative Redeemable Preferred Stock
1,922,273

 
$
26.50

We paid the holders that tendered approximately $86.1 million in cash, which was without interest or accrued and unpaid dividends.
New Bank Credit Facility. On June 30, 2011, we entered into a new $300.0 million secured, bank credit facility, which also includes a $100.0 million accordion feature. This new facility replaced the $350.0 million secured bank credit facility that was set to expire in March 2012. The facility’s interest rate is based upon a leverage-based pricing grid ranging from London InterBank Offered Rate (LIBOR) plus 275 basis points to LIBOR plus 375 basis points. The facility’s current interest rate is LIBOR plus 300 basis points, a reduction from the previous facility’s pricing of LIBOR plus 375 basis points. The facility expires on June 30, 2014, with a one-year extension available, subject to certain conditions. See “—Liquidity and Capital Resources—Bank credit facility.”
Common Stock. On April 23, 2012, we completed a public offering of common stock by issuing 18.4 million shares at a public offering price of $6.50 per share. After underwriting discounts and commissions and transaction expenses, we raised net proceeds of approximately $114.1 million. These proceeds were used for general corporate purposes, including, without limitation, reducing our borrowings under our secured bank credit facility, funding the payment of accrued and unpaid preferred dividends, repaying other debt and funding capital expenditures and working capital.
On March 11, 2011, we issued 8.0 million shares of our common stock to an affiliate of the seller of the Four Seasons Silicon Valley and Four Seasons Jackson Hole hotels in a private placement at a price of $6.25 per share for approximate net proceeds of $49.7 million after expenses. These proceeds were used to repay existing indebtedness under our previous bank credit facility.
Impairment Losses. In the fourth quarter of 2012, we performed an impairment test of the long-lived assets related to a Mexican development site as a result of a change in the anticipated holding period for this land and recorded an impairment loss of $14.6 million during the year ended December 31, 2012.
Termination and De-Designation of Cash Flow Hedges. On June 20, 2011, we paid $29.7 million to terminate five interest rate swaps with a combined notional amount of $300.0 million. In addition, based on changes in the forecasted levels of LIBOR-based debt, we de-designated one interest rate swap with a notional amount of $100.0 million as a cash flow hedge. Changes in the market value of the interest rate swap will be recorded in earnings subsequent to the de-designation.

33


On February 11, 2011, we paid approximately $4.2 million to terminate three interest rate swaps with a combined notional amount of $125.0 million. There were no immediate charges to earnings based on our forecasted levels of LIBOR-based debt at the time of the transaction.
Mortgage Loan Agreements. On November 1, 2012, we refinanced and decreased the loan secured by the Hyatt Regency La Jolla hotel to $90.0 million with interest payable monthly at LIBOR plus 4.00%, subject to a 0.50% LIBOR floor, for $72.0 million of the principal balance and interest paid monthly at an annual fixed rate of 10.00% for $18.0 million of the principal balance. The loan has a maturity date of December 1, 2017.
On July 28, 2011, we refinanced and increased the loan secured by the InterContinental Chicago hotel to $145.0 million with interest payable monthly at an annual fixed rate of 5.61% and a maturity date of August 1, 2021.
On July 20, 2011, we executed a mortgage agreement in the amount of $130.0 million, which is secured by the Four Seasons Washington, D.C. hotel, that has interest payable monthly at one-month LIBOR plus 3.15% and has a maturity date of July 20, 2014, with two, one-year extension options, subject to certain conditions.
On July 14, 2011, we refinanced and decreased the loan secured by the Loews Santa Monica Beach Hotel to $110.0 million with interest payable monthly at one-month LIBOR plus 3.85%. The loan has a maturity date of July 14, 2015, with three, one-year extension options, subject to certain conditions.
On July 6, 2011, we refinanced and decreased the loan secured by the InterContinental Miami hotel to $85.0 million with interest payable monthly at one-month LIBOR plus 3.50%. The loan has a maturity date of July 6, 2016, with two, one-year extension options, subject to certain conditions.
On June 29, 2011, we repaid the $76.5 million mortgage loan secured by the Ritz-Carlton Half Moon Bay hotel, which became one of the borrowing base properties under the $300.0 million bank credit facility agreement.
Acquisition of Note Receivable. In January 2012, we acquired, at a discount to par value, a note receivable that is secured by a property adjacent to the Fairmont Chicago hotel for $10.5 million.


34


Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011
Operating Results
The following table presents the operating results for the years ended December 31, 2012 and 2011, including the amount and percentage change in these results between the two years of our Total Portfolio and Same Store Assets (in thousands, except operating data).
 
Total Portfolio
 
Same Store Assets
 
2012
 
2011
 
Change ($)
Favorable/
(Unfavorable)
 
Change (%)
Favorable/
(Unfavorable)
 
2012
 
2011
 
Change ($)
Favorable/
(Unfavorable)
 
Change (%)
Favorable/
(Unfavorable)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rooms
$
446,760

 
$
410,315

 
$
36,445

 
8.9
 %
 
$
394,079

 
$
367,800

 
$
26,279

 
7.1
 %
Food and beverage
273,857

 
267,194

 
6,663

 
2.5
 %
 
246,868

 
235,130

 
11,738

 
5.0
 %
Other hotel operating revenue
82,922

 
80,907

 
2,015

 
2.5
 %
 
66,775

 
66,280

 
495

 
0.7
 %
Lease revenue
4,778

 
5,422

 
(644
)
 
(11.9
)%
 
4,778

 
5,422

 
(644
)
 
(11.9
)%
Total revenues
808,317

 
763,838

 
44,479

 
5.8
 %
 
712,500

 
674,632

 
37,868

 
5.6
 %
Operating Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotel operating expenses
618,276

 
592,306

 
(25,970
)
 
(4.4
)%
 
540,641

 
520,027

 
(20,614
)
 
(4.0
)%
Lease expense
4,580

 
4,865

 
285

 
5.9
 %
 
4,580

 
4,865

 
285

 
5.9
 %
Depreciation and amortization
103,464

 
112,062

 
8,598

 
7.7
 %
 
94,854

 
100,978

 
6,124

 
6.1
 %
Impairment losses and other charges
18,843

 

 
(18,843
)
 
(100.0
)%
 
4,204

 

 
(4,204
)
 
(100.0
)%
Corporate expenses
31,857

 
39,856

 
7,999

 
20.1
 %
 

 

 

 

Total operating costs and expenses
777,020

 
749,089

 
(27,931
)
 
(3.7
)%
 
644,279

 
625,870

 
(18,409
)
 
(2.9
)%
Operating income
31,297

 
14,749

 
16,548

 
112.2
 %
 
$
68,221

 
$
48,762

 
$
19,459

 
39.9
 %
Interest expense, net
(75,272
)
 
(86,274
)
 
11,002

 
12.8
 %
 
 
 
 
 
 
 
 
Loss on early extinguishment of debt

 
(1,237
)
 
1,237

 
100.0
 %
 
 
 
 
 
 
 
 
Loss on early termination of derivative financial instruments

 
(29,242
)
 
29,242

 
100.0
 %
 
 
 
 
 
 
 
 
Equity in losses of unconsolidated affiliates
(13,485
)
 
(9,215
)
 
(4,270
)
 
(46.3
)%
 
 
 
 
 
 
 
 
Foreign currency exchange loss
(1,075
)
 
(2
)
 
(1,073
)
 
(53,650.0
)%
 
 
 
 
 
 
 
 
Other income, net
1,820

 
5,767

 
(3,947
)
 
(68.4
)%
 
 
 
 
 
 
 
 
Loss before income taxes and discontinued operations
(56,715
)
 
(105,454
)
 
48,739

 
46.2
 %
 
 
 
 
 
 
 
 
Income tax expense
(1,011
)
 
(970
)
 
(41
)
 
(4.2
)%
 
 
 
 
 
 
 
 
Loss from continuing operations
(57,726
)
 
(106,424
)
 
48,698

 
45.8
 %
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net of tax
(535
)
 
101,572

 
(102,107
)
 
(100.5
)%
 
 
 
 
 
 
 
 
Net loss
(58,261
)
 
(4,852
)
 
(53,409
)
 
(1,100.8
)%
 
 
 
 
 
 
 
 
Net loss attributable to the noncontrolling interests in SHR’s operating partnership
184

 
29

 
155

 
534.5
 %
 
 
 
 
 
 
 
 
Net loss (income) attributable to the noncontrolling interests in consolidated affiliates
2,771

 
(383
)
 
3,154

 
823.5
 %
 
 
 
 
 
 
 
 
Net loss attributable to SHR
$
(55,306
)
 
$
(5,206
)
 
$
(50,100
)
 
(962.4
)%
 
 
 
 
 
 
 
 
Reconciliation of Same Store Assets Operating Income to Total Portfolio Operating Income:
 
 
 
 
 
 
Same Store Assets operating income
 
 
 
 
 
 
 
$
68,221

 
$
48,762

 
$
19,459

 
39.9
 %
Corporate expenses
 
 
 
 
 
 
 
 
(31,857
)
 
(39,856
)
 
7,999

 
20.1
 %
Corporate depreciation and amortization
 
 
 
 
 
 
 
(979
)
 
(1,141
)
 
162

 
14.2
 %
Non-Same Store Assets operating (loss) income
 
 
 
 
 
 
 
(4,088
)
 
6,984

 
(11,072
)
 
(158.5
)%
Total Portfolio operating income
 
 
 
 
 
 
 
$
31,297

 
$
14,749

 
$
16,548

 
112.2
 %
Operating Data (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of hotels
16

 
15

 
 
 
 
 
13

 
13

 
 
 
 
Number of rooms
6,865

 
6,356

 
 
 
 
 
6,032

 
6,032

 
 
 
 
(1)
Operating data includes the leasehold interest in Marriott Hamburg and excludes unconsolidated affiliates and properties included in discontinued operations.

35


Rooms. Our Same Store Assets contributed to a $26.3 million, or 7.1%, increase in rooms revenue for the year ended December 31, 2012 when compared to the year ended December 31, 2011, which is more fully explained below as part of our rooms revenue Same Store Assets analysis. The components of RevPAR from our Same Store Assets for the years ended December 31, 2012 and 2011 are summarized as follows:
 
Years Ended December 31,
 
2012
 
2011
 
Change (%)
Favorable/
(Unfavorable)
Occupancy
73.9
%
 
72.2
%
 
2.4
%
ADR
253.14

 
242.76

 
4.3
%
RevPAR
187.19

 
175.16

 
6.9
%
The increase in RevPAR for the Same Store Assets resulted from the combination of an increase in ADR and a 1.7 percentage-point increase in occupancy. Rooms revenue increased due to improving market conditions across the majority of our Same Store Assets for the year ended December 31, 2012 when compared to the year ended December 31, 2011. Rooms revenue at the Four Seasons Punta Mita Resort decreased due to the continued declining transient demand resulting from security concerns in Mexico and rooms revenue at the Four Seasons Washington D.C. hotel decreased due to a large group customer in the prior year that did not repeat in the current year.
For the Total Portfolio, rooms revenue increased $36.4 million, or 8.9%, for the year ended December 31, 2012 from the year ended December 31, 2011. In addition to the increase in the Same Store Assets, Total Portfolio rooms revenue also includes a $9.5 million increase of additional rooms revenue generated by the Four Seasons Silicon Valley and the Four Seasons Jackson Hole hotels, which we acquired in March 2011, and a $20.8 million increase of additional rooms revenue generated by the JW Marriott Essex House Hotel, which we acquired in September 2012, offset by a $20.2 million decrease attributed to the Fairmont Scottsdale Princess hotel, which became an unconsolidated affiliate in June 2011. The components of RevPAR from our Total Portfolio for the years ended December 31, 2012 and 2011 are summarized as follows: 
 
Years Ended December 31,
 
2012
 
2011
 
Change (%)
Favorable/
(Unfavorable)
Occupancy
73.8
%
 
72.0
%
 
2.5
%
ADR
265.77

 
247.80

 
7.3
%
RevPAR
196.14

 
178.48

 
9.9
%
Food and Beverage. Our Same Store Assets experienced a $11.7 million, or 5.0%, increase in food and beverage revenue for the year ended December 31, 2012 when compared the the year ended December 31, 2011. Significant increases at the InterContinental Miami hotel, the Ritz-Carlton Laguna Niguel hotel and the InterContinental Chicago hotel were primarily due to higher occupancy and increased revenue at the hotels’ food and beverage outlets, which included the opening of the Michael Jordan's Steak House at the InterContinental Chicago hotel. For the Total Portfolio, food and beverage revenue increased $6.7 million, or 2.5%, when comparing the year ended December 31, 2012 to the year ended December 31, 2011. In addition to the increase in the Same Store Assets, Total Portfolio food and beverage revenue also includes $6.2 million additional food and beverage revenue generated by the Four Seasons Silicon Valley and the Four Seasons Jackson Hole hotels, which we acquired in March 2011, and $5.8 million additional food and beverage revenue generated by the JW Marriott Essex House Hotel, which we acquired in September 2012, offset by a $17.1 million decrease attributed to the Fairmont Scottsdale Princess hotel, which became an unconsolidated affiliated in June 2011.
Other Hotel Operating Revenue. Other hotel operating revenue at the Same Store Assets increased $0.5 million, or 0.7%, for the year ended December 31, 2012 when compared to the year ended December 31, 2011. For the Total Portfolio, other hotel operating revenue increased $2.0 million, or 2.5%, for the year ended December 31, 2012 when compared to the year ended December 31, 2011. In addition to the increase in the Same Store Assets, Total Portfolio other hotel operating revenue also includes a $4.9 million increase of additional other hotel operating revenue generated by the Four Seasons Silicon Valley and the Four Seasons Jackson Hole hotels, which we acquired in March 2011, and a $1.9 million increase of additional other hotel operating revenue generated by the JW Marriott Essex House Hotel, which we acquired in September 2012, offset by a $5.3 million decrease attributed to the Fairmont Scottsdale Princess hotel, which became an unconsolidated affiliate in June 2011.

36


Hotel Operating Expenses. The following table presents the components of our hotel operating expenses for the years ended December 31, 2012 and 2011, including the amount and percentage changes in these expenses between the two years of our Total Portfolio and Same Store Assets (in thousands):
 
Total Portfolio
 
Same Store Assets
 
2012
 
2011
 
Change ($)
Favorable/
(Unfavorable)
 
Change (%)
Favorable/
(Unfavorable)
 
2012
 
2011
 
Change ($)
Favorable/
(Unfavorable)
 
Change (%)
Favorable/
(Unfavorable)
Hotel operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rooms
$
124,896

 
$
114,087

 
$
(10,809
)
 
(9.5
)%
 
$
110,148

 
$
102,886

 
$
(7,262
)
 
(7.1
)%
Food and beverage
199,573

 
192,028

 
(7,545
)
 
(3.9
)%
 
176,300

 
171,018

 
(5,282
)
 
(3.1
)%
Other departmental expenses
211,981

 
207,664

 
(4,317
)
 
(2.1
)%
 
184,924

 
179,085

 
(5,839
)
 
(3.3
)%
Management fees
24,984

 
24,719

 
(265
)
 
(1.1
)%
 
22,231

 
21,084

 
(1,147
)
 
(5.4
)%
Other hotel expenses
56,842

 
53,808

 
(3,034
)
 
(5.6
)%
 
47,038

 
45,954

 
(1,084
)
 
(2.4
)%
Total hotel operating expenses
$
618,276

 
$
592,306

 
$
(25,970
)
 
(4.4
)%
 
$
540,641

 
$
520,027

 
$
(20,614
)
 
(4.0
)%
Hotel operating expenses for our Same Store Assets increased by $20.6 million, or 4.0%, primarily due to:
$8.2 million higher payroll costs resulting from higher occupancy and wage increases at the hotels,
$3.0 million higher credit card and travel agent commissions, which increased due to higher occupancy, rates and food and beverage volume,
$1.8 million higher food and beverage costs due to increased food and beverage consumption and the new Michael Jordan's Steak House at the InterContinental Chicago hotel,
$1.8 million higher real estate taxes,
$1.1 million higher management fees,
$0.8 million higher insurance costs, and
$0.8 million higher marketing costs.
For the Total Portfolio, hotel operating expenses increased by $26.0 million, or 4.4%, for the year ended December 31, 2012 when compared to the year ended December 31, 2011. In addition to the increase at the Same Store Assets, the Total Portfolio hotel operating expenses also includes a $14.4 million increase related to the Four Seasons Silicon Valley and Four Seasons Jackson Hole hotels, which we acquired in March 2011, and a $21.7 million increase related to the JW Marriott Essex House Hotel, which we acquired in September 2012. These increases are offset by a $31.3 million decrease attributed to the Fairmont Scottsdale Princess hotel, which became an unconsolidated affiliate in June 2011.
Depreciation and Amortization. For the Same Store Assets, depreciation and amortization decreased $6.1 million, or 6.1%, for the year ended December 31, 2012 when compared to the year ended December 31, 2011 primarily due to certain assets becoming fully depreciated, partially offset by rooms placed in service subsequent to the third quarter of 2011 at the InterContinental Miami hotel. For the Total Portfolio, depreciation and amortization decreased $8.6 million, or 7.7%, for the year ended December 31, 2012 when compared to the year ended December 31, 2011. In addition to the decrease at the Same Store Assets, the Total Portfolio also includes a decrease in depreciation expense of $6.3 million related to the Fairmont Scottsdale Princess hotel, which became an unconsolidated affiliate in June 2011, partially offset by an increase in depreciation expense of $1.0 million related to the Four Seasons Silicon Valley and Four Seasons Jackson Hole hotels, which we acquired in March 2011, and a $3.0 million increase in depreciation expense related to the JW Marriott Essex House Hotel, which we acquired in September 2012.
Impairment Losses and Other Charges. During the year ended December 31, 2012, we performed an impairment test of long-lived assets related to a Mexican development site as a result of a change in the anticipated holding period for this land and recorded a non-cash impairment charge of $14.6 million. We also recorded a charge of approximately $4.2 million to write off costs related to capital projects that management decided to abandon during the year ended December 31, 2012. There were no impairment losses and other charges recorded during the year ended December 31, 2011.
Corporate Expenses. Corporate expenses decreased $8.0 million, or 20.1%, for the year ended December 31, 2012 when compared to the year ended December 31, 2011. These expenses consist primarily of payroll and related costs, professional fees, travel expenses, office rent, and acquisition costs. The decrease in corporate expenses is primarily due to a $17.2 million decrease in the charge related to the Value Creation Plan. See “Item 8. Financial Statements and Supplementary Data—13. Share-Based

37


Employee Compensation Plans—Value Creation Plan” for further description of this plan. The amounts recorded in corporate expenses related to the Value Creation Plan are based on the fair value of the Value Creation Plan awards, which are based directly on our market capitalization and fluctuate as a result of changes in our stock price and, prior to the VCP Amendment, issuances of shares of our common stock. This decrease was partially offset by an increase in corporate expenses primarily due to an increase in acquisition costs mainly related to the acquisition of the JW Marriott Essex House Hotel, and increases in RSU, severance and legal expenses.
Interest Expense, Net. The $11.0 million, or 12.8%, decrease in interest expense, net for the year ended December 31, 2012 when compared to the year ended December 31, 2011, was primarily due to:
a $10.0 million decrease in expense related to the mark to market of certain interest rate swaps,
a $7.0 million decrease in amortization of interest rate swap costs, and
a $0.5 million increase in capitalized interest, partially offset by
a $3.9 million increase attributable to higher average borrowings,
a $2.3 million increase due to higher average interest rates, and
a $0.3 million increase in the amortization of deferred financing costs.
The components of interest expense, net for the years ended December 31, 2012 and 2011 are summarized as follows (in thousands):
 
Years Ended December 31,
 
2012
 
2011
Mortgages and other debt
$
(72,536
)
 
$
(67,528
)
Bank credit facility
(3,582
)
 
(2,353
)
Amortization of deferred financing costs
(3,993
)
 
(3,721
)
Amortization of interest rate swap costs
(9,150
)
 
(16,111
)
Mark to market of certain interest rate swaps
12,238

 
2,183

Interest income
217

 
173

Capitalized interest
1,534

 
1,083

Total interest expense, net
$
(75,272
)
 
$
(86,274
)
The weighted average debt outstanding for the years ended December 31, 2012 and 2011 amounted to $1.12 billion and $1.06 billion, respectively. At December 31, 2012, including the effect of interest rate swaps, approximately 74.8% of our total debt had fixed interest rates.
Loss on Early Extinguishment of Debt. During the year ended December 31, 2011, we recognized a loss on early extinguishment of debt of $1.2 million primarily due to write offs of unamortized deferred financing costs and other closing costs related to refinancing of certain mortgages and a new bank credit facility.
Loss on Early Termination of Derivative Financial Instruments. During the year ended December 31, 2011, we terminated five interest rate swaps and recorded a charge in loss on early termination of derivative financial instruments of $27.3 million, which included the immediate write-off of $25.5 million previously recorded in accumulated OCL related to interest rate swaps that were designated to hedge cash flows that are no longer probable of occurring and $1.8 million of mark to market adjustments related to the terminated interest rate swaps. In addition, based on changes in the forecasted levels of LIBOR-based debt, we de-designated one interest rate swap as a cash flow hedge. We recorded an additional charge in loss on early termination of derivative financial instruments of $2.0 million for the year ended December 31, 2011 to write off amounts previously recorded in accumulated OCL related to this swap.

38


Equity in Losses of Unconsolidated Affiliates. The following tables present equity in (losses) earnings and certain components included in the calculation of equity in losses resulting from our unconsolidated affiliates.
Year ended December 31, 2012 (in thousands):
 
 
Fairmont Scottsdale Princess Venture(1)
 
Hotel del Coronado Venture(2)
 
Four Seasons Residence Club Punta Mita (RCPM)
 
Total
Equity in (losses) earnings
$
(1,690
)
 
$
(11,947
)
 
$
152

 
$
(13,485
)
Depreciation and amortization
7,145

 
8,021

 
92

 
15,258

Interest expense