Arlington Announces Fourth Quarter

Arlington Hospitality, Inc.
(Nasdaq/NM: HOST), a leading hotel development and management company, primarily of
AmeriHost Inns, today announced results for the fourth quarter and year ended December 31,
Revenues decreased slightly to $76.5 million in 2002, including hotel sale proceeds and
commissions, from $77.2 million the prior year. Operating income declined to $2.0 million in
2002 from $5.6 million in 2001. Net loss for full- year 2002 was $(1.7) million, or $(0.34) per
diluted share, compared to net income of $755,000, or $0.13 per diluted share, in 2001. The net
loss included: (i) an extraordinary gain of $197,000, net of tax, from an insurance settlement; (ii)
certain one-time expenses of approximately $683,000, pre-tax, relating to a change in
management and recruitment of a new CEO and (iii) non-cash charges of approximately
$642,000, pre-tax, for impairment adjustments on primarily non-core (non-AmeriHost Inn branded) hotels. The net loss was due primarily to further deterioration in results at the
company’s non-core assets (non-AmeriHost Inn hotels) and margin pressure at all hotels due to
higher insurance and energy costs, as well as room rate compression.
Net income plus depreciation and amortization was $3.6 million in 2002, compared to
$5.4 million in the 2001 like period. Net income plus deprecation is not defined by generally
accepted accounting principles (GAAP), however, the company believes it provides relevant
information about its operations and is important in understand ing the company’s results, given
its significant investment in real estate. Net income plus depreciation and amortization is
defined as net income before extraordinary items, adjusted to eliminate the impact of
depreciation and amortization.
“The prolonged sluggish economy and continuing concerns with geopolitical events had
a significant impact on the lodging industry throughout the year,” said Jerry H. Herman,
Arlington Hospitality president and chief executive officer. “Despite one of the most difficult
operating periods in hotel industry history, the company’s same-room revenue per available
room (RevPAR) for its 66 owned AmeriHost Inn hotels rose 3.7 percent in 2002 to $33.86,
compared to a 0.6 percent decline for the mid-scale without food and beverage segment,
according to Smith Travel Research,” he pointed out. Occupancy rose to 59.1 percent, while
average daily rate declined to $57.26. “We attribute the RevPAR improvement to our drive-to
locations, primarily in smaller towns, which have been less impacted by the general economy,
and to aggressive marketing by our hotels.”
Revenues improved to $19.6 million from $18.2 million during the 2001 fourth quarter.
Fourth quarter 2002 operating loss was $(1.7) million, compared to operating income of
$466,162 in the 2001 fourth quarter. For the three months ended December 31, 2002, the
company reported a net loss of $(1.9) million, or $(0.39) per diluted share, compared to a net loss
of $(634,000), or $(0.13) per diluted share during the same period a year earlier. The net loss
was due primarily to the seasonality of the company’s business and other factors as discussed
above. In addition, the net loss includes: (i) an extraordinary gain of $197,000, net of tax, from
an insurance settlement; (ii) certain one-time expenses of approximately $300,000, pre-tax,
relating to a change in management and recruitment of a new CEO and (iii) non-cash charges of
approximately $542,000, pre-tax, for impairment adjustments on primarily non-core hotels.
Selling AmeriHost and non-strategic hotels from its portfolio is a key component of the
company’s growth strategy. In 2002, the company was involved in the sale of seven AmeriHost
properties and one non-core hotel, compared to nine hotels the prior year. Four of the seven
AmeriHost hotels were 100 percent owned by the company and sold in the aggregate for gross
proceeds of $9.6 million, resulting in a gain of $1.4 million and a $7.1 million reduction in debt
for the company.
“We are evaluating ways to accelerate the turnover of our assets and reinvest the
proceeds in new projects.” Herman said. “In 2003 year-to-date, the company and a joint
venture in which the company has an ownership interest, already has sold three AmeriHost Inns and have an additional four hotels under contract for sale.” The company expects to
consummate these transactions during the next six months. Although the company has these
hotels under contract for sale with non-refundable cash deposits in most cases, certain conditions
to closing remain and there can be no assurance that these sales will be consummated as
Herman noted that the company also continued to develop hotels in 2002, one of its core
growth strategies. During the year, the company began construction on three AmeriHost Inns;
opened four AmeriHost Inns, including one property for a joint venture in which the company
has an ownership interest; and one property for an unrelated third party. In addition, the
company acquired one AmeriHost Inn hotel from a joint venture in which it had a minority
interest. The company currently is building two AmeriHost Inn hotels, which are expected to
open in the 2003 second quarter.
“We believe we are at or near the bottom of the cycle and are examining a number of new
development opportunities so that we can be on the leading edge when the economy begins to
rebound,” Herman said. “We have extensive experience in developing for third parties, as well
as for our own account, and want to maximize the significant opportunities we see ahead. Our
focus will be to expand primarily through joint ventures, which will allow us to maximize the
number of properties in development, subject to rigorous market and investment analysis.”
Herman commented that the company will continue to aggressively assist Cendant
Corporation (NYSE: CD), the franchisor of AmeriHost Inn hotels, in expansion of the brand.
Arlington Hospitality sold the AmeriHost Inn brand name to Cendant in 2000. During 2002, the
Company received $2.0 million in development incentive fees and royalty sharing fees as a result
of its agreement with Cendant, a portion of which is accounted for as deferred income. “We
have very attractive incentives to develop and sell AmeriHost Inn properties, and we will
accelerate our activity as conditions warrant.
“The AmeriHost chain has approximately 100 properties, which gives the brand the
economies of scale to market more aggressively, including national advertising. In addition,
Cendant has indicated that it will launch a guest frequency program later in the year to build
guest loyalty. We believe these and other initiatives by Cendant will increase brand awareness
and, as a result, will enhance returns and the value of the properties. In addition, the AmeriHost
product is a growing brand comprised primarily of new-construction properties, which are in top
physical condition, making these branded hotels highly attractive for acquisition,” he said.
Development proficiency—In 2002, the company opened four properties in an average
construction time of 125 days per hotel, after pouring the foundation slab. This speed of
completion, coupled with a low average construction cost of $39,500 to $42,500 per
room, makes Arlington Hospitality one of the most efficient and cost-effective hotel
developers in the mid- market, limited-service segment.
Balance sheet strength—Total shareholders’ equity was approximately $17.4 million, or
$3.50 per outstanding common share, at December 31, 2002. In addition, the company
had approximately $10.9 million in deferred income as of December 31, 2002, or $1.31
per outstanding share after tax, which represents cash already received by the company
and will be amortized into income in future periods for financial reporting purposes
pursuant to GAAP.
Corporate governance—Since June 2002, Arlington Hospitality has adopted strong
corporate governance changes that enhance the independent composition and
independent functioning of the company’s board. Key elements include mandating that
a super- majority of two-thirds of the board and 100 percent of its key committees be
composed of independent directors. To date, five new directors have been elected to the
seven- member board. The board meets regularly in non-management executive session,
and the chairman of the board position has been made independent and separate from the
chief executive officer. In February 2003, an independent director was named vice
chairman as part of the board’s program to improve succession planning.
Management depth—Jerry Herman, a 20-year hotel and real estate veteran, joined the
company as chief executive officer and member of the board in early January 2003. In January, Herman purchased 40,000 shares of restricted common stock of the company at
a price of $3.16 per share.