Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002                                 Commission file number 001-11975

Boykin Lodging Company
(Exact Name of Registrant as Specified in Its Charter)

(216) 430-1200

     Indicate by check mark whether the registrant (1) has filed all reports 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 No

     The number of common shares, without par value, outstanding as of August 2, 2002: 17,255,117

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

BOYKIN LODGING COMPANY
INDEX TO FINANCIAL STATEMENTS

Table of Contents

BOYKIN LODGING COMPANY

The accompanying notes to consolidated financial statements are an integral part of these balance sheets.

3

Table of Contents

BOYKIN LODGING COMPANY

4

Table of Contents

BOYKIN LODGING COMPANY

The accompanying notes to consolidated financial statements are an integral part of this statement.

5

Table of Contents

BOYKIN LODGING COMPANY

The accompanying notes to consolidated financial statements are an integral part of these statements.

6

Table of Contents

BOYKIN LODGING COMPANY

1. BACKGROUND:

     Boykin Lodging Company (“Boykin”), an Ohio corporation, is a real estate investment trust (“REIT”) that owns hotels throughout the United States. As of June 30, 2002, Boykin owned interests in 33 hotels containing a total of 9,257 guest rooms located in 19 states.

Formation and Significant Events

     Boykin was formed and completed an initial public offering (“IPO”) in 1996 to continue and expand the over 40-year history of hotel ownership, acquisition, redevelopment and repositioning activities of its predecessors, Boykin Management Company and its affiliates. Boykin Hotel Properties, L.P., an Ohio limited partnership (the “Partnership”), is the operating partnership that transacts business and holds the direct and indirect ownership interest in Boykin’s hotels. As of June 30, 2002, Boykin had an 85.0% ownership interest in and is the sole general partner of the Partnership.

     Since the IPO, Boykin has expanded its hotel portfolio by using capital raised through a combination of common share issuances, various debt financings, capital from strategic joint venture partners and cash flow generated from operations.

Taxable REIT Subsidiary

     The Work Incentives Improvement Act of 1999 (“REIT Modernization Act”) amended the tax laws to permit REITs, like Boykin, to lease hotels to a subsidiary that qualifies as a taxable REIT subsidiary (“TRS”) as long as the TRS engages an independent hotel management company to operate those hotels under a management contract. Boykin implemented this structure for the properties previously leased to Boykin Management Company Limited Liability Company (“BMC”) and certain of its subsidiaries and Meristar Hotels and Resorts, Inc. (“Meristar”) effective January 1, 2002. Subsequent to these transactions, all but two of the 33 hotel properties Boykin owns an interest in are operated under the TRS structure.

     The transaction included the Partnerships acquisition of 16 subsidiaries of BMC. The Partnership acquired these entities, whose primary assets were leasehold interests in 25 hotel properties owned by the Partnership, and certain working capital assets and liabilities of those hotels, for consideration comprised of 1,427,142 limited partnership units valued at $11.4 million (based upon the average closing price of the common shares for the five-day period prior to the closing of the transaction), and the assumption of $1.6 million of working capital liabilities in excess of assets relating to Westboy LLC (“Westboy”), one of the subsidiaries. The Partnership then contributed the acquired subsidiaries to Bellboy, Inc. (“Bellboy”), a wholly owned subsidiary of the Partnership. Bellboy has elected to be treated as a TRS.

     Effective December 31, 2001, Boykin terminated percentage lease agreements with affiliates of Meristar for two hotel properties owned by Boykin. These hotel properties were subsequently leased to subsidiaries of Bellboy. A Meristar affiliate also assigned a percentage lease agreement for a third hotel property Boykin owns to a subsidiary of Bellboy.

     Effective January 1, 2002, Boykin entered into new management agreements with BMC to operate 15 of the hotels previously leased to BMC and with Meristar to operate the three hotels previously leased to them. The BMC Management Agreements have terms of three to nine years, but are cancelable by Boykin without penalty upon 90 days notice. The Meristar management agreements have terms of five to six years, and are also cancelable by Boykin without penalty upon 90 days notice.

7

Table of Contents

     Westboy is party to an existing long-term management agreement with a subsidiary of Hilton Hotels Corporation (“Hilton”) to operate ten Doubletree branded hotels. This management agreement has a remaining term of ten years and Hilton has ten successive options to extend the term by five years each. Except with respect to the three Doubletree hotels located in the state of Washington, the agreement with Hilton may not be terminated without penalty.

     As a result of the TRS transactions discussed above, the consolidated financial statements for 2002 and going forward include the operating results of the consolidated hotels operated by BMC, Hilton and Meristar. Previously, revenues were derived primarily from lease payments which were made out of the net operating income of the properties; now revenues are generated from total revenues from the properties with the related operating expenses also being reported.

Consolidated Joint Ventures

     Boykin currently has strategic alliances with three hotel operators and owns three hotels with them through joint venture structures. These properties are managed by their respective joint venture partner. The following table sets forth the joint ventures established with these hotel operators:

Unconsolidated Joint Ventures

     Boykin currently has a 25% ownership interest in a joint venture with AEW Partners III, L.P. (“AEW”), an investment partnership managed by AEW Capital Management, L.P., a Boston-based real estate investment firm. The Boykin/AEW venture has a 75% ownership interest in Boykin Chicago, LLC, which owns a hotel in downtown Chicago. Boykin owns the remaining 25% ownership interest in Boykin Chicago, LLC thereby resulting in Boykin’s total ownership percentage in the hotel of 43.75%.

     In July 2001, Boykin formed a joint venture with Concord Hospitality Enterprises (“Concord”), a privately owned hotel investment and management company based in Cleveland, Ohio. Boykin has a 50% ownership interest in the joint venture, which acquired a 227-room full-service hotel in Lyndhurst, New Jersey.

     Because of the non-controlling nature of Boykin’s ownership interests in these joint ventures, Boykin accounts for these investments using the equity method.

8

Table of Contents

     The following table sets forth the total assets and liabilities of the unconsolidated joint ventures discussed above as of June 30, 2002 and December 31, 2001:

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

     The separate financial statements of Boykin, the Partnership, Bellboy and the consolidated joint ventures discussed above are consolidated because Boykin exercises unilateral control over these entities. All significant intercompany transactions and balances have been eliminated.

     These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The operations of the hotels have historically been seasonal. Twenty-nine hotels historically maintained higher occupancy rates during the second and third quarters while the four hotels located in Florida have historically experienced their highest occupancy in the first quarter. For further information, refer to the consolidated financial statements and footnotes thereto included in Boykin’s annual report on Form 10-K for the year ended December 31, 2001.

Inventories

     Inventories consisting primarily of food and beverages and gift store merchandise are stated at the lower of first-in, first-out cost or market.

Revenue Recognition

Hotel revenues — Hotel revenues including room, food, beverage and other hotel revenues, are recognized as earned. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

9

Table of Contents

Lease revenue — Actual payments due from tenants under the percentage leases were $1,628 and $20,860 for the three months ended June 30, 2002 and 2001, respectively. However, under the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition in Financial Statements”, percentage lease revenue is recorded net of deferred lease revenue of $243 and $4,522 for the three months ended June 30, 2002 and 2001, respectively. Actual payments due from tenants under the percentage leases were $2,930 and $40,400 for the six months ended June 30, 2002 and 2001, respectively. Percentage lease revenue is recorded net of deferred lease revenue of $262 and $7,825 for 2002 and 2001, respectively. Under the provisions of SAB No. 101, a portion of Boykin’s percentage lease revenues are deferred in the first, second and third quarters, and will be recognized in the fourth quarter as specified targets are achieved. SAB No. 101 has no impact on Boykin’s interim cash flow or year-ended results of operations.

Sale of Condominium Units

     During 2001, Boykin completed a $2,700 renovation of a 60-unit tower at the Pink Shell Beach Resort in Ft. Myers Beach, Florida. These renovated studio units are being sold as Sanibel View Villas Condominiums, with the expectation that the unit owners will make their units available by contract for rental as hotel rooms. The revenue related to the sale of the units is recorded upon closing of the sale. Through June 30, 2002, 17 of these units have sold, netting revenues in excess of the renovation cost of the entire project. The cost basis of the unsold units as of June 30, 2002 of $6,459 is reflected in the consolidated balance sheets as other assets.

Fair Value of Financial Instruments

     Effective January 1, 2001 Boykin adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities”. This statement requires companies to carry all derivative instruments, including embedded derivatives, in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. For financial reporting purposes, the change in market value of the effective portion of the hedge flows through the other comprehensive income component of equity. All other changes will flow through earnings.

     The impact of adopting SFAS No. 133 was the recognition of an unrealized loss of $373, net of minority interest of $32, related to Boykin’s existing interest rate cap, which is reflected as a one-time effect of a change in accounting principle in Boykin’s statement of operations and comprehensive income for the six months ended June 30, 2001. The interest rate cap is with a third party and is valued at $2 at June 30, 2002 based upon estimated market valuations. Changes in the fair value of the interest rate cap are recorded through the statement of operations.

     In March 2001, Boykin entered into an interest rate swap that fixes the overall interest rate at 7.32% on $83,000 of debt. The estimated fair market value of the swap as of June 30, 2002 is reflected as other comprehensive loss of $2,484 in shareholders’ equity, with a corresponding liability in the accompanying balance sheet. In connection with the execution of this swap contract, Boykin wrote an option contract (reverse cap contract) until July 2003 with a notional balance of $83,000 and a LIBOR based strike price of 7.90%, obligating Boykin as the floating rate counterparty. This contract is with a third party and was valued in a payable position of $2 at June 30, 2002 with changes in the contract’s fair value recorded in the statement of operations.

New Accounting Pronouncements

     Effective January 1, 2002, Boykin adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  As of June 30, 2002, SFAS No. 144 had no impact on the accompanying financial statements.

10

Table of Contents

Reclassifications

     Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation.

     3.     EARNINGS PER SHARE:

     Boykin’s basic and diluted earnings per share for the three and six months ended June 30, 2002 and 2001 are computed under the provisions of SFAS No. 128, “Earnings per Share”. Basic earnings per share is based on the weighted average number of common shares outstanding during the period whereas diluted earnings per share adjusts the weighted average shares outstanding for the effect of all dilutive securities. For the three and six months ended June 30, 2002 and 2001, the weighted average basic and diluted common shares outstanding was as follows:

4. MINORITY INTEREST/LIMITED PARTNERSHIP UNITS OUTSTANDING:

     A total of 2,718,256 and 1,291,114 limited partnership units were issued and outstanding at June 30, 2002 and 2001, respectively. The weighted average number of limited partnership units outstanding for the three and six month periods ended June 30, 2002 and 2001 were 2,718,256 and 1,291,114, respectively. For the three and six months ended June 30, 2002 and 2001, the weighted average basic and diluted common shares and limited partnership units outstanding was as follows:

5. INTERCOMPANY CONVERTIBLE NOTE:

     In 1996, Boykin loaned $40,000 to the Partnership in exchange for an intercompany convertible note. The terms of the note have been renewed to extend the maturity date to November 2006 and, effective November 2001, amended the interest rate to 8.05%, payable quarterly. The note may be prepaid in full, but not in part, at any time. Boykin has the right to convert the note, prior to maturity and in advance of any proposed prepayment by the Partnership, into additional equity interests in the Partnership at $20 per share. The note is secured by mortgages on certain hotel properties. The note and related interest are eliminated upon consolidation.

6. CREDIT FACILITY:

     In March 2002, Boykin negotiated new terms to its secured credit facility which enables Boykin to borrow up to $65,000, subject to borrowing base and loan-to-value limitations, at a rate that ranges between LIBOR plus 2.25% to 4.00% (5.38% as of June 30, 2002), as defined. Boykin is required to pay a ..25% fee on

11

Table of Contents

the unused portion of the credit facility. The facility expires in July 2003 and contains a one-year extension option, subject to certain approvals. The credit facility is secured by seven hotel properties. Outstanding borrowings against the credit facility at June 30, 2002 and December 31, 2001 were $40,000 and $39,000, respectively.

     The credit facility requires Boykin, among other things, to maintain a minimum net worth, a coverage ratio of EBITDA to debt service, a coverage ratio of EBITDA to debt service and fixed charges and a maximum leverage ratio. Further, Boykin is required to maintain the franchise agreement at each hotel and to maintain its REIT status. Boykin was in compliance with its covenants at June 30, 2002.

7. TERM NOTES PAYABLE:

     Red Lion Inns Operating L.P. (“OLP”), a wholly-owned subsidiary of the Partnership, has a $130,000 term loan agreement that expires in June 2023 and may be prepaid without penalty after May 21, 2008. The outstanding balance as of June 30, 2002 was $125,922. The loan bears interest at a fixed rate of 6.9% until May 2008, and at a new fixed rate to be determined thereafter. The loan is secured by ten Doubletree hotels and requires principal repayments based on a 25-year amortization schedule. Under covenants in the loan agreement, assets of OLP are not available to pay the creditors of any other Boykin entity, except to the extent of permitted cash distributions from OLP to Boykin. Likewise, the assets of other Boykin entities are not available to pay the creditors of OLP. The loan agreement also requires OLP to hold funds in escrow for the payment of capital expenditures, insurance and real estate taxes. The term note also requires OLP to maintain certain financial reporting requirements. OLP was in compliance with these requirements at June 30, 2002 and December 31, 2001.

     In March 2002, Boykin renegotiated the terms of the $45,000 term loan agreement that expires in October 2002, with the option of an extension to July 2003. The loan is secured by three hotel properties and bears interest at a rate that fluctuates at LIBOR plus 2.00% to 4.00% (5.35% at June 30, 2002). The loan agreement requires Boykin, among other things, to maintain a minimum net worth, a coverage ratio of EBITDA to debt service and fixed charges, and to maintain a leverage ratio below a specified level. Boykin is required to maintain the franchise agreement at each hotel and to maintain its REIT status. Boykin was in compliance with its covenants at June 30, 2002.

     Boykin Holding, LLC (“BHC”), a wholly-owned subsidiary of the Partnership, has a $108,000 term loan agreement. The loan matures in July 2003 and contains two one-year extension options. The loan is secured by nine hotel properties and bears interest at a rate that fluctuates at LIBOR plus 2.35% (4.19% at June 30, 2002). Under covenants in the loan agreement, assets of BHC are not available to pay the creditors of any other Boykin entity, except to the extent of permitted cash distributions from BHC to Boykin. Likewise, the assets of other entities are not available to pay the creditors of BHC. The loan agreement also requires BHC to hold funds in escrow for the payment of capital expenditures, insurance and real estate taxes and requires BHC to maintain certain financial reporting requirements. BHC was in compliance with these requirements at June 30, 2002 and December 31, 2001.

     In March 2001, the Partnership entered into an interest rate swap, which fixes the overall interest rate at 7.32% on $83,000 of debt designated to BHC’s $108,000 term note until July 2003. BHC also has interest rate protection on the remaining $25,000 to cap the overall loan interest rate at no more than 10.25%.

     Maturities of long-term debt at June 30, 2002 are as follows:

12

Table of Contents

8. RELATED PARTY TRANSACTIONS:

     The Chairman and Chief Executive Officer of Boykin is the majority shareholder of BMC. BMC and Westboy LLC, previously a subsidiary of BMC, were a significant source of Boykin’s percentage lease revenue through December 31, 2001. As of December 31, 2001, Boykin had rent receivable of $1,118 due from related party lessees. As of December 31, 2001, Boykin had related party payables to BMC of $90 primarily for the reimbursement of capital expenditure costs incurred on behalf of Boykin. Boykin paid a $1,600 lease termination fee to BMC related to the sale of the Daytona Beach Radisson Resort in January 2001.

     As a result of the TRS transaction discussed in Note 1, Boykin acquired 16 subsidiaries of BMC whose primary assets were leasehold interests in 25 hotel properties owned by Boykin. At December 31, 2001, Boykin had recorded a receivable from BMC of $2,008 for the net working capital assets of the subsidiaries acquired. As of June 30, 2002, $642 of the receivable remains outstanding.

     Also in conjunction with the TRS transaction, effective January 1, 2002, BMC manages 15 of the properties in which Boykin owns interest. Management fees earned by BMC related to these hotels during the three and six month periods ended June 30, 2002 totaled $1,208 and $2,057, respectively. As of June 30, 2002, Boykin had related party payables to BMC of $573 primarily related to management fees and reimbursements of expenses on behalf of the hotel properties. During 2001, a subsidiary of BMC managed the Radisson Hotel Mt. Laurel pursuant to a management agreement. Boykin paid the BMC subsidiary management fees of $60 and $103, respectively, for the three and six months periods ending June 30, 2001.

     Through June 30, 2002, Boykin paid a wholly-owned subsidiary of BMC $138 and $5, respectively, for design and project management services related to capital improvements at its hotels. During 2001, the subsidiary sold a portion of its business to an unrelated third party. A portion of the sales price is contingent upon future revenues of the business, including revenues from Boykin.

9. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:

     During the six-month period ended June 30, 2001, there was $6,814 of dividends and Partnership distributions which were declared but not paid as of June 30, 2001. As of June 30, 2002, there were no dividends or Partnership distributions that were declared but not paid.

     Interest paid during the six-month periods ended June 30, 2002 and 2001 was $10,148 and $11,172, respectively.

     In the first half of 2002, Boykin issued 98,170 common shares, valued at $856 under Boykin’s Long-Term Incentive Plan.

10. INCOME TAXES

     Effective January 1, 2002, Bellboy elected to be treated as a TRS of the Partnership and as such, is subject to federal and state income taxes. Bellboy accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” As of June 30, 2002, Bellboy has a deferred tax asset of approximately $1.0 million, prior to any valuation allowance, related to the assumption of the retained deficit of Westboy as well as the operating losses of Bellboy and its subsidiaries during the six month period then ended. Boykin has recorded a 100% valuation allowance against this asset due to the uncertainty of realization of the deferred tax asset and therefore, no provision or benefit from income taxes is reflected in the accompanying consolidated statements of operations.

13

Table of Contents

11. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

     The following unaudited pro forma information for the three and six months ended June 30, 2001 is presented as if the following transactions had occurred as of January 1, 2001:

	•		acquisition of lessees from BMC;
	•		the issuance of 1,427,142 Partnership units to a BMC subsidiary;
	•		entering into the BMC management agreements;
	•		termination/assignment of Meristar leases;
	•		entering into the Meristar management agreements; and
	•		termination of the percentage lease for a hotel in Chicago, Illinois owned by an unconsolidated joint venture, and a new TRS owned by that joint venture entering into a management contract with a BMC subsidiary.

14

Table of Contents

15

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BACKGROUND AND BUSINESS STRATEGIES

     Boykin Lodging Company, an Ohio corporation, is a real estate investment trust (“REIT”) that currently owns interests in 33 hotels throughout the United States. Boykin Lodging was formed and completed an initial public offering in 1996 to continue and expand the over 40-year history of hotel ownership, acquisition, redevelopment and repositioning activities of its predecessors, Boykin Management Company and its affiliates (the “Boykin Group”). Boykin Hotel Properties, L.P., an Ohio limited partnership (the “Partnership”), is the operating partnership entity that transacts business and holds the direct and indirect ownership interests in our hotels. As of June 30, 2002, Boykin Lodging Company had an 85.0% ownership interest in, is the sole general partner of and does all its business through the Partnership.

     Our primary business objectives are to maximize current returns to our shareholders by increasing cash flow available for distribution and long-term total returns to shareholders through appreciation in value of our common shares. We seek to achieve these objectives through the following key business strategies relating to the ownership and operation of our hotels:

•

Maximizing operating cash flows of our hotels through:

	•		aggressive asset management to maximize revenue and minimize expenses;
	•		selective renovation;
	•		expansion and development; and
	•		improved brand positioning;

	•		Focused portfolio management including acquiring upscale, full-service commercial and resort hotels located in urban and beach markets at a discount to their replacement cost and selectively disposing of non-core suburban assets;
	•		Branding our hotels with the industry’s premier upscale franchises or by being independent of franchise affiliations in markets that can support this; and
	•		Contracting with high-quality, experienced hotel management companies to operate our hotels effectively by maximizing their cash flow and value.

SECOND QUARTER HIGHLIGHTS AND OUTLOOK FOR THE REMAINDER OF 2002

     Refer to the “Results of Operations” section below for discussion of our second quarter 2002 results compared to 2001 actual and pro forma results.

     In spite of a challenging operating environment, we are seeing an improvement in the RevPAR trend at our properties as we experienced a total portfolio RevPAR decline of 10.6% for the second quarter 2002 from the second quarter 2001 versus the first quarter 2002 decline of 16.0% from the first quarter 2001.

     Based on our year to date results and our current booking trends, our outlook is for third quarter RevPAR to be flat to up 3% over the same period last year, with a full year 2002 RevPAR 3% to 5% below 2001. With these assumptions, we expect that our funds from operations (“FFO”) could range between $0.44 and $0.53 per diluted share in the third quarter and $1.45 and $1.65 per share for the full year. For a definition of FFO, a reconciliation of net income to FFO and a discussion of why we believe FFO is an important measure to investors of a REIT’s financial performance, see “Results of Operations” section below.

     As a result of the recent trends in the industry, our Board of Directors suspended the quarterly dividend in the fourth quarter 2001. Based upon our current guidance, we anticipate that management will recommend to the Board of Directors the resumption of a regular dividend in the third quarter

16

Table of Contents

at a rate of $0.18 per share for the remaining two quarters of 2002. Please refer to the “Liquidity and Capital Resources” section below for further discussion regarding our dividend policy going forward.

Capital Projects

     Through June 30, 2002, we had approximately $5.7 million of fixed asset additions at our hotels, excluding the Chicago Executive Plaza and Meadowlands projects discussed below. This amount primarily includes planned refurbishments and replacements at selected existing hotels. Significant portions of this total relate to the guestroom renovation at our Buffalo Marriott property and a ballroom renovation and a new air conditioning system at the Omaha Doubletree.

     We are proceeding with the expansion project at the Pink Shell Beach Resort which will increase the resort by 39 rooms. The project includes demolishing 53 cottage units and constructing a new 92-unit tower called White Sand Villas, which will significantly upgrade the character of the resort. During the second quarter, we reached our targeted pre-sales of the units and we are currently in the final stages of negotiations with lenders to obtain financing for the construction of the new tower. The units in the tower will be sold as condominiums, with the expectation that the owners would put their unused room nights back to the resort by contract. Total construction costs of the condominium tower are estimated to be $24.0 million with a scheduled completion date at the end of 2003.

     Our approximate $20.0 million renovation of the Chicago Executive Plaza hotel is on target for a September completion, when the hotel will be renamed ‘Hotel 71’. Through June 30, 2002, the joint venture which owns the property had spent approximately $14.8 million towards the total renovation costs, which are being funded through equity contributions to the joint venture and draws on the construction loan previously secured. During the six months ended June 30, 2002, we provided $3.5 million of equity funding towards the renovation. As a result of the renovation, there were approximately 10,000 and 17,300 room nights out of service at the hotel for the first and second quarters of 2002. We anticipate an additional 5,500 room nights out of service during the third quarter when the project is scheduled for completion.

Ancillary Conference Center Strategy

     We have identified a potential opportunity to increase performance levels of our existing properties through the development of International Association of Conference Centers (“IACC”) accredited ancillary conference facilities within a select group of our hotels. The development of IACC-approved facilities is anticipated to serve the needs of corporations and businesses requiring state-of-the art training facilities and thus substantially improve hotel business traffic. After conducting market focus groups and consulting with another company that has successfully implemented this strategy, we have identified the possibility of implementing such facilities within several of our hotels. We are moving forward with this concept at our Berkeley property and anticipate completion of the upgraded facilities and receipt of IACC accreditation in the first quarter of 2003.

Taxable REIT Subsidiary

     Effective January 1, 2002, we took advantage of the restructuring available under the Work Incentives Improvement Act of 1999 (“REIT Modernization Act”). The REIT Modernization Act amended the tax laws to permit REITs, like us, to lease hotels to a subsidiary that qualifies as a taxable REIT subsidiary (“TRS”) as long as the TRS engages an independent hotel management company to operate those hotels under a management contract. We acquired a total of 28 leasehold interests in our hotels from two of our operators, Boykin Management Company Limited Liability Company (“BMC”) and Meristar Hotels and Resorts, Inc. (“Meristar”), and entered into management contracts with them effective January 1, 2002. Following these transactions, 31 of our 33 hotels are operated under the TRS structure whereby the hotels are leased to a TRS of Boykin Lodging. The transactions also resulted in the assumption of the net working capital of the leasehold interests and the issuance of 1,427,142 partnership units to BMC. The results of operations of the hotels operated by BMC, Hilton and Meristar are now recorded in our consolidated financial statements, which replace the previously recorded percentage lease revenue from these properties.

     We believe that the new TRS structure will enhance our long-term performance, better align the interests of our operators with ours, and allow us to benefit from expense management initiatives which can be

17

Table of Contents

implemented and monitored more closely. In addition, we believe that our flexibility has been significantly enhanced because the new management agreements with BMC and Meristar are terminable by us without penalty, whereas the previous percentage leases provided for significant termination penalties even if we sold a property.

RESULTS OF OPERATIONS

     As of January 1, 2002, we are reporting the hotel operating revenues and expenses with respect to the hotels included within the TRS transactions discussed above, whereas in the past, we reported percentage lease revenue. As a result, the results of operations for the quarter and six month period ended June 30, 2002 are not directly comparable to the same periods in 2001.

Quarter Ended June 30, 2002 Compared to Pro Forma 2001

     Total revenues decreased 5.3% to $68.6 million for the second quarter 2002 versus the same period 2001 pro forma total of $72.4 million. Hotel revenues for the three months ended June 30, 2002 were $66.5 million, which is a decrease of 6.3% from the $71.0 million in hotel revenues for the same pro forma period in 2001. Overall hotel operating revenues have been affected by the recent status of the economy and the hotel industry. Please refer to the key operating statistics data below.

     Gross operating profit of the consolidated hotels under the TRS structure for second quarter of 2002 of 30.0% remained consistent with the 30.2% gross operating profit for pro forma second quarter 2001. In 2002 there were no deferred incentive management fees incurred to Hilton as the maximum deferral was reached in the prior year. In addition, we have been able to realize the benefits of cost containment initiatives implemented by our operators since September 11th which have enabled us to improve our flow-through and keep our margins consistent during a period of declining revenues.

     Included in second quarter revenues is $.4 million related to revenues from the sales of two Sanibel View Villas condominium units. The renovation and conversion of the Sanibel View building to condominiums was completed in late 2001, therefore, no sales had occurred in the same period of the previous year. The related costs of the units sold totaling $.3 million are included in the second quarter 2002 results.

     Interest expense decreased $.4 million due to significant decreases in the weighted average interest rate on our variable rate debt during the second quarter of 2002 versus pro forma 2001 despite the average outstanding balance on the debt being higher in 2002.

     As a result of the above, the second quarter 2002 net income decreased to $2.9 million compared to the same period last year when pro forma net income totaled $5.0 million.

     Our FFO for the quarter ended June 30, 2002 was $10.8 million compared to $13.8 million for pro forma 2001.

Quarter Ended June 30, 2002 Compared to Actual 2001

     Total revenues increased to $68.6 million from $18.6 million primarily as a result of the TRS transaction discussed above.

     Lease revenue decreased to $1.4 million versus $16.3 million for 2001 because during the second quarter 2002, there were only two properties which were not under the TRS structure for which we continued to record lease revenues. Hotel revenues increased to $66.5 million from $2.0 million in the prior year as we acquired the leasehold interests in 28 properties through the TRS transaction and we now record their hotel operating revenues. Please refer to the “Quarter Ended June 30, 2002 Compared to Pro Forma 2001” section above for discussion regarding changes in revenues from sale of condominium units and the related cost of units sold.

     Similar to total revenues, total expenses increased substantially to $65.0 million for the second quarter 2002 versus $18.5 million for the same period in 2001. Hotel operating expenses, which include hotel departmental expenses, indirect expenses and management fees, increased to $46.5 million from $1.4 million in

18

Table of Contents

the prior year due to the inclusion of the results of the 28 properties for which we acquired leasehold interest in connection with the TRS transaction. Property taxes, insurance and other expense increased $1.0 million over prior year due to increases in property and casualty insurance rates and the inclusion of related costs at the hotel property level in our operating results under the TRS structure.

     Please refer to the “Quarter Ended June 30, 2001 Compared to Pro Forma 2001” section above for discussion regarding the $.4 million decrease in interest expense versus actual 2001 results.

     As a result of the above, the second quarter 2002 net income increased to $2.9 million compared to the same period last year net income of $1.2 million.

     Our funds from operations for the quarter ended June 30, 2002 was $10.8 million compared to $12.9 million in 2001.

Six Months Ended June 30, 2002 Compared to Pro Forma 2001

     Total revenues decreased 6.8% to $129.5 million for the six months ended June 30, 2002 versus the same period 2001 pro forma total of $139.0 million due to a general softening in the economy and the impact on the travel industry from the aftermath of September 11th.

     Included in revenues is $3.7 million from the sales of 17 Sanibel View Villas condominium units during the six months ended June 30, 2002. The renovation and conversion of the Sanibel View building to condominiums was completed in late 2001, therefore, no sales had occurred in prior periods. The related costs of the units sold totaled $2.8 million and were also recorded during the six months ended June 30, 2002.

     During the first six months of 2002, gross operating profit averaged 27.9% compared with 28.1% gross operating profit for pro forma 2001. Even though hotel operating revenues have declined over prior year, we were able to maintain margin levels due to the continuation of cost control initiatives implemented at the properties after September 11th. In addition, in 2002 there were no deferred incentive management fees incurred to Hilton as the maximum deferral was reached in the prior year.

     Property taxes, insurance and other expenses increased $.5 million over prior due to significant increases in insurance rates. Corporate general and administrative expense increased $.8 million over prior year due primarily to non-recurring charges incurred in the first quarter of 2002. Amortization of financing costs increased $.4 million due to the additional deferred financing costs incurred in conjunction with the amendments of the credit facility and $45.0 million term note in the first quarter.

     Offsetting these increases is a $1.3 million decrease in interest expense due to a significant decrease in the weighted average interest rate of our variable rate debt, even though the average outstanding balance of our variable rate credit facility was higher in 2002.

     Net income for the six months ended June 30, 2002 declined to $1.0 million from pro forma 2001 net income of $5.0 million.

     FFO for the six months ended June 30, 2002 was $15.7 million compared to $21.4 million for pro forma 2001.

Six Months Ended June 30, 2002 Compared to Actual 2001

     Total revenues increased to $129.5 million from $37.0 million in 2001 and hotel revenues increased to $122.6 million from $3.4 million in the prior year as we now record operating revenues for the leasehold interests in 28 properties acquired through the TRS transaction.

     Lease revenue decreased to $2.7 million versus $32.6 million for 2001 as during the second quarter 2002, we were only recording lease revenue for the two properties not under the TRS structure.

     Similar to total revenues, total expenses increased significantly to $127.6 million for the six months ended June 30, 2002 versus $37.0 million for the same period in 2001, primarily due to the TRS implementation.

19

Table of Contents

     Property taxes, insurance and other expense increased $2.1 million over prior year due to increases in property and casualty insurance rates and the inclusion of related costs at the hotel property level in our operating results under the TRS structure.

     Please refer to the “Six Months Ended June 30, 2002 Compared to Pro Forma 2001” section above for discussion regarding the changes in sales of cost of condominium units and the related costs of units sold, corporate general and administrative expense, interest expense and amortization of deferred financing costs.

     Net income for the six month period ended June 30, 2002 increased to $1.0 million versus $.7 million for the same period in the prior year.

     Our funds from operations for the six months ended June 30, 2002 was $15.7 million compared to $23.0 million in 2001.

     The White Paper on Funds From Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in October 1999 defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of properties and extraordinary items, plus real estate related depreciation and amortization, and after comparable adjustments for our portion of these items related to unconsolidated entities and joint ventures. We believe that FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flow from operating, financing and investing activities, it provides investors with another indication of our ability to incur and service debt, make capital expenditures and fund other cash needs.

     We compute FFO in accordance with our interpretation of standards established by NAREIT which may not be comparable to FFO reported by other REITS that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income as an indication of our financial performance or to cash flow from operating activities as determined by GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. FFO may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties. The following is a reconciliation between net income before one-time effect of change in accounting principle and FFO for the three and six months ended June 30, 2002 and 2001, respectively (in thousands):