CONFIDENTIAL OFFERING MEMORANDUM
Dated June 18, 2024
Verimark Hospitality Group Inc.
$500,000,000 8.250% Senior Notes due 2031
Verimark Hospitality Group Inc. ("VHG," the "Issuer," the "Company," "we," "us," or "our"), a Delaware corporation, is offering $500,000,000 aggregate principal amount of its 8.250% Senior Notes due 2031 (the "Notes"). The Notes will bear interest at the rate of 8.250% per annum, payable semi-annually in arrears on January 1 and July 1 of each year, commencing on January 1, 2025. Interest on the Notes will accrue from July 1, 2024. The Notes will mature on July 1, 2031. The Notes are being issued at an issue price of 98.500% of the principal amount thereof.
The Notes will be senior unsecured obligations of VHG and will be guaranteed on a senior unsecured basis by certain of VHG's subsidiaries as described herein.
Optional Redemption. The Notes will be redeemable, in whole or in part, at VHG's option, at the following redemption prices (expressed as percentages of the principal amount thereof), plus accrued and unpaid interest to the applicable redemption date, during the twelve-month periods beginning on the dates set forth below:
Prior to July 1, 2027, VHG may redeem the Notes, in whole or in part, at a make-whole redemption price equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest discounted to the redemption date at the Treasury Rate plus 50 basis points, plus, in each case, accrued and unpaid interest thereon to the redemption date.
Equity Clawback. In addition, prior to July 1, 2027, VHG may redeem up to 40% of the original aggregate principal amount of the Notes at a redemption price of 108.250% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more qualifying equity offerings, provided that at least 60% of the original aggregate principal amount of the Notes remains outstanding immediately after such redemption.
Change of Control. Upon the occurrence of a change of control triggering event, each holder of the Notes may require VHG to repurchase all or a portion of such holder's Notes at a purchase price equal to 101.000% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase.
The Notes will not be listed on any securities exchange. There is no established trading market for the Notes.
CUSIP (Rule 144A): 923847 AA 5
Investing in the Notes involves significant risks. See "Risk Factors" beginning on page 28 of this Offering Memorandum.
The Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any state securities laws and are being offered and sold only (i) in the United States to "qualified institutional buyers" as defined in Rule 144A under the Securities Act ("QIBs") and (ii) outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act. Prospective purchasers of the Notes that are QIBs are hereby notified that the sellers of the Notes may be relying on the exemption from the registration provisions of the Securities Act provided by Rule 144A thereunder. For a description of certain restrictions on transfers, see "Notice to Investors."
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined whether this Offering Memorandum is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this Offering Memorandum is June 18, 2024.
NOTICE TO INVESTORS
This Offering Memorandum is confidential and has been prepared by VHG solely for use in connection with the offering of the Notes described herein (the "Offering"). This Offering Memorandum is personal to each offeree to whom it has been delivered and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the Notes. Distribution of this Offering Memorandum to any person other than the prospective investor to whom this Offering Memorandum is delivered and those persons, if any, retained to advise such prospective investor with respect thereto is unauthorized, and any disclosure of any of its contents without VHG's prior written consent is prohibited. Each prospective investor, by accepting delivery of this Offering Memorandum, agrees to the foregoing and to make no photocopies of this Offering Memorandum or any documents referred to herein, other than for the use of such prospective investor and its advisors in connection with evaluating this Offering.
Rule 144A and Regulation S. The Notes offered hereby have not been registered under the Securities Act or any state or foreign securities laws and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act) except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Notes are being offered and sold (i) in the United States only to QIBs (as defined in Rule 144A under the Securities Act) in transactions exempt from registration under the Securities Act pursuant to Rule 144A and (ii) outside the United States only to persons who are not U.S. persons in offshore transactions meeting the requirements of Regulation S under the Securities Act. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the registration requirements of Section 5 of the Securities Act provided by Rule 144A.
No Public Offering. This Offering does not constitute a public offering of securities in the United States or in any other jurisdiction. No action has been or will be taken in any jurisdiction by VHG or the initial purchasers that would permit a public offering of the Notes or the possession, circulation, or distribution of this Offering Memorandum or any other material relating to VHG or the Notes in any jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this Offering Memorandum nor any other offering material or advertisements in connection with the Notes may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws, rules, and regulations of any such jurisdiction. Persons into whose possession this Offering Memorandum comes are advised to inform themselves about and to observe any restrictions relating to the Offering and the distribution of this Offering Memorandum. See "Plan of Distribution" and "Notice to Investors" for a further description of the restrictions on the offering, sale, and distribution of the Notes and the distribution of this Offering Memorandum.
Forward-Looking Statements. This Offering Memorandum contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues, or other financial items, any statements of the plans, strategies, and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management's beliefs, goals, strategies, intentions, and objectives, and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "plan," "anticipate," and other similar words. Although VHG believes that the expectations reflected in its forward-looking statements are reasonable at the time made, actual results could differ materially from those currently anticipated due to a number of factors, including risks discussed under "Risk Factors" in this Offering Memorandum. VHG undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
Information Provided by VHG Management. The information contained in this Offering Memorandum has been furnished by VHG and other sources identified herein. Neither Kensington Barrow & Co., Ridgeline Capital Markets LLC, nor Stonebridge Marvelo Securities Inc. (collectively, the "Initial Purchasers") has independently verified any of the information contained in this Offering Memorandum, and no representation or warranty, express or implied, is made by the Initial Purchasers as to the accuracy or completeness of any such information. Each of the Initial Purchasers disclaims any and all liability relating to the information contained in this Offering Memorandum or for any omissions therefrom. Nothing contained in this Offering Memorandum is, or shall be relied upon as, a promise or representation by the Initial Purchasers as to the past or the future.
Market Data and Industry Statistics. This Offering Memorandum includes industry and market data and forecasts that VHG has obtained from third-party sources, including industry publications, as well as from internal company surveys. These sources include, among others, STR, Inc., the American Hotel & Lodging Association, the U.S. Bureau of Labor Statistics, and the U.S. Travel Association. Although VHG believes these sources to be reliable, VHG has not independently verified such data and makes no representation as to the accuracy or completeness of such data. VHG's estimates involve risks and uncertainties, including assumptions that may not be realized, and are subject to revision.
ERISA Considerations. Each purchaser and holder of the Notes, or any interest therein, will be deemed to have represented and warranted, on each day from the date on which such purchaser or holder acquires the Notes through and including the date on which such purchaser or holder disposes of its interest in the Notes, either that (a) it is not an employee benefit plan, individual retirement account, or other arrangement subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), or a governmental, church, non-U.S., or other plan subject to any federal, state, local, or non-U.S. law or regulation that is substantially similar to the provisions of Title I of ERISA or Section 4975 of the Code, or an entity whose underlying assets include "plan assets" (within the meaning of ERISA) by reason of an employee benefit plan's or other plan's investment in such entity, or (b) the acquisition, holding, and disposition of the Notes will not give rise to a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code (or, in the case of a governmental, church, non-U.S., or other plan, any violation of applicable law or regulation).
No representation or warranty, express or implied, is made by VHG or any Initial Purchaser as to the accuracy or completeness of the information set forth herein, and nothing contained in this Offering Memorandum is, or shall be relied upon as, a promise or representation by VHG or any Initial Purchaser, whether as to the past or the future.
SUMMARY
The following summary highlights selected information from this Offering Memorandum and may not contain all the information that may be important to you. You should read this entire Offering Memorandum carefully, including "Risk Factors" and VHG's financial statements and related notes included elsewhere in this Offering Memorandum, before making an investment decision. Unless otherwise indicated or the context otherwise requires, references in this Offering Memorandum to "VHG," the "Company," the "Issuer," "we," "our," or "us" refer to Verimark Hospitality Group Inc. and its consolidated subsidiaries, and references to the "Notes" refer to the 8.250% Senior Notes due 2031 offered hereby.
The Offering
The following summary describes the principal terms of the Notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. For a more detailed description of the terms and conditions of the Notes, see "Description of Notes."
Issuer: Verimark Hospitality Group Inc., a Delaware corporation. VHG's common stock is listed on the Nasdaq Global Select Market under the ticker symbol "VMRK." VHG's SEC Central Index Key (CIK) number is 0001847293. VHG's principal executive offices are located at 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129.
Securities Offered: $500,000,000 aggregate principal amount of 8.250% Senior Notes due 2031.
Issue Price: 98.500% of the principal amount thereof, generating gross proceeds to VHG of $492,500,000.
Original Issue discount: 1.500% of the principal amount of the Notes, or $7,500,000 in the aggregate.
Maturity Date: July 1, 2031.
Interest Rate: 8.250% per annum.
Interest Payment Dates: Interest on the Notes will be payable semi-annually in arrears on January 1 and July 1 of each year, commencing January 1, 2025. Interest on the Notes will accrue from July 1, 2024.
Guarantees: The Notes will be guaranteed on a senior unsecured basis, jointly and severally, by the following subsidiaries of VHG (each, a "Guarantor," and collectively, the "Guarantors"):
1. Verimark Resort Holdings LLC, a Delaware limited liability company;
2. VHG Properties Inc., a Delaware corporation;
3. Bayshore Hotel Management LLC, a Florida limited liability company;
4. Verimark Capital Holdings LLC, a Delaware limited liability company; and
5. Pinnacle Lodging Enterprises Inc., a Delaware corporation.
Ranking: The Notes will be senior unsecured obligations of VHG and will:
• rank equally in right of payment with all of VHG's existing and future senior unsecured indebtedness;
• rank senior in right of payment to all of VHG's future subordinated indebtedness;
• be effectively subordinated to any of VHG's secured indebtedness, to the extent of the value of the collateral securing such indebtedness; and
• be structurally subordinated to all existing and future liabilities of VHG's non-guarantor subsidiaries.
Similarly, the guarantees of the Notes will be senior unsecured obligations of each Guarantor and will rank equally in right of payment with all of such Guarantor's existing and future senior unsecured indebtedness, senior to any future subordinated indebtedness, effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such indebtedness, and structurally subordinated to all liabilities of any non-guarantor subsidiaries of such Guarantor.
Optional Redemption: The Notes will be redeemable at VHG's option, in whole at any time or in part from time to time, at the following redemption prices (expressed as percentages of the principal amount of the Notes to be redeemed), plus accrued and unpaid interest to, but not including, the redemption date, if redeemed during the twelve-month period beginning on the date set forth below:
Prior to July 1, 2027, VHG may redeem the Notes, in whole or in part, at a redemption price equal to the make-whole price described under "Description of Notes — Optional Redemption."
Equity Clawback: Prior to July 1, 2027, VHG may redeem up to 40% of the original aggregate principal amount of the Notes (i.e., up to $200,000,000 in aggregate principal amount) at a redemption price equal to 108.250% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more qualifying equity offerings; provided, however, that at least 60% of the original aggregate principal amount of the Notes (calculated after giving effect to any such redemption) must remain outstanding immediately after each such redemption and that such redemption occurs within 180 days after the closing of the applicable qualifying equity offering.
Change of Control: Upon the occurrence of a "change of control triggering event" (as defined in the Indenture), each holder of the Notes will have the right to require VHG to repurchase all or a portion of such holder's Notes at a purchase price equal to 101.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. See "Description of Notes — Change of Control."
Certain Covenants: The Indenture governing the Notes will contain covenants that, among other things, will limit the ability of VHG and its restricted subsidiaries to:
• incur additional indebtedness unless the Fixed Charge Coverage Ratio on a pro forma basis would be at least 2.00 to 1.00;
• make restricted payments (subject to a builder basket of $50,000,000 plus 50% of cumulative Consolidated Net Income accrued from and after July 1, 2024);
• incur additional indebtedness outside of basket exceptions (general permitted indebtedness basket of $75,000,000);
• create or incur liens (permitted liens basket of $50,000,000);
• sell assets (with a 365-day reinvestment period for proceeds);
• enter into transactions with affiliates on other than arm's-length terms;
• merge, consolidate, or sell all or substantially all of its assets; and
• fail to provide certain financial reports and information to the Trustee and holders of the Notes.
These covenants are subject to a number of important exceptions and qualifications. See "Description of Notes — Covenants."
Registration Rights: Pursuant to the Registration Rights Agreement, VHG has agreed to file a registration statement with the SEC with respect to an offer to exchange the Notes for substantially identical notes that are registered under the Securities Act within 180 days after the closing of this Offering (i.e., on or before January 4, 2025) and to cause such registration statement to become effective within 365 days after the closing of this Offering (i.e., on or before July 8, 2025). If VHG fails to satisfy these obligations, additional interest on the Notes will accrue at the rate of 0.25% per annum for the first 90 days of non-compliance, increasing to 0.50% per annum thereafter, up to a maximum additional interest rate of 1.00% per annum. See "Registration Rights."
Trustee, Registrar, Paying Agent, and Transfer Agent: Fidelitas Trust Company, N.A., located at 100 Wall Street, Suite 1500, New York, New York 10005.
Governing Law: The Indenture, the Notes, and the Guarantees will be governed by, and construed in accordance with, the laws of the State of New York.
No Listing: The Notes will not be listed on any securities exchange. There can be no assurance that an active trading market for the Notes will develop. See "Risk Factors — Risks Related to the Notes and This Offering — Limited trading market; no listing on any exchange; liquidity may be limited."
Settlement: It is expected that delivery of the Notes will be made against payment therefor on or about June 25, 2024 (being the fifth business day following the date of the pricing of the Notes), in accordance with customary settlement procedures (T+5).
Our Company
Verimark Hospitality Group Inc. is a publicly traded hospitality and real estate company incorporated in the State of Delaware and headquartered at 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129. VHG's common stock is listed on the Nasdaq Global Select Market under the ticker symbol "VMRK," and VHG is a reporting company under the Exchange Act (SEC CIK: 0001847293).
VHG owns and operates a diversified portfolio of 47 full-service hotels and 12 resort properties located across 19 U.S. states and the U.S. Virgin Islands, comprising approximately 18,400 guest rooms. Our properties range from premium urban hotels in major gateway cities to destination resort properties in key leisure markets. We believe that our portfolio is well-positioned to benefit from the ongoing recovery and growth in both business and leisure travel demand.
For the twelve-month period ended March 31, 2024 (the "LTM Period"), VHG generated total revenue of $1,820,000,000 and Adjusted EBITDA of $412,000,000, reflecting the strong recovery trajectory of our business following the severe disruptions caused by the COVID-19 pandemic.
VHG is led by an experienced management team with deep expertise in the hospitality and real estate industries:
• Marcus J. Delano, Chief Executive Officer
• Patricia R. Henning, Chief Financial Officer
• Raymond T. Ochoa, Chief Operating Officer
• David K. Moretti, General Counsel and Secretary
• Eleanor M. Vasquez, Chairman of the Board of Directors
During the COVID-19 pandemic, VHG experienced a significant decline in revenues and operating results, consistent with the broader hospitality industry. In response, VHG drew heavily on its revolving credit facility and incurred $475,000,000 in term loan debt during 2020 and 2021 under the Existing Credit Facility (as defined below) to maintain operations and preserve its property portfolio through the pandemic. As travel demand has recovered, VHG has rebuilt its operating performance and is now well-positioned to transition its capital structure from secured bank debt incurred during the pandemic era to longer-dated, unsecured capital markets debt.
The Refinancing Transaction
VHG intends to use the net proceeds from this Offering, together with cash on hand, to repay in full all outstanding obligations under the Amended and Restated Credit Agreement, dated as of March 15, 2021 (the "Existing Credit Facility"), among VHG, as borrower, the lenders party thereto, and Greystone National Bank, N.A., as administrative agent (the "Existing Credit Agreement"; Loan No. GNB-SYN-2021-04417), and to terminate the Existing Credit Facility in its entirety.
The Existing Credit Facility consists of the following tranches:
• Term Loan A ("TLA"): Outstanding principal amount of $280,142,819.16 as of April 1, 2024; bears interest at SOFR plus 375 basis points.
• Term Loan B ("TLB"): Outstanding principal amount of $187,200,000.00 as of April 1, 2024; bears interest at SOFR plus 425 basis points.
• Revolving Credit Facility: $150,000,000 in commitments; undrawn as of April 1, 2024.
The aggregate outstanding principal amount under the Existing Credit Facility as of April 1, 2024 was $467,342,819.16. The Existing Credit Facility matures on March 15, 2026 and is secured by liens on substantially all assets of VHG and its subsidiaries. The syndicate lenders under the Existing Credit Facility are Greystone National Bank, N.A., Harborview Lending Group, Cascade Federal Bank, and Meriden Commercial Finance LLC.
The Existing Credit Facility was originally entered into during the height of the COVID-19 pandemic with an aggregate original principal amount of $500,000,000 (TLA: $300,000,000; TLB: $200,000,000), plus the $150,000,000 revolving credit facility. VHG has amortized the term loans in accordance with their terms, reducing the outstanding balance to the amounts described above.
The refinancing of the Existing Credit Facility through this Offering provides the following key benefits to VHG:
• Extended Maturity: The maturity date is extended from March 15, 2026 to July 1, 2031, effectively pushing out VHG's debt maturity by more than five years.
• Unsecured Indebtedness: The Notes are unsecured obligations, replacing the secured indebtedness under the Existing Credit Facility and freeing VHG's assets from existing liens.
• Incurrence Covenants: The Notes are governed by incurrence-based covenants (rather than the maintenance covenants under the Existing Credit Facility), providing VHG with greater operational flexibility.
• Reduced Refinancing Risk: By extending the maturity to 2031, VHG substantially reduces the near-term refinancing risk associated with the March 2026 maturity of the Existing Credit Facility.
Upon the repayment of the Existing Credit Facility, VHG will request the release of all liens securing the obligations thereunder, and the Existing Credit Facility (including the revolving credit facility) will be terminated in its entirety.
Summary Use of Proceeds
The following table summarizes the estimated sources and uses of funds in connection with this Offering and the Refinancing Transaction:
See "Use of Proceeds" for additional information.
Summary Corporate and Organizational Structure
The following chart summarizes VHG's simplified corporate and organizational structure, including the Guarantors, immediately following the consummation of this Offering and the Refinancing Transaction:
Verimark Hospitality Group Inc. (Parent; Delaware corporation; Issuer; Nasdaq: VMRK)
Verimark Capital Holdings LLC (Delaware LLC; intermediate holding company; Guarantor)
Verimark Resort Holdings LLC (Delaware LLC; resort property portfolio; Guarantor)
VHG Properties Inc. (Delaware corporation; fee-simple interests in 32 hotel properties; Guarantor)
Pinnacle Lodging Enterprises Inc. (Delaware corporation; acquired hotel brand subsidiary; Guarantor)
Bayshore Hotel Management LLC (Florida LLC; hotel management and operations; Guarantor)
All of the subsidiaries listed above are Guarantors of the Notes. Each Guarantee is a senior unsecured obligation of the applicable Guarantor, ranking equally in right of payment with all of such Guarantor's existing and future senior unsecured indebtedness. See "Description of Notes — Subsidiary Guarantees."
Summary Historical and Pro Forma Financial Data
The following table sets forth summary historical and pro forma financial data for VHG as of and for the periods indicated. The summary historical financial data for the LTM Period ended March 31, 2024 has been derived from VHG's audited and unaudited financial statements included elsewhere in this Offering Memorandum. The pro forma financial data gives effect to this Offering and the Refinancing Transaction as if they had occurred on March 31, 2024 (with respect to balance sheet data) and on April 1, 2023 (with respect to income statement data). The summary financial data should be read in conjunction with "Selected Historical Financial Data," "Capitalization," and VHG's financial statements and related notes included elsewhere in this Offering Memorandum.
The Pro Forma Net Leverage Ratio is calculated as $500,000,000 divided by Adjusted EBITDA of $412,000,000, yielding a ratio of approximately 1.21x. The Pro Forma Interest Coverage Ratio is calculated as Adjusted EBITDA of $412,000,000 divided by annual interest expense on the Notes of $41,250,000, yielding a ratio of approximately 9.99x. The Pro Forma Fixed Charge Coverage Ratio is calculated as Adjusted EBITDA of $412,000,000 less capital expenditures of $48,000,000 (i.e., $364,000,000) divided by annual interest expense on the Notes of $41,250,000, yielding a ratio of approximately 8.83x.
See "Selected Historical Financial Data" for a reconciliation of Adjusted EBITDA to net income and for additional historical financial information.
RISK FACTORS
You should carefully consider the following risk factors, as well as the other information contained in this Offering Memorandum, before purchasing the Notes. If any of the following risks actually occur, VHG's business, financial condition, or results of operations could be materially and adversely affected. In that case, VHG may not be able to make payments on the Notes when due, and you could lose all or a part of your investment. This Offering Memorandum also contains forward-looking statements that involve risks and uncertainties. VHG's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this Offering Memorandum.
Risks Related to Our Business and Industry
The hospitality industry is cyclical and is sensitive to changes in general economic conditions, including pandemics, recessions, and natural disasters, any of which could materially and adversely affect our business, financial condition, and results of operations.
VHG's business is inherently cyclical and is sensitive to changes in general economic conditions, including changes in consumer confidence, levels of disposable consumer income, business travel spending, corporate budgets, and overall economic growth. Declines in economic conditions, including recessions, inflationary pressures, or disruptions to consumer and business travel patterns, could reduce demand for lodging and other hospitality services and have a material adverse effect on our revenues and operating results. The COVID-19 pandemic demonstrated the vulnerability of the hospitality industry to exogenous shocks, resulting in unprecedented declines in occupancy rates, revenue per available room ("RevPAR"), and overall financial performance across the sector. Although VHG has experienced a strong recovery, as reflected in LTM revenue of $1,820,000,000 and LTM Adjusted EBITDA of $412,000,000, there can be no assurance that similar events, including future pandemics, geopolitical conflicts, natural disasters, severe weather events, or other exogenous shocks, will not recur and have a material adverse effect on our business.
Our business is subject to geographic concentration risk, as our properties are located across 19 U.S. states and the U.S. Virgin Islands, and adverse conditions in any of these markets could disproportionately affect our results.
VHG's 47 full-service hotels and 12 resort properties are located across 19 U.S. states and the U.S. Virgin Islands. While we believe our geographic diversification mitigates certain risks, we maintain meaningful concentrations of properties in certain markets, particularly in Florida, California, New York, and Texas. Adverse economic, regulatory, weather-related, or competitive conditions in any of these markets could have a disproportionate impact on our revenues and profitability. In addition, certain of our resort properties are located in areas that may be particularly susceptible to hurricanes, flooding, wildfires, and other natural disasters, the occurrence of which could result in property damage, business interruption, and increased insurance costs.
We face intense competition in the lodging and resort industry from range competitors, including other hotel companies, online travel agencies, and alternative lodging platforms.
The lodging and resort industry is highly competitive, and we compete for guests with other full-service hotels, luxury resorts, branded hotel chains, independent hotels, and increasingly, alternative lodging providers such as short-term rental platforms. Many of our competitors have greater financial resources, broader geographic reach, and more widely recognized brands than we do. Increased competition could require us to reduce room rates, increase marketing expenditures, or make additional capital investments in our properties, any of which could adversely affect our operating margins and profitability. In addition, the continued growth of online travel agencies and alternative lodging platforms could disrupt traditional lodging demand patterns and place additional competitive pressure on our properties.
We depend on the services of key personnel, including our Chief Executive Officer, Marcus J. Delano, our Chief Financial Officer, Patricia R. Henning, and our Chief Operating Officer, Raymond T. Ochoa, and the loss of any of these individuals could adversely affect our business.
VHG's success depends in significant part on the efforts, abilities, and experience of our senior management team, including Marcus J. Delano, our Chief Executive Officer, Patricia R. Henning, our Chief Financial Officer, and Raymond T. Ochoa, our Chief Operating Officer. Each of these individuals has extensive experience in the hospitality and real estate industries and plays a critical role in the formulation and execution of our business strategy. The loss of the services of any of these individuals, or our inability to attract and retain other qualified management personnel, could adversely affect our business, financial condition, and results of operations. We do not maintain key person life insurance policies with respect to any of our executive officers.
Our ownership of real estate assets subjects us to various risks, including environmental liabilities, casualty losses, and condemnation proceedings.
As the owner of 47 full-service hotels and 12 resort properties, VHG is subject to the risks inherent in the ownership of real estate, including risks related to environmental contamination, the presence of hazardous materials, and compliance with federal, state, and local environmental laws and regulations. Under various federal, state, and local laws and regulations, a current or former owner or operator of real property may be liable for the costs of cleaning up hazardous substances released on or from its property, regardless of whether the owner or operator knew of or caused the contamination. In addition, our properties are subject to the risk of casualty loss from fire, weather events, natural disasters, terrorism, and other causes, which could result in significant repair or replacement costs and business interruption losses. Our properties may also be subject to condemnation or eminent domain proceedings by governmental authorities, which could result in the loss of some or all of our investment in the affected properties.
Our business is subject to seasonal fluctuations in hotel demand and revenue, which could cause variability in our results of operations from quarter to quarter.
The hospitality industry is characterized by significant seasonal fluctuations. Demand for hotel rooms at our properties is generally higher during the spring and summer months and during holiday periods, and is lower during the late fall and winter months, particularly at our resort properties. These seasonal fluctuations may result in significant variability in our revenues and operating results from quarter to quarter, which could make it more difficult to predict our financial performance and could cause our results in any particular quarter to be lower than expected.
We are subject to significant labor costs and face risks related to labor relations, including the risk of unionization of our workforce.
Labor costs represent one of the largest operating expenses at our hotel and resort properties. We employ a significant number of hourly workers, and our operations are labor-intensive. Increases in labor costs, including increases in the minimum wage, healthcare costs, and other employee benefits, could adversely affect our operating margins. In addition, a portion of our employees are represented by labor unions or are subject to collective bargaining agreements, and we may face efforts to organize additional portions of our workforce. Work stoppages, strikes, slowdowns, or other labor disruptions could adversely affect our ability to operate our properties and could increase our labor costs.
We face technology and cybersecurity risks, including the risk of data breaches, system failures, and other disruptions to our information technology systems.
VHG relies on information technology systems and networks to manage our hotel and resort operations, process reservations, manage guest data, and conduct financial and other business transactions. These systems are subject to the risk of cyberattacks, data breaches, computer viruses, unauthorized access, and other security incidents, as well as the risk of system failures, power outages, and other disruptions. A significant cybersecurity incident or system failure could result in the unauthorized disclosure of sensitive guest or employee information, disruption of our operations, damage to our reputation, and significant financial losses, including costs related to investigation, remediation, regulatory fines, and litigation.
Our directors' and officers' liability insurance may not be sufficient to cover all potential claims, and the cost of such insurance may increase significantly.
VHG maintains directors' and officers' liability insurance provided by Atlantic Indemnity Insurance Co. (Policy No. DOP-2024-881437). There can be no assurance that such insurance will be available to us in the future at reasonable premiums or that the coverage provided will be sufficient to cover all claims that may arise. Significant claims or increases in insurance premiums could adversely affect our financial condition and results of operations.
Risks Related to Our Indebtedness
Following the completion of this Offering and the Refinancing Transaction, we will have substantial indebtedness, which could adversely affect our financial condition and our ability to service our debt obligations, including the Notes.
Upon the completion of this Offering and the Refinancing Transaction, we will have $500,000,000 aggregate principal amount of Notes outstanding. Our substantial indebtedness could have important consequences to holders of the Notes, including, but not limited to:
• requiring us to dedicate a significant portion of our cash flow from operations to the payment of interest on the Notes ($41,250,000 per annum) and, ultimately, the repayment of the principal amount of the Notes at maturity, thereby reducing the availability of our cash flow for other purposes, including capital expenditures, acquisitions, and other general corporate purposes;
• increasing our vulnerability to adverse general economic and industry conditions and to competitive pressures;
• limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
• placing us at a competitive disadvantage compared to our competitors that are less leveraged; and
• limiting our ability to borrow additional funds to fund working capital, capital expenditures, acquisitions, and other general corporate purposes.
The Notes are unsecured obligations and will be effectively subordinated to any secured indebtedness that we may incur in the future.
The Notes are unsecured obligations of VHG and will be effectively subordinated in right of payment to all of VHG's existing and future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. Although the Existing Credit Facility will be repaid and terminated in connection with this Offering, the Indenture governing the Notes permits VHG and its restricted subsidiaries to incur additional secured indebtedness in the future, subject to the limitations set forth in the Indenture. In particular, the Indenture permits VHG and its restricted subsidiaries to incur liens securing indebtedness in an aggregate amount not to exceed $50,000,000 at any time outstanding (the "permitted liens basket"), as well as certain other categories of permitted liens. In the event of a bankruptcy, liquidation, dissolution, reorganization, or similar proceeding, the holders of any secured indebtedness of VHG would have a prior claim on the collateral securing such indebtedness to the extent of the value of such collateral, and the holders of the Notes would share ratably with all other holders of unsecured, unsubordinated indebtedness in the remaining assets of VHG, if any, after satisfaction of all secured claims.
The incurrence-based covenants in the Indenture provide VHG with flexibility to incur additional indebtedness and take other actions that could adversely affect holders of the Notes.
The Indenture governing the Notes contains incurrence-based covenants, rather than maintenance covenants. This means that VHG is not required to maintain specified financial ratios on an ongoing basis, but rather must satisfy the applicable incurrence tests only at the time of specified transactions. These incurrence covenants provide VHG with significant flexibility, including the ability to incur additional indebtedness under a general basket of $75,000,000 and to incur permitted liens securing indebtedness of up to $50,000,000, in each case without satisfying any financial ratio test. As a result, VHG could incur significant additional indebtedness that could increase its leverage and reduce the amount of assets available to satisfy claims of holders of the Notes.
Our ability to service our indebtedness, including the Notes, is dependent on our operating performance and Adjusted EBITDA, which may be affected by factors beyond our control.
Our ability to make scheduled payments of interest on the Notes, to repay the principal of the Notes at maturity, and to satisfy our other debt obligations depends on our future operating performance, which will be affected by prevailing economic, financial, competitive, legislative, regulatory, and other conditions, many of which are beyond our control. If our operating performance declines or if we are unable to generate sufficient cash flow from operations to service our indebtedness, we may be forced to take actions such as reducing or delaying capital expenditures, selling assets, seeking additional equity capital, or restructuring or refinancing our indebtedness, any of which could adversely affect holders of the Notes. There can be no assurance that any of these actions could be effected on satisfactory terms, if at all, or that such actions would be sufficient to enable us to continue to meet our debt service obligations.
While the fixed rate of the Notes eliminates variable interest rate risk with respect to the Notes, any future borrowings under a revolving credit facility or other variable rate instruments may expose us to interest rate risk.
The Notes bear interest at a fixed rate of 8.250% per annum, which eliminates VHG's exposure to variable interest rate risk with respect to the Notes. However, following the Refinancing Transaction, VHG may seek to enter into a new revolving credit facility or other credit arrangements that may bear interest at variable rates. Increases in prevailing interest rates, including the Secured Overnight Financing Rate ("SOFR"), could increase VHG's interest expense on any such variable rate borrowings and adversely affect our financial condition and results of operations.
The change of control provisions in the Indenture may limit our ability to consummate certain transactions, and we may not be able to repurchase the Notes upon a change of control triggering event.
Upon the occurrence of a change of control triggering event, each holder of the Notes will have the right to require VHG to repurchase all or a portion of such holder's Notes at 101.000% of the principal amount thereof, plus accrued and unpaid interest. VHG may not have sufficient funds at the time of any change of control triggering event to repurchase all of the Notes tendered for repurchase. In addition, the change of control provisions may discourage, delay, or prevent a change of control transaction or a tender offer for VHG's common stock that a stockholder might consider favorable, including a transaction at a premium over the then-current market price.
Risks Related to the Notes and This Offering
The Notes have not been registered under the Securities Act and are subject to transfer restrictions that may limit your ability to resell the Notes.
The Notes have not been registered under the Securities Act or the securities laws of any state or other jurisdiction, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from registration. The Notes are being offered and sold only (i) in the United States to QIBs in reliance on Rule 144A under the Securities Act and (ii) outside the United States to non-U.S. persons in offshore transactions in compliance with Regulation S under the Securities Act. These transfer restrictions may limit the number of potential purchasers of the Notes and could adversely affect the market price and liquidity of the Notes.
There is no established trading market for the Notes, and the Notes will not be listed on any securities exchange. You may not be able to sell the Notes at a favorable price or at all.
The Notes are a new issue of securities for which there is currently no established trading market. VHG does not intend to apply for listing of the Notes on any securities exchange or for inclusion of the Notes in any automated dealer quotation system. Although the Initial Purchasers have informed VHG that they currently intend to make a market in the Notes after the completion of this Offering, they are under no obligation to do so and may discontinue any market-making activities at any time without notice. There can be no assurance that an active trading market for the Notes will develop or, if developed, will be sustained. If an active trading market does not develop, the price at which you may be able to sell the Notes may be adversely affected. Future trading prices of the Notes will depend on many factors, including prevailing interest rates, the market for similar securities, general economic conditions, and our financial condition and results of operations.
The registration rights penalty interest is the sole remedy available to holders of the Notes if VHG fails to complete the exchange offer on a timely basis.
Under the Registration Rights Agreement, VHG has agreed to file a registration statement for an exchange offer within 180 days of the closing of this Offering and to cause such registration statement to become effective within 365 days of the closing. If VHG fails to meet either of these deadlines, additional interest will accrue on the Notes at the rate of 0.25% per annum for the first 90 days of non-compliance, increasing to 0.50% per annum thereafter, up to a maximum additional interest rate of 1.00% per annum. This additional interest is the sole remedy available to holders of the Notes for VHG's failure to comply with its registration obligations. Holders will not have the right to require VHG to register the Notes under the Securities Act or to take any other action in connection with any failure to satisfy such obligations, except for the payment of such additional interest.
The Notes were issued with original issue discount, and holders must include OID in gross income for federal income tax purposes over the life of the Notes, regardless of their method of accounting.
The Notes are being issued at an issue price of 98.500% of the principal amount thereof, resulting in original issue discount ("OID") of 1.500% of the principal amount, or $7,500,000 in the aggregate. Holders of the Notes must include OID in their gross income as ordinary income for U.S. federal income tax purposes over the life of the Notes under the constant yield method, in advance of the receipt of the cash attributable to such income and regardless of the holder's method of accounting for tax purposes. See "Certain U.S. Federal Income Tax Considerations — Original Issue discount."
The ratings assigned to the Notes are not recommendations to purchase, hold, or sell the Notes and may be revised, suspended, or withdrawn at any time.
The Notes have received a rating of B1 (stable outlook) from Crestline Ratings Group and B+ (stable outlook) from Broadmark Rating Services Inc. These ratings are not recommendations to purchase, hold, or sell the Notes, inasmuch as such ratings do not comment on market price or suitability for a particular investor. In addition, ratings may be revised, suspended, or withdrawn at any time by the rating agencies in their sole discretion. Any downgrade, suspension, or withdrawal of a rating assigned to the Notes could adversely affect the market price and liquidity of the Notes.
The Notes are structurally subordinated to the obligations of our non-guarantor subsidiaries.
Not all of VHG's subsidiaries will guarantee the Notes. The Notes are structurally subordinated to all existing and future liabilities of VHG's non-guarantor subsidiaries. In the event of a bankruptcy, liquidation, dissolution, reorganization, or similar proceeding affecting any of VHG's non-guarantor subsidiaries, holders of the Notes would have no direct claim against the assets of such subsidiaries. Creditors of such non-guarantor subsidiaries, including trade creditors, would generally have priority with respect to the assets and earnings of such subsidiaries over the claims of holders of the Notes.
The subsidiary guarantees may be subject to challenge under fraudulent conveyance or fraudulent transfer laws.
The guarantees of the Notes by the Guarantors could be subject to challenge under applicable fraudulent conveyance or fraudulent transfer laws. Under these laws, a court could void or subordinate the guarantee of a Guarantor if the court were to find, among other things, that the Guarantor did not receive fair consideration or reasonably equivalent value in exchange for issuing the guarantee, and that the Guarantor was insolvent or rendered insolvent by reason of the incurrence of the guarantee, was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital, or intended to incur or believed that it would incur debts beyond its ability to pay as they mature. If a court were to avoid or subordinate any Guarantor's guarantee of the Notes, the holders of the Notes would no longer have a claim against such Guarantor.
USE OF PROCEEDS
We estimate that the gross proceeds from this Offering will be $492,500,000, based on the issue price of 98.500% of the principal amount of the Notes. After deducting the Initial Purchasers' discount of $8,750,000 (equal to 1.750% of the aggregate principal amount of the Notes), the estimated net proceeds to VHG from this Offering will be approximately $483,750,000.
We intend to use the net proceeds from this Offering, together with cash on hand, as follows:
Use of Proceeds Table:
Description of Existing Credit Facility Being Refinanced. The Existing Credit Facility is governed by the Amended and Restated Credit Agreement, dated as of March 15, 2021 (Loan No. GNB-SYN-2021-04417), among VHG, as borrower, the lenders party thereto, and Greystone National Bank, N.A., as administrative agent. The original aggregate principal commitments under the Existing Credit Facility consisted of Term Loan A in the original principal amount of $300,000,000, Term Loan B in the original principal amount of $200,000,000, and a revolving credit facility with aggregate commitments of $150,000,000. As of April 1, 2024, the outstanding principal amounts under the Existing Credit Facility were as follows: Term Loan A — $280,142,819.16; Term Loan B — $187,200,000.00; and the revolving credit facility was undrawn.
The Existing Credit Facility bears interest at the following rates: Term Loan A at SOFR plus 375 basis points per annum, and Term Loan B at SOFR plus 425 basis points per annum. The Existing Credit Facility matures on March 15, 2026 and is secured by liens on substantially all assets of VHG and its subsidiaries.
The syndicate lenders under the Existing Credit Facility are Greystone National Bank, N.A., Harborview Lending Group, Cascade Federal Bank, and Meriden Commercial Finance LLC.
The Existing Credit Facility was originally incurred during 2020 and 2021 in connection with VHG's efforts to maintain operations and preserve its hotel and resort portfolio through the severe revenue declines caused by the COVID-19 pandemic. As described under "Summary — The Refinancing Transaction," VHG believes that the refinancing of the Existing Credit Facility with the proceeds of this Offering is beneficial because it extends VHG's debt maturity from March 2026 to July 2031, replaces secured bank debt with unsecured senior notes, replaces maintenance covenants with incurrence covenants, and substantially reduces VHG's near-term refinancing risk.
Upon the repayment in full of all outstanding obligations under the Existing Credit Facility with the net proceeds from this Offering, VHG will terminate the Existing Credit Facility, including the $150,000,000 revolving credit facility, and will request the release of all liens on VHG's assets securing obligations under the Existing Credit Facility. VHG may seek to enter into a new revolving credit facility following the closing of this Offering, although any such new facility is unrelated to this Offering and VHG has made no commitment to enter into any such facility. The prepayment premium payable in connection with the repayment of the Existing Credit Facility is 0.50% of the outstanding principal amount, or $2,336,714.10.
CAPITALIZATION
The following table sets forth VHG's capitalization as of March 31, 2024 (i) on an actual historical basis and (ii) on a pro forma basis after giving effect to this Offering and the application of the net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with "Use of Proceeds," "Selected Historical Financial Data," and VHG's financial statements and related notes included elsewhere in this Offering Memorandum.
Historical and Pro Forma Capitalization Table (as of March 31, 2024)
(1) Reflects cash used to fund the prepayment premium ($2,336,714.10), accrued interest on the Existing Credit Facility ($4,207,180.84), deferred financing costs ($6,863,285.90), the portion of principal repayment not funded by the Notes' net proceeds ($67,136,105.06 difference offset by proceeds), and general corporate purposes ($3,000,000.00). Net adjustment reflects the difference between net proceeds received and total application of funds.
(2) Reflects the write-off of deferred financing costs associated with the Existing Credit Facility and new transaction costs associated with this Offering, net of tax.
The revolving credit facility under the Existing Credit Facility, with aggregate commitments of $150,000,000, was undrawn as of March 31, 2024 and will be terminated in connection with the Refinancing Transaction. As a result, VHG will have no revolving credit facility immediately following the closing of this Offering.
On a pro forma basis, giving effect to this Offering and the Refinancing Transaction:
• Pro forma total debt (face amount): $500,000,000
• Pro forma net leverage ratio: approximately 1.21x ($500,000,000 ÷ $412,000,000 LTM Adjusted EBITDA)
• Pro forma interest coverage ratio: approximately 9.99x ($412,000,000 LTM Adjusted EBITDA ÷ $41,250,000 annual interest expense on the Notes)
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data for VHG as of the dates and for the periods indicated. The selected financial data for the fiscal years ended December 31, 2023, December 31, 2022, and December 31, 2021 has been derived from VHG's audited consolidated financial statements, which were audited by Palladian & Howe LLP, independent registered public accounting firm, located at 200 South Biscayne Boulevard, Suite 2600, Miami, Florida 33131 (Kenneth W. Sturgis, Engagement Partner). The selected financial data for the twelve-month period ended March 31, 2024 (the "LTM Period") has been derived from VHG's audited consolidated financial statements for the fiscal year ended December 31, 2023 and VHG's unaudited condensed consolidated financial statements for the three months ended March 31, 2024 and March 31, 2023. The unaudited condensed consolidated financial statements include, in the opinion of VHG's management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of VHG's financial position and results of operations for such periods.
The information set forth below should be read in conjunction with "Capitalization," "Business," and VHG's consolidated financial statements and related notes included elsewhere in this Offering Memorandum.
Selected Financial Data
Reconciliation of Adjusted EBITDA to Net Income
The following table provides a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, for the periods indicated. VHG defines "Adjusted EBITDA" as net income before interest expense, income tax expense, depreciation and amortization, and further adjusted to exclude certain non-recurring items, including impairment charges, gain or loss on sale of assets, stock-based compensation expense, and other non-cash or non-recurring items. VHG believes that Adjusted EBITDA provides useful information to investors regarding VHG's financial condition and operating performance because it assists in comparing VHG's performance on a consistent basis across periods by removing the impact of certain items that do not directly reflect VHG's core operating results.
Adjusted EBITDA is not a financial measure determined in accordance with accounting principles generally accepted in the United States ("GAAP"). You should not consider Adjusted EBITDA as a substitute for net income, operating income, or cash flows from operating activities, or as a measure of financial performance or liquidity. Other companies may calculate Adjusted EBITDA differently, and therefore VHG's Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
BUSINESS
Overview
Verimark Hospitality Group Inc. is a publicly traded hospitality and real estate company headquartered at 2400 Brickell Bay Drive, Suite 3100, Miami, Florida 33129. VHG was incorporated in the State of Delaware and is traded on the Nasdaq Global Select Market under the ticker symbol "VMRK." VHG's Employer Identification Number (EIN) is 84-3291057, and its SEC Central Index Key (CIK) number is 0001847293.
VHG owns and operates a diversified portfolio of 47 full-service hotels and 12 resort properties across 19 U.S. states and the U.S. Virgin Islands, comprising approximately 18,400 guest rooms. Our portfolio includes premium urban hotels, convention center hotels, airport hotels, and destination resort properties serving both business and leisure travelers. We believe our diversified portfolio, experienced management team, and strong market positions provide a compelling platform for continued growth and value creation.
VHG is led by a seasoned management team with deep expertise in the hospitality and real estate industries:
• Marcus J. Delano, Chief Executive Officer — Mr. Delano has served as VHG's CEO since 2017 and brings over 25 years of experience in the hospitality industry.
• Patricia R. Henning, Chief Financial Officer — Ms. Henning has served as VHG's CFO since 2019 and previously served in senior finance roles at other major hospitality companies.
• Raymond T. Ochoa, Chief Operating Officer — Mr. Ochoa has served as VHG's COO since 2018 and oversees all hotel and resort operations across the portfolio.
• David K. Moretti, General Counsel and Secretary — Mr. Moretti has served as VHG's General Counsel since 2020 and is responsible for all legal, compliance, and governance matters.
• Eleanor M. Vasquez, Chairman of the Board of Directors — Ms. Vasquez has served as Chairman of VHG's Board since 2016 and brings extensive experience in real estate investment and corporate governance.
For the twelve-month period ended March 31, 2024, VHG generated total revenue of $1,820,000,000 and Adjusted EBITDA of $412,000,000, reflecting a strong recovery from the severe disruptions caused by the COVID-19 pandemic and ongoing strength in both business and leisure travel demand.
Our Properties and Operations