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CNL HOSPITALITY PROPERTIES, INC.
Supplement No. 1, dated August 26, 1999
to Prospectus, dated June 4, 1999
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This Supplement is part of, and should be read in conjunction with, the
Prospectus dated June 4, 1999. This Supplement replaces all prior Supplements to
the Prospectus. Capitalized terms used in this Supplement have the same meaning
as in the Prospectus unless otherwise stated herein.
Information as to proposed properties for which the Company has
received initial commitments and as to the number and types of Properties
acquired by the Company is presented as of August 11, 1999, and all references
to commitments or Property acquisitions should be read in that context. Proposed
properties for which the Company receives initial commitments, as well as
property acquisitions that occur after August 11, 1999, will be reported in a
subsequent Supplement.
THE OFFERINGS
Upon completion of its Initial Offering on June 17, 1999, the Company
had received aggregate subscriptions for 15,007,264 Shares totalling
$150,072,637 in Gross Proceeds, from 5,567 stockholders, including 7,264 Shares
($72,637) issued pursuant to the Reinvestment Plan. Following the completion of
the Initial Offering, the Company commenced this offering of up to 27,500,000
Shares. As of August 11, 1999, the Company had received aggregate subscriptions
for 18,863,490 Shares totalling $188,634,901 in Gross Proceeds, including 16,104
Shares ($161,040) issued pursuant to the Reinvestment Plan from its Initial
Offering and this offering. As of August 11, 1999, net proceeds to the Company
from its offerings of Shares and capital contributions from the Advisor, after
deduction of Selling Commissions, marketing support and due diligence expense
reimbursement fees and Organizational and Offering Expenses totalled
approximately $168,399,000. The Company has used Net Offering Proceeds from the
offerings to invest, directly or indirectly, approximately $63,098,200 in nine
hotel Properties, to pay $6,320,000 as deposits on four additional hotel
Properties, to redeem 3,000 Shares of Common Stock for $27,600 and to pay
approximately $9,575,100 in Acquisition Fees and certain Acquisition Expenses,
leaving approximately $89,378,000 available to invest in Properties and Mortgage
Loans.
MANAGEMENT COMPENSATION
For information concerning compensation and fees paid to the Advisor
and its Affiliates since the date of inception of the Company, see "Certain
Transactions."
BUSINESS
GENERAL
The following information updates and replaces the paragraph at the
bottom of page 39, the table at the top of page 40 and the last full paragraph
on page 40 of the Prospectus.
<PAGE>
The Company will invest Net Offering Proceeds in Properties of selected
national and regional limited service, extended stay and full service Hotel
Chains. The Company believes that attractive opportunities exist to acquire
limited service, extended stay and full service hotels in urban and resort
locations. According to Smith Travel Research, a leading provider of lodging
industry statistical research, the hotel industry has been steadily improving
its financial performance over the past eight consecutive years. Also according
to Smith Travel Research, in 1998, the industry reached its highest absolute
level of pre-tax profit in its history at approximately $21 billion.
Pre-Tax Profits
of Hospitality Industry
(in billions)
Year Profitability
---- -------------
1993 $ 2.4
1994 5.5
1995 8.5
1996 12.5
1997 17.0
1998 20.9
Source: Smith Travel Research
According to American Hotel & Motel Association data, in 1997,
Americans traveling in the United States spent more than $1.38 billion per day,
$57.4 million per hour and $955,800 per minute on travel and tourism. Total
travel expenditures in the United States generated $481.5 billion in sales. In
addition, there were 49,000 hotel properties which included over 3.8 million
hotel rooms. Hotels are a vital part of travel and tourism. In the United
States, the tourism industry, which globally is the world's largest industry, is
currently ranked third behind auto sales and retail food sales. In terms of
employment, the hotel industry supports over 7 million direct jobs, generating
$18.93 billion in wages. According to Smith Travel Research data, United States
lodging industry revenues reached over $93 billion in 1998.
PROPERTY ACQUISITIONS
The following information updates and replaces the "Property
Acquisitions" section of the Prospectus.
Atlanta Portfolio. On July 31, 1998, the Company acquired two hotel
Properties. The Properties are the Residence Inn(R) by Marriott(R) located in
the Buckhead (Lenox Park) area of Atlanta, Georgia (the "Buckhead (Lenox Park)
Property"), and the Residence Inn by Marriott located at Gwinnett Place in
Duluth, Georgia (the "Gwinnett Place Property").
The Company acquired the Buckhead (Lenox Park) Property for $15,731,414
from Buckhead Residence Associates, L.L.C. and the Gwinnett Place Property for
$11,514,125 from Gwinnett Residence Associates, L.L.C. In connection with the
purchase of the two Properties, the Company, as landlord, entered into two
separate, long-term lease agreements. The tenant of the Buckhead (Lenox Park)
and the Gwinnett Place Properties is the same unaffiliated tenant. The leases on
both Properties are cross-defaulted. The general terms of the lease agreements
are described in "Business -- Description of Property Leases." The principal
features of the leases are as follows:
o The initial term of each lease expires in approximately 19 years, on
August 31, 2017.
o At the end of the initial lease term, the tenant will have three
consecutive renewal options of five years.
o The leases require minimum rent payments to the Company of $1,651,798
per year for the Buckhead (Lenox Park) Property and $1,208,983 per year
for the Gwinnett Place Property.
<PAGE>
o Minimum rent payments increased to $1,691,127 per year for the Buckhead
(Lenox Park) Property and $1,237,768 per year for the Gwinnett Place
Property after the first lease year.
o In addition to minimum rent, for each calendar year, the leases require
percentage rent equal to 15% of the aggregate amount of all revenues
combined, for the Buckhead (Lenox Park) and the Gwinnett Place
Properties, in excess of $8,080,000.
o A security deposit equal to $819,000 for the Buckhead (Lenox Park)
Property and $598,500 for the Gwinnett Place Property has been retained
by the Company as security for the tenant's obligations under the
leases.
o Management fees payable to Stormont Trice Management Corporation for
operation of the Buckhead (Lenox Park) and Gwinnett Place Properties
are subordinated to minimum rents due to the Company.
o The tenant of the Buckhead (Lenox Park) and Gwinnett Place Properties
has established a reserve fund which will be used for the replacement
and renewal of furniture, fixtures and equipment relating to the hotel
Properties (the "FF&E Reserve"). Deposits to the FF&E Reserve are made
monthly as follows: 3% of gross receipts for the first lease year; 4%
of gross receipts for the second lease year; and 5% of gross receipts
every lease year thereafter. Funds in the FF&E Reserve and all property
purchased with funds from the FF&E Reserve shall be paid, granted and
assigned to the Company as additional rent.
o Stormont Trice Corporation, Stormont Trice Development Corporation and
Stormont Trice Management Corporation jointly and severally have
guaranteed the obligations of the tenant under the leases for the
Buckhead (Lenox Park) and the Gwinnett Place Properties combined. The
guarantee terminates on the earlier of the end of the third lease year
or at such time as the net operating income from the Buckhead (Lenox
Park) and the Gwinnett Place Properties exceeds minimum rent due under
the leases by 25% for any trailing 12 month period. The guarantee is
equal to $2,835,000 for the first two years, and $1,197,000 for the
third year.
Pursuant to the purchase agreement in connection with the acquisition
of the two Properties above, the Company may be required to make an additional
payment of up to $1 million, contingent upon these Properties achieving certain
gross earnings before interest, taxes, depreciation and amortization, as
compared to the original purchase price pursuant to a formula during a 36 month
period ending July 31, 2001. Rental income will be adjusted upward in accordance
with the lease agreements for any such amount paid.
The estimated federal income tax basis of the depreciable portion of
the Buckhead (Lenox Park) Property and the Gwinnett Place Property is
approximately $14,700,000 and $11,100,000, respectively.
The Buckhead (Lenox Park) Property and the Gwinnett Place Property are
newly constructed hotels which commenced operations on August 7, 1997 and July
29, 1997, respectively. The Buckhead (Lenox Park) Property is situated in a 22
acre mixed-use development and has 150 guest suites. The Gwinnett Place Property
is located 30 minutes from downtown Atlanta and has 132 guest suites. Other
lodging facilities located in proximity to the Buckhead (Lenox Park) Property
include an Embassy Suites, a Summerfield Suites, a Homewood Suites, an
Amerisuites, a Courtyard(R) by Marriott(R) and another Residence Inn by
Marriott. Other lodging facilities located in proximity to the Gwinnett Place
Property include a Courtyard by Marriott, an
<PAGE>
Amerisuites, a Sumner Suites and a Hampton Inn. The average occupancy rate, the
average daily room rate and the revenue per available room for the periods the
hotels have been operational are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buckhead (Lenox Park) Property Gwinnett Place Property
-------------------------------------------------------- -------------------------------------------------
Average Average Revenue Average Average Revenue
Occupancy Daily Room per Available Occupancy Daily Room per Available
Year Rate Rate Room Rate Rate Room
- ------------- ------------- --------------- ------------------ ------------- ------------- ---------------
*1997 42.93% $ 91.15 $39.13 39.08% $85.97 $33.60
**1998 75.20% 99.70 75.01 74.10% 87.36 64.73
***1999 80.10% 105.80 84.69 82.50% 88.30 72.83
</TABLE>
* Data for the Buckhead (Lenox Park) Property represents the period
August 7, 1997 through December 31, 1997 and data for the Gwinnett
Place Property represents the period August 1, 1997 through December
31, 1997.
** Data for 1998 represents the period January 1, 1998 through December
31, 1998.
*** Data for 1999 represents the period January 1, 1999 through June 30,
1999.
The Company believes that the results achieved by the Properties for
year-end 1997, are not indicative of their long-term operating potential, as
both Properties had been open for less than six months during the reporting
period. On a proforma basis, had the Company owned the Properties as of January
1, 1998, combined net operating income before subordinated management fees would
have been 1.19 times base rent for the 12 months ended December 31, 1998. Actual
combined net income before subordinated management fees for the period January
1, 1999 through June 30, 1999, was 1.33 times base rent.
Western International Portfolio. In February 1999, the Company executed
a series of agreements with Five Arrows Realty Securities II L.L.C. ("Five
Arrows"), pursuant to which the Company and Five Arrows formed a jointly owned
real estate investment trust, CNL Hotel Investors, Inc. ("Hotel Investors"), for
the purpose of acquiring up to eight hotel Properties from various sellers
affiliated with Western International (the "Hotels"). At the time the agreement
was entered into, the eight Hotels (four Courtyard by Marriott hotels, three
Residence Inn by Marriott hotels, and one Marriott Suites(R)) were either newly
constructed or in various stages of completion. As of August 11, 1999, the
Company had acquired an interest in seven of the eight Hotels and the remaining
Hotel is expected to be acquired after completion of construction.
The Advisor is also the advisor to Hotel Investors pursuant to a
separate advisory agreement. However, in no event will the Company pay the
Advisor fees, including the Company's pro rata portion of Hotel Investors'
advisory fees, in excess of amounts payable under its Advisory Agreement. The
Advisor entered into separate purchase agreements for each of the eight Hotels,
which agreements included customary closing conditions, including inspection of
and due diligence on the completed Properties. The aggregate purchase price of
all eight Hotels, once the remaining Hotel under construction is acquired, will
be approximately $184 million, excluding closing costs.
In order to fund these purchases, Five Arrows committed to make an
investment of up to $50.9 million in Hotel Investors. The Company committed to
make an investment of up to $40 million in Hotel Investors, which investment has
been and will be made through one of the Company's wholly owned subsidiaries,
CNL Hospitality Partners, LP ("Hospitality Partners"). Hotel Investors expected
to fund the remaining amount of approximately $96.6 million with permanent
financing from Jefferson-Pilot Life Insurance Company, secured by Hotel
Investors' interests in the properties (the "Hotel Investors Loan").
In return for their respective funding commitments, Five Arrows
received a 51% common stock interest and Hospitality Partners received a 49%
common stock interest in Hotel Investors. As funds are continually advanced to
Hotel Investors, Five Arrows will receive up to 50,886 shares of Hotel
Investors' 8% Class A cumulative, preferred stock ("Class A Preferred Stock"),
and Hospitality Partners will receive up to 39,982 shares of Hotel Investors'
9.76% Class B cumulative, preferred stock ("Class B Preferred Stock"). The Class
A Preferred Stock is exchangeable upon demand into Common Stock of the Company,
as determined pursuant to a formula that is intended to make the conversion not
dilutive to funds from operations (based on
<PAGE>
the revised definition adopted by the Board of Governors of the National
Association of Real Estate Investment Trusts which means net earnings determined
in accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of property, plus depreciation and
amortization of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures) per share of the Company's common stock.
On February 25, 1999, Hotel Investors purchased four of the eight
Hotels for an aggregate purchase price of approximately $90 million (the
"Initial Hotels") and paid $10 million as a deposit on the four remaining
Hotels. The Initial Hotels are the Courtyard by Marriott located in Plano, Texas
(the "Legacy Park Property"), the Marriott Suites located in Dallas, Texas (the
"Market Center Property"), the Residence Inn by Marriott located in Las Vegas,
Nevada (the "Hughes Center Property") and the Residence Inn by Marriott located
in Plano, Texas (the "Dallas Plano Property"). On June 16, 1999, Hotel Investors
purchased three additional Hotels of the eight Hotels (the "Additional Hotels")
for an aggregate purchase price of approximately $77 million. The Additional
Hotels are the Courtyard by Marriott located in Scottsdale, Arizona (the
"Scottsdale Downtown Property"), the Courtyard by Marriott located in Seattle,
Washington (the "Lake Union Property") and the Residence Inn by Marriott located
in Phoenix, Arizona (the "Phoenix Airport Property"). Hotel Investors applied $7
million of the $10 million deposit toward the acquisition of the Additional
Hotels. As a result of these purchases and the deposit, Five Arrows has funded
approximately $48 million of its commitment and purchased 48,337 shares of Class
A Preferred Stock and the Company has funded approximately $38 million of its
commitment to Hotel Investors and purchased 37,979 shares of Class B Preferred
Stock. Hotel Investors has obtained advances totalling approximately $88 million
relating to the Hotel Investors Loan in order to facilitate the acquisition of
the Initial Hotels and the Additional Hotels (the "Seven Hotels"). Hotel
Investors intends to use the remaining committed capital contributions from Five
Arrows and the Company, and proceeds from the Hotel Investors Loan
proportionately to fund the remaining Property acquisition.
Five Arrows also committed to invest up to $15 million in the Company
through the purchase of Common Stock pursuant to the Company's Initial Offering
and this offering, the proceeds of which have been and will be used by the
Company to fund approximately 38% of its funding commitment to Hotel Investors.
As of February 24, 1999, Five Arrows had invested $9,297,056 in the Company. Due
to the stock ownership limitations specified in the Company's Articles of
Incorporation at the time of Five Arrows' initial investment, $5,612,311 was
invested in the Company's Common Stock through the purchase of 590,770 Shares
and $3,684,745 was advanced to the Company as a convertible loan, bearing an
interest rate of eight percent. Due to additional subscription proceeds received
from February 24, 1999 to April 30, 1999, the loan was converted to 387,868
Shares of the Company's Common Stock on April 30, 1999. On June 17, 1999, Five
Arrows invested an additional $4,952,566 through the purchase of 521,322 Shares
of Common Stock. Therefore, as of June 30, 1999, Five Arrows had invested
$14,249,622 of its $15 million commitment in the Company. In addition to the
above investments, Five Arrows has purchased a 10% interest in the Advisor. In
connection with Five Arrows' commitment to invest $15 million in the Company,
the Advisor and certain Affiliates have agreed to waive certain fees otherwise
payable to them by the Company.
Cash flow from operations of Hotel Investors is distributed first to
Five Arrows with respect to dividends payable on the Class A Preferred Stock.
Such dividends are calculated based on Five Arrows' "special investment amount"
which is $1,294.78 per share, representing the sum of its investment in Hotel
Investors and its $15 million investment in the Company on a per share basis,
adjusted for any distributions received from the Company. Then, cash flow from
operations is distributed to the Company with respect to its Class B Preferred
Stock. Next, cash flow is distributed to 100 CNL Group, Inc. and subsidiaries'
associates who each own one share of Class C preferred stock in Hotel Investors,
to provide a quarterly, cumulative, compounded 8% return. All remaining cash
flow from operations is distributed pro rata with respect to the interest in the
common shares.
Hotel Investors acquired the Legacy Park Property for $12,694,000 from
PLC Hotel Property, Ltd., the Market Center Property for $32,973,000 from Marcen
Property, Ltd., the Hughes Center Property for $33,097,000 from LVHC Hotel
Property, Ltd., the Dallas Plano Property for $11,684,000 from PLR1 Hotel
Property, Ltd, the Scottsdale Downtown Property for $19,614,216 from SAHD
Property, LP, the Lake Union
<PAGE>
Property for $35,801,212 from Westlake Hotel Property, LP and the Phoenix
Airport Property for $21,351,707 from APRI Hotel Property, LP. In connection
with the purchase of the Seven Hotels, Hotel Investors, as lessor, entered into
seven separate, long-term lease agreements. The lessee of the Seven Hotels is
the same unaffiliated lessee. The leases on all seven Properties are
cross-defaulted. The general terms of the lease agreements are described in the
section of the Prospectus entitled "Business -- Description of Property Leases."
The principal features of the leases are as follows:
o The initial term of each lease expires in approximately 20 years, on
December 28, 2018.
o At the end of the initial lease term, the tenant will have three
consecutive renewal options of fifteen years.
o The leases require minimum rent payments as follows.
<PAGE>
Minimum Annual Rent
---------------------------------
Year 2 and
Property Year 1 Thereafter
------------------------------- ----------- -------------
Legacy Park Property $1,308,673 $1,341,390
Market Center Property 3,399,319 3,484,302
Hughes Center Property 3,412,068 3,497,369
Dallas Plano Property 1,204,485 1,234,597
Scottsdale Downtown Property 2,022,084 2,072,636
Lake Union Property 3,690,847 3,783,118
Phoenix Airport Property 2,201,207 2,256,237
o In addition to minimum rent, for lease years one and two, the leases
require percentage rent equal to 7.75% of the aggregate amount of all
room revenues combined, for the Seven Hotels, in excess of a combined
threshold of $47,540. For lease year three and thereafter, the leases
require percentage rent equal to 7.75% of the aggregate amount of all
room revenues combined, for the Seven Hotels, in excess of lease year
two actual room revenues.
o The tenant of the Seven Hotels has established a FF&E Reserve which
will be used for the replacement and renewal of furniture, fixtures and
equipment relating to the hotel Properties. Deposits to the FF&E
Reserve are made once every four weeks as follows: (i) for the Legacy
Park, Hughes Center, Dallas Plano, Scottsdale Downtown, Lake Union and
Phoenix Airport Properties, 1% of gross receipts for the first lease
year; 3% of gross receipts for the second lease year; and 5% of gross
receipts every lease year thereafter and (ii) for the Market Center
Property, 1% of gross receipts for the first lease year; 2% of gross
receipts for the second lease year; 3% of gross receipts for the third
through fifth lease years; 4% of gross receipts for the sixth through
tenth lease years; and 5% of gross receipts for the eleventh lease year
and thereafter. Funds in the FF&E Reserve and all property purchased
with funds from the FF&E Reserve shall be paid, granted and assigned to
Hotel Investors.
o The tenant under each lease is required to maintain, for up to three
years from the commencement of the last lease for the Hotels to be
executed (but the period will in no event end earlier than December 31,
2003), a liquid net worth equal to a minimum amount (the "Net Worth
Requirement"), which may be used solely to make payments under the
leases. The Net Worth Requirement may be reduced after twelve months to
the extent by which payment of rent exceeds cash available for lease
payments (gross revenues less property expenses) derived from the
leased Hotels during the one-year period. In addition, providing that
all of the Hotels have been opened for one year, the Net Worth
Requirement will terminate at such time that cash available for lease
payments for all of the leased Hotels equals 125% of total minimum rent
due under the leases for 12 consecutive months; or that the lease is
terminated pursuant to its terms (other than for an event of default).
<PAGE>
The estimated federal income tax basis of the depreciable portion of
the Seven Hotels is as follows.
Legacy Park Property $11,200,000
Market Center Property 30,500,000
Hughes Center Property 29,700,000
Dallas Plano Property 10,400,000
Scottsdale Downtown Property 16,900,000
Lake Union Property 29,300,000
Phoenix Airport Property 19,300,000
Each of the Seven Hotels is a newly constructed hotel which recently
commenced operations. The Legacy Park Property is located approximately 25 miles
north of the city of Dallas and has 153 guest rooms and five suites. The Market
Center Property is approximately two miles northwest of the Dallas central
business district and has 266 guest suites. The Dallas Plano Property is located
approximately 25 miles north of the city of Dallas and has 126 guest suites.
According to Hospitality Valuation Services (HVS) data, Dallas has more than 200
planned industrial districts and is home to over 250 insurance companies and
many major oil companies. Since 1996, more than 20 regional and national
companies have relocated to or completed expansions in the area. Other lodging
facilities located in proximity to the Legacy Park Property include a Hampton
Inn, a Fairfield Inn(R) by Marriott(R), a LaQuinta Inn & Suites and another
Courtyard by Marriott. Other lodging facilities located in proximity to the
Market Center Property include a Renaissance(R) Hotel, an Embassy Suites, a
Sheraton Suites, a Wyndham Garden Hotel and a Courtyard by Marriott. Other
lodging facilities located in proximity to the Dallas Plano Property include a
Homewood Suites, a Bradford Suites, a Mainstay Suites, a La Quinta Inn & Suites,
a Courtyard by Marriott and another Residence Inn by Marriott.
The Hughes Center Property is in a commercial park located east of the
Las Vegas strip and has 256 guest suites. According to HVS data, in 1998, Las
Vegas hosted approximately 4,000 conventions with more than 3.3 million people
in attendance. The 1998 economic impact of conventions was an estimated $4.2
billion. In addition, Las Vegas is known a the "Entertainment Capital of the
World," drawing more than 30 million visitors in 1998 and generating a 1998
hotel occupancy rate of 85.8% compared to the United States national average
occupancy rate of 64%. Other lodging facilities located in proximity to the
Hughes Center Property include an AmeriSuites, a Hawthorn Suites and another
Residence Inn by Marriott.
The Scottsdale Downtown Property is located approximately 15 miles
northeast of Phoenix Sky Harbor International Airport and has 176 guest rooms
and four suites. The Phoenix Airport Property is located approximately three
miles north of Phoenix Sky Harbor International Airport and has 200 guest
suites. According to VHS data, Arizona is one of the top two fastest growing
states in the nation, second only to the state of Nevada. Phoenix is the
fifteenth largest metropolis in the United States. Due to its location and
climate, Phoenix has become a convention destination with more than 347,238 room
nights booked in 1998. Other lodging facilities located in proximity to the
Scottsdale Downtown Property include a Hampton Inn, a Fairfield Inn by Marriott,
a Holiday Inn, a Comfort Suites, a Quality Suites, a Days Inn and a Ramada.
Other lodging facilities located in proximity to the Phoenix Airport Property
include a Double Tree Suites, an Embassy Suites, an Embassy Suites West, a
Wyndham Garden Hotel and a Holiday Inn Select.
The Lake Union Property is in downtown Seattle, near the University
district and the Seattle Center area and has 248 guest rooms and two suites.
According to VHS data, computer and electronic jobs in Seattle have grown by 300
percent in the past 20 years. Other lodging facilities located in proximity to
the Lake Union Property include a Residence Inn by Marriott, a Hampton Inn &
Suites, a Cavanaugh's Inn, a Warwick Hotel, a Mayflower and a Roosevelt Hotel.
Since the Seven Hotels are newly constructed properties, limited
operating history is available. Of the Seven Hotels, the Hughes Center Property
and the Dallas Plano Property were the earliest to commence operations, in
October 1998. Based on information provided to the Company by Western
International for the period ended December 31, 1998, the hotels located on
these Properties generated gross operating profits of
<PAGE>
$690,000 and $188,000, respectively, which resulted in net operating profits
(earnings before interest, taxes and depreciation) of $394,000 and $55,000
respectively. The average occupancy rate, the average daily room rate and the
revenue per available room for the periods the hotels have been operational are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Average Average Revenue
Occupancy Daily Room per
Property Year Rate Rate Available Room
----------------------------- ---------- ------------- -------------- -------------------
Legacy Park Property *1998 8.20% $45.28 $ 3.70
**1999 55.90% 95.54 53.41
Market Center Property *1998 37.90% $100.95 $ 38.26
**1999 73.30% 118.18 86.63
Hughes Center Property *1998 47.30% $107.86 $ 51.00
**1999 73.10% 100.92 73.77
Dallas Plano Property *1998 46.70% $88.79 $ 41.47
**1999 58.90% 83.95 49.45
Scottsdale Downtown Property **1999 20.10% $57.96 $ 11.65
Lake Union Property **1999 57.60% $114.33 $ 65.85
Phoenix Airport Property **1999 32.00% $73.30 $ 23.46
</TABLE>
* Data for the Legacy Park Property represents the period December 23,
1998 through January 1, 1999, data for the Market Center Property
represents the period November 11, 1998 through January 1, 1999, data
for the Hughes Center Property represents the period October 1, 1998
through January 1, 1999 and data for the Dallas Plano Property
represents the period October 12, 1998 through January 1, 1999.
** Data for the Legacy Park, Market Center, Hughes Center and Dallas Plano
Properties represents the period January 2, 1999 through July 16, 1999,
and data for the Scottsdale Downtown, Lake Union and Phoenix Airport
Properties represents the period May 22, 1999 through July 16, 1999.
The Company believes that the results achieved by the Seven Hotels, as
shown in the table above, are not indicative of their long-term operating
potential since they each had been open for three months or less than one year
during the reporting period.
Marriott Brands. The brands, Residence Inn by Marriott, Courtyard by
Marriott and Marriott Hotels, Resorts and Suites(R) are part of Marriott
International's portfolio of brands. According to data obtained in February 1999
from Marriott's Market Planning & Feasibility department, Marriott International
is one of the world's leading hospitality companies, managing the most hotels
worldwide, and is ranked as the sixth largest hotel company overall by brand
(based on number of rooms in 1997). According to Marriott data, as of January
1999, Marriott International had more than 1,800 units (or properties), for an
aggregate of more than 325,000 rooms worldwide. Although Marriott International
has entered into a management agreement relating to the Seven Hotels, it has not
guaranteed the payments due under the leases.
Each Residence Inn by Marriott hotel typically offers daily
complimentary breakfast and newspaper, an evening hospitality hour, a swimming
pool, heated whirlpool and Sport Court(R). Guest suites provide in-room modem
jacks, separate living and sleeping areas and a fully equipped kitchen with
appliances and cooking utensils. According to Marriott, as of January 1999,
there were over 294 Residence Inn by Marriott hotels in the United States and
four in Canada and Mexico. With a usage rate of more than 83% among extended
stay chains, Residence Inn by Marriott is the top U.S. extended stay lodging
brand, appealing to travelers who need a room for five or more consecutive
nights, according to data obtained in February 1999 from Marriott's Marketing
Planning & Feasibility department.
<PAGE>
Each Courtyard by Marriott features a residential atmosphere, a
restaurant, lounge, meeting space, exercise room and swimming pool. According to
data obtained in February 1999 from Marriott's Marketing Planning & Feasibility
department, Courtyard by Marriott is a leading moderate price lodging chain
featuring a residential atmosphere. According to Marriott, as of January 1999,
there were more than 415 Courtyard by Marriott hotels across the United States,
Canada and abroad.
Marriott Hotels, Resorts and Suites is Marriott International's
flagship brand of upscale, full-service hotels and resorts. Each of the Marriott
Hotels, Resorts and Suites features multiple restaurants and lounges, health
club, swimming pool, gift shop, concierge level, business center and meeting
facilities. According to Marriott, as of January 1999, there were over 351
Marriott Hotels, Resorts and Suites worldwide.
In connection with the acquisition of certain of the Properties, the
Company and Hotel Investors have entered into agreements with Marriott
International or one of its affiliates. Among other things, these agreements
require under certain circumstances that the Company or Hotel Investors obtain
the consent of, or offer the Property to, Marriott International or one of its
affiliates in the event that the Company or Hotel Investors wishes to sell the
Property to a third party. The Company believes that these agreements and the
terms thereof are consistent with standard practices in the hospitality
industry.
PENDING INVESTMENTS
The following information updates and replaces the "Pending
Investments" section of the Prospectus.
As of August 11, 1999, the Company had initial commitments to acquire,
directly or indirectly, four hotel properties. These Properties are two
Courtyards by Marriott, one located in Orlando, Florida, and one located in
Addison, Texas, one Fairfield Inn by Marriott located in Orlando, Florida and
one SpringHill Suites located in Orlando, Florida. The acquisition of each of
these properties is subject to the fulfillment of certain conditions. There can
be no assurance that any or all of the conditions will be satisfied or, if
satisfied, that one or more of these properties will be acquired by the Company.
If acquired, the leases of these properties are expected to be entered into on
substantially the same terms described in the section of the Prospectus entitled
"Business -- Description of Property Leases." In order to acquire all of these
properties, the Company must obtain additional funds through the receipt of
additional offering proceeds and/or debt financing.
Leases. Set forth below are summarized terms expected to apply to the
leases for each of the properties. More detailed information relating to a
property and its related lease will be provided at such time, if any, as the
property is acquired.
<PAGE>
<TABLE>
<CAPTION>
Estimated
Purchase Lease Term and Minimum Annual
Property Price Renewal Options Rent Percentage Rent
- -------- --------- --------------- -------------- ---------------
<S><C>
Courtyard by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "Courtyard Little Lake Bryan the property of revenues in excess of
Property") revenues for the second
Hotel under construction lease year
Fairfield Inn by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "Fairfield Inn Little Lake the property of revenues in excess of
Bryan Property") revenues for the second
Hotel under construction lease year
SpringHill Suites by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after
Orlando, FL (1) renewal options total cost to purchase the second lease year, 7%
(the "SpringHill Suites Little the property of revenues in excess of
Lake Bryan Property") revenues for the second
Hotel under construction lease year
Courtyard by Marriott $17,085,000 approximately 20 years; 10.309% of the total cost for the first and second
Addison, TX (3)(4)(5) three 15-year renewal to purchase the Property; lease years, 7.75% of room
(the "Courtyard Addison options increases to 10.567% revenues in excess of the
Property") after the first lease year second year pro forma
Hotel under construction revenues; and for the third
lease year and thereafter,
7.75% of room revenues in
excess of the second year
actual revenues
</TABLE>
- ------------------------------------
FOOTNOTES:
(1) The leases for the Courtyard Little Lake Bryan, the Fairfield Inn
Little Lake Bryan and the SpringHill Suites Little Lake Bryan
Properties are expected to be with the same unaffiliated lessee.
(2) The anticipated aggregate purchase price for the Courtyard Little Lake
Bryan, Fairfield Inn Little Lake Bryan and SpringHill Suites Little
Lake Bryan Properties is approximately $100 million.
(3) The Company, together with an institutional investor, will indirectly
acquire this hotel property (in addition to the Seven Hotels) through
Hotel Investors. (See "Property Acquisitions" above.)
<PAGE>
(4) In connection with the acquisition of this property, Hotel Investors is
expected to obtain approximately $8,776,000 in long-term, permanent
financing to be used to fund a portion of the purchase price. Such
financing will be secured by the property, bear interest at a market
rate and be nonrecourse to Hotel Investors. (See "Property
Acquisitions" above.)
(5) In connection with the acquisition of this hotel property (in addition
to the Seven Hotels), an investment of $15,000,000 in the Company and
the acquisition of a ten percent interest in the Advisor by the
institutional investor, the Advisor and certain of its Affiliates have
waived or reduced certain fees otherwise payable by the Company. (See
"Property Acquisitions" above.) In connection with these transactions,
Hotel Investors paid the advisor of the institutional investor a
commitment fee.
<PAGE>
Little Lake Bryan. Three of the Properties are located in Little Lake
Bryan, a 300-acre community planned by The Little Lake Bryan Company. Included
in the proposed acquisition are a 314-room Courtyard by Marriott, a 389-room
Fairfield Inn by Marriott and a 398-room SpringHill Suites(TM) by Marriott(R)
(formerly Fairfield Suites(R) by Marriott(R)). The hotels are being developed by
Marriott International, Inc. with completion scheduled for the year 2000. The
community is less than five miles from the WALT DISNEY WORLD(R) Resort and less
than ten miles from SeaWorld(R) Orlando, Universal Studios Escape(R) and the
Orange County Convention Center.
As shown below, the lodging market in the Lake Buena Vista area
averaged 77% occupancy and an average daily room rate of $121 for 1998. The Lake
Buena Vista lodging market also achieved a 9.6% growth in room demand on a
compounded annual basis over the last ten years. The following table reflects
the hotel occupancy rates and daily room rates for hotels in the Orlando area:
<TABLE>
<CAPTION>
<S> <C>
ORLANDO AREA HOTEL OCCUPANCY RATES
AND AVERAGE DAILY ROOM RATES
ORLANDO LAKE BUENA VISTA*
AVERAGE DAILY AVERAGE DAILY
YEAR OCCUPANCY RATE ROOM RATE OCCUPANCY RATE ROOM RATE
- ----------- ------------------- ------------------- ----------------- -------------------
1993 72.2% $64.61 74.7% $103.09
1994 71.3% 65.85 76.3% 100.26
1995 74.6% 68.55 80.3% 96.99
1996 80.1% 73.04 82.5% 104.65
1997 78.7% 80.99 80.2% 116.18
1998 74.7% 84.64 76.9% 121.48
</TABLE>
* Little Lake Bryan is part of the Lake Buena Vista market area.
Source: Smith Travel Research
According to the Orlando/Orange County Convention & Visitors Bureau
1998 Research report, Central Florida is one of the top five travel destinations
in the United States and leisure travel to Orlando continues to grow. The number
of domestic non-Florida leisure travelers visiting Orlando in 1997 increased
16.1% over 1996. In 1997, Universal Studios Escape(R) drew an estimated 8.9
million visitors and SeaWorld(R) Orlando had an estimated 4.9 million visitors.
Area attractions continue to grow with new developments.
In addition, according to the Orlando/Orange County Convention &
Visitors Bureau 1998 Research report, visitor arrivals at Orlando International
Airport increased from approximately 21,500,000 passengers in 1993, to
27,300,000 passengers in 1997. The number of domestic non-Florida business
travelers during 1997 increased 22.1% over 1996. In addition, more than six
million international visitors arrived in Florida in 1997, for a national market
share of 25.1%. The Orlando area claimed 11.5% of the national market share. On
average, international visitors spent $800 per person/per trip, excluding
airfare, while visiting Orlando in 1997.
The Orange County Convention Center recently completed a new phase of
development. With 1.1 million square feet of exhibition space, an independent
study ranked the center as number two in the nation for continuous exhibition
space. The following table reflects the number of events which took place at the
Orange County Convention Center between 1994 and 1998 and attendance levels for
those events:
ORANGE COUNTY CONVENTION
CENTER ATTENDANCE
Year Number of Events Attendance
---- ---------------- ----------
1994 188 705,824
1995 168 700,429
1996 240 1,017,679
1997 260 930,219
1998 244 967,363
Source: Orlando/Orange County CVB
<PAGE>
Western International. The remaining hotel property which the Company
has an initial commitment to acquire an interest, is a 176-room Courtyard by
Marriott, located in Addison, Texas, a northern suburb of Dallas, in close
proximity to high-rise office buildings, retail centers and restaurants.
According to HVA data, Addison has a daytime office population of more than
100,000 people.
Marriott Brands. Fairfield Inn by Marriott is an economy lodging brand
appealing to both business and leisure travelers. According to Marriott, as of
January 1999, there are more than 376 Fairfield Inn by Marriott hotels in 47
states.
SpringHill Suites by Marriott is Marriott's new, moderately priced,
all-suite lodging brand, with guest suites that are up to 25 percent larger than
standard hotel rooms. All SpringHill Suites feature a complimentary continental
breakfast, indoor swimming pool and exercise room. According to Marriott, as of
January 1999, SpringHill Suites by Marriott is projected to grow to 115
properties by 2002.
The following chart provides additional information on systemwide
occupancy levels for Marriott lodging brands:
Total Occupancy Rate for 1998
Marriott Brand as Compared to
U.S. Lodging Industry
Occupancy Rate
--------------
U.S. Lodging Industry 64.0%
Courtyard by Marriott 77.6%
Fairfield Inn by Marriott 72.4%
Marriott Hotels, Resorts and Suites 75.9%
Residence Inn by Marriott 80.6%
Source: Smith Travel Research (U.S.Lodging Industry only) and
Marriott International, Inc. 1998 Form 10-K
SELECTED FINANCIAL DATA
The following table sets forth certain financial information for the
Company, and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements included in Appendix B.
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended
June 30, 1999 June 30, 1998 Year Ended December 31,
(Unaudited) (Unaudited) 1998 1997 (1) 1996 (2)
----------------- ----------------- ---------------- ------------ ------------
Revenues $3,420,429 $371,159 $1,955,461 $ 46,071 $ -
Net earnings 1,892,529 201,973 958,939 22,852 -
Cash distributions declared (3) 3,052,616 257,086 1,168,145 29,776 -
Funds from operations (4) 2,870,479 201,973 1,343,105 22,852 -
Earnings per Share
Basic and Diluted 0.20 0.11 0.40 0.03 -
Cash distributions declared per Share 0.36 0.15 0.46 0.05 -
Weighted average number of Shares
outstanding (5) 9,391,870 1,820,362 2,402,344 686,063 -
June 30, 1999 June 30, 1998 December 31,
(Unaudited) (Unaudited) 1998 1997 1996
----------------- ----------------- ------------ ----------- -----------
Total assets $141,107,865 $20,332,910 $48,856,690 $9,443,476 $598,190
Total stockholders' equity 138,605,679 20,240,660 37,116,491 9,233,917 200,000
</TABLE>
<PAGE>
(1) No operations commenced until the Company received minimum offering
proceeds and funds were released from escrow on October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12, 1996
(date of inception) through December 31, 1996.
(3) Cash distributions are declared by the Board of Directors and generally
are based on various factors, including cash available from operations.
Approximately 52%, 40%, 18% and 23% of cash distributions for the six
months ended June 30, 1999 and 1998, and the years ended December 31,
1998 and 1997, respectively, represent a return of capital in
accordance with generally accepted accounting principles ("GAAP"). Cash
distributions treated as a return of capital on a GAAP basis represent
the amount of cash distributions in excess of accumulated net earnings
on a GAAP basis, including deductions for depreciation expense. The
Company has not treated such amount as a return of capital for purposes
of calculating Invested Capital and the Stockholders' 8% Return.
(4) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization
of real estate assets and after adjustments for unconsolidated
partnerships and joint ventures. FFO was developed by NAREIT as a
relative measure of performance and liquidity of an equity REIT in
order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. However, FFO (i)
does not represent cash generated from operating activities determined
in accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the
determination of net earnings), (ii) is not necessarily indicative of
cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net earnings determined in accordance
with GAAP as an indication of the Company's operating performance, or
to cash flow from operating activities determined in accordance with
GAAP as a measure of either liquidity or the Company's ability to make
distributions. Accordingly, the Company believes that in order to
facilitate a clear understanding of the historical operating results of
the Company, FFO should be considered in conjunction with the Company's
net earnings and cash flows as reported in the accompanying financial
statements and notes thereto. See Appendix B-- Financial Information
included in this Prospectus Supplement and in the Prospectus.
(5) The weighted average number of Shares outstanding is based upon the
period the Company was operational.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
section of the Prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The following information, including, without limitation, the Year 2000
Compliance disclosure, that are not historical facts may be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. Although the Company believes that
the expectations reflected in such forward-looking statements are based upon
reasonable assumptions, the Company's actual results could differ materially
from those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: changes in general economic
conditions, changes in local and national real estate conditions, continued
availability of proceeds from the Company's offering, the ability of the Company
to obtain permanent financing on satisfactory terms, the ability of the Company
to identify suitable investments, the ability of the Company to locate suitable
tenants for its Properties and borrowers for its Mortgage Loans and Secured
Equipment Leases, and the ability of such tenants and borrowers to make payments
under their respective leases, Mortgage Loans or Secured Equipment Leases.
The Company is a Maryland corporation that was organized on June 12,
1996. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are wholly owned
subsidiaries of CNL Hospitality Properties, Inc., organized in Delaware in June
1998. CNL Hospitality Partners, LP is a Delaware limited partnership formed in
June 1998. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are the general
and limited partners, respectively, of CNL Hospitality Partners, LP. The term
"Company" includes, unless the context otherwise requires, CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp. and CNL
Hospitality LP Corp.
<PAGE>
The Company was formed to acquire Properties located across the United
States to be leased on a long-term, "triple-net" basis to operators of selected
national and regional limited service, extended stay and full service Hotel
Chains. The Company may also provide Mortgage Loans and Secured Equipment Leases
to operators of Hotel Chains. Secured Equipment Leases will be funded from the
proceeds of financing to be obtained by the Company. The aggregate outstanding
principal amount of Secured Equipment Leases will not exceed 10% of gross
proceeds from the Company's offerings of Shares of Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
On July 9, 1997, the Company commenced its Initial Offering of Shares
of Common Stock. Upon completion of the Initial Offering on June 17, 1999, the
Company had received aggregate subscriptions for 15,007,264 Shares totalling
$150,072,637 in Gross Proceeds, including $72,637 (7,264 Shares) through the
Company's Reinvestment Plan. Following the completion of its Initial Offering,
the Company commenced this offering of up to 27,500,000 Shares of Common Stock
($275,000,000). Of the 27,500,000 Shares of Common Stock offered, 2,500,000 are
available only to stockholders purchasing Shares through the Reinvestment Plan.
As of June 30, 1999, the Company had received subscriptions for 765,776 Shares
totalling $7,657,757 in Gross Proceeds from this offering, including $88,403
(8,840 Shares) through the Company's Reinvestment Plan. The price per Share and
the other terms of this offering, including the percentage of gross proceeds
payable (i) to the Managing Dealer for Selling Commissions and expenses in
connection with the offering and (ii) to the Advisor for Acquisition Fees, are
substantially the same as those for the Initial Offering.
As of August 11, 1999, the Company had received aggregate subscriptions
for 18,863,490 Shares totalling $188,634,901 in Gross Proceeds from its Initial
Offering and this offering, including $161,040 (16,104 Shares) through the
Reinvestment Plan. As of August 11, 1999, net proceeds to the Company from its
offerings of Shares and capital contributions from the Advisor, after deduction
of Selling Commissions, marketing support and due diligence expense
reimbursement fees and Organizational and Offering Expenses totalled
approximately $168,399,000. The Company has used net proceeds from the offerings
to invest, directly or indirectly, approximately $63,098,200 in nine hotel
Properties, to pay $6,320,000 as deposits on four additional hotel Properties,
to redeem 3,000 Shares of Common Stock for $27,600 and to pay approximately
$9,575,100 in Acquisition Fees and certain Acquisition Expenses, leaving
approximately $89,378,000 available for investment in Properties and Mortgage
Loans.
The Company expects to use net proceeds it has received from its
Initial Offering and this offering, plus any additional net proceeds from the
sale of Shares in this offering, to purchase additional Properties and, to a
lesser extent, make Mortgage Loans. See the section of the Prospectus entitled
"Investment Objectives and Policies." In addition, the Company intends to borrow
money to acquire Assets and to pay certain related fees. The Company intends to
encumber Assets in connection with such borrowing. The Company currently has a
$30,000,000 initial Line of Credit, as described below, and plans to obtain one
or more revolving Lines of Credit in an aggregate amount up to $100,000,000 and
may, in addition, also obtain Permanent Financing. The Lines of Credit may be
repaid with offering proceeds, working capital or Permanent Financing. Although
the Board of Directors anticipates that the Lines of Credit will be in an amount
up to $100,000,000 and that the aggregate amount of any Permanent Financing will
not exceed 30% of the Company's total assets, the maximum amount the Company may
borrow, absent a satisfactory showing that a higher level of borrowing is
appropriate as approved by a majority of the Independent Directors, is 300% of
the Company's Net Assets.
On July 31, 1998, the Company entered into an initial Line of Credit
and security agreement with a bank to be used by the Company to acquire hotel
Properties. The initial Line of Credit provides that the Company will be able to
receive advances of up to $30,000,000 until July 30, 2003, with an annual review
to be performed by the bank to indicate that there has been no substantial
deterioration, as determined by the bank in its reasonable discretion, of the
credit quality. Interest expense on each advance shall be payable monthly, with
all unpaid interest and principal due no later than five years from the date of
the advance. Advances under the Line of Credit will bear interest at either (i)
a rate per annum equal to 318 basis points above the London Interbank Offered
Rate (LIBOR) or (ii) a rate per annum equal to 30 basis points above the bank's
base rate, whichever the Company selects at the time advances are made. In
<PAGE>
addition, a fee of 0.5% per advance will be due and payable to the bank on funds
as advanced. Each advance made under the Line of Credit will be collateralized
by an assignment of rents and leases. In addition, the Line of Credit provides
that the Company will not be able to further encumber the applicable hotel
Property during the term of the advance without the bank's consent. The Company
will be required, at each closing, to pay all costs, fees and expenses arising
in connection with the Line of Credit. The Company must also pay the bank's
attorney's fees, subject to a maximum cap, incurred in connection with the Line
of Credit and each advance. As of August 11, 1999, the Company obtained and
repaid three advances totalling $9,600,000 relating to the Line of Credit. In
connection with the Line of Credit, the Company incurred a commitment fee, legal
fees and closing costs of $93,596. The proceeds were used in connection with the
purchase of two hotel Properties and the commitment to acquire three additional
Properties. The Company has not yet received a commitment for any Permanent
Financing and there is no assurance that the Company will obtain any Permanent
Financing on satisfactory terms.
At the Company's annual meeting of stockholders held on May 12, 1999,
the stockholders approved an amendment to the Company's Amended and Restated
Articles of Incorporation proposed by the Board of Directors to expand the class
of investors for whom they are authorized to waive the common and preferred
share ownership limitation under certain circumstances. On May 26, 1999, this
amendment became effective. The Board of Directors believes that this will allow
the Company to take better advantage of investments that are in the best
interest of the Company.
In February 1999, the Company executed a series of agreements with Five
Arrows pursuant to which the Company and Five Arrows formed a jointly owned real
estate investment trust, Hotel Investors, for the purpose of acquiring up to
eight Hotels. At the time the agreement was entered into, the eight Hotels (four
Courtyard by Marriott hotels, three Residence Inn by Marriott hotels, and one
Marriott Suites) were either newly constructed or in various stages of
completion. As of June 30, 1999, the Company had acquired an interest in seven
of the eight Hotels and the remaining Hotel is expected to be acquired after
completion of construction.
The Advisor is also the advisor to Hotel Investors pursuant to a
separate advisory agreement. However, in no event will the Company pay the
Advisor fees, including the Company's pro rata portion of Hotel Investors'
advisory fees, in excess of amounts payable under its Advisory Agreement. The
Advisor entered into separate purchase agreements for each of the eight Hotels,
which agreements include customary closing conditions, including inspection of
and due diligence on the completed Properties. The aggregate purchase price of
all eight Hotels, once the remaining Hotel under construction is acquired, will
be approximately $184 million, excluding closing costs.
In order to fund these purchases, Five Arrows committed to make an
investment of up to $50.9 million in Hotel Investors. The Company committed to
make an investment of up to $40 million in Hotel Investors, which investment has
been and will be made through its wholly owned subsidiary, CNL Hospitality
Partners, LP. Hotel Investors expected to fund the remaining amount of
approximately $96.6 million (including closing costs) with permanent financing
from Jefferson-Pilot Life Insurance Company consisting of eight separate loans,
collateralized by the Hotel Investors Loan.
In return for their respective funding commitments, Five Arrows
received a 51% common stock interest and Hospitality Partners, LP received a 49%
common stock interest in Hotel Investors. As funds are continually advanced to
Hotel Investors, Five Arrows will receive up to 50,886 shares of Class A
Preferred Stock, and CNL Hospitality Partners, LP will receive up to 39,982
shares of Class B Preferred Stock. The Class A Preferred Stock is exchangeable
upon demand into Common Stock of the Company, as determined pursuant to a
predetermined formula that is intended to make the conversion not dilutive to
funds from operations (based on the revised definition adopted by the Board of
Governors of the National Association of Real Estate Investment Trusts which
means net earnings determined in accordance with generally accepted
<PAGE>
accounting principles, excluding gains or losses from debt restructuring and
sales of property, plus depreciation and amortization of real estate assets and
after adjustments for unconsolidated partnerships and joint ventures) per share
of the Company's common stock.
On February 25, 1999, Hotel Investors purchased the four Initial Hotels
for an aggregate purchase price of approximately $90 million and paid $10
million as a deposit on the four remaining Hotels. The Initial Hotels are the
Courtyard by Marriott located in Plano, Texas, the Marriott Suites located in
Dallas, Texas, the Residence Inn by Marriott located in Las Vegas, Nevada and
the Residence Inn by Marriott located in Plano, Texas. On June 16, 1999, Hotel
Investors purchased three additional hotels of the eight Hotels (the "Additional
Hotels") for an aggregate purchase price of approximately $77 million. The
Additional Hotels are the Courtyard by Marriott located in Scottsdale, Arizona,
the Courtyard by Marriott located in Seattle, Washington and the Residence Inn
by Marriott located in Phoenix, Arizona. Hotel Investors applied $7 million of
the $10 million deposit toward the acquisition of the Additional Hotels. As a
result of these purchases and the deposit, Five Arrows has funded approximately
$48 million of its commitment and purchased 48,337 shares of Hotel Investors'
Class A Preferred Stock and the Company has funded approximately $38 million of
its commitment to Hotel Investors and purchased 37,979 shares of Hotel
Investors' Class B Preferred Stock. Hotel Investors has obtained advances
totalling approximately $88 million relating to the Hotel Investors Loan in
order to facilitate the acquisition of the Seven Hotels. Hotel Investors intends
to use the remaining committed capital contributions from Five Arrows and the
Company, and proceeds from the Hotel Investors Loan proportionately to fund the
remaining Property acquisition.
Five Arrows also committed to invest up to $15 million in the Company
through the purchase of Common Stock pursuant to the Company's Initial Offering
and this offering, the proceeds of which have been and will be used by the
Company to fund approximately 38% of its funding commitment to Hotel Investors.
As of February 24, 1999, Five Arrows had invested $9,297,056 in the Company. Due
to the stock ownership limitations specified in the Company's Articles of
Incorporation at the time of Five Arrows' initial investment, $5,612,311 was
invested in the Company's Common Stock through the purchase of 590,770 Shares
and $3,684,745 was advanced to the Company as a convertible loan, bearing an
interest rate of eight percent. Due to additional subscription proceeds received
from February 24, 1999 to April 30, 1999, the loan was converted to 387,868
Shares of the Company's Common Stock on April 30, 1999. On June 17, 1999, Five
Arrows invested an additional $4,952,566 through the purchase of 521,322 Shares
of Common Stock. Therefore, as of June 30, 1999, Five Arrows had invested
$14,249,622 of its $15 million commitment in the Company. In addition to the
above investments, Five Arrows has purchased a 10% interest in the Advisor. In
connection with Five Arrows' commitment to invest $15 million in the Company,
the Advisor and certain Affiliates have agreed to waive certain fees otherwise
payable to them by the Company.
Cash flow from operations of Hotel Investors is distributed first to
Five Arrows with respect to dividends payable on the Class A Preferred Stock.
Such dividends are calculated based on Five Arrows' "special investment amount,"
or $1,294.78 per share, which represents the sum of its investment in Hotel
Investors and its $15 million investment in the Company on a per share basis,
adjusted for any distributions received from the Company. Then, cash flow from
operations is distributed to the Company with respect to its Class B Preferred
Stock. Next, cash flow is distributed to 100 CNL Group, Inc. and subsidiaries'
associates who each own one share of Class C preferred stock in Hotel Investors,
to provide a quarterly, cumulative, compounded 8% return. All remaining cash
flow from operations is distributed pro rata with respect to the interest in the
common shares.
As of August 11, 1999, the Company had initial commitments to acquire,
directly or indirectly, four hotel Properties. The acquisition of each of these
Properties is subject to the fulfillment of certain conditions. In order to
acquire all of these Properties, the Company must obtain additional funds
through the receipt of additional offering proceeds and/or advances on the Line
of Credit. In connection with three of these agreements, the Company was
required by the seller to obtain a letter of credit. The letter of credit was
collateralized by a $5,000,000 certificate of deposit. In connection with the
letter of credit, the Company incurred $22,500 in
<PAGE>
closing costs. In connection with the remaining agreement, Hotel Investors was
required by the seller to pay a deposit of $3,000,000 which is being held in
escrow by the title company. Of this amount, Five Arrows contributed $1,680,000
and the Company contributed $1,320,000. There can be no assurance that any or
all of the conditions will be satisfied or, if satisfied, that one or more of
these Properties will be acquired by the Company.
As of August 11, 1999, the Company had not entered into any
arrangements creating a reasonable probability a Mortgage Loan or Secured
Equipment Lease would be funded. The Company is presently negotiating to acquire
additional Properties, but as of August 11, 1999, the Company had not acquired
any such Properties or entered into any Mortgage Loans.
The Properties are, and are expected to be, leased on a long-term,
triple-net basis, meaning that tenants are generally required to pay all repairs
and maintenance, property taxes, insurance and utilities. Rental payments under
the leases are expected to exceed the Company's operating expenses. For these
reasons, no short-term or long-term liquidity problems associated with operating
the Properties are currently anticipated by management.
Until Properties are acquired, or Mortgage Loans are entered into, Net
Offering Proceeds are held in short-term, highly liquid investments, such as
demand deposit accounts at commercial banks, certificates of deposit and money
market accounts with a less than 30-day maturity date, which management believes
to have appropriate safety of principal. This investment strategy provides high
liquidity in order to facilitate the Company's use of these funds to acquire
Properties at such time as Properties suitable for acquisition are located or to
fund Mortgage Loans. At June 30, 1999, the Company had $63,669,254 invested in
such short-term investments as compared to $13,228,923 at December 31, 1998. The
increase in the amount invested in short-term investments primarily reflects
proceeds received from the sale of Shares during the six months ended June 30,
1999, pending investment in Properties or Mortgage Loans. These funds will be
used primarily to purchase additional Properties and make Mortgage Loans, to pay
Offering Expenses and Acquisition Expenses, Distributions to stockholders and
other Company expenses and, in management's discretion, to create cash reserves.
During the six months ended June 30, 1999 and 1998, Affiliates of the
Company incurred on behalf of the Company $1,539,215 and $58,403, respectively,
for certain Organizational and Offering Expenses, $418,353 and $20,302,
respectively, for certain Acquisition Expenses and $169,220 and $58,172,
respectively, for certain Operating Expenses. As of June 30, 1999 and 1998, the
Company owed the Advisor $443,914 and $60,918, respectively, for such amounts,
unpaid fees and administrative expenses. The Advisor has agreed to pay or
reimburse to the Company all Organizational and Offering Expenses in excess of
three percent of gross offering proceeds.
During the six months ended June 30, 1999 and 1998, the Company
generated cash from operations (which includes cash received from tenants, and
dividend, interest and other income received, less cash paid for operating
expenses) of $2,033,757 and $210,452, respectively. Based on current and
anticipated future cash from operations, the Company declared Distributions to
its stockholders of $3,052,616 and $257,086 during the six months ended June 30,
1999 and 1998, respectively. In addition, on July 1, 1999 and August 1, 1999,
the Company declared Distributions to stockholders of record on July 1, 1999 and
August 1, 1999, totalling $964,344 and $1,086,775, respectively ($0.0604 per
Share), payable in September 1999. For the six months ended June 30, 1999 and
1998, approximately 64 percent and 100 percent, respectively, of the
Distributions received by stockholders were considered to be ordinary income and
for the six months ended June 30, 1999, approximately 36 percent was considered
a return of capital for federal income tax purposes. The characterization for
tax purposes of Distributions declared for the six months ended June 30, 1999,
may not be indicative of actual results for the
year ending December 31, 1999. No amounts distributed or to be distributed to
the stockholders as of August 11, 1999, were required to be or have been treated
by the Company as a return of capital for purposes of calculating the
Stockholders' 8% Return on Invested Capital.
<PAGE>
Management believes that the Properties are adequately covered by
insurance. In addition, the Advisor has obtained contingent liability coverage
for the Company. This insurance policy is intended to reduce the Company's
exposure in the unlikely event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to a Property.
The tenants of the Properties owned by the Company, either directly or
indirectly through Hotel Investors, have established FF&E Reserve funds which
will be used for the replacement and renewal of furniture, fixtures and
equipment relating to the hotel Properties. Funds in the FF&E Reserve have been
paid, granted and assigned to the Company, or in the case of the seven
Properties owned indirectly, to Hotel Investors. For the six months ended June
30, 1999, revenues relating to the FF&E Reserve of the Properties directly owned
by the Company and indirectly owned through Hotel Investors, totalled $126,033
and $59,976, respectively, of which $20,000 is included in receivables as of
June 30, 1999. Due to the fact that the Properties are leased on a long term,
triple-net basis, management does not believe that other working capital
reserves are necessary at this time. Management has the right to cause the
Company to maintain additional reserves if, in their discretion, they determine
such reserves are required to meet the Company's working capital needs.
Management is not aware of any material trends, favorable or
unfavorable, in either capital resources or the outlook for long-term cash
generation, nor does management expect any material changes in the availability
and relative cost of such capital resources, other than as referred to in the
Prospectus.
Management expects that the cash to be generated from operations will
be adequate to pay Operating Expenses and to make Distributions to stockholders.
RESULTS OF OPERATIONS
As of June 30, 1999, the Company had acquired nine Properties, either
directly or indirectly through Hotel Investors, consisting of land, buildings
and equipment, and had entered into a long-term, triple-net lease agreement
relating to each of these Properties. The Property leases provide for minimum
base annual rental payments ranging from approximately $1,204,000 to $3,691,000,
which are payable in monthly installments. The leases also provide that,
commencing in the second lease year, the annual base rent required under the
terms of the leases will increase. In addition to annual base rent, the tenants
pay contingent rent computed as a percentage of gross sales of the Property. The
Company's leases also require the establishment of the FF&E Reserves. The FF&E
Reserves established for the tenant of the wholly owned Properties at June 30,
1999, are owned by the Company, or in the case of the seven Properties owned
indirectly, by Hotel Investors, and have been reported as additional rent.
During the quarter and six months ended June 30, 1999, the Company
earned $748,908 and $1,486,526, respectively, from its two wholly owned
Properties, including $13,084 and $24,326, respectively, in contingent rental
income. The Company also earned $65,006 and $126,033 in FF&E Reserve income
during the quarter and six months ended June 30, 1999, respectively. Because the
Company has not yet acquired all of its Properties, revenues for the six months
ended June 30, 1999, represent only a portion of revenues which the Company is
expected to earn in future periods.
During the six months ended June 30, 1999, the Company owned and leased
seven Properties indirectly through its investment in Hotel Investors, as
described above in "Liquidity and Capital Resources." In connection therewith,
during the quarter and six months ended June 30, 1999, the Company recorded
$658,288 and $900,131, respectively, in dividend income and an equity in loss
after deduction of preferred stock dividends of $205,911 and $390,450,
respectively, resulting in net earnings of $452,377 and $509,681, respectively,
attributable to this investment.
<PAGE>
During the six months ended June 30, 1999 and 1998, the Company also
earned $907,739 and $371,159, respectively, in interest income from investments
in money market accounts and other short-term, highly liquid investments and
other income, of which $614,875 and $232,006 was earned during the quarters
ended June 30, 1999 and 1998, respectively. The increase in interest income
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was primarily attributable to the
receipt of subscription proceeds temporarily invested in money market accounts
or other short-term, highly liquid investments pending investment in Properties
or Mortgage Loans. As Net Offering Proceeds from the Company's Initial Offering
and this offering are invested in Properties and used to make Mortgage Loans,
the percentage of the Company's total revenues from interest income from
investments in money market accounts or other short term, highly liquid
investments is expected to decrease.
Operating Expenses, including interest expense and depreciation and
amortization expense, were $1,137,450 and $169,186 for the six months ended June
30, 1999 and 1998, respectively, of which $418,917 and $77,341 were incurred for
the quarters ended June 30, 1999 and 1998, respectively. Total operating
expenses were greater due to the fact that the Company owned an interest in nine
Properties during the six months ended June 30, 1999, as compared to none during
the six months ended June 30, 1998. In addition, the Company had a weighted
average balance outstanding on its Line of Credit of $3,200,000 during the six
months ended June 30, 1999. The Company did not have any borrowings on its Line
of Credit during the six months ended June 30, 1998. Operating Expenses,
including Asset Management Fees and depreciation and amortization expense,
represent only a portion of Operating Expenses which the Company is expected to
incur during a full period in which the Company's Properties are operational.
The dollar amount of Operating Expenses is expected to increase as the Company
acquires additional Properties and invests in Mortgage Loans. However, general
and administrative expenses as a percentage of total revenues is expected to
decrease as the Company acquires additional Properties and invests in Mortgage
Loans.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Cost of Start-Up
Activities," which is effective for the Company as of January 1, 1999. The
adoption of this SOP did not have a material effect on the Company.
The Company is subject to interest rate risk through outstanding
balances on its variable rate Line of Credit. The Company may mitigate this risk
by paying down the Line of Credit from offering proceeds should interest rates
rise substantially. As of June 30, 1999, the Company had repaid the outstanding
balance on the Line of Credit.
Year 2000 Compliance
The Year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The Company does not have any
information technology systems or any non-information technology systems other
than those located on the Company's Properties described below. The Advisor and
Affiliates of the Advisor provide all services requiring the use of information
and non-information technology systems pursuant to a management agreement with
the Company. The information technology system of the Affiliates of the Advisor
consists of a network of personal computers and servers built using hardware and
software from mainstream suppliers. The non-information technology systems of
the Affiliates of the Advisor are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The Affiliates of the Advisor have no internally
generated programmed software coding to correct, as substantially all of the
software utilized by the Advisor and Affiliates is purchased or licensed from
external providers. The non-information technology systems located on the
Properties owned by the Company are generally the responsibility of the tenant
and any repairs or replacements will be paid out of the FF&E Reserve. To the
extent that such expenditures are in excess of the amounts available in the FF&E
Reserve, the Company will be required to fund such amounts. Rental income will
be adjusted upward in accordance with the lease agreements for any such amount
paid.
<PAGE>
In early 1998, the Advisor and Affiliates formed a Year 2000 committee
(the "Y2K Team") for the purpose of identifying, understanding and addressing
the various issues associated with the Year 2000 problems. The Y2K Team consists
of members from the Advisor and its Affiliates, including representatives from
senior management, information systems, telecommunications, legal, office
management, accounting and property management. The Y2K Team's initial step in
assessing the Company's Year 2000 ("Y2K") readiness consists of identifying any
systems that are date sensitive and, accordingly, could have potential Y2K
problems. The Y2K Team is in the process of conducting inspections, interviews
and tests to identify which of the systems of the Advisor and Affiliates could
have a potential Y2K problem.
The information system of the Advisor and its Affiliates is comprised
of hardware and software applications from mainstream suppliers; accordingly,
the Y2K Team is in the process of contacting the respective vendors and
manufacturers to verify the Y2K compliance of their products. In addition, the
Y2K Team has also requested and is evaluating documentation from other companies
with which the Company has a material third party relationship, including the
Company's tenants, major vendors, financial institutions and transfer agent. The
Company depends on its tenants for rents and cash flows, its financial
institutions for availability of cash and financing and its transfer agent to
maintain and track investor information. The Y2K Team has also requested and is
evaluating documentation from the non-information technology systems providers
of the Advisor and Affiliates. Although the Advisor continues to receive
positive responses from its third party relationships regarding their Y2K
compliance, the Advisor cannot be assured that the tenants, financial
institutions, transfer agent, other vendors and non-information technology
system providers have adequately considered the impact of the Year 2000. The
Advisor is not able to measure the effect on the operations of the Advisor and
its Affiliates of any third party's failure to adequately address the impact of
the Year 2000.
The Advisor and its Affiliates have identified and have implemented
upgrades for certain hardware equipment. In addition, the Advisor and its
Affiliates have identified certain software applications which will require
upgrades to become Year 2000 compliant. The Advisor expects all of these
upgrades as well as any other necessary remedial measures on the information
technology systems used in the business activities and operations of the Company
to be completed by September 30, 1999, although, the Advisor cannot be assured
that the upgrade solutions provided by the vendors have addressed all possible
Year 2000 issues. The Advisor does not expect the aggregate cost of the Year
2000 remedial measures to be material to the results of operations of the
Company.
The Advisor and Affiliates have received certification from the
Company's transfer agent of its Y2K compliance. Due to the material relationship
of the Company with its transfer agent, the Y2K Team is evaluating the Year 2000
compliance of the systems of the transfer agent and expects to have the
evaluation completed by September 30, 1999. Despite the positive response from
the transfer agent and the evaluation of the transfer agent's system by the Y2K
Team, the Advisor cannot be assured that the transfer agent has addressed all
possible Year 2000 issues. In the event that the systems of the transfer agent
are not Y2K compliant, the worst case scenario of the Advisor would be that the
Advisor would have to allocate resources to internally perform the functions of
the transfer agent. The Advisor does not anticipate that the additional cost of
these resources would have a material impact on the Company.
Based upon the progress the Advisor and Affiliates have made in
addressing the Year 2000 issues and their plan and timeline to complete the
compliance program, the Advisor does not foresee significant risks associated
with its Year 2000 compliance at this time. The Advisor plans to address its
significant Y2K issues prior to being affected by them; therefore, it has not
developed a comprehensive contingency plan. However, if the Advisor identifies
significant risks related to its Year 2000 compliance or if its progress
deviates from the anticipated timeline, the Advisor will develop contingency
plans as deemed necessary at that time.
<PAGE>
CERTAIN TRANSACTIONS
The Managing Dealer is entitled to receive Selling Commissions
amounting to 7.5% of the total amount raised from the sale of Shares of Common
Stock for services in connection with the offering of Shares, a substantial
portion of which may be paid as commissions to other broker-dealers. For the
years ended December 31, 1998 and 1997, the Company incurred $2,377,026 and
$849,405, respectively, of such fees through the Initial Offering, of which
$2,200,516 and $792,832, respectively, was paid by the Managing Dealer as
commissions to other broker-dealers. In addition, during the period January 1,
1999 through June 17, 1999, the Company incurred $6,904,047 of such fees through
the Initial Offering, and during the period June 18, 1999 through August 11,
1999, the Company incurred $2,892,170 of such fees through this offering, the
majority of which has been or will be paid as commissions to other
broker-dealers.
In addition, the Managing Dealer is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of the total
amount raised from the sale of Shares, a portion of which may be reallowed to
other broker-dealers. For the years ended December 31, 1998 and 1997, the
Company incurred $158,468 and $56,627, respectively, of such fees through the
Initial Offering, the majority of which were reallowed to other broker-dealers
and from which all bona fide due diligence expenses were paid. In addition,
during the period January 1, 1999 through June 17, 1999, the Company incurred
$460,270 of such fees through the Initial Offering, and during the period June
18, 1999 through August 11, 1999, the Company incurred $192,811 of such fees
through this offering, the majority of which were reallowed to other
broker-dealers and from which all bona fide due diligence expenses were paid.
The Advisor is entitled to receive Acquisition Fees for services in
identifying the Properties and structuring the terms of the acquisition and
leases of the Properties and structuring the terms of the Mortgage Loans equal
to 4.5% of the total amount raised from the sale of Shares, loan proceeds from
Permanent Financing and amounts outstanding on the Line of Credit, if any, at
the time of Listing, but excluding that portion of the Permanent Financing used
to finance Secured Equipment Leases. For the years ended December 31, 1998 and
1997, the Company incurred $1,426,216 and $509,643, respectively, of such fees
through the Initial Offering. In addition, during the period January 1, 1999
through June 17, 1999, the Company incurred $4,712,413 of such fees through the
Initial Offering, and during the period June 18, 1999 through August 11, 1999,
the Company incurred $1,735,302 of such fees through this offering.
The Company and the Advisor have entered into an Advisory Agreement
pursuant to which the Advisor will receive a monthly Asset Management Fee of
one-twelfth of 0.60% of the Company's Real Estate Asset Value and the
outstanding principal balance of any Mortgage Loans as of the end of the
preceding month. The Asset Management Fee, which will not exceed fees which are
competitive for similar services in the same geographic area, may or may not be
taken, in whole or in part as to any year, in the sole discretion of the
Advisor. All or any portion of the Asset Management Fee not taken as to any
fiscal year shall be deferred without interest and may be taken in such other
fiscal year as the Advisor shall determine. During the six months ended June 30,
1999 and the year ended December 31, 1998, the Company incurred $67,436 and
$68,114, respectively, of such fees.
The Company incurs Operating Expenses which, in general, are those
expenses relating to administration of the Company on an ongoing basis. Pursuant
to the Advisory Agreement described above, the Advisor is required to reimburse
the Company the amount by which the total Operating Expenses paid or incurred by
the Company exceed in any four consecutive fiscal quarters (the "Expense Year"),
the greater of 2% of Average Invested Assets or 25% of Net Income (the "Expense
Cap"). During the year ended December 31, 1998, the Company's Operating Expenses
exceeded the Expense Cap by $92,733; therefore, the Advisor reimbursed the
Company such amount in accordance with the Advisory Agreement.
The Advisor and its Affiliates provide accounting and administrative
services to the Company (including accounting and administrative services in
connection with the offering of Shares) on a day-to-day basis. In connection
with the Initial Offering (and for the period June 18, 1999 through June 30,
1999, in connection with
<PAGE>
this offering), for the six months ended June 30, 1999, and the years ended
December 31, 1998 and 1997, the Company incurred a total of $1,859,388, $644,189
and $192,224, respectively, for these services, $1,709,008, $494,729 and
$185,335, respectively, of such costs representing stock issuance costs, $0,
$9,084 and $0, respectively, representing acquisition related costs and
$150,380, $140,376 and $6,889, respectively, representing general operating and
administrative expenses, including costs related to preparing and distributing
reports required by the Securities and Exchange Commission.
All amounts paid by the Company to Affiliates are believed by the
Company to be fair and comparable to amounts that would be paid for similar
services provided by unaffiliated third parties.
PRIOR PERFORMANCE INFORMATION
The information presented in this section represents the historical
experience of certain real estate programs organized by certain officers and
directors of the Advisor. Prior public programs have invested only in restaurant
properties and have not invested in hotel properties. Investors in the Company
should not assume that they will experience returns, if any, comparable to those
experienced by investors in such prior public real estate programs. Investors
who purchase Shares in the Company will not thereby acquire any ownership
interest in any partnerships or corporations to which the following information
relates.
Two Directors of the Company, Robert A. Bourne and James M. Seneff,
Jr., individually or with others have served as general partners of 88 and 89
real estate limited partnerships, respectively, including 18 publicly offered
CNL Income Fund partnerships, and as directors and officers of two unlisted
public REITs. None of these limited partnerships or the unlisted REITs have been
audited by the IRS. Of course, there is no guarantee that the Company will not
be audited. Based on an analysis of the operating results of the prior programs,
Messrs. Bourne and Seneff believe that each of such programs has met or is
meeting its principal investment objectives in a timely manner.
CNL Realty Corporation, which was organized as a Florida corporation in
November 1985 and whose sole stockholders are Messrs. Bourne and Seneff,
currently serves as the corporate general partner with Messrs. Bourne and Seneff
as individual general partners of 18 CNL Income Fund limited partnerships, all
of which were organized to invest in fast-food, family-style and in the case of
two of the partnerships, casual-dining restaurant properties. In addition,
Messrs. Bourne and Seneff currently serve as directors and officers of CNL
American Properties Fund, Inc., an unlisted public REIT organized to invest in
fast-food, family-style and casual-dining restaurant properties, mortgage loans
and secured equipment leases; and CNL Health Care Properties, Inc., an unlisted
public REIT organized to invest in health care and seniors' housing facilities.
Both of the unlisted public REITs have investment objectives similar to those of
the Company. As of June 30, 1999, the 18 partnerships and the two unlisted REITs
had raised a total of $1,364,459,571 from a total of 81,097 investors, and had
invested in 1,324 fast-food, family-style and casual-dining restaurant
properties. Certain additional information relating to the offerings and
investment history of the 18 public partnerships and the two unlisted public
REITs is set forth below.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Shares Committed to
Entity Amount (1) Date Closed Sold Investment (2)
- ------ ---------- ----------- ---- --------------
CNL Income $15,000,000 December 31, 1986 30,000 December 1986
Fund, Ltd. (30,000 units)
CNL Income $25,000,000 August 21, 1987 50,000 November 1987
Fund II, Ltd. (50,000 units)
CNL Income $25,000,000 April 29, 1988 50,000 June 1988
Fund III, Ltd. (50,000 units)
CNL Income $30,000,000 December 6, 1988 60,000 February 1989
Fund IV, Ltd. (60,000 units)
CNL Income $25,000,000 June 7, 1989 50,000 December 1989
Fund V, Ltd. (50,000 units)
CNL Income $35,000,000 January 19, 1990 70,000 May 1990
Fund VI, Ltd. (70,000 units)
CNL Income $30,000,000 August 1, 1990 30,000,000 January 1991
Fund VII, Ltd. (30,000,000 units)
CNL Income $35,000,000 March 7, 1991 35,000,000 September 1991
Fund VIII, Ltd. (35,000,000 units)
CNL Income $35,000,000 September 6, 1991 3,500,000 November 1991
Fund IX, Ltd. (3,500,000 units)
CNL Income $40,000,000 April 22, 1992 4,000,000 June 1992
Fund X, Ltd. (4,000,000 units)
CNL Income $40,000,000 October 8, 1992 4,000,000 September 1992
Fund XI, Ltd. (4,000,000 units)
CNL Income $45,000,000 April 15, 1993 4,500,000 July 1993
Fund XII, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 13, 1993 4,000,000 August 1993
Fund XIII, Ltd. (4,000,000 units)
CNL Income $45,000,000 March 23, 1994 4,500,000 May 1994
Fund XIV, Ltd. (4,500,000 units)
CNL Income $40,000,000 September 22, 1994 4,000,000 December 1994
Fund XV, Ltd. (4,000,000 units)
CNL Income $45,000,000 July 18, 1995 4,500,000 August 1995
Fund XVI, Ltd. (4,500,000 units)
<PAGE>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Shares Committed to
Entity Amount (1) Date Closed Sold Investment (2)
- ------ ---------- ----------- ---- --------------
CNL Income $30,000,000 October 10, 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units) 1996
CNL Income Fund $35,000,000 February 6, 1998 3,500,000 December 1997
XVIII, Ltd. (3,500,000 units)
CNL American $747,464,413 January 20, 1999 (3) 74,746,441 (3) February 1999 (3)
Properties Fund, Inc. (74,746,441 shares)
CNL Health Care $155,000,000 (4) (4) (4)
Properties, Inc. (15,500,000 shares)
</TABLE>
(1) The amount stated includes the exercise by the general partners of each
partnership of their option to increase by $5,000,000 the maximum size of
the offering of CNL Income Fund, Ltd., CNL Income Fund II, Ltd., CNL Income
Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund VI, Ltd., CNL
Income Fund VIII, Ltd., CNL Income Fund X, Ltd., CNL Income Fund XII, Ltd.,
CNL Income Fund XIV, Ltd., CNL Income Fund XVI, Ltd. and CNL Income Fund
XVIII, Ltd. The number of shares of common stock for CNL American
Properties Fund, Inc. ("APF") represents the number of shares prior to a
one-for-two reverse stock split, which was effective on June 3, 1999.
(2) For a description of the property acquisitions by these programs, see the
table set forth on the following page.
(3) In April 1995, APF commenced an offering of a maximum of 16,500,000 shares
of common stock ($165,000,000). On February 6, 1997, the initial offering
closed upon receipt of subscriptions totalling $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) through the reinvestment plan.
Following completion of the initial offering on February 6, 1997, APF
commenced a subsequent offering (the "1997 Offering ") of up to 27,500,000
shares ($275,000,000) of common stock. On March 2, 1998, the 1997 Offering
closed upon receipt of subscriptions totalling $251,872,648 (25,187,265
shares), including $1,872,648 (187,265 shares) through the reinvestment
plan. Following completion of the 1997 Offering on March 2, 1998, APF
commenced a subsequent offering (the "1998 Offering ") of up to 34,500,000
shares ($345,000,000) of common stock. As of December 31, 1998, APF had
received subscriptions totalling $345,000,000 (34,500,000 shares),
including $3,107,848 (310,785 shares) through the reinvestment plan, from
the 1998 Offering. The 1998 Offering closed in January 1999, upon receipt
of the proceeds from the last subscriptions. As of March 31, 1999, net
proceeds to APF from its three offerings totalled $670,151,200 and all of
such amount had been invested or committed for investment in properties and
mortgage loans.
(4) Effective September 18, 1998, CNL Health Care Properties, Inc. commenced an
offering of up to 15,500,000 shares ($155,000,000) of common stock. As of
June 30, 1999, CNL Health Care Properties, Inc. had not yet acquired any
properties.
As of June 30, 1999, Mr. Seneff and Mr. Bourne, directly or through
affiliated entities, also had served as joint general partners of 69 nonpublic
real estate limited partnerships. The offerings of all of these 69 nonpublic
limited partnerships had terminated as of June 30, 1999. These 69 partnerships
raised a total of $185,927,353 from approximately 4,519 investors, and
purchased, directly or through participation in a joint venture or limited
partnership, interests in a total of 216 projects as of June 30, 1999. These 216
projects consist of 19 apartment projects (comprising 10% of the total amount
raised by all 69 partnerships), 13 office buildings (comprising 5% of the total
amount raised by all 69 partnerships), 169 fast-food, family-style, or
casual-dining restaurant property and business investments (comprising 69% of
the total amount raised by all 69 partnerships), one condominium development
(comprising 0.5% of the total amount raised by all 69 partnerships), four
hotels/motels (comprising 5% of the total amount raised by all 69 partnerships),
eight commercial/retail properties (comprising 10% of the total amount raised by
all 69 partnerships), and two tracts of undeveloped land (comprising 0.5% of the
total amount raised by all 69 partnerships).
<PAGE>
Mr. Bourne also has served, without Mr. Seneff, as a general partner of
one additional nonpublic real estate limited partnership program which raised a
total of $600,000 from 13 investors and purchased, through participation in a
limited partnership, one apartment building located in Georgia with a purchase
price of $1,712,000.
Mr. Seneff also has served, without Mr. Bourne, as a general partner of
two additional nonpublic real estate limited partnerships which raised a total
of $240,000 from 12 investors and purchased two office buildings with an
aggregate purchase price of $928,390. Both of the office buildings are located
in Florida.
Of the 90 real estate limited partnerships whose offerings had closed
as of June 30, 1999 (including 18 CNL Income Fund limited partnerships) in which
Mr. Seneff and/or Mr. Bourne serve or have served as general partners in the
past, 39 invested in restaurant properties leased on a "triple-net" basis,
including eight which also invested in franchised restaurant businesses
(accounting for approximately 93% of the total amount raised by all 90 real
estate limited partnerships).
The following table sets forth summary information, as of June 30,
1999, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs.
<TABLE>
<CAPTION>
<S> <C>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 22 fast-food or AL, AZ, CA, FL, GA, All cash Public
Fund, Ltd. family-style LA, MD, OK, PA, TX,
restaurants VA, WA
CNL Income 49 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund- TN, TX, WA, WY
CNL Income 38 fast-food or AL, AZ, CA, CO, FL, All cash Public
Fund III, Ltd. family-style GA, IA, IL, IN, KS,
restaurants KY, MD, MI, MN, MO,
NC, NE, OK, TX
CNL Income 47 fast-food or AL, DC, FL, GA, IL, All cash Public
Fund IV, Ltd. family-style IN, KS, MA, MD, MI,
restaurants MS, NC, OH, PA, TN,
TX, VA
CNL Income 35 fast-food or AZ, FL, GA, IL, IN, All cash Public
Fund V, Ltd. family-style MI, NH, NY, OH, SC,
restaurants TN, TX, UT, WA
CNL Income 56 fast-food or AR, AZ, FL, GA, IL, All cash Public
Fund VI, Ltd. family-style IN, KS, MA, MI, MN,
restaurants NC, NE, NM, NY, OH,
OK, PA, TN, TX, VA,
WA, WY
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 49 fast-food or AZ, CO, FL, GA, IN, All cash Public
Fund VII, Ltd. family-style LA, MI, MN, NC, OH,
restaurants SC, TN, TX, UT, WA
CNL Income 42 fast-food or AZ, FL, IN, LA, MI, All cash Public
Fund VIII, Ltd. family-style MN, NC, NY, OH, TN,
restaurants TX, VA
CNL Income 44 fast-food or AL, CO, FL, GA, IL, All cash Public
Fund IX, Ltd. family-style IN, LA, MI, MN, MS,
restaurants NC, NH, NY, OH, SC,
TN, TX
CNL Income 54 fast-food or AL, CA, CO, FL, ID, All cash Public
Fund X, Ltd. family-style IL, LA, MI, MO, MT,
restaurants NC, NE, NH, NM, NY,
OH, PA, SC, TN, TX,
WA
CNL Income 43 fast-food or AL, AZ, CA, CO, CT, All cash Public
Fund XI, Ltd. family-style FL, KS, LA, MA, MI,
restaurants MS, NC, NH, NM, OH,
OK, PA, SC, TX, VA,
WA
CNL Income 50 fast-food or AL, AZ, CA, FL, GA, All cash Public
Fund XII, Ltd. family-style LA, MO, MS, NC, NM,
restaurants OH, SC, TN, TX, WA
CNL Income 50 fast-food or AL, AR, AZ, CA, CO, All cash Public
Fund XIII, Ltd. family-style FL, GA, IN, KS, LA,
restaurants MD, NC, OH, PA, SC,
TN, TX, VA
CNL Income 65 fast-food or AL, AZ, CO, FL, GA, All cash Public
Fund XIV, Ltd. family-style KS, LA, MN, MO, MS,
restaurants NC, NJ, NV, OH, SC,
TN, TX, VA
CNL Income 55 fast-food or AL, CA, FL, GA, KS, All cash Public
Fund XV, Ltd. family-style KY, MN, MO, MS, NC,
restaurants NJ, NM, OH, OK, PA,
SC, TN, TX, VA
<PAGE>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
CNL Income 48 fast-food or AZ, CA, CO, DC, FL, All cash Public
Fund XVI, Ltd. family-style GA, ID, IN, KS, MN,
restaurants MO, NC, NM, NV, OH,
TN, TX, UT, WI
CNL Income 31 fast-food, CA, FL, GA, IL, IN, All cash Public
Fund XVII, Ltd. family-style or MI, NC, NV, OH, SC,
casual-dining TN, TX, WA
restaurants
CNL Income 25 fast-food, AZ, CA, FL, GA, IL, All cash Public
Fund XVIII, Ltd. family-style or KY, MD, MN, NC, NV,
casual-dining NY, OH, TN, TX, VA
restaurants
CNL American 578 fast-food, AL, AZ, CA, CO, CT, (1) Public REIT
Properties Fund, family-style or DE, FL, GA, IA, ID,
Inc. casual-dining IL, IN, KS, KY, LA,
restaurants MD, MI, MN, MO, MS,
NC, NE, NH, NJ, NM,
NV, NY, OH, OK, OR,
PA, RI, SC, TN, TX,
UT, VA, WA, WI, WV
CNL Health Care (2) (2) (2) Public REIT
Properties, Inc.
</TABLE>
(1) As of March 31, 1999, all of APF's net offering proceeds had been
invested or committed for investment in properties and mortgage loans.
Since April 1, 1999, APF has used proceeds from its line of credit to
acquire and develop properties and to fund mortgage loans and secured
equipment leases.
(2) As of June 30, 1999, CNL Health Care Properties, Inc. had not acquired
any properties.
A more detailed description of the acquisitions by real estate limited
partnerships and the two unlisted REITs sponsored by Messrs. Bourne and Seneff
is set forth in prior performance Table VI, included in Part II of the
registration statement filed with the Securities and Exchange Commission for
this offering. A copy of Table VI is available to stockholders from the Company
upon request, free of charge. In addition, upon request to the Company, the
Company will provide, without charge, a copy of the most recent Annual Report on
Form 10-K filed with the Securities and Exchange Commission for CNL Income Fund,
Ltd., CNL Income Fund II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV,
Ltd., CNL Income Fund V, Ltd., CNL Income Fund VI, Ltd., CNL Income Fund VII,
Ltd., CNL Income Fund VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X,
Ltd., CNL Income Fund XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII,
Ltd., CNL Income Fund XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI,
Ltd., CNL Income Fund XVII, Ltd., CNL Income Fund XVIII, Ltd., CNL American
Properties Fund, Inc. and CNL Health Care Properties, Inc. as well as a copy,
for a reasonable fee, of the exhibits filed with such reports.
<PAGE>
In order to provide potential purchasers of Shares in the Company with
information to enable them to evaluate the prior experience of the Messrs.
Seneff and Bourne as general partners of real estate limited partnerships and as
directors and officers of the two unlisted REITs, including those set forth in
the foregoing table, certain financial and other information concerning those
limited partnerships and the two unlisted REITs, with investment objectives
similar to one or more of the Company's investment objectives, is provided in
the Prior Performance Tables included as Appendix C. Information about the
previous public partnerships, the offerings of which became fully subscribed
between January 1994 and December 1998, is included therein. Potential
stockholders are encouraged to examine the Prior Performance Tables attached as
Appendix C (in Table III), which include information as to the operating results
of these prior partnerships, for more detailed information concerning the
experience of Messrs. Seneff and Bourne.
DISTRIBUTION POLICY
DISTRIBUTIONS
The following table reflects total Distributions and Distributions per
Share declared and paid by the Company for each month since the Company
commenced operations.
Total Distributions
Month Distributions Per Share
- ----- ------------- ---------
November 1997 $ 10,757 $0.025000
December 1997 19,019 0.025000
January 1998 28,814 0.025000
February 1998 32,915 0.025000
March 1998 39,627 0.025000
April 1998 46,677 0.025000
May 1998 52,688 0.025000
June 1998 56,365 0.025000
July 1998 99,589 0.041700
August 1998 105,708 0.041700
September 1998 156,747 0.058300
October 1998 167,848 0.058300
November 1998 183,302 0.058300
December 1998 197,865 0.058300
January 1999 251,967 0.058300
February 1999 314,928 0.058300
March 1999 431,757 0.058300
April 1999 554,807 0.060400
May 1999 687,916 0.060400
June 1999 811,241 0.060400
In addition, in July and August 1999, the Company declared
Distributions totalling $964,344 and $1,086,775, respectively (each representing
$0.0604 per Share). The Company intends to continue to make regular
Distributions to stockholders. The payment of Distributions commenced in
December 1997. Distributions will be made to those stockholders who are
stockholders as of the record date selected by the Directors. Distributions will
be declared monthly during the offering period, declared monthly during any
subsequent offering, paid on a quarterly basis during an offering period, and
declared and paid quarterly thereafter. The Company is required to distribute
annually at least 95% of its real estate investment trust taxable income to
maintain its objective of qualifying as a REIT. Generally, income distributed
will not be taxable to the Company under federal income tax laws if the Company
complies with the provisions relating to qualification as a REIT. If the cash
available to the Company is insufficient to pay such Distributions, the
<PAGE>
Company may obtain the necessary funds by borrowing, issuing new securities, or
selling Assets. These methods of obtaining funds could affect future
Distributions by reducing revenues or increasing operating costs. To the extent
that Distributions to stockholders exceed earnings and profits, such amounts
constitute a return of capital for federal income tax purposes, although such
Distributions might not reduce stockholders' aggregate Invested Capital.
Distributions in kind shall not be permitted, except for distributions of
readily marketable securities; distributions of beneficial interests in a
liquidating trust established for the dissolution of the Company and the
liquidation of its assets in accordance with the terms of the Articles of
Incorporation; or distributions of in-kind property as long as the Directors (i)
advise each stockholder of the risks associated with direct ownership of the
property, (ii) offer each stockholder the election of receiving in-kind property
distributions, and (iii) distribute in-kind property only to those stockholders
who accept the Directors' offer.
For the six months ended June 30, 1999, the year ended December 31,
1998, and the period October 15, 1997 (the date operations of the Company
commenced) through December 31, 1997, approximately 64%, 76% and 100%,
respectively, of the Distributions declared and paid were considered to be
ordinary income and for the six months ended June 30, 1999 and the year ended
December 31, 1998, approximately 36% and 24%, respectively, were considered a
return of capital for federal income tax purposes. Due to the fact that the
Company had not yet acquired all of its Properties and was still in the offering
stage as of December 31, 1998 and June 30, 1999, the characterization of
Distributions for federal income tax purposes is not necessarily considered by
management to be representative of the characterization of Distributions in
future periods.
Distributions will be made at the discretion of the Directors,
depending primarily on net cash from operations (which includes cash received
from tenants except to the extent that such cash represents a return of
principal in regard to the lease of a Property consisting of building only,
distributions from joint ventures, and interest income from lessees of Equipment
and borrowers under Mortgage Loans, less expenses paid) and the general
financial condition of the Company, subject to the obligation of the Directors
to cause the Company to qualify and remain qualified as a REIT for federal
income tax purposes. The Company intends to increase Distributions in accordance
with increases in net cash from operations.
<PAGE>
APPENDIX B
FINANCIAL INFORMATION
---------------------------------------------
| |
| THE UPDATED PRO FORMA FINANCIAL STATEMENTS |
| AND THE UNAUDITED FINANCIAL STATEMENTS OF |
| CNL HOSPITALITY PROPERTIES, INC. CONTAINED |
| IN THIS ADDENDUM SHOULD BE READ IN |
| CONJUNCTION WITH APPENDIX B TO THE ATTACHED |
| PROSPECTUS, DATED JUNE 4, 1999. |
| |
---------------------------------------------
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
Page
----
Pro Forma Consolidated Financial Information (unaudited):
Pro Forma Consolidated Balance Sheet as of June 30, 1999 B-2
Pro Forma Consolidated Statement of Earnings for the six months
ended June 30, 1999 B-3
Pro Forma Consolidated Statement of Earnings for the year ended
December 31, 1998 B-4
Notes to Pro Forma Consolidated Financial Statements for the six
months ended June 30, 1999 and the year ended December 31, 1998 B-5
Updated Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 B-9
Condensed Consolidated Statements of Earnings for the six
months ended June 30, 1999 and 1998 B-10
Condensed Consolidated Statements of Stockholders'Equity for
the six months ended June 30, 1999 and the year ended
December 31, 1998 B-11
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 B-12
Notes to Condensed Consolidated Financial Statements for the
six months ended June 30, 1999 and 1998 B-14
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Balance Sheet of CNL
Hospitality Properties, Inc. and subsidiaries (the "Company") gives effect to
(i) the receipt of $157,730,394 in gross offering proceeds from the sale of
15,773,039 shares of common stock for the period from inception through June 30,
1999, and the application of such funds to purchase two properties, to invest in
an unconsolidated subsidiary which owned seven properties as of June 30, 1999,
to redeem 500 shares of common stock pursuant to the Company's redemption plan,
and to pay offering expenses, acquisition fees and miscellaneous acquisition
expenses, (ii) the receipt of $30,904,507 in gross offering proceeds from the
sale of 3,090,451 additional shares for the period July 1, 1999 through August
11, 1999, (iii) the application of such funds to redeem 2,500 shares of common
stock pursuant to the Company's redemption plan, and to pay offering expenses,
acquisition fees and miscellaneous acquisition expenses, all as reflected in the
pro forma adjustments described in the related notes. The Unaudited Pro Forma
Consolidated Balance Sheet as of June 30, 1999, includes the transactions
described in (i) above, from its historical balance sheet, adjusted to give
effect to the transactions in (ii) and (iii) above as if they had occurred on
June 30, 1999.
The Unaudited Pro Forma Consolidated Statements of Earnings for the six
months ended June 30, 1999 and the year ended December 31, 1998, includes the
historical operating results of the properties described in (i) above from the
date of their acquisitions plus operating results from (A) the later of (1) the
date the property became operational or (2) January 1, 1998, to (B) the earlier
of (1) the date the property was acquired by the Company or its unconsolidated
subsidiary or (2) to the end of the pro forma period presented.
This pro forma consolidated financial information is presented for
informational purposes only and does not purport to be indicative of the
Company's financial results or condition if the various events and transactions
reflected therein had occurred on the dates, or been in effect during the
periods, indicated. This pro forma financial information should not be viewed as
predictive of the Company's financial results or conditions in the future.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Pro Forma
ASSETS Historical Adjustments Pro Forma
------------- -------------- --------------
Land, buildings and equipment on operating leases,
less accumulated depreciation of $845,625 $27,906,924 $ -- $27,906,924
Investment in unconsolidated subsidiary 39,350,470 -- 39,350,470
Cash and cash equivalents 63,669,254 25,965,952 (a) 89,635,206
Restricted cash 204,132 -- 204,132
Certificate of deposit 5,015,822 -- 5,015,822
Due from related party 49,085 -- 49,085
Receivables 34,412 -- 34,412
Dividends receivable 777,324 -- 777,324
Loan costs, less accumulated amortization of $71,863 44,233 -- 44,233
Accrued rental income 75,970 -- 75,970
Other assets 3,980,239 1,390,703 (a) 5,370,942
--------------- ------------- --------------
$141,107,865 $27,356,655 $168,464,520
=============== ============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 51,102 (27,100 ) (a) $ 24,002
Due to related parties 1,033,584 (1,025,391 ) (a) 8,193
Security deposits 1,417,500 -- 1,417,500
--------------- ------------- --------------
Total liabilities 2,502,186 (1,052,491 ) 1,449,695
--------------- ------------- --------------
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares -- -- --
Excess shares, $.01 par value per share.
Authorized and unissued 63,000,000 shares -- -- --
Common stock, $.01 par value per share.
Authorized 60,000,000 shares; issued 15,793,039
and outstanding 15,792,539 shares; issued
18,883,490 and outstanding 18,880,490 shares,
as adjusted 157,925 30,880 (a) 188,805
Capital in excess of par value 139,823,971 28,378,266 (a) 168,202,237
Accumulated distributions in excess of net earnings (1,376,217 ) -- (1,376,217 )
--------------- ------------- --------------
Total stockholders' equity 138,605,679 28,409,146 167,014,825
--------------- ------------- --------------
$141,107,865 $27,356,655 $168,464,520
=============== ============= ==============
See accompanying notes to unaudited pro
forma consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
SIX MONTHS ENDED JUNE 30, 1999
Pro Forma
Historical Adjustments Pro Forma
------------ -------------- --------------
Revenues:
Rental income from operating
leases $1,486,526 $ -- $1,486,526
FF&E Reserve income 126,033 -- 126,033
Dividend income 900,131 461,106 (3) 1,361,237
Interest and other income 907,739 (201,013 ) (4) 706,726
--------------- ---------------- ----------------
3,420,429 260,093 3,680,522
--------------- ---------------- ----------------
Expenses:
Interest and loan cost amortization 233,330 -- 233,330
General operating and
administrative 308,029 -- 308,029
Professional services 29,272 -- 29,272
Asset management fees to
related party 67,436 24,392 (7) 91,828
State taxes 5,968 -- 5,968
Depreciation and amortization 493,415 -- 493,415
--------------- ---------------- ----------------
1,137,450 24,392 1,161,842
--------------- ---------------- ----------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiary 2,282,979 235,701 2,518,680
Equity in Loss of Unconsolidated
Subsidiary After Deduction of
Preferred Stock Dividends (390,450 ) (140,342 ) (9) (530,792 )
--------------- ---------------- ----------------
Net Earnings $1,892,529 $ 95,359 $1,987,888
=============== ================ ================
Earnings Per Share of Common Stock
(Basic and Diluted) (10) $ 0.20 $ 0.21
=============== ================
Weighted Average Number of Shares
of Common Stock Outstanding (10) 9,391,870 9,449,558
=============== ================
See accompanying notes to unaudited pro
forma consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1998
Pro Forma
Historical Adjustments Pro Forma
------------ ---------------- --------------
Revenues:
Rental income from
operating leases $1,218,500 $1,706,732 (1) $2,925,232
FF&E Reserve income 98,099 140,000 (2) 238,099
Dividend income -- 423,938 (3) 423,938
Interest income 638,862 (609,975 )(4) 28,887
------------- ---------------- ----------------
1,955,461 1,660,695 3,616,156
------------- ---------------- ----------------
Expenses:
Interest and loan cost amortization 350,322 448,718 (5) 799,040
General operating and
administrative 167,951 92,733 (6) 260,684
Professional services 21,581 -- 21,581
Asset management fees to
related party 68,114 106,571 (7) 174,685
Depreciation and amortization 388,554 538,125 (8) 926,679
------------- ---------------- ----------------
996,522 1,186,147 2,182,669
------------- ---------------- ----------------
Earnings Before Equity in Loss
of Unconsolidated Subsidiary 958,939 474,548 1,433,487
Equity in Loss of Unconsolidated
Subsidiary After Deduction of
Preferred Stock Dividends -- (56,464 )(9) (56,464 )
------------- ---------------- ----------------
Net Earnings $ 958,939 $ 418,084 $1,377,023
============= ================ ================
Earnings Per Share of Common Stock
(Basic and Diluted) (10) $ 0.40 $ 0.51
============= ================
Weighted Average Number of Shares of
Common Stock Outstanding (10) 2,402,344 2,697,355
============= ================
</TABLE>
See accompanying notes to unaudited pro
forma consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Balance Sheet:
- -----------------------------------------------
(a) Represents gross proceeds of 30,904,507 from the sale of 3,090,451
shares during the period July 1, 1999 through August 11, 1999, used (i)
to pay acquisition fees and costs of $1,580,524 ($189,821 of which was
accrued at June 30, 1999), and to pay selling commissions and offering
expenses of $3,335,031 which have been netted against stockholders'
equity (a total of $862,670 of which was accrued as of June 30, 1999)
and (ii) to redeem 2,500 shares of common stock for $23,000, leaving
$25,965,952 for future investment.
Unaudited Pro Forma Consolidated Statements of Earnings:
- --------------------------------------------------------
(1) Represents adjustment to rental income from operating leases for the
properties acquired by the Company as of August 11, 1999, (the "Pro
Forma Properties"), for the period commencing (A) the later of (i) the
date the Pro Forma Property became operational by the previous owner or
(ii) January 1, 1998, to (B) the earlier of (i) the date the Pro Forma
Property was acquired by the Company or (ii) the end of the pro forma
period presented. The following presents the actual date the Pro Forma
Properties were acquired or placed in service by the Company as
compared to the date the Pro Forma Properties were treated as becoming
operational as a rental property for purposes of the Pro Forma
Consolidated Statements of Earnings.
Date Pro Forma
Date Placed Property Became
in Service Operational as
By the Company Rental Property
-------------- ---------------
Residence Inn Buckhead (Lenox
Park) in Atlanta, GA July 31, 1998 January 1, 1998
Residence Inn Gwinnett Place
in Duluth, GA July 31, 1998 January 1, 1998
Generally, the leases provide for the payment of percentage rent in
addition to base rental income. However, due to the fact that no
percentage rent was due under the leases for the Pro Forma Properties
during the portion of 1998 that the Company held the properties, no pro
forma adjustment was made for percentage rental income for the year
ended December 31, 1998.
(2) Represents reserve funds which will be used for the replacement and
renewal of furniture, fixtures and equipment relating to the Pro Forma
Properties (the "FF&E Reserve"). The funds in the FF&E Reserve and all
property purchased with funds from the FF&E Reserve will be paid,
granted and assigned to the Company as additional rent. In connection
therewith, FF&E Reserve income was earned at approximately $10,000 per
month, per Pro Forma Property.
(3) Represents adjustment to dividend income earned on the Company's
$37,978,272 investment at June 30, 1999, in the 9.76% Class B
cumulative preferred stock of the unconsolidated subsidiary, for the
period commencing (A) the later of (i) the date the properties owned by
the unconsolidated subsidiary became operational by the previous owner
or (ii) January 1, 1998, to (B) the earlier of (i) the date the
properties owned by the unconsolidated subsidiary were acquired or (ii)
the end of the pro forma period presented. The cash from the Company's
investment, along with loan proceeds and funds from an institutional
investor were used to purchase seven hotel properties which were
operational prior to the Company's investment in the unconsolidated
subsidiary. The following presents the actual date the unconsolidated
subsidiary
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statements of Earnings - Continued:
- --------------------------------------------------------------------
properties were acquired or placed in service by the unconsolidated
subsidiary as compared to the date the unconsolidated subsidiary's
properties were treated as becoming operational for purposes of the Pro
Forma Consolidated Statements of Earnings:
<TABLE>
<CAPTION>
<S> <C>
Pro forma
Date Unconsolidated
Date Placed Subsidiary
in Service Properties Became
By the Operational as
Unconsolidated Subsidiary Rental Property
------------------------- ---------------
Residence Inn Las Vegas, NV February 25, 1999 October 1, 1998
Residence Inn Plano, TX February 25, 1999 October 12, 1998
Marriott Suites Dallas, TX February 25, 1999 November 11, 1998
Courtyard Plano, TX February 25, 1999 December 23, 1998
Residence Inn Phoenix, AZ June 16, 1999 May 14, 1999
Courtyard Scottsdale, AZ June 16, 1999 May 21, 1999
Courtyard Seattle, WA June 16, 1999 May 22, 1999
</TABLE>
(4) Represents adjustment to interest income due to the decrease in the
amount of cash available for investment in interest bearing accounts
during the periods commencing (A) the later of (i) the dates the Pro
Forma Properties and the unconsolidated subsidiary's properties became
operational by the previous owners or (ii) January 1, 1998, through (B)
the earlier of (i) the actual date the Pro Forma Properties and the
unconsolidated subsidiary's properties were acquired or (ii) the end of
the pro forma period presented, as described in Note (1) and Note (3)
above. The estimated pro forma adjustment is based upon the fact that
interest income from interest bearing accounts was earned at a rate of
approximately four percent per annum by the Company during the year
ended December 31, 1998 and the six months ended June 30, 1999.
(5) Represents adjustment to interest expense incurred at a rate ranging
from 8.05% to 8.8% per annum in connection with the assumed borrowings
from the line of credit of $8,600,000 on January 1, 1998 for the period
January 1, 1998 through July 31, 1998. Also represents amortization of
the loan origination fee of $43,000 (.5% on the $8,600,000 from
borrowings on the line of credit) and $19,149 of other miscellaneous
closing costs, amortized under the straight-line method over a period
of five years.
(6) The Company has incurred operating expenses which, in general, are
those expenses relating to administration of the Company on an ongoing
basis. Pursuant to the advisory agreement, CNL Hospitality Advisors,
Inc. (the "Advisor") is required to reimburse the Company the amount by
which the total operating expenses paid or incurred by the Company
exceed in any four consecutive fiscal quarters the greater of two
percent of average invested assets or 25 percent of net income (the
"Expense Cap"). During the year ended December 31, 1998, the Company's
operating expenses exceeded the Expense Cap by $92,733; therefore, the
Advisor reimbursed the Company such amount in accordance with the
advisory agreement. However, as a result of the increase in pro forma
earnings for the year ended December 31, 1998, the Company's operating
expenses no longer exceeded the Expense Cap. Therefore, this
reimbursement was reversed for pro forma purposes.
(7) Represents increase in asset management fees relating to the Pro Forma
Properties and the investment in unconsolidated subsidiary for the
period commencing (A) the later of (i) the date the Pro Forma
Properties and the unconsolidated subsidiary's properties became
operational by the previous owners or (ii) January 1, 1998, through (B)
the earlier of (i) the date the Pro Forma Properties and the
unconsolidated subsidiary's
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statements of Earnings - Continued:
- --------------------------------------------------------------------
properties were acquired or (ii) the end of the pro forma period
presented, as described in Notes (1) and (3) above. Asset management
fees are equal to 0.60% per year of the Company's Real Estate Asset
Value, including the investment in the unconsolidated subsidiary, as
defined in the Company's prospectus.
(8) Represents incremental increase in depreciation expense of the building
and the furniture, fixture and equipment ("FF&E") portions of the Pro
Forma Properties accounted for as operating leases using the
straight-line method. The buildings and FF&E are depreciated over
useful lives of 40 and seven years, respectively.
(9) Represents adjustment to equity in loss of unconsolidated subsidiary
for the period commencing (A) the date the unconsolidated subsidiary's
properties became operational by the previous owner, through (B) the
earlier of (i) the date the properties were acquired by the
unconsolidated subsidiary or (ii) the end of the pro forma period
presented, as described in Note (3) above. The following represents the
Company's share of pro forma net earnings or loss after deduction of
preferred stock dividends declared for the pro forma period ending:
<TABLE>
<CAPTION>
<S> <C>
June 30, December 30,
1999 1998
------------ ------------
Unconsolidated Subsidiary Pro Forma
Earnings Before Preferred Stock Dividends $ 1,744,374 $ 752,368
8% Class A Cumulative Preferred Stock
Dividends (institutional investor) (1,462,385) (442,261)
9.76% Class B Cumulative Preferred Stock
Dividends (the Company) (1,361,237) (423,938)
8% Class C Cumulative Preferred Stock
Dividends (other investors) (4,000) (1,402)
------------- ----------
Pro Forma Net Loss of Unconsolidated Subsidiary
After Preferred Stock Dividends $(1,083,248) $(115,233)
============= ==========
The Company's 49% Interest in the Pro Forma
Loss of the Unconsolidated Subsidiary $ (530,792) $ (56,464)
============= ==========
</TABLE>
(10) Historical earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding during the six
months ended June 30, 1999 and the year ended December 31, 1998.
As a result of the two Pro Forma Properties being treated in the Pro
Forma Consolidated Statements of Earnings as operational since January
1, 1998, the Company assumed approximately 2,206,573 shares of common
stock were sold, and the net offering proceeds were available for
purchase of these properties. Due to the fact that approximately
1,929,115, of these shares of common stock were actually sold
subsequently, during the period January 1, 1998 through May 21, 1998,
the weighted average number of shares outstanding for the pro forma
period was adjusted.
In addition, as a result of the investment in the unconsolidated
subsidiary being treated in the Pro Forma Consolidated Statements of
Earnings as invested pro rata beginning on October 1, 1998 (the date
the first property became operational), the Company assumed additional
shares of common stock were sold and net offering proceeds were
available for investment during the period October 1, 1998 through
December 31,
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statements of Earnings - Continued:
- --------------------------------------------------------------------
1998 and the period January 1, 1999 through January 26, 1999. Due to
the fact that approximately 857,020 of these shares of common stock
were actually sold during the six months ended June 30, 1999, the
weighted average number of shares outstanding for the pro forma period
was adjusted. Pro forma earnings per share were calculated based upon
the weighted average number of shares of common stock outstanding, as
adjusted, during the six months ended June 30, 1999 and the year ended
December 31, 1998.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C>
June 30, December 31,
1999 1998
-------------- ----------------
ASSETS
Land, buildings and equipment on operating leases,
less accumulated depreciation of $845,625 and
$384,166, respectively $27,906,924 $ 28,368,383
Investment in unconsolidated subsidiary 39,350,470 --
Cash and cash equivalents 63,669,254 13,228,923
Restricted cash 204,132 82,407
Certificate of deposit 5,015,822 5,016,575
Due from related party 49,085 --
Receivables 34,412 28,257
Dividends receivable 777,324 --
Organization costs, less accumulated amortization of
$24,973 and $5,221, respectively -- 19,752
Loan costs, less accumulated amortization of $71,863
and $12,980, respectively 44,233 78,282
Accrued rental income 75,970 44,160
Other assets 3,980,239 1,989,951
---------------- ------------------
$141,107,865 $ 48,856,690
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ -- $ 9,600,000
Interest payable -- 66,547
Accounts payable and accrued expenses 51,102 337,215
Due to related parties 1,033,584 318,937
Security deposits 1,417,500 1,417,500
---------------- ------------------
Total liabilities 2,502,186 11,740,199
---------------- ------------------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares -- --
Excess shares, $.01 par value per share.
Authorized and unissued 63,000,000 shares -- --
Common stock, $.01 par value per share.
Authorized 60,000,000 shares, issued 15,793,039
and 4,321,908 shares, respectively, and outstanding
15,792,539 and 4,321,908 shares, respectively 157,925 43,219
Capital in excess of par value 139,823,971 37,289,402
Accumulated distributions in excess of net earnings (1,376,217 ) (216,130 )
---------------- ------------------
Total stockholders' equity 138,605,679 37,116,491
---------------- ------------------
$141,107,865 $ 48,856,690
================ ==================
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------- --------------- ------------- ------------
Revenues:
Rental income from operating
leases $ 748,908 $ -- $1,486,526 $ --
FF&E Reserve income 65,006 -- 126,033 --
Dividend income 658,288 -- 900,131 --
Interest and other income 614,875 232,006 907,739 371,159
--------------- --------------- -------------- --------------
2,087,077 232,006 3,420,429 371,159
--------------- --------------- -------------- --------------
Expenses:
Interest and loan cost amortization 32,757 -- 233,330 --
General operating and
administrative 119,973 61,263 308,029 146,656
Professional services 8,066 15,078 29,272 20,530
Asset management fees to
related party 17,871 -- 67,436 --
State taxes 593 -- 5,968 --
Depreciation and amortization 239,657 1,000 493,415 2,000
--------------- --------------- -------------- --------------
418,917 77,341 1,137,450 169,186
--------------- --------------- -------------- --------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiary 1,668,160 154,665 2,282,979 201,973
Equity in Loss of Unconsolidated
Subsidiary After Deduction of
Preferred Stock Dividends (205,911 ) -- (390,450 ) --
--------------- --------------- -------------- --------------
Net Earnings $1,462,249 $ 154,665 $1,892,529 $ 201,973
=============== =============== ============== ==============
Earnings Per Share of Common Stock
(Basic and Diluted) $ 0.12 $ 0.07 $ 0.20 $ 0.11
=============== =============== ============== ==============
Weighted Average Number of Shares
of Common Stock Outstanding 12,330,853 2,162,300 9,391,870 1,820,362
=============== =============== ============== ==============
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY Six Months Ended June 30, 1999 and Year Ended
December 31, 1998
Accumulated
Common stock distributions
--------------------------- Capital in in excess
Number Par excess of of net
of Shares value par value earnings Total
----------- ----------- ------------- --------------- ------------
Balance at December 31, 1997 1,152,540 $ 11,525 $ 9,229,316 $ (6,924 ) $ 9,233,917
Subscriptions received for common
stock through public offering
and distribution reinvestment
plan 3,169,368 31,694 31,661,984 -- 31,693,678
Stock issuance costs -- -- (3,601,898 ) -- (3,601,898)
Net earnings -- -- -- 958,939 958,939
Distributions declared and paid
($0.46 per share) -- -- -- (1,168,145 ) (1,168,145)
------------ ------------ -------------- --------------- --------------
Balance at December 31, 1998 4,321,908 43,219 37,289,402 (216,130 ) 37,116,491
Gross Proceeds from subscriptions
for
common stock through public
offerings and distribution 11,471,131 114,711 114,596,604 -- 114,711,315
reinvestment plan
Retirement of common stock (500 ) (5 ) (4,595 ) -- (4,600)
Stock issuance costs -- -- (12,057,440 ) -- (12,057,440)
Net earnings -- -- -- 1,892,529 1,892,529
Distributions declared and paid
($0.36 per share) -- -- -- (3,052,616 ) (3,052,616)
------------ ------------ -------------- --------------- --------------
Balance at June 30, 1999 15,792,539 $157,925 $139,823,971 $(1,376,217 ) $138,605,679
============ ============ ============== =============== ==============
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1999 1998
--------------- ----------------
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities $2,033,757 $ 210,452
----------------- -----------------
Cash Flows from Investing Activities:
Investment in unconsolidated subsidiary (37,172,643 ) --
Investment in certificates of deposit -- (1,500,000 )
Increase in restricted cash (121,725 ) --
Increase in other assets (4,509,931 ) (633,866 )
----------------- -----------------
Net cash used in investing activities (41,804,299 ) (2,133,866 )
----------------- -----------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and stock
issuance costs paid by related parties
on behalf of the Company (1,914,280 ) (70,150 )
Payment on line of credit (9,600,000 ) --
Increase in loan costs (24,834 ) --
Subscriptions received from stockholders 114,711,315 12,252,880
Retirement of shares of common stock (4,600 ) --
Distributions to stockholders (3,052,616 ) (257,086 )
Payment of stock issuance costs (9,919,083 ) (1,213,762 )
Other 14,971 (2,500 )
----------------- -----------------
Net cash provided by financing activities 90,210,873 10,709,382
----------------- -----------------
Net Increase in Cash and Cash Equivalents 50,440,331 8,785,968
Cash and Cash Equivalents at Beginning of Period 13,228,923 8,869,838
----------------- -----------------
Cash and Cash Equivalents at End of Period $ 63,669,254 $ 17,655,806
================= =================
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six Months Ended
June 30,
1999 1998
--------------- ----------------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition
and stock issuance costs on
behalf of the Company as follows:
Acquisition costs $ 418,353 $ 20,302
Stock issuance costs 1,539,215 58,403
----------------- ----------------
$ 1,957,568 $ 78,705
================= ================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS Quarters and Six Months Ended June 30,
1999 and 1998
1. Organization and Nature of Business:
CNL Hospitality Properties, Inc. was organized in Maryland on June 12,
1996. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are wholly
owned subsidiaries of CNL Hospitality Properties, Inc., organized in
Delaware in June 1998. CNL Hospitality Partners, LP is a Delaware
limited partnership formed in June 1998. CNL Hospitality GP Corp. and
CNL Hospitality LP Corp. are the general and limited partner,
respectively, of CNL Hospitality Partners, LP. The term "Company"
includes, unless the context otherwise requires, CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality GP
Corp. and CNL Hospitality LP Corp.
The Company was formed primarily to acquire properties (the
"Properties") located across the United States to be leased on a
long-term, "triple-net" basis. The Company intends to invest the
proceeds from its public offering, after deducting offering expenses,
in hotel Properties to be leased to operators of national and regional
limited service, extended stay and full service hotel chains (the
"Hotel Chains"). The Company may also provide mortgage financing (the
"Mortgage Loans") and furniture, fixture and equipment financing
("Secured Equipment Leases") to operators of Hotel Chains.
2. Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
do not include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the management, necessary to a fair
statement of the results for the interim periods presented. Operating
results for the quarter and six months ended June 30, 1999, may not be
indicative of the results that may be expected for the year ending
December 31, 1999. Amounts as of December 31, 1998, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 1998.
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company, CNL Hospitality Properties, Inc.,
and its wholly owned subsidiaries, CNL Hospitality GP Corp. and CNL
Hospitality LP Corp., as well as the accounts of CNL Hospitality
Partners, LP. All significant intercompany balances and transactions
have been eliminated. The Company accounts for its 49% interest in the
common stock of CNL Hotel Investors, Inc. using the equity method and
accounts for its preferred stock investment in CNL Hotel Investors,
Inc. using the cost method.
Certain items in the prior year's financial statements have been
reclassified to conform with the 1999 presentation. These
reclassifications had no effect on stockholders' equity or net
earnings.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities," which became effective for the Company as of
January 1, 1999. The adoption of this SOP did not have a material
effect on the Company.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
3. Public Offerings:
On June 17, 1999, the Company completed its offering of 16,500,000
shares of common stock ($165,000,000) (the "Initial Offering"), which
included 1,500,000 shares ($15,000,000) available only to stockholders
who elected to participate in the Company's reinvestment plan.
Following the completion of the Initial Offering, the Company commenced
an offering of up to 27,500,000 additional shares of common stock
($275,000,000) (the "1999 Offering"). Of the 27,500,000 shares of
common stock to be offered, 2,500,000 will be available only to
stockholders purchasing shares through the reinvestment plan. The price
per share and the other terms of the 1999 Offering, including the
percentage of gross proceeds payable (i) to the managing dealer for
selling commissions and expenses in connection with the offering and
(ii) to CNL Hospitality Advisors, Inc. (the "Advisor") for acquisition
fees, are substantially the same as those for the Company's Initial
Offerin n
Offering to purchase additional Properties and, to a lesser extent,
make Mortgage Loans.
4. Investment in Unconsolidated Subsidiary:
In February 1999, the Company executed a series of agreements with Five
Arrows Realty Securities II L.L.C. ("Five Arrows") pursuant to which
the Company and Five Arrows formed a jointly owned real estate
investment trust, CNL Hotel Investors, Inc. ("Hotel Investors"), for
the purpose of acquiring up to eight hotel Properties from various
sellers affiliated with Western International (the "Hotels"). At the
time the agreement was entered into, the eight Hotels (four as
Courtyard(R) by Marriott(R) hotels, three as Residence Inn(R) by
Marriott(R) hotels, and one as a Marriott Suites(R)) were either newly
constructed or in various stages of completion. The seven Hotels owned
by Hotel Investors as of June 30, 1999, and the remaining Hotel to be
acquired by Hotel Investors, were or will be acquired after completion
of construction.
The Company's Advisor is also the advisor to Hotel Investors pursuant
to a separate advisory agreement. However, in no event will the Company
pay the Advisor fees, including the Company's pro rata portion of Hotel
Investors' advisory fees, in excess of amounts payable under its
advisory agreement. The Advisor entered into separate purchase
agreements for each of the eight Hotels, which agreements included
customary closing conditions, including inspection of and due diligence
on the completed Properties. The aggregate purchase price of all eight
Hotels, once acquired, will be approximately $184 million, excluding
closing costs.
In order to fund these purchases, Five Arrows committed to make an
investment of up to $50.9 million in Hotel Investors. The Company
committed to make an investment of up to $40 million in Hotel Investors
through its wholly owned subsidiary, CNL Hospitality Partners, LP.
Hotel Investors expected to fund the remaining amount of approximately
$96.6 million (including closing costs) with permanent financing from
Jefferson-Pilot Life Insurance Company consisting of eight separate
loans (the "Hotel Investors Loan"), collateralized by Hotel Investors'
interests in the Properties.
On February 25, 1999, Hotel Investors purchased four of the eight
Hotels for an aggregate purchase price of approximately $90 million
(the "Initial Hotels") and paid $10 million as a deposit on the four
remaining Hotels. The Initial Hotels are the Courtyard by Marriott
located in Plano, Texas, the Marriott Suites located in Dallas, Texas,
the Residence Inn by Marriott located in Las Vegas, Nevada and the
Residence Inn by Marriott located in Plano, Texas. On June 16, 1999,
Hotel Investors purchased three additional hotels of the eight Hotels
(the "Additional Hotels") for an aggregate purchase price of
approximately $77 million. The Additional Hotels are the Courtyard by
Marriott
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
4. Investment in Unconsolidated Subsidiary - Continued:
located in Scottsdale, Arizona, the Courtyard by Marriott located in
Seattle, Washington and the Residence Inn by Marriott located in
Phoenix, Arizona. Hotel Investors applied $7 million of the $10 million
deposit toward the acquisition of the Additional Hotels. As a result of
these purchases and the deposit, Five Arrows has funded approximately
$48 million of its commitment and purchased 48,337 shares of Hotel
Investors' 8% Class A cumulative, preferred stock ("Class A Preferred
Stock") and the Company has funded approximately $38 million of its
commitment and purchased 37,979 shares of Hotel Investors' 9.76% Class
B cumulative, preferred stock ("Class B Preferred Stock"). Hotel
Investors has obtained advances totalling approximately $88 million
relating to the Hotel Investors Loan in order to facilitate the
acquisition of the Initial Hotels and Additional Hotels. Hotel
Investors has and intends to use future funds from Five Arrows, the
Company and the Hotel Investors Loan proportionately to fund the
remaining Property acquisition.
In return for their respective funding commitments, Five Arrows
received a 51% common stock interest and CNL Hospitality Partners, LP
received a 49% common stock interest in Hotel Investors. As funds are
continually advanced to Hotel Investors, Five Arrows will receive
additional shares up to 50,886 shares of Class A Preferred Stock and
CNL Hospitality Partners, LP will receive additional shares up to
39,982 shares of Class B Preferred Stock. The Class A Preferred Stock
is exchangeable upon demand into common stock of the Company, as
determined pursuant to a predetermined formula.
Five Arrows also committed to invest up to $15 million in the Company
through the purchase of common stock pursuant to the Company's Initial
Offering and the 1999 Offering, the proceeds of which have been and
will be used by the Company to fund approximately 38% of its funding
commitment to Hotel Investors. As of February 24, 1999, Five Arrows had
invested $9,297,056 in the Company. Due to the stock ownership
limitations specified in the Company's Articles of Incorporation at the
time of Five Arrows' initial investment, $5,612,311 was invested in the
Company's common stock through the purchase of 590,770 shares and
$3,684,745 was advanced to the Company as a convertible loan bearing an
interest rate of eight percent. Due to additional subscription proceeds
received from February 24, 1999 to April 30, 1999, the loan was
converted to 387,868 shares of the Company's common stock on April 30,
1999. On June 17, 1999, Five Arrows invested an additional $4,952,566
through the purchase of 521,322 shares of common stock. Therefore, as
of June 30, 1999, Five Arrows had invested $14,249,622 of its $15
million commitment in the Company. In addition to the above
investments, Five Arrows has purchased a 10% interest in the Advisor.
In connection with Five Arrows' commitment to invest $15 million in the
Company, the Advisor and certain Affiliates have agreed to waive
certain fees otherwise payable to them by the Company.
Cash flow from operations of Hotel Investors will be distributed first
to Five Arrows with respect to dividends payable on the Class A
Preferred Stock. Such dividends are calculated based on Five Arrows'
"special investment amount," or $1,294.78 per share, which represents
the sum of its investment in Hotel Investors and its $15 million
investment in the Company on a per share basis, adjusted for any
dividends received from the Company. Then, cash flow from operations
will be distributed to the Company with respect to its Class B
Preferred Stock. Next, cash flow will be distributed to 100 CNL Group,
Inc. and subsidiaries' associates who each own one share of Class C
preferred stock in Hotel Investors, to provide a quarterly, cumulative,
compounded 8% return. All remaining cash flow from operations will be
distributed pro rata with respect to the interest in the common shares.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
4. Investment in Unconsolidated Subsidiary - Continued:
The following presents condensed financial information for Hotel
Investors at June 30, 1999:
Land, buildings and equipment on operating
leases, less accumulated depreciation $167,512,025
Cash 3,844,504
Loan costs, less accumulated amortization 665,993
Accrued rental income 82,523
Deposits and other assets 3,024,073
Liabilities 90,712,647
Redeemable preferred stock - Class A 48,336,090
Stockholders' equity 36,080,382
Revenues 3,798,398
Net earnings 1,079,561
During the quarter and six months ended June 30, 1999, the Company
recorded $658,288 and $900,131, respectively, in dividend income and an
equity in loss after deduction of preferred stock dividends of $205,911
and $390,450, respectively, resulting in net earnings of $452,377 and
$509,681, respectively, attributable to this investment.
5. Convertible Loan:
As described above in Note 4, $3,684,745 was advanced to the Company by
Five Arrows as a convertible loan, bearing interest at a rate of eight
percent per annum payable at the time the loan was converted to shares
of common stock. On April 30, 1999, the loan was converted to 387,868
shares of common stock of the Company. In connection therewith, the
Company incurred $24,565 and $54,043 in interest expense during the
quarter and six months ended June 30, 1999, respectively.
6. Other Assets:
Other assets as of June 30, 1999 and December 31, 1998 were $3,980,239
and $1,989,951, respectively, which consisted of acquisition fees and
miscellaneous acquisition expenses that will be allocated to future
Properties, and other prepaid expenses.
7. Redemption of Shares:
In October 1998, the Board of Directors elected to implement the
Company's redemption plan. Under the redemption plan, the Company may
elect to redeem shares, subject to certain conditions and limitations.
During the quarter ended June 30, 1999, 500 shares of common stock were
redeemed at $9.20 per share ($4,600) and retired.
8. Stock Issuance Costs:
The Company has incurred certain expenses of its offerings of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the
offerings. Preliminary costs incurred prior to raising capital were
advanced by the Advisor. The Advisor has
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
8. Stock Issuance Costs - Continued:
agreed to pay all offering expenses (excluding commissions and
marketing support and due diligence expense reimbursement fees) which
exceed three percent of the gross offering proceeds received from the
sale of shares of the Company in connection with the current offering.
During the six months ended June 30, 1999 and the year ended December
31, 1998, the Company incurred $12,057,440 and $3,606,871,
respectively, in organizational and offering costs, including
$7,976,937 and $2,535,494, respectively, in commissions and marketing
support and due diligence expense reimbursement fees (see Note 10). Of
these amounts $12,057,440 and $3,601,898, respectively, have been
treated as stock issuance costs and for the year ended December 31,
1998, $4,973 has been treated as organization costs. The stock issuance
costs have been charged to stockholders' equity subject to the three
percent cap described above.
9. Distributions:
For the six months ended June 30, 1999 and 1998, approximately 64 and
100 percent, respectively, of distributions paid to stockholders were
considered ordinary income and for the six months ended June 30, 1999,
approximately 36 percent was considered a return of capital to
stockholders for federal income tax purposes. No amounts distributed to
the stockholders for the six months ended June 30, 1999 and 1998 are
required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' 8% return on
their invested capital. The characterization for tax purposes of
distributions declared for the six months ended June 30, 1999 may not
be indicative of the results that may be expected for the year ending
December 31, 1999.
10. Related Party Transactions:
During the six months ended June 30, 1999 and 1998, the Company
incurred $7,478,378 and $918,966, respectively, in selling commissions
due to CNL Securities Corp. for services in connection with the
offering of shares. A substantial portion of these amounts ($6,978,557
and $857,875, respectively) were or will be paid by CNL Securities
Corp. as commissions to other brokers.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5% of
the total amount raised from the sale of shares, a portion of which may
be reallowed to other broker-dealers. During the six months ended June
30, 1999 and 1998, the Company incurred $498,559 and $61,264,
respectively, of such fees, the majority of which will be reallowed to
other broker-dealers and from which all bona fide due diligence
expenses will be paid.
In addition, the Company has agreed to issue and sell soliciting dealer
warrants ("Soliciting Dealer Warrants") to CNL Securities Corp., the
managing dealer of the Company. The price for each warrant will be
$0.0008 and one warrant will be issued for every 25 shares sold by the
managing dealer. All or a portion of the Soliciting Dealer Warrants may
be reallowed to soliciting dealers with prior written approval from,
and in the sole discretion of, the managing dealer, except where
prohibited by either federal or state securities laws. The holder of a
Soliciting Dealer Warrant will be entitled to purchase one share of
common stock from the Company at a price of $12.00 during the five year
period commencing with the date the offering begins. No Soliciting
Dealer Warrant, however, will be exercisable until one year from the
date of issuance.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
10. Related Party Transactions - Continued:
The Advisor is entitled to receive acquisition fees for services in
finding, negotiating the leases of and acquiring Properties on behalf
of the Company equal to 4.5% of gross proceeds, loan proceeds from
permanent financing and amounts outstanding on the line of credit, if
any, at the time of listing, but excluding that portion of the
permanent financing used to finance Secured Equipment Leases. During
the six months ended June 30, 1999 and 1998, the Company incurred
$5,057,012 and $551,380, respectively, of such fees. Such fees are
included in land, buildings and equipment on operating leases, the
investment in unconsolidated subsidiary and other assets at June 30,
1999.
The Company and the Advisor have entered into an advisory agreement
pursuant to which the Advisor will receive a monthly asset management
fee of one-twelfth of 0.60% of the Company's real estate value and the
outstanding principal balance of any Mortgage Loans as of the end of
the preceding month. The management fee, which will not exceed fees
which are competitive for similar services in the same geographic area,
may or may not be taken, in whole or in part as to any year, in the
sole discretion of the Advisor. All or any portion of the management
fee not taken as to any fiscal year shall be deferred without interest
and may be taken in such other fiscal year as the Advisor shall
determine. During the quarter and six months ended June 30, 1999, the
Company incurred $17,871 and $67,436 of such fees, respectively.
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial,
tax and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the offering of
shares), on a day-to-day basis. The expenses incurred for these
services were classified as follows for the six months ended June 30:
1999 1998
------------ -----------
Stock issuance costs $1,709,008 $154,337
General operating and
administrative expenses 150,380 76,082
============ ===========
$1,859,388 $230,419
============ ===========
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
10. Related Party Transactions - Continued:
The amounts due to related parties consisted of the following at:
June 30, December 31,
1999 1998
------------- --------------
CNL Securities Corp.:
Commissions $ 568,726 $66,063
Marketing support and due
diligence expense
reimbursement fee 20,944 4,404
------------- --------------
589,670 70,467
------------- --------------
The Advisor:
Expenditures incurred on
behalf of the Company and
accounting and administrative
services 255,642 110,496
Acquisition fees 188,272 137,974
------------- --------------
443,914 248,470
------------- --------------
$1,033,584 $318,937
============= ==============
11. Concentration of Credit Risk:
Two lessees, STC Leasing Associates, LLC (which operates and leases the
two Properties directly owned by the Company) and WI Hotel Leasing, LLC
(which leases the seven Properties in which the Company owns an
interest through Hotel Investors) each contributed more than ten
percent of the Company's total rental income (including the Company's
share of total rental income from Hotel Investors) for the six months
ended June 30, 1999. In addition, all of the Company's rental income
(including the Company's share of rental income from Hotel Investors)
was earned from Properties operating as Marriott(R) brand chains.
Although the Company intends to acquire Properties located in various
states and regions and to carefully screen its tenants in order to
reduce risks of default, failure of these lessees or the Marriott brand
chains could significantly impact the results of operations of the
Company. However, management believes that the risk of such a default
is reduced due to the essential or important nature of these Properties
for the ongoing operations of the lessees.
It is expected that the percentage of total rental income contributed
by these lessees will decrease as additional Properties are acquired
and leased during 1999 and subsequent years.
12. Commitments and Contingencies:
As of June 30, 1999, the Company has entered into agreements to
acquire, directly or indirectly, four hotel Properties. In connection
with three of these agreements, the Company was required by the seller
to obtain a letter of credit. The letter of credit was collateralized
by a $5,000,000 certificate of deposit. In connection with the letter
of credit, the Company incurred $22,500 in closing costs. In connection
with the remaining agreement, Hotel Investors was required by the
seller to pay a deposit of $3,000,000 which is being held in escrow by
the title company. Of this amount, Five Arrows contributed $1,680,000
and the Company contributed $1,320,000.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
CONTINUED Quarters and Six Months Ended June 30,
1999 and 1998
12. Commitments and Contingencies - Continued:
Pursuant to the purchase agreement in connection with the acquisition
of the two Properties directly owned by the Company, the Company may be
required to make an additional payment of up to $1 million, contingent
upon these Properties achieving certain gross earnings before interest,
taxes, depreciation and amortization, as compared to the original
purchase price pursuant to a formula during a 36 month period ending
July 31, 2001. Rental income will be adjusted upward in accordance with
the lease agreements for any such amount paid.
13. Subsequent Events:
During the period July 1, 1999 through August 5, 1999, the Company
received subscription proceeds for an additional 2,555,549 shares
($25,555,486) of common stock.
On July 1, 1999 and August 1, 1999, the Company declared distributions
totalling $964,344 and $1,086,775, respectively, or $0.0604 per share
of common stock, payable in September 1999, to stockholders of record
on July 1, 1999 and August 1, 1999, respectively.
On July 15, 1999, the Company redeemed 2,500 shares of common stock for
$23,000 or $9.20 per share.
<PAGE>
