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CNL HOSPITALITY PROPERTIES, INC.
Supplement No. 3, dated February 17, 2000
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 January 7, 2000, 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 January 7, 2000, 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 January 7, 2000, the Company had received aggregate subscriptions
for 29,217,898 Shares totalling $292,178,981 in Gross Proceeds, including 50,392
Shares ($503,917) issued pursuant to the Reinvestment Plan from its Initial
Offering and this offering. As of January 7, 2000, 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 $135,700,000. The Company has used Net Offering Proceeds from the
offerings to invest, directly or indirectly, approximately $137,100,000 in 11
hotel Properties, to pay $6,600,000 as deposits on five additional hotel
Properties, to redeem 12,885 Shares of Common Stock for $118,542 and to pay
approximately $14,300,000 in Acquisition Fees and certain Acquisition Expenses,
leaving approximately $105,200,000 available to invest in Properties and
Mortgage Loans. See "Business -- Pending Investments" for information on six
Properties the Company has entered into commitments to acquire.
As described in "The Offering" section of the Prospectus, the Board of
Directors may determine to engage in future offerings of Common Stock. In
connection therewith, the Board of Directors has approved a third offering by
the Company (the "2000 Offering") of up to 45,000,000 Shares which is expected
to commence immediately following the completion of this offering. Of the
45,000,000 Shares expected to be offered, up to 5,000,000 Shares are expected to
be available to stockholders purchasing through the Reinvestment Plan. Until
such time, if any, as the stockholders approve an increase in the number of
authorized Shares of Common Stock of the Company, the 2000 Offering will be
limited to 20,000,000 Shares. The Board of Directors expects to submit, for a
vote of the stockholders at a meeting expected to be held in May 2000, a
proposal to increase the number of authorized Shares of Common Stock of the
Company from 60,000,000 to 150,000,000. The price per Share and the other terms
of the 2000 Offering, including the percentage of gross proceeds payable to the
Managing Dealer for Selling Commissions and expenses in connection with the
offering, payable to the Advisor for Acquisition Fees and Acquisition Expenses
and reimbursable to the Advisor for Offering Expenses, are expected to be the
same as those for this offering. Net proceeds from the 2000 Offering are
expected to be invested in additional Properties and Mortgage Loans. The Company
<PAGE>
believes that the net proceeds received from the 2000 Offering and any
additional offerings will enable the Company to continue to grow and take
advantage of acquisition opportunities until such time, if any, that the
Company's Shares are listed on a national securities exchange or
over-the-counter market. Under the Company's Articles of Incorporation, if the
Company does not List by December 31, 2007, it will commence an orderly
liquidation of its Assets, and the distribution of the proceeds therefrom to its
stockholders.
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."
CONFLICTS OF INTEREST
The following information updates and replaces the "Conflicts of
Interest" section as well as the last paragraph under the heading "Acquisition
of Properties" on page 31 of the Prospectus.
The Company will be subject to various conflicts of interest arising
out of its relationship to the Advisor and its Affiliates, as described below.
The following indicates the relationship between the Company, the
Advisor and CNL Financial Group, Inc., including its Affiliates that will
provide services to the Company.
CNL Financial Group, Inc. (1)
Subsidiaries, Affiliates and Strategic Business Units
<TABLE>
<CAPTION>
Capital Markets: Retail:
--------------- ------
<S> <C>
CNL Capital Markets, Inc. (2) Commercial Net Lease Realty, Inc. (6)
CNL Investment Company
CNL Securities Corp. (3) Restaurant:
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CNL Institutional Advisors, Inc. CNL American Properties Fund, Inc. (7)
Administrative Services: Hospitality:
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CNL Shared Services, Inc. (4) CNL Hospitality Properties, Inc. (8)
Real Estate Services: Health Care:
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CNL Real Estate Services, Inc. (5) CNL Health Care Properties, Inc. (9)
CNL Hospitality Corp.
(formerly CNL Hospitality Advisors, Inc.) Financial Services:
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CNL Hotel Development Company CNL Finance, Inc.
CNL Health Care Corp. CNL Capital Corp.
CNL Health Care Development, Inc. CNL Advisory Services, Inc.
CNL Corporate Properties, Inc.
CNL Community Development Corp.
CNL Properties, Inc.
</TABLE>
(1) CNL Financial Group, Inc. (formerly CNL Group, Inc.) is a wholly owned
subsidiary of CNL Holdings, Inc. James M. Seneff, Jr., Chairman of the
Board and Chief Executive Officer of the Company, shares ownership and
voting control of CNL Holdings, Inc. with Dayle L. Seneff, his wife.
(2) CNL Capital Markets, Inc. is a wholly owned subsidiary of CNL Financial
Group, Inc. and is the parent company of CNL Investment Company.
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(3) CNL Securities Corp. is a wholly owned subsidiary of CNL Investment
Company and has served as managing dealer in the offerings for various
CNL public and private real estate programs, including the Company.
(4) CNL Shared Services, Inc. (formerly CNL Corporate Services, Inc.) is a
wholly owned subsidiary of CNL Holdings, Inc., and together with other
Affiliates provides administrative services for various CNL entities,
including the Company.
(5) CNL Real Estate Services, Inc., a wholly owned subsidiary of CNL
Financial Group, Inc., is the parent company of CNL Hospitality Corp.;
CNL Health Care Corp.; CNL Corporate Properties, Inc.; CNL Properties,
Inc.; and CNL Community Development Corp.
(6) Commercial Net Lease Realty, Inc. is a REIT listed on the New York
Stock Exchange. Effective January 1, 1998, CNL Realty Advisors, Inc.
and Commercial Net Lease Realty, Inc. merged, at which time Commercial
Net Lease Realty, Inc. became self advised. James M. Seneff, Jr.
continues to hold the positions of Chief Executive Officer and Chairman
of the Board, and Robert A. Bourne continues to hold the position of
Vice Chairman of the Board of Commercial Net Lease Realty, Inc.
(7) CNL American Properties Fund, Inc. is a public, unlisted REIT.
Effective September 1, 1999, CNL Fund Advisors, Inc., CNL Financial
Services, Inc., CNL Financial Corp. and CNL American Properties Fund,
Inc. merged, at which time CNL American Properties Fund, Inc. became
self advised. James M. Seneff, Jr. continues to hold the position of
Chairman of the Board and Robert A. Bourne continues to hold the
position of Vice Chairman of the Board of CNL American Properties Fund,
Inc.
(8) CNL Hospitality Properties, Inc. is a public, unlisted REIT. James M.
Seneff, Jr. holds the positions of Chief Executive Officer and Chairman
of the Board, and Robert A. Bourne holds the positions of President and
Vice Chairman of the Board of CNL Hospitality Properties, Inc. CNL
Hospitality Corp., a majority owned subsidiary of CNL Real Estate
Services, Inc., provides management and advisory services to the
Company pursuant to the Advisory Agreement.
(9) CNL Health Care Properties, Inc. is a public, unlisted REIT. James M.
Seneff, Jr. holds the positions of Chief Executive Officer and Chairman
of the Board, and Robert A. Bourne holds the positions of President and
director of CNL Health Care Properties, Inc. CNL Health Care Corp., a
majority owned subsidiary of CNL Real Estate Services, Inc., provides
management and advisory services to the Company pursuant to the
Advisory Agreement.
ACQUISITION OF PROPERTIES
The Company will supplement this Prospectus during the offering period
to disclose the acquisition of a Property at such time as the Advisor believes
that a reasonable probability exists that the Company will acquire the Property,
including an acquisition from the Advisor or its Affiliates. Based upon the
experience of management of the Company and the Advisor and the proposed
acquisition methods, a reasonable probability that the Company will acquire a
Property normally will occur as of the date on which (i) a commitment letter is
executed by a proposed tenant, (ii) a satisfactory credit underwriting for the
proposed tenant has been completed, (iii) a satisfactory site inspection has
been completed, and (iv) a nonrefundable deposit has been paid on the Property.
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<PAGE>
BUSINESS
GENERAL
The following information updates and replaces the paragraph at the
bottom of page 39, the table at the top of page 40, the last full paragraph on
page 40 and the first paragraph under the heading "Investment of Offering
Proceeds" on page 42 of the Prospectus.
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 profits in its history at $20.9 billion, which is 23% more than
1997 and nearly double the amount earned in 1996.
Pre-Tax Profits
of Hospitality Industry
(in billions)
Year Profitability
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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. In 1998,
total travel expenditures in the United States generated $495.1 billion in
sales. In addition, there were 51,000 hotel properties which included over 3.9
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 7.6 million direct jobs,
generating $20.2 billion in wages. According to Smith Travel Research data,
United States lodging industry sales reached over $93 billion in 1998.
INVESTMENT OF OFFERING PROCEEDS
The Company has undertaken to supplement this Prospectus during the
offering period to disclose the use of proceeds of this offering to acquire
Properties at such time as the Company believes that a reasonable probability
exists that any such Property will be acquired by the Company. Based upon the
experience and acquisition methods of the Affiliates of the Company and the
Advisor, this normally will occur, with regard to acquisition of Properties, as
of the date on which (i) a commitment letter is executed by a proposed tenant,
(ii) a satisfactory credit underwriting for the proposed tenant has been
completed, (iii) a satisfactory site inspection has been completed, and (iv) a
nonrefundable deposit has been paid on the Property. However, the initial
disclosure of any proposed acquisition, cannot be relied upon as an assurance
that the Company ultimately will consummate such proposed acquisition or that
the information provided concerning the proposed acquisition will not change
between the date of such supplement and the actual purchase or extension of
financing. The terms of any borrowing by the Company will also be disclosed by
supplement following receipt by the Company of an acceptable commitment letter
from a potential lender.
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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 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.
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.
In connection with the acquisition of these two Properties, the Company
may be required to make an additional payment (the "Earnout Amount") of up to $1
million if certain earnout provisions are achieved by July 31, 2001. After July
31, 2001, the Company will no longer be obligated to make any payments under the
earnout provision. The Earnout Amount is equal to the difference between
earnings before interest, taxes, depreciation and amortization expense adjusted
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by the earnout factor (7.44), and the initial purchase price. Rental income will
be adjusted upward in accordance with the lease agreements for any amount paid.
The 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 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>
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
- -------------- -------------- -------------- ---------------- -------------- -------------- ----------------
<S> <C>
*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 81.00% 104.50 84.66 80.40% 88.16 70.84
</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
December 31, 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 December 31, 1999, was 1.26 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. At the time the agreement was entered
into, the eight Properties (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.
On February 25, 1999, Hotel Investors purchased four of the Properties
for an aggregate purchase price of approximately $90 million (the "Initial
Hotels") and paid $10 million as a deposit on the four remaining Properties. The
Initial Hotels are a Courtyard by Marriott located in Plano, Texas (the "Legacy
Park Property"), a Marriott Suites located in Dallas, Texas (the "Market Center
Property"), a Residence Inn by Marriott located in Las Vegas, Nevada (the
"Hughes Center Property") and a Residence Inn by Marriott located in Plano,
Texas (the "Dallas Plano Property"). On June 16, 1999, Hotel Investors purchased
three additional Properties (the "Additional Hotels") for an aggregate purchase
price of approximately $77 million. The Additional Hotels are a Courtyard by
Marriott located in Scottsdale, Arizona (the "Scottsdale Downtown Property"), a
Courtyard by Marriott located in Seattle, Washington (the "Lake Union Property")
and a Residence Inn by Marriott located in Phoenix, Arizona (the "Phoenix
Airport Property"). Hotel Investors applied $7 million of the $10 million
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<PAGE>
deposit toward the acquisition of the Additional Hotels. The $3 million deposit
relating to the eighth Property was refunded to Hotel Investors by the seller in
January 2000 as a result of Hotel Investors exercising its option to terminate
its obligation to purchase the property under the purchase and sale agreement.
As of January 7, 2000, Hotel Investors owned seven of the newly constructed
Properties (the "Seven Hotels").
In order to fund these purchases, Five Arrows invested approximately
$48 million and the Company invested approximately $38 million in Hotel
Investors, through a wholly owned subsidiary, CNL Hospitality Partners, LP
("Hospitality Partners"). Hotel Investors funded the remaining amount of
approximately $88 million with permanent financing, secured by Hotel Investors'
interests in the Properties (the "Hotel Investors Loan").
In return for their respective investments, Five Arrows received a 51%
common stock interest and the Company received a 49% common stock interest in
Hotel Investors. Five Arrows received 48,337 shares of Hotel Investors' 8% Class
A cumulative, preferred stock ("Class A Preferred Stock"), and the Company
received 37,979 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 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.
Cash available for distributions 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 approximately $14 million investment in the Company,
described below, on a per share basis, adjusted for any distributions received
from the Company. Then, cash available for distributions is distributed to the
Company with respect to its Class B Preferred Stock. Next, cash available for
distributions is distributed to 100 CNL Holdings, Inc. and affiliates'
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
available for distributions is distributed pro rata with respect to the interest
in the common shares.
Five Arrows also invested approximately $14 million in the Company
through the purchase of Common Stock pursuant to the Company's Initial Offering
and this offering, the proceeds of which were used by the Company to fund
approximately 38% of its funding commitment to Hotel Investors. During 1999,
approximately $3.7 million of this amount was initially treated as a loan due to
the stock ownership limitations specified in the Company's Articles of
Incorporation at the time of investment. On April 30, 1999, this loan was
converted to 387,868 Shares of Common Stock. In addition to the above
investments, Five Arrows purchased a 10% interest in the Advisor. In connection
with Five Arrows' investment in the Company, the Advisor and Hotel Investors,
certain Affiliates have agreed to waive certain fees otherwise payable to them
by the Company. The Advisor is also the advisor to Hotel Investors pursuant to a
separate advisory agreement. The Company will not 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.
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 Property for $35,801,212 from Westlake Hotel
Property, LP and the Phoenix Airport Property for $21,351,707 from APRI Hotel
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<PAGE>
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 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:
<TABLE>
<CAPTION>
Minimum Annual Rent
--------------------------------
Year 2 and
Property Location Year 1 Thereafter
---------------------------------------- -------------------- -------------- --------------
<S> <C>
Legacy Park Property Plano, TX $1,308,673 $1,341,390
Market Center Property Dallas, TX 3,399,319 3,484,302
Hughes Center Property Las Vegas, NV 3,412,068 3,497,369
Dallas Plano Property Plano, TX 1,204,485 1,234,597
Scottsdale Downtown Property Scottsdale, AZ 2,022,084 2,072,636
Lake Union Property Seattle, WA 3,690,847 3,783,118
Phoenix Airport Property Phoenix, AZ 2,201,207 2,256,237
</TABLE>
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
quarterly threshold of $11,885,000. 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 Properties 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
Properties during the one-year period. In addition, providing that all
of the Properties 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 Properties 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).
Although Marriott International, Inc. has entered into a management
agreement relating to the Seven Hotels, it has not guaranteed the
payments due under the leases.
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<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
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 as 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 HVS 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 HVS 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 were constructed in late 1998 and the first half
of 1999, 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
-9-
<PAGE>
on these Properties generated gross operating profits of $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>
Revenue
Average Average per
Occupancy Daily Room Available
Property Location Year Rate Rate Room
- ------------------------------- ------------------ ---------- -------------- -------------- ------------
<S> <C>
Legacy Park Property Plano, TX *1998 8.20% $ 45.28 $ 3.70
**1999 61.50% 89.09 54.80
Market Center Property Dallas, TX *1998 37.90% $ 100.95 $ 38.26
**1999 69.20% 115.34 79.87
Hughes Center Property Las Vegas, NV *1998 47.30% $ 107.86 $ 51.00
**1999 75.20% 94.16 70.85
Dallas Plano Property Plano, TX *1998 46.70% $ 88.79 $ 41.47
**1999 74.30% 75.38 56.03
Scottsdale Downtown
Property Scottsdale, AZ **1999 39.30% $ 76.95 $ 30.26
Lake Union Property Seattle, WA **1999 69.70% $ 116.72 $ 81.34
Phoenix Airport Property Phoenix, AZ **1999 41.40% $ 83.88 $ 34.70
</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 December 31,
1999, and data for the Scottsdale Downtown, Lake Union and Phoenix
Airport Properties represents the period May 22, 1999 through December
31, 1999.
The Company believes that the results achieved by the Initial Hotels
for 1998, and the Additional Hotels for 1999, as shown in the table above, are
not indicative of their long-term operating potential since they each had been
open for less than one year.
Courtyard by Marriott located in Philadelphia, Pennsylvania. On
November 16, 1999, the Company acquired an 89% interest in CNL Philadelphia
Annex, LLC (formerly Courtyard Annex, L.L.C.) (the "LLC"), a limited liability
company, a portion of which is indirectly owned by Marriott International, Inc.,
for $57,876,349. The sole purpose of the LLC is to own and lease a Courtyard by
Marriott hotel Property located in Philadelphia, Pennsylvania (the "Philadelphia
Downtown Property").
The LLC acquired and renovated the Philadelphia Downtown Property,
which is its sole asset. The LLC, as lessor, has entered into a long-term lease
agreement relating to this Property. The general terms of the lease agreement
are described in "Business -- Description of Property Leases." The principal
features of the lease are as follows:
o The initial term of the lease expires in approximately 15 years.
-10-
<PAGE>
o At the end of the initial lease term, the tenant will have two
consecutive renewal options of seven years, five months and 14 days
each.
o The lease will require minimum rent payments of $6,500,000 per year.
o In addition to minimum rent, for each lease year after the second lease
year, the lease will require percentage rent equal to seven percent of
total hotel revenues, in excess of total hotel revenues for the second
lease year.
o A security deposit equal to $3,150,000 will be retained by the Company
as security for the tenant's obligations under the lease until the end
of the fifth lease year, at which time such security deposit will be
reduced to $2,000,000.
o The tenant has established a reserve fund which will be used for the
replacement and renewal of furniture, fixtures and equipment relating
to the hotel Property (the "FF&E Reserve"). Deposits to the FF&E
Reserve are made every four weeks 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 LLC as additional rent.
o Marriott International, Inc. has guaranteed the tenant's obligation to
pay minimum rent under the lease. 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 Property exceeds minimum rent due under the
lease by 25% for any trailing 12-month period. The maximum amount of
the guarantee is $7,300,000.
o Five years after the hotel opening, the Company will have the right to
obligate CBM Annex, Inc. (the minority interest owner in the LLC) to
sell its 11% interest in the LLC and CBM Annex, Inc. will have the
right to obligate the Company to purchase its 11% interest in the LLC
for a price equal to 11% of the lesser of (a) an amount equal to the
product of 8.5 multiplied by the "net house profit" (defined as total
hotel revenues less property expenses) for the 13 period accounting
year preceding the notice of the option exercise, and (b) the appraised
fair market value.
The estimated federal income tax basis of the depreciable portion of
the Philadelphia Downtown Property is approximately $58 million.
The Philadelphia Downtown Property is a recently restored building
listed on the National Register of Historic Places. The hotel commenced
operations in late November 1999. The Philadelphia Downtown Property is located
in the historic Penn Square district of Philadelphia and has 477 guest rooms and
21 suites, approximately 6,375 square feet of meeting and banquet rooms, a
160-seat cafe, an 80-seat lobby lounge, a gift shop, an exercise room and an
indoor pool and whirlpool. According to HVS data, Philadelphia is the fifth most
populous city in the United States, home to approximately 1.5 million residents.
Just three blocks from the hotel is the 1.3 million-square-foot Pennsylvania
Convention Center which hosted more than 180 events in 1999 with more than
817,000 people in attendance. Several historical and cultural sites are also
within walking distance of the hotel, including Independence National Historical
Park, home of the Liberty Bell, and Penn Station. Also in close proximity to the
Philadelphia Downtown Property is the Reading Terminal Market, and indoor
restaurant and retail area, and the Avenue of the Arts, the city's premier art,
theater and music district. Fine restaurants, recreational facilities and a
central shopping district with landmark department stores are equally close.
Other lodging facilities located in proximity to the Philadelphia Downtown
-11-
<PAGE>
Property include a Marriott(R) Hotel, a Doubletree Hotel, a Wyndham Hotel, an
Embassy Suites, a Crowne Plaza, a Hawthorne Suites, a Sheraton Hotel, an Omni
Hotel and a Holiday Inn. The average occupancy rate, the average daily room rate
and the revenue per available room for the period the hotel has been operational
are as follows:
Philadelphia Downtown Property
------------------------------------------------------
Average Average Revenue
Occupancy Daily Room per Available
Year Rate Rate Room
- ----------- -------------- --------------- ----------------
*1999 25.20% $114.95 $28.97
* Data for the Philadelphia Downtown Property represents the period
November 20, 1999 through December 31, 1999.
The Company believes that the results achieved by the Property for
year-end 1999, are not indicative of its long-term operating potential, as the
Property had been open for less than two months during the reporting period.
Residence Inn by Marriott located in Mira Mesa, California. On December
10, 1999, the Company acquired a Residence Inn located in Mira Mesa, California
(the "Mira Mesa Property") for $15,530,000 from Residence Inn by Marriott, Inc.
The Company, as lessor, has entered into a long-term lease agreement relating to
this Property. The general terms of the lease agreement are described in
"Business -- Description of Property Leases." The principal features of the
lease are as follows:
o The initial term of the lease expires in approximately 15 years.
o At the end of the initial lease term, the tenant will have two
consecutive renewal options of ten years each.
o The lease will require minimum rent payments of $1,542,300 per year.
o In addition to minimum rent, for each lease year after the second lease
year, the lease will require percentage rent equal to seven percent of
room revenues, in excess of room revenues for the second lease year.
o A security deposit equal to $474,554 will be retained by the Company as
security for the tenant's obligations under the lease.
o The tenant will establish an FF&E Reserve. Deposits to the FF&E Reserve
will be made every four weeks as follows: 2% 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 Marriott International, Inc. has guaranteed the tenant's obligation to
pay minimum rent under the lease. 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 Property exceeds minimum rent due under the
lease by 25% for any trailing 12-month period. The maximum amount of
the guarantee is $1,542,300.
The estimated federal income tax basis of the depreciable portion of
the Mira Mesa Property is approximately $13.6 million.
-12-
<PAGE>
The Mira Mesa Property is a newly constructed hotel which commenced
operations in late September 1999. The Mira Mesa Property is located in the
Sorrento Valley area of northern San Diego, California, approximately 18 miles
north of the downtown San Diego area, in the suburb of Sorrento Mesa. The hotel
has 150 guest suites, approximately 689 square feet of meeting space, a
restaurant and an indoor exercise room. According to the San Diego Regional
Economic Development Corporation, the San Diego area has more than 350 computer
software companies, the fourth-largest concentration of biotechnology companies
in the world and the third-highest concentration of telecommunications companies
in the world. According to HVS data, San Diego is a growing center for wireless
communications. San Diego's telecommunications industry has grown 26% each year
since 1993, and provides more than 25,000 jobs. Due to the tremendous growth in
the telecommunications and biomedical industries, San Diego area office
occupancy rose to 97% in 1998. To meet the demands, approximately 300,000 square
feet of new, high-end office space is currently under construction, including
the 150,000-square-foot Uniden building located approximately one block from the
Mira Mesa Property. In addition, more than one million square feet of industrial
and research and development space is under development in Sorrento Mesa. A
number of attractions and shopping areas are in close proximity to the Mira Mesa
Property, including Old Town San Diego, Sea World(R) California, the San Diego
Zoo and Qualcomm Stadium. The hotel is accessible by a variety of local, county,
state and interstate highways, and is less than 11 miles from the San Diego
International Airport. Other lodging facilities located in proximity to the Mira
Mesa Property include a Doubletree Hotel, a Wyndham Garden Hotel, an Embassy
Suites, a Courtyard by Marriott and another Residence Inn. The average occupancy
rate, the average daily room rate and the revenue per available room for the
period the hotel has been operational are estimated to be as follows:
Mira Mesa Property
------------------------------------------------------
Average Average Revenue
Occupancy Daily Room per Available
Year Rate Rate Room
- ----------- -------------- --------------- ----------------
*1999 74% $104 $76.96
* Data for the Mira Mesa Property represents the period September 20,
1999 through December 31, 1999.
The Company believes that the results achieved by the Property for
year-end 1999, may or may not be indicative of its long-term operating
potential, as the Property had been open for less than four months 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 lodging brands. According to Marriott's corporate
profile, Marriott International is a leading worldwide hospitality company with
operations in the United States and 56 other countries and territories.
According to Marriott data, as of September 1999, Marriott International had
more than 1,810 hotels and resorts totalling approximately 345,000 rooms and
4,400 timeshare villas worldwide.
Each Residence Inn by Marriott hotel typically offers daily
complimentary breakfast and newspaper, a swimming pool and heated whirlpool.
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 data, as of September 1999, Residence Inn by Marriott is the top
extended-stay lodging chain in the world, with 312 hotels in the United States
and seven in Canada and Mexico.
Each Courtyard by Marriott features superior guest accommodations for
both the business and pleasure traveler. Most of the rooms overlook a central
landscaped courtyard with an outdoor swimming pool and socializing area with a
gazebo. According to Marriott data, as of September 1999, Courtyard by Marriott
is the leading United States moderate price chain with 450 Courtyard by Marriott
hotels in the United States, Europe and the Asia-Pacific region.
-13-
<PAGE>
Marriott Hotels, Resorts and Suites is Marriott International's line of
upscale, full-service hotels and suites. Each of the Marriott Hotels, Resorts
and Suites features multiple restaurants and lounges, fully equipped health
clubs, swimming pool, gift shop, concierge level, business center and meeting
facilities. According to Marriott data, as of September 1999, there were 345
Marriott Hotels, Resorts and Suites, 247 properties in the United States and 98
in 43 other countries and territories.
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 January 7, 2000, the Company had initial commitments to acquire,
directly or indirectly, six hotel properties. These Properties are one Courtyard
by Marriott (in Orlando, Florida), one Fairfield Inn by Marriott (in Orlando,
Florida), two SpringHill Suites(TM) by Marriott(R) (one in each of Orlando,
Florida and Gaithersburg, Maryland), one Residence Inn by Marriott (in
Merrifield, Virginia) and one TownePlace Suites(R) by Marriott(R) (in Newark,
California). 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.
-14-
<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 the
Orlando, FL (1) renewal options total cost to purchase second lease year, 7% of
(the "Courtyard Little Lake the property revenues in excess of revenues
Bryan Property") for the second lease year
Hotel under construction
Fairfield Inn by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after the
Orlando, FL (1) renewal options total cost to purchase second lease year, 7% of
(the "Fairfield Inn Little Lake the property revenues in excess of revenues
Bryan Property") for the second lease year
Hotel under construction
SpringHill Suites by Marriott (2) 15 years; two ten-year 10% of the Company's for each lease year after the
Orlando, FL (1) renewal options total cost to purchase second lease year, 7% of
(the "SpringHill Suites Little the property revenues in excess of revenues
Lake Bryan Property") for the second lease year
Hotel under construction
Residence Inn by Marriott $18,816,000 15 years; two ten-year 10% of the Company's for each lease year after the
Merrifield, VA (3) renewal options total cost to purchase second lease year, 7% of
(the "Residence Inn Merrifield the property revenues in excess of revenues
Property") for the second lease year
Hotel under construction
SpringHill Suites by Marriott $15,215,000 15 years; two ten-year 10% of the Company's for each lease year after the
Gaithersburg, MD (3) renewal options total cost to purchase second lease year, 7% of
(the "SpringHill Suites the property revenues in excess of revenues
Gaithersburg Property") for the second lease year
Hotel under construction
TownePlace Suites by Marriott $13,600,000 15 years; two ten-year 10% of the Company's for each lease year after the
Newark, CA (3) (4) renewal options total cost to purchase second lease year, 7% of
(the "TownePlace Suites the property revenues in excess of revenues
Newark Property") for the second lease year
Hotel under construction
</TABLE>
-15-
<PAGE>
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 leases for the Residence Inn Merrifield, the SpringHill Suites
Gaithersburg and the TownePlace Suites Newark Properties are expected
to be with the same unaffiliated lessee.
(4) The Company may be obligated to fund up to an additional $1 million in
construction costs relating to this property.
-16-
<PAGE>
Little Lake Bryan Properties. 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
by Marriott (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 Sea World(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:
ORLANDO AREA HOTEL OCCUPANCY RATES
AND AVERAGE DAILY ROOM RATES
<TABLE>
<CAPTION>
ORLANDO LAKE BUENA VISTA*
AVERAGE AVERAGE
OCCUPANCY DAILY ROOM OCCUPANCY DAILY ROOM
YEAR RATE RATE RATE RATE
- -------------- ------------------- --------------------- ------------------ ------------------
<S> <C>
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 Sea World(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.
-17-
<PAGE>
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
Merrifield Property. The Merrifield Property, which is scheduled to
open in June 2000, is a Residence Inn by Marriott located in Merrifield,
Virginia. The Merrifield Property is expected to include 149 guest suites,
approximately 500 square feet of meeting space, an exercise room and
SportCourt(R). The Property is located in Fairfax County, and according to HVS
data, it is one of the fastest-growing areas in the Washington D.C. area. The
hotel's specific location is within Jefferson Park, the site of the national
headquarters for the American Red Cross. The office park is currently under
expansion with the construction of two 208,000-square-foot buildings that will
house additional Red Cross employees. Jefferson Park is also expanding with a
new residential development of approximately 48 townhomes with an average price
of approximately $275,000 per unit. The area surrounding the hotel site is
comprised of commercial, retail, residential and office developments. The
Yorktowne Center, a commercial/retail development, is to the immediate west of
the property. Eight Merrifield community shopping centers are within a radius of
eight miles from the Residence Inn. The Galleria mall, located just five miles
from the hotel, contains approximately one million square feet of retail space
and features major retail department stores, jewelry stores and boutiques.
Located approximately 12 miles northwest of the nation's capital, the hotel is
within driving distance of the legislative, judicial and executive branches of
the United States government.
Gaithersburg Property. The Gaithersburg Property, which is scheduled to
open in June 2000, is a SpringHill Suites by Marriott located in Gaithersburg,
Maryland. The Gaithersburg Property is expected to include 162 guest suites and
approximately 500 square feet of meeting space. The hotel is a few hundred yards
south of a fully leased office, retail, dining and entertainment complex called
Gaithersburg Washingtonian Center (Rio Center), which features retail outlets,
restaurants and entertainment. Another prominent office complex, the Avenel
Business Park, is less than three miles from the hotel. Avenel Business Park
houses a number of major companies and is 96% leased with plans for a
177,000-square-foot expansion in 2000. The National Institute of Standards of
Technology (NIST), a federal government technology research facility, is just
four miles north of the SpringHill Suites property. In addition, the property is
located approximately 15 miles northwest of the nation's capital.
Newark Property. The Newark Property, which is scheduled to open in
June 2000, is a TownePlace Suites by Marriott located in Newark, California,
near Silicon Valley. The Newark Property is expected to resemble a garden
apartment complex and include 127 guest suites. According to HVS data, Silicon
Valley is home to more than 33% of the 100 largest technology firms launched
since 1965 and currently boasts 11% of the nation's high-technology jobs. In
1998 alone, more than 50,000 new jobs were created in the area. Due to this high
concentration of high-technology employment, personal wealth levels in the area
are 21.2% higher than the national average. The Silicon Valley area is home to a
number of Fortune 500 high technology companies. One major high technology firm,
located just three miles from the hotel, recently completed a 1.1 million
square-foot expansion for its worldwide training facility and has broken ground
on an 800,000-square-foot research and development site. Additional business
growth within 3.5 miles includes the expansion of the Ardenwood Business Park
and the Baypoint Center Technology Park, a 500,000-square-foot research and
-18-
<PAGE>
development property. The property is readily accessible by a variety of local
and county roadways, as well as some state highways. The San Jose International
Airport is located approximately 14 miles south of the hotel and the Oakland
International Airport is approximately 18 miles north of the property.
Marriott Brands. Fairfield Inn by Marriott is a lower moderate-priced
hotel appealing to the business and leisure traveler. Fairfield Inn by Marriott
provides clean, convenient, quality accommodations and friendly hospitality at
an economical price. All Fairfield Inn by Marriott hotels feature a
complimentary continental breakfast, free local calls, large, well-lit work
desks and an outdoor swimming pool. According to Marriott data, as of September
1999, there were more than 400 Fairfield Inn by Marriott hotels nationwide.
SpringHill Suites by Marriott is Marriott's new, all-suite hotel in the
upper-moderate tier. SpringHill Suites by Marriott appeals to both business and
leisure travelers, especially women and families, with rooms that are up to 25
percent larger than comparable hotel rooms. Average stays range from one to five
nights. All SpringHill Suites by Marriott hotels feature a complimentary
continental breakfast, same-day dry-cleaning service, indoor swimming pool,
whirlpool spa and exercise room. According to Marriott data, as of September
1999, SpringHill Suites by Marriott had 30 hotels and was projected to grow to
32 hotels by year-end 1999 and 125 properties over the next five years with
locations throughout the United States.
TownePlace Suites by Marriott is Marriott's mid-priced, extended-stay
product accommodating practical travelers seeking home-like services and
amenities. All TownePlace Suites by Marriott hotels feature fully equipped
kitchens, an exercise room and an outdoor swimming pool. Guest suites offer
separate living and working areas, two-line telephones with data port and
premium television and movie channels. According to Marriott data, as of
September 1999, there were 48 TownePlace Suites by Marriott. Marriott expects
this brand to reach 130 hotels in 2000.
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
-19-
<PAGE>
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>
Nine Months Ended
September 30, 1999 September 30, 1998 Year Ended December 31,
(Unaudited) (Unaudited)
1998 1997 (1) 1996 (2)
------------------- -------------------- ------------- ------------ ----------
<S> <C>
Revenues $6,402,130 $1,026,740 $1,955,461 $ 46,071 $ --
Net earnings 4,314,045 583,842 958,939 22,852 --
Cash distributions declared (3) 6,331,072 619,131 1,168,145 29,776 --
Funds from operations (4) 6,129,738 737,508 1,343,105 22,852 --
Earnings per Share:
Basic 0.34 0.28 0.40 0.03 --
Diluted 0.33 0.28 0.40 0.03 --
Cash distributions declared per
Share 0.54 0.29 0.46 0.05 --
Weighted average number of
Shares outstanding (5):
Basic 12,652,059 2,082,845 2,402,344 686,063
Diluted 17,509,791 2,082,845 2,402,344 686,063
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998 December 31,
(Unaudited) (Unaudited)
1998 1997 1996
------------------- -------------------- ------------- ------------ ----------
<S> <C>
Total assets $198,384,857 $36,387,230 $48,856,690 $9,443,476 $598,190
Total stockholders' equity 196,460,350 24,567,655 37,116,491 9,233,917 200,000
</TABLE>
(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 32%, 6%, 18% and 23% of cash distributions for the nine
months ended September 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
consolidated 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.
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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
Readiness 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. These statements generally are
characterized by the use of terms such as "believe", "expect" and "may."
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, availability of capital from borrowings
under the Company's Line of Credit and security agreement, 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. Given
these uncertainties, readers are cautioned not to place undue reliance on such
statements.
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. 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
COMMON STOCK OFFERINGS
The Company was formed in June 1996, at which time it received initial
capital contributions from the Advisor of $200,000 for 20,000 Shares of Common
Stock. 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 September 30, 1999, the Company had received subscriptions for 7,324,841
Shares totalling $73,248,406 in Gross Proceeds from this offering, including
$232,466 (23,246 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 September 30, 1999, net proceeds to the Company from its Initial
Offering and this offering of Shares and capital contributions from the Advisor,
after deduction of Selling Commissions, marketing support and due diligence
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expense reimbursement fees and Organizational and Offering Expenses totalled
approximately $199,000,000. The Company had used net proceeds from the offerings
to invest, directly or indirectly, approximately $63,100,000 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
$11,300,000 in Acquisition Fees and certain Acquisition Expenses, leaving
approximately $118,000,000 as of September 30, 1999, available for investment in
Properties and Mortgage Loans.
On October 26, 1999, the Company filed a registration statement on Form
S-11 with the Securities and Exchange Commission in connection with the proposed
sale by the Company of up to an additional 45,000,000 Shares of Common Stock
($450,000,000) (the "2000 Offering") in an offering expected to commence
immediately following the completion of this offering. Of the 45,000,000 Shares
of Common Stock expected to be offered, up to 5,000,000 Shares are expected to
be available to stockholders purchasing shares through the Reinvestment Plan.
The price per Share and the other terms of the 2000 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 expected to be substantially the same as those for the
Initial Offering and this offering.
As of January 7, 2000, the Company had received aggregate subscriptions
for 29,217,898 Shares totalling $292,178,981 in Gross Proceeds from its Initial
Offering and this offering, including 50,392 Shares totalling $503,917 through
the Reinvestment Plan. As of January 7, 2000, 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 $262,100,000. The Company has used net proceeds from the offerings
to invest, directly or indirectly, approximately $135,700,000 in 11 hotel
Properties, to pay $6,600,000 as deposits on five additional hotel Properties,
to redeem 12,885 Shares of Common Stock for $118,542 and to pay approximately
$14,300,000 in Acquisition Fees and certain Acquisition Expenses, leaving
approximately $105,200,000 available for investment in Properties and Mortgage
Loans. See "Business -- Pending Investments" for information on four Properties
the Company has entered into commitments to acquire.
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, 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. The Line of Credit may
be repaid with offering proceeds, working capital or Permanent Financing. 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.
LINE OF CREDIT AND SECURITY AGREEMENT
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
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. In connection with the Line
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of Credit, the Company incurred a commitment fee, legal fees and closing costs
of approximately $94,000. The proceeds from the Line of Credit were used in
connection with the purchase of two hotel Properties and the commitment to
acquire three additional Properties. As of September 30, 1999, the Company has
no amounts outstanding under the Line of Credit. The Company had 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.
INTEREST RATE RISK
The Company may be subject to interest rate risk through any
outstanding balances on its variable rate Line of Credit. The Company may
mitigate this risk by paying down any outstanding balances on the Line of Credit
from offering proceeds should interest rates rise substantially.
PROPERTY ACQUISITIONS AND INVESTMENTS
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 Properties. At the time the agreement was entered into, the eight
Properties (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.
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 Properties. The Initial Hotels were a
Courtyard by Marriott located in Plano, Texas, a Marriott Suites located in
Dallas, Texas, a Residence Inn by Marriott located in Las Vegas, Nevada and a
Residence Inn by Marriott located in Plano, Texas. On June 16, 1999, Hotel
Investors purchased three Additional Hotels for an aggregate purchase price of
approximately $77 million. The Additional Hotels were a Courtyard by Marriott
located in Scottsdale, Arizona, a Courtyard by Marriott located in Seattle,
Washington and a 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. The $3 million deposit relating to the eighth Property
was refunded to Hotel Investors by the seller in January 2000 as a result of
Hotel Investors exercising its option to terminate its obligation to purchase
the Property under the purchase and sale agreement.
In order to fund these purchases, Five Arrows invested approximately
$48 million and the Company invested approximately $38 million in Hotel
Investors, through a wholly owned subsidiary, Hospitality Partners. Hotel
Investors funded the remaining amount of approximately $88 million with
permanent financing, collateralized by the Hotel Investors Loan.
In return for their respective investments, Five Arrows received a 51%
common stock interest and the Company received a 49% common stock interest in
Hotel Investors. Five Arrows received 48,337 shares of Class A Preferred Stock,
and the Company received 37,979 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 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.
Cash available for distributions 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 approximately $14 million investment in the Company,
described below, on a per share basis, adjusted for any distributions received
from the Company. Cash available for distributions is distributed to the Company
with respect to its Class B Preferred Stock. Next, cash available for
distributions
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is distributed to 100 CNL Holdings, Inc. and affiliates' 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 available for distributions
is distributed pro rata with respect to the interest in the common shares.
Five Arrows also invested approximately $14 million in the Company
through the purchase of Common Stock pursuant to the Company's Initial Offering
and this offering, the proceeds of which were used by the Company to fund
approximately 38% of its funding commitment to Hotel Investors. During 1999,
approximately $3.7 million of this amount was initially treated as a loan due to
the stock ownership limitations specified in the Company's Articles of
Incorporation at the time of investment. On April 30, 1999, this loan was
converted to 387,868 Shares of Common Stock. In addition to the above
investments, Five Arrows purchased a 10% interest in the Advisor. In connection
with Five Arrows' investment in the Company, the Advisor and Hotel Investors,
certain Affiliates have agreed to waive certain fees otherwise payable to them
by the Company. The Advisor is also the advisor to Hotel Investors pursuant to a
separate advisory agreement. The Company will not 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.
On November 16, 1999, the Company acquired an 89% interest in the LLC
for approximately $58 million. The sole purpose of the LLC is to own and lease
the Courtyard by Marriott hotel Property located in Philadelphia, Pennsylvania.
This historic Property was recently renovated and converted into a hotel which
commenced operations in late November 1999. In addition, on December 10, 1999,
the Company acquired a newly constructed Property located in Mira Mesa,
California, for approximately $15.6 million. The Property is being operated by
the tenant as a Residence Inn by Marriott.
Hotel Investors, the LLC and the Company, as lessors, have entered into
long-term, triple-net leases with operators of Hotel Chains, as described below
in "Liquidity Requirements."
CAPITAL COMMITMENTS
As of January 7, 2000, the Company had initial commitments to acquire,
directly or indirectly, six 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 has a
deposit, in the form of a letter of credit, collateralized by a certificate of
deposit, amounting to $5 million. In connection with two of the remaining
agreements, the Company has a deposit of approximately $1.6 million held in
escrow. 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 January 7, 2000, 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 January 7, 2000, the Company had not acquired
any such Properties or entered into any Mortgage Loans.
CASH AND CASH EQUIVALENTS
Until Properties are acquired, or Mortgage Loans are entered into, Net
Offering Proceeds are held in short-term (defined as investments with a maturity
of three months or less), highly liquid investments, such as demand deposit
accounts at commercial banks, certificates of deposit and money market accounts.
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 September 30,
1999, the Company had $118,019,624 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 is primarily attributable to proceeds
received from the sale of Shares of Common Stock. These funds will be used to
purchase additional Properties and make Mortgage Loans, to pay Offering Expenses
and Acquisition Expenses, to pay Distributions to stockholders and other Company
expenses and, in management's discretion, to create cash reserves.
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LIQUIDITY REQUIREMENTS
The Company expects to meet its short-term liquidity requirements,
other than for offering expenses, acquisition and development of Properties and
investment in Mortgage Loans and Secured Equipment Leases, through cash flow
provided by operating activities. The Company believes that cash flow provided
by operating activities will be sufficient to fund normal recurring Operating
Expenses, regular debt service requirements and Distributions to stockholders.
To the extent that the Company's cash flow provided by operating activities is
not sufficient to meet such short-term liquidity requirements as a result, for
example, of unforeseen expenses due to tenants defaulting under the terms of
their lease agreements, the Company will use borrowings under its Line of
Credit.
Due to the fact that the Company leases its Properties on a triple-net
basis, meaning that tenants are generally required to pay all repairs and
maintenance, property taxes, insurance and utilities, management does not
believe that working capital reserves are necessary at this time. Management
believes that the Properties are adequately covered by insurance. In addition,
the Advisor has obtained contingent liability and property 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 Company expects to meet its other short-term liquidity
requirements, including payment of offering expenses, Property acquisitions and
development and investment in Mortgage Loans and Secured Equipment Leases, with
additional advances under its Line of Credit and proceeds from its offerings.
The Company expects to meet its long-term liquidity requirements
through short or long-term, unsecured or secured debt financing or equity
financing.
DISTRIBUTIONS
During the nine months ended September 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 $4,642,118 and $2,047,046, respectively. Based on current and
anticipated future cash from operations and dividends due to the Company from
Hotel Investors at September 30, 1999 (and received in October 1999), the
Company declared and paid Distributions to its stockholders of $6,331,072 and
$619,131 during the nine months ended September 30, 1999 and 1998, respectively.
In addition, on October 1, November 1, and December 1, 1999, the Company
declared Distributions to stockholders of record on October 1, November 1, and
December 1, 1999, totalling $1,352,274, $1,468,292 and $1,615,415, respectively
($0.0604 per Share), payable in December 1999. On January 1, 2000, the Company
declared Distributions to stockholders of record on January 1, 2000, totalling
$1,745,931 ($0.0604 per Share), payable in March 2000. For the nine months ended
September 30, 1999 and 1998, approximately 73 percent and 94 percent,
respectively, of the Distributions received by stockholders were considered to
be ordinary income and approximately 27 percent and 6 percent, respectively, was
considered a return of capital for federal income tax purposes. The
characterization for tax purposes of Distributions declared for the nine months
ended September 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 January 7, 2000, 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.
AMOUNTS DUE TO RELATED PARTIES
During the nine months ended September 30, 1999 and 1998, Affiliates of
the Company incurred on behalf of the Company $2,387,955 and $158,184,
respectively, for certain Organizational and Offering Expenses, $530,233 and
$220,575, respectively, for certain Acquisition Expenses and $285,847 and
$64,422, respectively, for certain Operating Expenses. As of September 30, 1999
and December 31, 1998, the Company owed the Advisor $307,977 and $318,937,
respectively, for expenditures incurred on behalf of the Company and for
Acquisition Fees. The Advisor has agreed to pay or reimburse to the Company all
Offering Expenses in excess of three percent of gross offering proceeds.
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RESULTS OF OPERATIONS
REVENUES
As of September 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 Properties directly or
indirectly owned by the Company at September 30, 1999, have been reported as
additional rent.
During the nine months ended September 30, 1999 and 1998, the Company
earned rental income of $2,255,968 and $487,400, respectively, from the two
wholly owned Properties ($769,422 and $487,400 of which was earned during the
quarters ended September 30, 1999 and 1998, respectively). Contingent rental
income of $38,342 and $62,688 was earned for the quarter and nine months ended
September 30, 1999, respectively. No contingent rental income was earned for the
nine months ended September 30, 1998. The Company also earned $194,301 and
$41,099 in FF&E Reserve income during the nine months ended September 30, 1999
and 1998, respectively ($68,268 and $41,099 of which was earned during the
quarters ended September 30, 1999 and 1998, respectively). The increase in
rental income, contingent rental income and FF&E Reserve income is due to the
fact that the Company owned its two wholly owned Properties for the full nine
months ended September 30, 1999, as compared to approximately three months
during the nine months ended September 30, 1998. Because the Company has not yet
acquired all of its Properties, revenues for the nine months ended September
30, 1999, represent only a portion of revenues which the Company is expected to
earn in future periods.
During the nine months ended September 30, 1999, the Company acquired
and leased seven Properties indirectly through its investment in Hotel
Investors, as described above in "Liquidity and Capital Resources -- Property
Acquisitions and Investments." In connection with its investment, during the
quarter and nine months ended September 30, 1999, the Company recognized
$926,687 and $1,826,818, respectively, in dividend income and $167,283 and
$557,733, respectively, in equity in loss after deduction of preferred stock
dividends, resulting in net earnings attributable to this investment of $759,404
and $1,269,085, respectively.
During the nine months ended September 30, 1999 and 1998, the Company
also earned $2,125,043 and $498,241, respectively, in interest income from
investments in money market accounts and other short-term, highly liquid
investments and other income ($1,217,304 and $127,082 of which was earned during
the quarters ended September 30, 1999 and 1998, respectively). The increase in
interest income during the nine months ended September 30, 1999, as compared to
the nine months ended September 30, 1998, was attributable to the receipt of
offering proceeds being 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.
SIGNIFICANT TENANTS
During the nine months ended September 30, 1999, two lessees, STC
Leasing Associates, LLC (which operates and leases the two Properties) 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). In addition, all of the Company's rental income
(including the Company's share of total rental income from Hotel Investors) was
earned from Properties operating as Marriott(R) brand chains. Although
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the Company intends to acquire additional 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(R) 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 2000 and subsequent years.
EXPENSES
Operating expenses, including interest expense and depreciation and
amortization expense, were $1,530.352 and $442,898 for the nine months ended
September 30, 1999 and 1998, respectively ($392,902 and $273,712 of which were
incurred for the quarters ended September 30, 1999 and 1998, respectively).
Total operating expenses were greater due to the fact that the Company owned its
two wholly owned Properties for the full nine months ended September 30, 1999,
as compared to approximately three months during the nine months ended September
30, 1998. Asset Management Fees and depreciation and amortization expenses are
expected to increase as the Company acquires additional Properties and invests
in Mortgage Loans.
OTHER
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 nine months ended
September 30, 1999, revenues relating to the FF&E Reserve of the Properties
directly owned by the Company totalled $194,301, and indirectly owned through
Hotel Investors totalled $257,259. 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.
YEAR 2000 READINESS DISCLOSURE
OVERVIEW OF YEAR 2000 COMPLIANCE ISSUES
The year 2000 compliance issues concern the ability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
READINESS STATUS
The Advisor and its Affiliates generally provide all services requiring
the use of information and some non-information technology systems pursuant to
an Advisory Agreement with the Company. The Company generally does not directly
own information technology systems. The non-information technology systems of
the Advisor, its Affiliates and the Company are primarily facility related and
include hotel and building security systems, elevators, fire suppressions, HVAC,
electrical systems and other utilities. In early 1998, Affiliates of the Advisor
formed a year 2000 committee (the "Y2K Team") that assessed the readiness of any
systems that were date sensitive and competed upgrades for the hardware
equipment and software that was not year 2000 compliant, as necessary. The cost
for these upgrades and other remedial measures was the responsibility of the
Advisor and its Affiliates. The Company has not incurred, and the Advisor and
its Affiliates do not expect that the Company will incur, any costs in
connection with the year 2000 remedial measures. In addition, the Y2K team
requested and received certifications of compliance from other companies with
which the Advisor, its Affiliates, and the Company have material third party
relationships.
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<PAGE>
In assessing the risks presented by the year 2000 compliance issues,
the Y2K Team identified potential worst case scenarios involving the failure of
the information and non-information technology systems used by the Company's
transfer agent, financial institutions and tenants. As of January 7, 2000, the
Company did not experience material disruption or other significant problems in
its information and non-information technology systems. In addition, as of the
same date, the Advisor is not aware of any material year 2000 compliance issues
relating to information and non-information technology systems of third parties
with which the Company maintains material relationships, including those of the
Company's transfer agent, financial institutions and tenants. Additionally, the
Company's interactions with the systems of its transfer agent, financial
institutions and tenants, have functioned normally. Until the Company's first
distribution in 2000 and the delivery of the information by the transfer agent
to stockholders in early 2000, the Advisor will continue to monitor the year
2000 compliance of the transfer agent. In addition, the Advisor continues to
monitor the systems used by the Company and to maintain contact with third
parties with which the Company has material relationships with respect to year
2000 compliance and any year 2000 issues that may arise at a later date. The
Advisor will develop contingency plans relating to ongoing year 2000 issues at
the time that such issues are identified and such plans are deemed necessary.
Based on the information provided to the Y2K team, the upgrade and
remedial measures by the Advisor and its Affiliates, and the normal functioning
to date of information and non-information technology systems used by the
Company and those third parties, the Advisor does not foresee significant risks
associated with its year 2000 compliance at this time. In addition, the Advisor
and its Affiliates do not expect to incur any additional costs in connection
with the year 2000 compliance efforts. However there can be no assurance that
the Advisor and its Affiliates or any third parties will not have ongoing year
2000 compliance issues that may have adverse effects on the Company.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following information updates and replaces the "Directors and
Executive Officers" section of the Prospectus.
The Directors and executive officers of the Company are listed below:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C>
James M. Seneff, Jr. 53 Director, Chairman of the Board, and Chief Executive Officer
Robert A. Bourne 52 Director, Vice Chairman of the Board, and President
Matthew W. Kaplan 37 Director
Charles E. Adams 37 Independent Director
Lawrence A. Dustin 54 Independent Director
John A. Griswold 51 Independent Director
Craig M. McAllaster 48 Independent Director
Charles A. Muller 41 Chief Operating Officer and Executive Vice President
C. Brian Strickland 37 Vice President of Finance and Administration
Jeanne A. Wall 41 Executive Vice President
Lynn E. Rose 51 Secretary and Treasurer
</TABLE>
James M. Seneff, Jr. Director, Chairman of the Board and Chief Executive
Officer. Since 1971, Mr. Seneff has been active in the acquisition, development,
and management of real estate projects and, directly or through an affiliated
entity, has served as a general partner or co-venturer in over 100 real estate
ventures. These ventures have involved the financing, acquisition, construction,
and leasing of restaurants, office buildings, apartment complexes, hotels, and
other real estate. Mr. Seneff is a principal stockholder of CNL Holdings, Inc.,
the parent company of CNL Financial Group, Inc. (formerly CNL Group, Inc.), a
diversified real estate company, and has served as a director, Chairman of the
Board and Chief Executive
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<PAGE>
Officer of CNL Financial Group, Inc. since its formation in 1980. CNL Financial
Group, Inc. is the parent company of CNL Real Estate Services, Inc., and the
parent company of CNL Hospitality Corp., the Advisor; and of CNL Capital
Markets, Inc., the parent company of CNL Investment Company. CNL Investment
Company is the parent company of CNL Securities Corp., the Managing Dealer in
this offering. Mr. Seneff currently serves as a director, Chairman of the Board
and Chief Executive Officer of CNL Hospitality Corp., the Advisor to the
Company. He also serves as a director, Chairman of the Board and Chief Executive
Officer of CNL Health Care Properties, Inc., a public, unlisted real estate
investment trust, as well as CNL Health Care Corp., its advisor. Since 1992, Mr.
Seneff has served as Chairman of the Board and Chief Executive Officer of
Commercial Net Lease Realty, Inc., a public real estate investment trust that is
listed on the New York Stock Exchange. In addition, he has served as a director
and Chairman of the Board since inception in 1994, and served as Chief Executive
Officer from 1994 through September 1999, of CNL American Properties Fund, Inc.,
a public, unlisted real estate investment trust. He also served as a director,
Chairman of the Board and Chief Executive Officer of CNL Fund Advisors, Inc.,
the advisor to CNL American Properties Fund, Inc. until it merged with the
company in September 1999. Mr. Seneff has also served as a director, Chairman of
the Board and Chief Executive Officer of the following affiliated companies
since formation: CNL Securities Corp., since 1979; CNL Investment Company, since
1990; and CNL Institutional Advisors, a registered investment advisor for
pension plans, since 1990. Mr. Seneff formerly served as a director of First
Union National Bank of Florida, N.A., and currently serves as the Chairman of
the Board of CNLBank. Mr. Seneff served on the Florida State Commission on
Ethics and is a former member and past Chairman of the State of Florida
Investment Advisory Council, which recommends to the Florida Board of
Administration investments for various Florida employee retirement funds. The
Florida Board of Administration is Florida's principal investment advisory and
money management agency and oversees the investment of more than $60 billion of
retirement funds. Mr. Seneff received his degree in Business Administration from
Florida State University in 1968.
Robert A. Bourne. Director, Vice Chairman of the Board and President. Since
joining CNL Securities Corp. in 1979, Mr. Bourne has participated as a general
partner or co-venturer in over 100 real estate ventures involved in the
financing, acquisition, construction, and leasing of restaurants, office
buildings, apartment complexes, hotels, and other real estate. Mr. Bourne is the
President and Treasurer of CNL Financial Group, Inc. (formerly CNL Group,
Inc.). He is also a director, Vice Chairman of the Board and President of CNL
Hospitality Corp., the Advisor to the Company. Mr. Bourne is a director and
President of CNL Health Care Properties, Inc., a public, unlisted real estate
investment trust; as well as a director and President of CNL Health Care Corp.,
its advisor. Mr. Bourne also serves as a director of CNLBank. He has served as a
director since 1992, Vice Chairman of the Board since February 1996, Secretary
and Treasurer from February 1996 through 1997, and President from July 1992
through February 1996, of Commercial Net Lease Realty Inc., a public real estate
investment trust listed on the New York Stock Exchange. Mr. Bourne has served as
a director since inception in 1994, President from 1994 through February 1999,
Treasurer from February 1999 through August 1999, and Vice Chairman of the Board
since February 1999 of CNL American Properties Fund, Inc., a public, unlisted
real estate investment trust. He also served in the following positions for CNL
Fund Advisors, Inc., the advisor to CNL American Properties Fund, Inc. prior to
its merger with the company: director from 1994 through August 1999, Treasurer
from July 1998 through August 1999, President from 1994 through September 1997,
and Vice Chairman of the Board from September 1997 through August 1999. Mr.
Bourne holds the following positions for these affiliates of CNL Financial
Group, Inc.: director, President and Treasurer of CNL Investment Company;
director, President, Treasurer, and Registered Principal of CNL Securities
Corp., a subsidiary of CNL Investment Company and the Managing Dealer for this
offering; and director, President, Treasurer, and Chief Investment Officer of
CNL Institutional Advisors, Inc., a registered investment advisor for pension
plans. Mr. Bourne began his career as a certified public accountant employed by
Coopers & Lybrand, Certified Public Accountants, from 1971 through 1978, where
he attained the position of tax manager in 1975. Mr. Bourne graduated from
Florida State University in 1970 where he received a B.A. in Accounting, with
honors.
Matthew W. Kaplan. Director. Mr. Kaplan serves as a director of the Advisor
and Hotel Investors. Mr. Kaplan is a managing director of Rothschild Realty Inc.
where he has served since 1992, and where he is responsible for securities
investment activities including acting as portfolio manager of Five Arrows
Realty Securities LLC, a $900 million private investment fund. Mr. Kaplan has
been a director a WNY Group, Inc., a private corporation, since 1999. From 1990
to 1992, Mr. Kaplan served in the corporate finance department of
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<PAGE>
Rothschild Inc., an affiliate of Rothschild Realty Inc. Mr. Kaplan served as a
director of Ambassador Apartments Inc. from August 1996 through May 1998 and is
a member of the Urban Land Institute. Mr. Kaplan received a B.A. with honors
from Washington University in 1984 and a M.B.A. from the Wharton School of
Finance and Commerce at the University of Pennsylvania in 1988.
Charles E. Adams. Independent Director. Mr. Adams is the president and a
founding principal with Celebration Associates, Inc., a real estate advisory and
development firm with offices in Celebration, Florida and Charlotte, North
Carolina. Celebration Associates specializes in large-scale master-planned
communities, seniors' housing and specialty commercial developments. Mr. Adams
joined The Walt Disney Company in 1990 and from 1996 until May 1997 served as
vice president of community business development for The Celebration Company and
Walt Disney Imagineering. He was responsible for Celebration Education,
Celebration Network, Celebration Health, and Celebration Foundation, as well as
new business development, strategic alliances, retail sales and leasing,
commercial sales and leasing, the development of Little Lake Bryan and
Celebration. Previously, Mr. Adams was responsible for the initial residential,
amenity, sales and marketing, consumer research and master planning efforts for
Celebration. Additionally, Mr. Adams participated in the planning for
residential development at EuroDisney in Paris, France. He was a founding member
of the Celebration School Board of Trustees and served as president and founding
member of the Celebration Foundation Board of Directors. Mr. Adams is a founding
member of the Health Magic Steering Committee and council member on the
Recreation Development Council for the Urban Land Institute. Before joining The
Walt Disney Company in 1990, Mr. Adams worked with Trammell Crow Residential
developing luxury apartment communities in the Orlando and Jacksonville, Florida
areas. Mr. Adams received a B.A. from Northeast Louisiana University in 1984 and
a M.B.A. from Harvard Graduate School of Business in 1989.
Lawrence A. Dustin. Independent Director. Mr. Dustin is president of the
lodging division of Travel Services, Inc., a specialized distributor of leisure
travel products and services. Mr. Dustin was a principal of BBT, an advisory
company specializing in hotel operations, marketing and development, from
September 1998 to August 1999. Mr. Dustin has over 30 years of experience in the
hospitality industry. From 1994 to September 1998, Mr. Dustin served as senior
vice president of lodging of Universal Studios Recreation Group, where he was
responsible for matters related to hotel development, marketing, operations and
management. Mr. Dustin supervised the overall process of developing the five
highly themed hotels and related recreational amenities within Universal Studios
Escape and provided guidance for hotel projects in Universal City, California,
Japan, and Singapore. From 1989 to 1994, Mr. Dustin served as a shareholder,
chief executive officer, and director of AspenCrest Hospitality, Inc., a
professional services firm which helped hotel owners enhance both the operating
performance and asset value of their properties. From 1969 to 1989, Mr. Dustin
held various positions in the hotel industry, including 14 years in management
with Westin Hotels & Resorts. Mr. Dustin received a B.A. from Michigan State
University in 1968.
John A. Griswold. Independent Director. Mr. Griswold serves as president of
Tishman Hotel Corporation, an operating unit of Tishman Realty & Construction
Co., Inc., founded in 1898. Tishman Hotel Corporation is a hotel developer,
owner and operator, and has provided such services for more than 85 hotels,
totalling more than 30,000 rooms. Mr. Griswold joined Tishman Hotel Corporation
in 1985. From 1981 to 1985, Mr. Griswold served as general manager of the Buena
Vista Palace Hotel in The Walt Disney World Village. From 1978 to 1981, he
served as vice president and general manager of the Homestead Resort, a luxury
condominium resort in Glen Arbor, Michigan. Mr. Griswold served as an operations
manager for The Walt Disney Company from 1971 to 1978. He was responsible for
operational, financial and future planning for multi-unit dining facilities in
Walt Disney World Village and Lake Buena Vista Country Club. He is a member of
the board of directors of the Florida Hotel & Motel Association, Orlando/Orange
County Convention & Visitors Bureau, Inc. and the First Orlando Foundation. Mr.
Griswold received a B.S. from the School of Hotel Administration at Cornell
University in Ithaca, New York.
Craig M. McAllaster. Independent Director. Dr. McAllaster has served as
director of the executive MBA program at the Roy E. Crummer Graduate School of
Business at Rollins College since 1994. Besides his duties as director, he is on
the management faculty and serves as executive director of the international
consulting practicum programs at the Crummer School. Prior to Rollins College,
Dr. McAllaster was on the faculty at the School of Industrial and Labor
Relations and the Johnson Graduate School of Management, both
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<PAGE>
at Cornell University, and the University of Central Florida. Dr. McAllaster
spent over ten years in the consumer services and electronics industry in
management, organizational and executive development positions. He is a
consultant to many domestic and international companies in the areas of strategy
and leadership. Dr. McAllaster received a B.S. from the University of Arizona in
1973, a M.S. from Alfred University in 1981 and a M.A. and Doctorate from
Columbia University in 1987.
Charles A. Muller. Chief Operating Officer and Executive Vice President.
Mr. Muller joined CNL Hospitality Corp. in October 1996 and is responsible for
the planning and implementation of CNL's interest in hotel industry investments,
including acquisitions, development, project analysis and due diligence. He
currently serves as the Chief Operating Officer and Executive Vice President of
CNL Hospitality Corp., the Advisor, and Executive Vice President of CNL Hotel
Development Company. Mr. Muller joined CNL following more than 15 years of
broadbased hotel industry experience with firms such as Tishman Hotel
Corporation, Wyndham Hotels & Resorts, Pannell Kerr Forster and AIRCOA
Hospitality Services. Mr. Muller's background includes responsibility for market
review and valuation efforts, property acquisitions and development, capital
improvement planning, hotel operations and project management for renovations
and new construction. Mr. Muller served on the former Market, Finance and
Investment Analysis Committee of the American Hotel & Motel Association and is a
founding member of the Lodging Industry Investment Council. He holds a
bachelor's degree in Hotel Administration from Cornell University.
C. Brian Strickland. Vice President of Finance and Administration. Mr.
Strickland currently serves as Senior Vice President of Finance and
Administration of CNL Hospitality Corp., the Advisor, and CNL Hotel Development
Company. Mr. Strickland supervises the companies' financial reporting, financial
control and accounting functions as well as the forecasting, budgeting and cash
management activities. He is also responsible for SEC compliance, equity and
debt financing activities and insurance for the companies. Mr. Strickland joined
CNL Hospitality Corp. in April 1998 with extensive accounting background. Prior
to joining CNL, he served as vice president of taxation with Patriot American
Hospitality, Inc., where he was responsible for implementation of tax planning
strategies on corporate mergers and acquisitions and where he performed or
assisted in strategic processes in the REIT industry. From 1989 to 1997, Mr.
Strickland served as a director of tax and asset management for Wyndham Hotels &
Resorts where he was integrally involved in structuring acquisitive
transactions, including the consolidation and initial public offering of Wyndham
Hotel Corporation and its subsequent merger with Patriot American Hospitality,
Inc. In his capacity of director of asset management, he was instrumental in the
development and opening of a hotel and casino in San Juan, Puerto Rico. Prior to
1989, Mr. Strickland was senior tax accountant for Trammell Crow Company where
he provided tax consulting services to regional development offices. From 1986
to 1988, Mr. Strickland was tax accountant for Ernst & Whinney where he was a
member of the real estate practice group. Mr. Strickland is a certified public
accountant and holds a bachelor's degree in accounting.
Jeanne A. Wall. Executive Vice President. Ms. Wall serves as Executive Vice
President and a director of CNL Hospitality Corp., the Advisor to the Company.
Ms. Wall also serves as Executive Vice President of CNL Health Care Properties,
Inc., a public, unlisted real estate investment trust, and CNL Health Care
Corp., its advisor. She also serves as a director for CNLBank. Ms. Wall serves
as Executive Vice President of CNL Financial Group, Inc. (formerly CNL Group,
Inc.). Ms. Wall has served as Chief Operating Officer of CNL Investment Company
and of CNL Securities Corp. since 1994 and has served as Executive Vice
President of CNL Investment Company since January 1991. In 1984, Ms. Wall joined
CNL Securities Corp. and in 1985, became Vice President. In 1987, she became a
Senior Vice President and in July 1997, became Executive Vice President of CNL
Securities Corp. In this capacity, Ms. Wall serves as national marketing and
sales director and oversees the national marketing plan for the CNL investment
programs. In addition, Ms. Wall oversees product development, communications and
investor services for programs offered through participating brokers. Ms. Wall
also served as Senior Vice President of CNL Institutional Advisors Inc., a
registered investment advisor, from 1990 to 1993. Ms. Wall served as Vice
President of Commercial Net Lease Realty, Inc., a public real estate investment
trust listed on the New York Stock Exchange, from 1992 through 1997, and served
as Vice President of CNL Realty Advisors, Inc. from its inception in 1991
through 1997. Ms. Wall also served as Executive Vice President of CNL American
Properties Fund, Inc., a public, unlisted real estate investment trust, from
1994 through August 1999, and as Executive Vice President of CNL Fund Advisors,
Inc., its advisor, from 1994 through August 1999, at which point it merged with
CNL American Properties Fund, Inc. Ms. Wall currently serves as a trustee on the
Board
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<PAGE>
of the Investment Program Association, is a member of the Corporate Advisory
Council for the International Association for Financial Planning and is a member
of IWF, International Women's Forum. In addition, she previously served on the
Direct Participation Program committee for the National Association of
Securities Dealers, Inc. Ms. Wall holds a B.A. in Business Administration from
Linfield College and is a registered principal of CNL Securities Corp.
Lynn E. Rose. Secretary and Treasurer. Ms. Rose also serves as
Secretary, Treasurer and a director of CNL Hospitality Corp., the Advisor to the
Company, and as Secretary of the subsidiaries of the Company. Ms. Rose is
Secretary and Treasurer of CNL Health Care Properties, Inc., a public, unlisted
real estate investment trust, and serves as Secretary of its subsidiaries. In
addition, she serves as Secretary, Treasurer and a director of CNL Health Care
Corp., its advisor. Ms. Rose served as Secretary of CNL American Properties
Fund, Inc., a public, unlisted real estate investment trust, from 1994 through
August 1999, and served as Treasurer from 1994 through February 1999. She also
served as Treasurer of CNL Fund Advisors, Inc., from 1994 through July 1998, and
served as Secretary and a director from 1994 through August 1999, at which point
it merged with CNL American Properties Fund, Inc. Ms. Rose served as Secretary
and Treasurer of Commercial Net Lease Realty, Inc., a public real estate
investment trust listed on the New York Stock Exchange, from 1992 to February
1996, and as Secretary and a director of CNL Realty Advisors, Inc., its advisor,
from its inception in 1991 through 1997. She also served as Treasurer of CNL
Realty Advisors, Inc. from 1991 through February 1996. Ms. Rose, a certified
public accountant, has served as Secretary of CNL Financial Group, Inc.
(formerly CNL Group, Inc.) since 1987, served as Controller from 1987 to 1993
and has served as Chief Financial Officer since 1993. She also serves as
Secretary of the subsidiaries of CNL Financial Group, Inc. and holds various
other offices in the subsidiaries. In addition, she serves as Secretary for
approximately 50 additional corporations affiliated with CNL Financial Group,
Inc. and its subsidiaries. Ms. Rose oversees the tax and legal compliance for
over 375 corporations, partnerships and joint ventures, and the accounting and
financial reporting for over 200 entities. Prior to joining CNL, Ms. Rose was a
partner with Robert A. Bourne in the accounting firm of Bourne & Rose, P.A.,
Certified Public Accountants. Ms. Rose holds a B.A. in Sociology from the
University of Central Florida. She was licensed as a certified public accountant
in 1979.
THE ADVISOR AND THE ADVISORY AGREEMENT
THE ADVISOR
CNL Hospitality Corp. (formerly CNL Hospitality Advisors, Inc.) is a
Florida corporation organized in January 1997 to provide management, advisory
and administrative services. The Company originally entered into the Advisory
Agreement with the Advisor effective July 9, 1997. CNL Hospitality Corp., as
Advisor, has a fiduciary responsibility to the Company and the stockholders.
The directors and executive officers of the Advisor are as follows:
<TABLE>
<S> <C>
James M. Seneff, Jr.....................Chairman of the Board, Chief Executive Officer, and Director
Robert A. Bourne........................Vice Chairman of the Board, President, and Director
Matthew W. Kaplan.......................Director
Charles A. Muller.......................Chief Operating Officer and Executive Vice President
C. Brian Strickland.....................Senior Vice President of Finance and Administration
Jeanne A. Wall..........................Executive Vice President and Director
Lynn E. Rose............................Secretary, Treasurer, and Director
</TABLE>
Management anticipates that any transaction by which the Company would
become self-administered would be submitted to the stockholders for approval.
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<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 in connection with 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 in
connection with the Initial Offering, and during the period June 18, 1999
through January 7, 2000, the Company incurred $10,657,976 of such fees in
connection with 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 in connection
with 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 in connection with the Initial Offering, and
during the period June 18, 1999 through January 7, 2000, the Company incurred
$710,532 of such fees in connection with 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
in connection with the Initial Offering. In addition, during the period January
1, 1999 through June 17, 1999, the Company incurred $4,712,413 of such fees in
connection with the Initial Offering, and during the period June 18, 1999
through January 7, 2000, the Company incurred $6,394,785 of such fees in
connection with 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 nine months ended
September 30, 1999 and the year ended December 31, 1998, the Company incurred
$87,146 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. For the nine
months ended September 30, 1999, and the years ended December 31, 1998 and 1997,
the Company incurred a total of $2,676,528, $644,189 and $192,224, respectively,
for these services, $2,467,852,
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<PAGE>
$494,729 and $185,335, respectively, of such costs representing stock issuance
costs, $0, $9,084 and $0, respectively, representing acquisition related costs
and $208,676, $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.
During 1999, the Company opened three bank accounts in a bank in which
certain officers and directors of the Company serve as directors, and in which
an Affiliate of the Advisor is a stockholder. The terms and conditions offered
by this bank are similar and competitive with terms offered by unrelated banks.
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/or 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 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 as directors and officers of 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 September 30, 1999, the 18 partnerships
and the two unlisted REITs had raised a total of approximately $1.5 billion from
a total of approximately 81,000 investors, and owned interests in approximately
1,400 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.
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<PAGE>
<TABLE>
<CAPTION>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Committed to
Entity Amount (1) Date Closed Shares Sold Investment (2)
- ------ ---------- ----------- ----------- --------------
<S> <C>
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)
CNL Income $30,000,000 October 10, 1996 3,000,000 December 1996
Fund XVII, Ltd. (3,000,000 units)
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
Number of Date 90% of Net
Limited Proceeds Fully
Maximum Partnership Invested or
Name of Offering Units or Committed to
Entity Amount (1) Date Closed Shares Sold Investment (2)
- ------ ---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
CNL Income $35,000,000 February 6, 1998 3,500,000 December 1997
Fund XVIII, Ltd. (3,500,000 units)
CNL American $747,464,413 January 20, 1999 (3) 74,746,441 (3) February 1999 (3)
Properties Fund, (74,746,441 shares)
Inc.
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 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 September 30, 1999, CNL Health Care Properties, Inc. had not yet
acquired any properties.
As of September 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 September 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 September 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).
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.
-36-
<PAGE>
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 September 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 September 30,
1999, regarding property acquisitions by the 18 limited partnerships and the two
unlisted REITs.
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
<S> <C> <C> <C> <C>
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 II, Ltd. family-style IL, IN, KS, LA, MI,
restaurants MN, MO, NC, NM, OH,
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
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
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
<S> <C> <C> <C> <C>
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
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
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
Name of Type of Method of Type of
Entity Property Location Financing Program
- ------ -------- -------- --------- -------
<S> <C> <C> <C> <C>
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 616 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 September 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.
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 July 1994 and June 1999, is included therein.
-39-
<PAGE>
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.
<TABLE>
<CAPTION>
Total Distributions
Month Distributions Per Share
- ----- ------------- --------------
<S> <C> <C>
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 811,246 0.060400
July 1999 964,253 0.060400
August 1999 1,086,760 0.060400
September 1999 1,227,438 0.060400
October 1999 1,351,427 0.060400
November 1999 1,467,967 0.060400
December 1999 1,615,415 0.060400
</TABLE>
In addition, in January 2000, the Company declared Distributions
totalling $1,745,931, (representing $0.0604 per Share), payable in March 2000.
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 (90% in 2001 and thereafter). 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 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
-40-
<PAGE>
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 nine months ended September 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 73%, 76% and 100%,
respectively, of the Distributions declared and paid were considered to be
ordinary income and for the nine months ended September 30, 1999 and the year
ended December 31, 1998, approximately 27% 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 September 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.
FEDERAL INCOME TAX CONSIDERATIONS
TAXATION OF THE COMPANY
New Tax Legislation. On December 17, 1999, President Clinton signed the
Work Incentives Improvement Act of 1999. This law includes several provisions
that pertain to REITs, two of which will affect the Company. First, the
distribution requirement, discussed in the section of the Prospectus entitled
"-- Distribution Requirements," will be reduced so that the Company will be
required to distribute dividends equal to 90% (rather than 95%) of its net
taxable income. Second, another provision will change the method for measuring
whether a lease violates the restriction that rent attributable to personal
property leased in connection with a lease of real property is no more than 15
percent of the total rent received under the lease. Under current law, the
percentage is determined by reference to the adjusted tax bases of the real
property and the personal property; under the recently passed law, the
percentage will be determined by reference to their respective fair market
values. These provisions will be effective beginning in 2001.
DEFINITIONS
"Advisor" means CNL Hospitality Corp. (formerly CNL Hospitality Advisors,
Inc.), a Florida corporation, any successor advisor to the Company, or any
person or entity to which CNL Hospitality Corp. or any successor advisors
subcontracts substantially all of its functions.
"Bank" means SouthTrust Bank, N.A., escrow agent for the offering.
"Initial Offering" means the initial offering of the Company which
commenced on July 9, 1997 and terminated on June 17, 1999, at which time this
offering commenced.
-41-
<PAGE>
ADDENDUM TO
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 September 30, 1999 B-2
Pro Forma Consolidated Statement of Earnings for the nine months
ended September 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
nine months ended September 30, 1999 and the year ended December
31, 1998 B-5
Updated Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 B-10
Condensed Consolidated Statements of Earnings for the quarters and
nine months ended September 30, 1999 and 1998 B-11
Condensed Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 1999 and the year ended December
31, 1998 B-12
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 B-13
Notes to Condensed Consolidated Financial Statements for the quarters
and nine months ended September 30, 1999 and 1998 B-15
<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 $223,321,043 in gross offering proceeds from the sale of
22,332,104 shares of common stock for the period from inception through
September 30, 1999, and the application of such funds to purchase two
properties, to invest in an unconsolidated subsidiary which owned seven
properties as of September 30, 1999, to redeem 3,000 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
$68,637,234 in gross offering proceeds from the sale of 6,863,723 additional
shares for the period October 1, 1999 through January 7, 2000, (iii) the
application of such funds to acquire an 89 percent interest in a limited
liability company, to purchase one property, to place a deposit on two
additional properties, to redeem 2,885 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 September 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 September 30,
1999.
The Unaudited Pro Forma Consolidated Statements of Earnings for the
nine months ended September 30, 1999 and the year ended December 31, 1998,
includes the historical operating results of the properties described in (i) and
(iii) 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 consolidated financial information should not
be viewed as indicative of the Company's financial results or conditions in the
future.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Pro Forma
ASSETS Historical Adjustments Pro Forma
-------------- --------------- --------------
Land, buildings and equipment on operating leases $ 27,676,298 $ 84,857,743 (a) (b) $112,534,041
Investment in unconsolidated subsidiary 38,882,550 -- 38,882,550
Cash and cash equivalents 118,019,624 (14,178,724 ) (b) 103,840,900
Restricted cash 250,177 -- 250,177
Certificate of deposit 5,015,822 -- 5,015,822
Due from related party 24,743 -- 24,743
Receivables 67,980 -- 67,980
Dividends receivable 1,214,772 -- 1,214,772
Loan costs 60,141 -- 60,141
Accrued rental income 80,523 -- 80,523
Other assets 7,092,227 (903,194 ) (b) 6,189,033
--------------- -------------- --------------
$ 198,384,857 $ 69,775,825 $268,160,682
================ ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 11,303 $ (1,200 ) (b) $ 10,103
Due to related parties 495,704 (492,688 ) (b) 3,016
Security deposits 1,417,500 -- 1,417,500
---------------- -------------- --------------
Total liabilities 1,924,507 (493,888 ) 1,430,619
---------------- -------------- --------------
Minority interest -- 7,150,000 (a) 7,150,000
---------------- -------------- --------------
Commitments and contingencies
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
22,352,104 and outstanding 22,349,104
shares; issued 29,215,827 and outstanding
29,209,942 shares, as adjusted 223,491 68,608 (b) 292,099
Capital in excess of par value 198,470,016 63,051,105 (b) 261,521,121
Accumulated distributions in excess of
net earnings (2,233,157 ) -- (2,233,157 )
---------------- -------------- --------------
Total stockholders' equity 196,460,350 63,119,713 259,580,063
---------------- -------------- --------------
$198,384,857 $ 69,775,825 $268,160,682
================ ============== ==============
See accompanying notes to unaudited pro
forma consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1999
Pro Forma
Historical Adjustments Pro Forma
------------- -------------- --------------
Revenues:
Rental income from operating
leases $2,255,968 $ 47,126 (1) $2,303,094
FF&E reserve income 194,301 3,953 (2) 198,254
Dividend income 1,826,818 461,106 (3) 2,287,924
Interest and other income 2,125,043 (219,052 ) (4) 1,905,991
-------------- ---------------- ----------------
6,402,130 293,133 6,695,263
-------------- ---------------- ----------------
Expenses:
Interest 239,922 -- 239,922
General operating and
administrative 415,245 -- 415,245
Professional services 45,478 -- 45,478
Asset management fees to
related party 87,146 24,392 (7) 111,538
Other 5,968 -- 5,968
Depreciation and amortization 736,593 15,826 (8) 752,419
-------------- ---------------- ----------------
1,530,352 40,218 1,570,570
-------------- ---------------- ----------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiary After
Deduction of Preferred Stock
Dividends 4,871,778 252,915 5,124,693
Equity in Loss of Unconsolidated
Subsidiary After Deduction of
Preferred Stock Dividends (557,733 ) (144,635 ) (9) (702,368 )
-------------- ---------------- ----------------
Net Earnings $4,314,045 $108,280 $4,422,325
============== ================ ================
Earnings Per Share of Common Stock:
Basic $ 0.34 $ 0.35
============== ================
Diluted $ 0.33 $ 0.35
============== ================
Weighted Average Number of Shares
Outstanding:
Basic 12,652,059 12,679,594
============== ================
Diluted 17,509,791 12,679,594
============== ================
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
After Deductions of Preferred
Stock Dividends 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Balance Sheet:
(a) The unaudited pro forma consolidated financial statements include the
accounts of the Courtyard Annex, L.L.C. (the "LLC"), an 89 percent
owned limited liability company. Minority interest represents the
minority owner's proportionate share of the equity in the LLC. All
intercompany balances and transactions have been eliminated.
The balance sheet of the LLC as of the acquisition date, November 16,
1999, consisted of the following:
Assets
Land, buildings and equipment $65,000,000
===========
Equity $65,000,000
===========
(b) Represents gross proceeds of $68,637,234 from the sale of 6,863,723
shares during the period October 1, 1999 through January 7, 2000 and
$14,178,724 in cash and cash equivalents, used (i) to acquire an 89
percent interest in the LLC and to purchase one property for
$61,044,865 and $16,662,878, respectively, (which includes closing
costs of $26,349 and $115,725, respectively, and acquisition fees and
costs of $3,168,516 and $1,124,153, respectively, which had been
recorded as other assets as of September 30, 1999), (ii) to pay
acquisition fees and costs of $1,895,574 ($126,899 of which was accrued
at September 30, 1999) which had been capitalized as other assets and
to reclassify from other assets $2,009,947 of acquisition fees
previously incurred relating to the acquired property, (iii) to make a
$1,620,800 deposit on three additional properties, (iv) to pay selling
commissions and offering expenses of $5,857,968 which have been netted
against stockholders' equity (a total of $366,989 of which was accrued
as of September 30, 1999), and (v) to redeem 2,885 shares of common
stock for $26,542.
The pro forma adjustment to land, buildings and equipment on operating
leases as a result of (i) above was as follows:
<TABLE>
<CAPTION>
<S> <C>
Acquisition Fees
and Expenses
Balance and Closing
as of Costs Allocated
January 7, 2000 to Investment Total
------------------- ------------------ -------------
Courtyard Philadelphia in
Philadelphia, PA
(See (a) above) $65,000,000 $3,194,865 $68,194,865
Residence Inn Mira Mesa in
Mira Mesa, CA 15,423,000 1,239,878 16,662,878
---------------- ------------------ -------------
$80,423,000 $4,434,743 $84,857,743
================ ================== =============
</TABLE>
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
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 January 7, 2000, (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.
<TABLE>
<CAPTION>
<S> <C>
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
Residence Inn Mira Mesa
in Mira Mesa, CA December 10, 1999 September 20, 1999
Courtyard Philadelphia Downtown
in Philadelphia, PA November 20, 1999 November 20, 1999
</TABLE>
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 and 1999 that the Company held the
properties, no pro forma adjustment was made for percentage rental
income for the year ended December 31, 1998 and the nine months ended
September 30, 1999.
(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 September 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
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statements of Earnings - Continued:
subsidiary 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 nine months ended September 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 Corp. (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.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statements of Earnings - Continued:
(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 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
after deduction of preferred stock dividends 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>
September 30, December 30,
1999 1998
---- ----
Unconsolidated Subsidiary Pro Forma
Earnings Before Preferred Stock Dividends $ 3,311,596 $ 752,368
8% Class A Cumulative Preferred Stock
Dividends (institutional investor) (2,451,076) (442,261)
9.76% Class B Cumulative Preferred Stock
Dividends (the Company) (2,287,925) (423,938)
8% Class C Cumulative Preferred Stock
Dividends (other investors) (6,000) (1,402)
------------- ----------
Pro Forma Net Loss of Unconsolidated Subsidiary
After Preferred Stock Dividends $(1,433,405) $(115,233)
============ =========
The Company's 49% Interest in the Pro Forma
Loss of the Unconsolidated Subsidiary $ (702,368) $ (56,464)
============ =========
</TABLE>
(10) Historical earnings per share were calculated based upon the weighted
average number of shares of common stock outstanding during the nine
months ended September 30, 1999 and the year ended December 31, 1998.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE YEAR ENDED DECEMBER 31, 1998
Unaudited Pro Forma Consolidated Statements of Earnings - Continued:
As a result of two of the 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, 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 nine months ended September
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 nine months ended September 30,
1999 and the year ended December 31, 1998.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C>
September 30, December 31,
1999 1998
-------------- ----------------
ASSETS
Land, buildings and equipment on operating leases,
less accumulated depreciation of $1,076,251 and
$384,166, respectively $27,676,298 $ 28,368,383
Investment in unconsolidated subsidiary 38,882,550 --
Cash and cash equivalents 118,019,624 13,228,923
Restricted cash 250,177 82,407
Certificate of deposit 5,015,822 5,016,575
Due from related party 24,743 --
Receivables 67,980 28,257
Dividends receivable 1,214,772 --
Organization costs, less accumulated amortization of $5,221 -- 19,752
Loan costs, less accumulated amortization of $78,455
and $12,980, respectively 60,141 78,282
Accrued rental income 80,523 44,160
Other assets 7,092,227 1,989,951
---------------- ------------------
$198,384,857 $ 48,856,690
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ -- $ 9,600,000
Interest payable -- 66,547
Accounts payable and accrued expenses 11,303 337,215
Due to related parties 495,704 318,937
Security deposits 1,417,500 1,417,500
---------------- ------------------
Total liabilities 1,924,507 11,740,199
---------------- ------------------
Commitments and contingencies
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 22,352,104
and 4,321,908 shares, respectively, and outstanding
22,349,104 and 4,321,908 shares, respectively 223,491 43,219
Capital in excess of par value 198,470,016 37,289,402
Accumulated distributions in excess of net earnings (2,233,157 ) (216,130 )
---------------- ------------------
Total stockholders' equity 196,460,350 37,116,491
---------------- ------------------
$198,384,857 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- --------------- ------------- ------------
Revenues:
Rental income from operating
leases $ 769,442 $ 487,400 $2,255,968 $ 487,400
FF&E reserve income 68,268 41,099 194,301 41,099
Dividend income 926,687 -- 1,826,818 --
Interest and other income 1,217,304 127,082 2,125,043 498,241
--------------- --------------- -------------- --------------
2,981,701 655,581 6,402,130 1,026,740
--------------- --------------- -------------- --------------
Expenses:
Interest 6,592 139,416 239,922 139,416
General operating and
administrative 107,216 44,979 415,245 212,165
Professional services 16,206 -- 45,478 --
Asset management fees to
related party 19,710 27,246 87,146 27,246
Reimbursement of operating
expenses -- (92,733 ) -- (92,733 )
Other -- -- 5,968 --
Depreciation and amortization 243,178 154,804 736,593 156,804
--------------- --------------- -------------- --------------
392,902 273,712 1,530,352 442,898
--------------- --------------- -------------- --------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiary After
Deduction of Preferred Stock
Dividends 2,588,799 381,869 4,871,778 583,842
Equity in Loss of Unconsolidated
Subsidiary After Deduction of
Preferred Stock Dividends (167,283 ) -- (557,733 ) --
--------------- --------------- -------------- --------------
Net Earnings $2,421,516 $ 381,869 $4,314,045 $ 583,842
=============== =============== ============== ==============
Earnings Per Share of Common Stock:
Basic $ 0.13 $ 0.15 $ 0.34 $ 0.28
=============== =============== ============== ==============
Diluted $ 0.12 $ 0.15 $ 0.33 $ 0.28
=============== =============== ============== ==============
Weighted Average Number of Shares
Outstanding:
Basic 19,073,159 2,599,251 12,652,059 2,082,845
=============== =============== ============== ==============
Diluted 26,437,719 2,599,251 17,509,791 2,082,845
=============== =============== ============== ==============
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY Nine Months Ended September 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 3,169,368 31,694 31,661,984 -- 31,693,678
distribution reinvestment plan
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
Subscriptions received for common
stock through public offerings
and 18,030,196 180,302 180,121,661 -- 180,301,963
distribution reinvestment plan
Retirement of common stock (3,000 ) (30 ) (27,570 ) -- (27,600)
Stock issuance costs -- -- (18,913,477 ) -- (18,913,477)
Net earnings -- -- -- 4,314,045 4,314,045
Distributions declared and paid
($0.54 per share) -- -- -- (6,331,072 ) (6,331,072)
------------ ------------ -------------- --------------- --------------
Balance at September 30, 1999 22,349,104 $223,491 $198,470,016 $(2,233,157 ) $196,460,350
============ ============ ============== =============== ==============
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1999 1998
--------------- ----------------
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities $ 4,642,118 $2,047,046
---------------- -----------------
Cash Flows from Investing Activities:
Investment in unconsolidated subsidiary (37,172,644 ) --
Additions to land, buildings and equipment
on operating leases -- (27,245,538 )
Investment in certificates of deposit -- (5,000,000 )
Increase in restricted cash (167,770 ) --
Increase in other assets (7,529,504 ) (983,305 )
---------------- -----------------
Net cash used in investing activities (44,869,918 ) (33,228,843 )
---------------- -----------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and stock
issuance costs paid by related parties
on behalf of the Company (2,855,472 ) (168,369 )
Payment on line of credit (9,600,000 ) --
Increase in loan costs (47,334 ) --
Proceeds from borrowings on line of credit -- 9,600,000
Subscriptions received from stockholders 180,301,963 17,133,319
Retirement of shares of common stock (27,600 ) --
Distributions to stockholders (6,331,072 ) (619,131 )
Payment of stock issuance costs (16,413,155 ) (1,634,250 )
Other (8,829 ) 12,500
---------------- -----------------
Net cash provided by financing activities 145,018,501 24,324,069
---------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents 104,790,701 (6,857,728 )
Cash and Cash Equivalents at Beginning of Period 13,228,923 8,869,838
---------------- -----------------
Cash and Cash Equivalents at End of Period $118,019,624 $2,012,110
================ =================
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Nine Months Ended
September 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 $ 530,233 $ 220,575
Stock issuance costs 2,387,955 158,184
----------------- ----------------
$ 2,918,188 $ 378,759
================= ================
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 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. were
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 condensed consolidated
financial statements reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of the management,
necessary to fairly reflect the results of operations for the interim
periods presented. Operating results for the quarter and nine months
ended September 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 condensed consolidated financial
statements, have been derived from audited consolidated financial
statements as of that date.
These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated 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 consolidated financial statements
have been reclassified to conform with the 1999 presentation. These
reclassifications had no effect on stockholders' equity or net
earnings.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Quarters and Nine Months
Ended September 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 Corp. (formerly known as CNL Hospitality
Advisors, Inc.) (the "Advisor") for acquisition fees, are substantially
the same as those for the Company's Initial Offering. The Company
expects to use the net proceeds from the 1999 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. As of September 30,
1999, Hotel Investors owns seven of the newly constructed Hotels.
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. The purchase agreements
included customary closing conditions, including performing due
diligence and inspection of the completed Properties. The aggregate
purchase price of all eight Hotels, once the final Hotel 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
through its wholly owned subsidiary, CNL Hospitality Partners, LP.
Hotel Investors funded and expects 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 Nine Months
Ended September 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 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.
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 September 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
distributions received from the Company. Cash flow from operations will
then 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 Nine Months
Ended September 30, 1999 and 1998
4. Investment in Unconsolidated Subsidiary - Continued:
The following presents condensed financial information for Hotel
Investors as of and for the nine months ended September 30, 1999:
Land, buildings and equipment on operating
leases, less accumulated depreciation $166,267,909
Cash 4,692,582
Loan costs, less accumulated amortization 723,579
Accrued rental income 183,218
Deposits and other assets 3,127,123
Liabilities 91,507,263
Redeemable preferred stock - Class A 48,336,090
Total stockholders' equity 83,487,148
Revenues 8,462,868
Net earnings 2,646,788
During the quarter and nine months ended September 30, 1999, the
Company recorded $926,687 and $1,826,818, respectively, in dividend
income and $167,283 and $557,733, respectively, in equity in loss after
deduction of preferred stock dividends, resulting in net earnings of
$759,404 and $1,269,085, 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. For the nine months ended
September 30, 1999, the Company incurred approximately $54,000 in
interest expense on this convertible loan.
6. Other Assets:
Other assets consists of acquisition fees, miscellaneous acquisition
expenses that will be allocated to future Properties, and prepaid
expenses.
7. Redemption of Shares:
The Company has a redemption plan under which the Company may elect to
redeem shares, subject to certain conditions and limitations. During
the nine months ended September 30, 1999, 3,000 shares of common stock
were redeemed and retired.
8. Stock Issuance Costs:
The Company has incurred certain expenses associated with 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 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.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Quarters and Nine Months
Ended September 30, 1999 and 1998
8. Stock Issuance Costs - Continued:
During the nine months ended September 30, 1999 and 1998, the Company
incurred $18,913,477 and $1,769,263, respectively, in organizational
and offering costs, including $13,224,189 and $1,370,665, respectively,
in commissions and marketing support and due diligence expense
reimbursement fee (see Note 10). Of these amounts, $18,913,477 and
$1,764,292, respectively, have been treated as stock issuance costs and
for the nine months ended September 30, 1998, $4,971 has been treated
as organization costs. The stock issuance costs have been charged to
stockholders' equity.
9. Distributions:
For the nine months ended September 30, 1999 and 1998, approximately 73
and 94 percent, respectively, of distributions paid to stockholders
were considered ordinary income and approximately 27 percent and 6
percent, respectively, were considered a return of capital to
stockholders for federal income tax purposes. No amounts distributed to
the stockholders for the nine months ended September 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 percent return
on their invested capital. The characterization for tax purposes of
distributions declared for the nine months ended September 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 nine months ended September 30, 1999 and 1998, the Company
incurred $12,397,677 and $1,284,999, respectively, in selling
commissions due to CNL Securities Corp. for services in connection with
the offering of shares. A substantial portion of these amounts
($11,569,902 and $1,199,289, 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, all or a portion of
which may be reallowed to other broker-dealers. During the nine months
ended September 30, 1999 and 1998, the Company incurred $826,512 and
$85,667, 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, in connection with its current offering of common stock,
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 the date the current offering began. No Soliciting Dealer
Warrants, however, will be exercisable until one year from the date of
issuance.
The Advisor is entitled to receive acquisition fees for services
rendered in connection with identifying and acquiring Properties,
negotiating leases and obtaining financing on behalf of the Company.
The fee is equal to 4.5% of gross proceeds of the offerings, loan
proceeds from permanent financing and amounts outstanding on the line
of credit, if any at the time the Company's stock is listed on a
national or regional
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Quarters and Nine Months
Ended September 30, 1999 and 1998
10. Related Party Transactions - Continued:
stock exchange, but excluding that portion of the permanent financing
used to finance Secured Equipment Leases. During the nine months ended
September 30, 1999 and 1998, the Company incurred $8,007,241 and
$770,999, 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 September 30, 1999 and
1998.
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. During the nine months ended September 30, 1999
and 1998, the Company incurred $87,146 and $27,246 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 nine months ended September
30:
1999 1998
------------- ------------
Stock issuance costs $2,467,852 $236,942
General operating and
administrative expenses 208,676 95,441
============== =============
$2,676,528 $332,383
============== =============
10. Related Party Transactions - Continued:
The amounts due to related parties consisted of the following at:
September 30, December 31,
1999 1998
------------ -------------
Due to CNL Securities Corp.:
Commissions $174,354 $66,063
Marketing support and due
diligence expense
reimbursement fee 13,373 4,404
------------- --------------
187,727 70,467
------------- --------------
Due to the Advisor:
Expenditures incurred on
behalf of the Company 184,930 110,496
Acquisition fees 123,047 137,974
------------- --------------
307,977 248,470
------------- --------------
$495,704 $318,937
============= ==============
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Quarters and Nine Months
Ended September 30, 1999 and 1998
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 nine months
ended September 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. Earnings Per Share:
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if other contracts to
issue common stock were exercised and shared in the earnings of the
Company. For the quarter and nine months ended September 30, 1999,
approximately 7.36 million and 4.86 million shares, respectively,
related to the conversion of Hotel Investors' Class A Preferred Stock
to the Company's common stock, were considered dilutive after the
application of the if converted method and were included in the
denominator of the diluted EPS calculation. The numerator in the
diluted EPS calculation includes an adjustment for the net earnings of
Hotel Investors for the applicable period.
13. Commitments and Contingencies:
As of September 30, 1999, the Company has entered into four agreements
to acquire, directly or indirectly, four hotel Properties. In
connection with three of these agreements, the Company has a deposit in
the form of a letter of credit, which is collateralized by a
certificate of deposit, amounting to $5 million. In connection with the
remaining agreement, Hotel Investors has a deposit of $3 million held
in escrow. Of this amount, Five Arrows contributed $1.68 million and
the Company contributed $1.32 million.
In connection with the acquisition of the two Properties owned by the
Company, the Company may be required to make an additional payment (the
"Earnout Amount") of up to $1 million if certain earnout provisions are
achieved by July 31, 2001. After July 31, 2001, the Company will no
longer be obligated to make any payments under the earnout provision.
The Earnout Amount is equal to the difference between earnings before
interest, taxes, depreciation and amortization expense adjusted by the
earnout factor (7.44), and the initial purchase price. Rental income
will be adjusted upward in accordance with the lease agreements for any
amount paid.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS - CONTINUED Quarters and Nine Months
Ended September 30, 1999 and 1998
14. Subsequent Events:
During the period October 1, 1999, through November 4, 1999, the
Company received subscription proceeds for an additional 2,394,296
shares ($23,942,963) of common stock.
On October 1, 1999 and November 1, 1999, the Company declared
distributions totalling $1,352,274 and $1,468,292, respectively, or
$0.0604 per share of common stock, payable in December 1999, to
stockholders of record on October 1, 1999 and November 1, 1999,
respectively.
On October 26, 1999, the Company filed a registration statement on Form
S-11 with the Securities and Exchange Commission in connection with the
proposed sale by the Company of up to an additional 45,000,000 shares
of common stock ($450,000,000) (the "2000 Offering") in an offering
expected to commence immediately following the completion of the
Company's 1999 Offering. Of the 45,000,000 shares of common stock to be
offered, 5,000,000 will be available to stockholders purchasing shares
through the reinvestment plan.
