FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
-------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------------- ---------------------------
Commission file number
0-24097
------------------------------
CNL Hospitality Properties, Inc.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 59-3396369
------------------------------------------------- ----------------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
------------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
--------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
35,080,933 shares of common stock, $.01 par value, outstanding as of April 24,
2000.
<PAGE>
CONTENTS
Part I
Item 1. Financial Statements: Page
Condensed Consolidated
Balance Sheets 1
Condensed Consolidated Statements
of Earnings 2
Condensed Consolidated Statements of
Stockholders' Equity 3
Condensed Consolidated Statements
of Cash Flows 4 - 5
Notes to Condensed Consolidated
Financial Statements 6-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13-18
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Part II
Other Information 19-22
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31,1999
----------------- ---------------------
<S><C>
ASSETS
Land, buildings and equipment on operating leases, less
accumulated depreciation of $2,484,663 and $1,603,334,
respectively $111,449,355 $112,227,771
Investment in unconsolidated subsidiary 37,878,065 38,364,157
Cash and cash equivalents 142,143,157 101,972,441
Restricted cash 409,538 275,630
Certificate of deposit 5,000,000 5,000,000
Dividends receivable 1,280,395 1,215,993
Receivables 427,240 112,184
Prepaid expenses 23,247 41,165
Loan costs, less accumulated amortization of $94,737 and
$86,627, respectively 43,859 51,969
Accrued rental income 78,276 79,399
Other assets 10,388,879 7,627,565
--------------- ---------------
$309,122,011 $266,968,274
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $10,000,000 $ --
Accounts payable and accrued expenses 892,783 405,855
Distributions payable 174,178 89,843
Due to related parties 506,490 995,500
Security deposits 5,042,054 5,042,054
Rents paid in advance 474,912 255,568
--------------- -----------------
Total liabilities 17,090,417 6,788,820
--------------- -----------------
Commitments and contingencies (Note 12)
Minority interest -- 7,124,615
--------------- -----------------
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. 60,000,000
authorized shares, issued and outstanding
33,873,315 and 28,902,914 shares, respectively 338,733 289,029
Capital in excess of par value 299,660,797 256,231,833
Accumulated distributions in excess of net earnings (5,043,063) (3,466,023 )
Minority interest distributions in excess of
contributions and accumulated earnings (2,924,873) --
--------------- -----------------
Total stockholders' equity 292,031,594 253,054,839
--------------- -----------------
$309,122,011 $266,968,274
=============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Quarters Ended March 31,
2000 1999
<S><C> --------------- -------------
Revenues:
Rental income from operating leases $ 2,725,894 $ 737,618
FF&E reserve income 159,237 61,027
Dividend income 926,817 241,843
Interest and other income 1,769,209 292,864
----------------- --------------
5,581,157 1,333,352
----------------- --------------
Expenses:
Interest and loan cost amortization 8,110 200,573
General operating and administrative 295,070 193,431
Professional services 45,337 21,206
Asset management fees to related party 126,422 49,565
Depreciation and amortization 916,641 253,758
----------------- --------------
1,391,580 718,533
----------------- --------------
Earnings Before Equity in Loss of Unconsolidated Subsidiary
After Deduction of Preferred Stock Dividends and Minority
Interest 4,189,577 614,819
Equity in Loss of Unconsolidated Subsidiary After Deduction
of Preferred Stock Dividends (119,803) (184,539)
Minority Interest (124,690) --
----------------- --------------
Net Earnings $ 3,945,084 $ 430,280
================= ==============
Earnings Per Share of Common Stock:
Basic $ 0.13 $ 0.07
================= ==============
$ 0.12 $ 0.06
Diluted ================= ==============
Weighted Average Number of Shares of Outstanding:
Basic 31,200,726 6,419,548
================= ==============
Diluted 38,622,874 7,812,448
================= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Quarter Ended March 31, 2000 and Year Ended December 31, 1999
<TABLE>
<CAPTION>
Minority
interest
distributions in
Accumulated excess of con-
Common stock Capital in distributions tributions and
--------------------------
Number Par excess of in excess of accumulated
net
of Shares value par value earnings earnings Total
------------ ----------- -------------- ---------------- --------------- ------------
<S><C>
Balance at December 31, 1998 4,321,908 $ 43,219 $37,289,402 $ (216,130 ) $ $37,116,491
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 24,593,891 245,939 245,692,968 -- -- 245,938,907
Retirement of common stock
(12,885) (129) (118,413) -- -- (118,542)
Stock issuance costs -- -- (26,632,124) -- (26,632,124)
--
Net earnings -- -- -- 7,515,988 -- 7,515,988
Distributions declared and paid
($.72 per share) -- -- -- (10,765,881) -- (10,765,881)
------------ ----------- --------------- -------------- -------------- -------------
Balance at December 31, 1999 28,902,914 $289,029 $256,231,833 $(3,466,023) -- $253,054,839
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 4,985,006 49,850 49,525,914 -- -- 49,575,764
Retirement of common stock (14,605) (146) (134,217) -- -- (134,363)
Stock issuance costs -- -- (5,962,733) -- -- (5,962,733)
Net earnings -- -- -- 3,945,084 -- 3,945,084
Minority interest distributions in
excess of contributions and
accumulated earnings -- -- -- -- (2,924,873 ) (2,924,873)
Distributions declared and paid
($.18 per share) -- -- -- (5,522,124 ) -- (5,522,124)
------------ ----------- --------------- -------------- -------------- -------------
Balance at March 31, 2000 33,873,315 $338,733 $299,660,797 $ (5,043,063 ) $(2,924,873 ) $292,031,594
============ =========== =============== ============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarters Ended March 31,
2000 1999
------------- ------------
<S><C>
Cash flows from operating activities:
Net earnings $ 3,945,084 $ 430,280
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 881,329 230,834
Amortization 43,422 73,724
Distribution from investment in
unconsolidated subsidiary, net
of equity in loss 473,512 184,539
Minority interest 124,690 --
Changes in operating assets and
liabilities:
Dividends receivable (64,402) (241,843 )
Receivables (315,056) 429
Prepaid expenses 17,918 (7,555)
Accrued rental income 1,123 (15,905)
Interest payable -- (36,152)
Accounts payable and accrued
expenses 398,103 58,094
Due to related parties - operating expenses 102,281 (9,519)
Rents paid in advance 219,344 (3,489)
--------------- ---------------
Net cash provided by operating activities 5,827,348 663,437
--------------- ---------------
Cash flows from investing activities:
Additions to land, buildings and equipment on
operating leases (125,645) --
Investment in unconsolidated subsidiary -- (23,983,718)
Investment in certificate of deposit -- (730,567)
Increase in restricted cash (133,908) (56,682)
Additions to other assets (2,823,904) (1,690,852)
--------------- ---------------
Net cash used in investing activities (3,083,457) (26,461,819)
--------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Quarters Ended March 31,
2000 1999
---------------- --------------
<S><C>
Cash flows from financing activities:
Proceeds from note payable 10,000,000 --
Repayment of borrowings on line of credit -- (9,600,000)
Proceeds from convertible loans -- 3,684,745
Subscriptions received from stockholders 49,575,764 47,730,318
Distributions to stockholders (5,522,124) (998,652)
Distributions to minority interest (10,000,000) --
Retirement of common stock (134,363) --
Payment of stock issuance costs (6,492,452) (5,396,076)
Other -- (10,029)
----------------- --------------
Net cash provided by financing activities 37,426,825 35,410,306
----------------- --------------
Net increase in cash and cash equivalents 40,170,716 9,611,924
Cash and cash equivalents at beginning of quarter 101,972,441 13,228,923
----------------- --------------
Cash and cash equivalents at end of quarter $ 142,143,157 $ 22,840,847
================= ==============
Supplemental schedule of non-cash financing activities:
Distributions declared but not paid to minority
interest $ 174,178 $ --
================= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Hospitality Properties, Inc. was
organized in Maryland on June 12, 1996. CNL Hospitality GP Corp. and CNL
Hospitality LP Corp. are wholly owned subsidiaries of CNL Hospitality
Properties, Inc., organized in Delaware in June 1998. CNL Hospitality Partners,
LP is a Delaware limited partnership formed in June 1998. CNL Hospitality GP
Corp. and CNL Hospitality LP Corp. are the general and limited 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., CNL Hospitality LP Corp. and
CNL Philadelphia Annex, LLC (the "LLC").
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
to hotel operators. The Company may also provide mortgage financing (the
"Mortgage Loans") and furniture, fixture and equipment financing ("Secured
Equipment Leases") to operators of hotel chains. 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.
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 and CNL Philadelphia Annex,
LLC (an 89% owned limited liability company). All significant intercompany
balances and transactions have been eliminated in consolidation. Interest of
unaffiliated third party is reflected as minority interest.
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 management, necessary to a fair
statement of the results for the interim periods presented. Operating results
for the quarter ended March 31, 2000, may not be indicative of the results that
may be expected for the year ending December 31, 2000. Amounts as of December
31, 1999, included in the condensed consolidated financial statements have been
derived from audited consolidated financial statements as of that date.
These unaudited 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, 1999.
Certain items in the prior period's financial statements have been reclassified
to conform with the 2000 presentation, including a change in the presentation of
the cash flow from the direct to the indirect method. These reclassifications
had no effect on stockholders' equity or net earnings.
2. 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"). The price per share
and 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. (the "Advisor")
for acquisition fees, are substantially the same for the Company's Initial
Offering. As of March 31, 2000, the Company received total subscription proceeds
from the Initial Offering, the 1999 Offering and the sale of warrants of
$338,733,751 (33,873,375 shares), including $748,625 (74,863 shares) through the
reinvestment plan.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
2. Public Offerings - Continued:
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 45,000,000 additional 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, up to 5,000,000 will be
available to stockholders purchasing shares through the reinvestment plan. The
price per share and 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 substantially the same for the Company's 1999 Offering. The Company
expects to use the net proceeds from the 2000 Offering to purchase additional
Properties and, to a lesser extent, make Mortgage Loans.
3. Investment in Unconsolidated Subsidiary:
During 1999, the Company with Five Arrows Realty Securities II L.L.C. ("Five
Arrows") formed a jointly owned real estate investment trust, CNL Hotel
Investors, Inc. ("Hotel Investors"), which acquired seven hotel Properties. In
order to fund the acquisition of the Properties, Five Arrows invested
approximately $48 million and the Company invested approximately $38 million in
Hotel Investors. Hotel Investors funded the remaining amount of approximately
$88 million with permanent financing, collateralized 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, using an exchange ratio based on the relationship between
the Company's operating results and those of Hotel Investors.
Five Arrows also invested approximately $14 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 were used by the Company to fund approximately
38% of its funding commitment to Hotel Investors.
The following presents condensed financial information for Hotel Investors as of
and for the quarter ended and year ended:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------- -----------------
<S><C>
Land, buildings and equipment on operating leases, net $163,941,510 $ 165,088,059
Cash and cash equivalents 8,578,188 4,884,014
Loan costs, net 693,092 708,006
Accrued rental income 365,183 283,914
Prepaid expenses, receivables and other assets 152,134 3,283,306
Liabilities 92,250,208 92,229,193
Redeemable preferred stock - Class A and Class B 86,314,361 85,361,864
Stockholders' deficit (3,982,913) (2,915,614)
Revenues 4,772,528 13,025,978
Net earnings 1,664,125 4,104,936
Preferred stock dividends 1,908,622 5,693,642
Loss applicable to common stockholders (244,497) (1,588,706)
</TABLE>
During the quarter ended March 31, 2000, the Company recorded $926,817 in
dividend income and $119,803 in equity in loss after deduction of preferred
stock dividends, resulting in net earnings of $807,014 attributable to this
investment.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
4. Other Assets:
Other assets consists of acquisition fees and miscellaneous acquisition expenses
that will be allocated to future Properties and deposits.
5. 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 three months
ended March 31, 2000, 14,605 shares of common stock were redeemed and retired.
6. Indebtedness:
The Company has a line of credit in the amount of $30,000,000 which
expires on July 30, 2003. 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 .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 the assignment of rents and leases. As of March 31, 2000 and
December 31, 1999, the Company had no amounts outstanding under the line of
credit.
During the quarter ended March 31, 2000, the Company through the LLC entered
into a Tax Increment Financing Agreement with the Philadelphia Authority for
Industrial Development ("TIF Note") for $10 million which is collateralized by
the LLC's hotel Property. The principal and interest on the TIF Note is expected
to be fully paid by the LLC's hotel Property's incremental property taxes over a
period of twenty years. The payment of the incremental property taxes is the
responsibility of the tenant of the hotel property. Interest on the TIF Note is
12.85% and payments are due each May, through May 2017. In the event that
incremental property taxes are insufficient to cover the principal and interest
due, Marriott International, Inc. is required to fund such shortfall pursuant to
its guarantee of the TIF Note.
7. Stock Issuance Costs:
The Company has incurred certain expenses in connection with its
offerings of common stock, 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. The Advisor has agreed to pay all organizational and offering
expenses (excluding commissions and marketing support and due diligence expense
reimbursement fees) which exceed three percent of the gross proceeds received
from the sale of shares of the Company in connection with the offerings.
During the three months ended March 31, 2000 and 1999, the Company incurred
$5,962,733 and $5,195,324, respectively, in stock issuance costs, including
$3,966,001 and $3,345,810, respectively, in commissions and marketing support
and due diligence expense reimbursement fees (see Note 9). The stock issuance
costs have been charged to stockholders' equity subject to the three percent cap
described above.
8. Distributions:
For the quarters ended March 31, 2000 and 1999, approximately 48 percent and 41
percent, respectively, of the distributions paid to stockholders were considered
ordinary income, and approximately 52 percent and 59 percent, respectively, were
considered a return of capital to stockholders for federal income tax purposes.
No amounts distributed to the stockholders for the quarters ended March 31, 2000
and 1999 are required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' return on their invested
capital. The characterization for tax purposes of distributions declared for the
quarter ended March 31, 2000 may not be indicative of the results that may be
expected for the year ended December 31, 2000.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
9. Related Party Transactions:
Certain directors and officers of the Company hold similar
positions with the Advisor and the managing dealer, CNL Securities Corp. These
affiliates are entitled to receive fees and compensation in connection with the
offerings, and the acquisition, management and sale of the assets of the
Company.
During the quarters ended March 31, 2000 and 1999, the Company incurred
$3,718,126 and $3,136,697 respectively, in selling commissions due to CNL
Securities Corp. for services in connection with its offerings. A substantial
portion of these amounts ($3,681,508 and $2,927,797, respectively) was or will
be paid by CNL Securities Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing support and
due diligence expense reimbursement fee equal to 0.5% of the total amount raised
from the sale of shares, a portion of which may be reallowed to other
broker-dealers. During the quarters ended March 31, 2000 and 1999, the Company
incurred $247,875 and $209,113, respectively, of such fees, the majority of
which were reallowed to other broker-dealers and from which all bona fide due
diligence expenses were paid.
CNL Securities Corp. will also receive, in connection with the Initial
Offering, a soliciting dealer servicing fee payable annually by the Company
beginning on December 31 of the year following the year in which the offering is
completed in the amount of 0.20% of the stockholders' investment in the Company.
CNL Securities Corp. in turn may reallow all or a portion of such fee to
soliciting dealers whose clients hold shares on such date. As of March 31, 2000,
no such fees had been incurred.
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 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. During the quarter ended March 31, 2000, the Company issued
approximately 479,000 Soliciting Dealer Warrants. As of March 31, 2000, in
connection with the 1999 Offering, CNL Securities Corp. was entitled to
approximately 171,500 additional Soliciting Dealer Warrants for shares sold
during the quarter then ended.
The Advisor is entitled to receive acquisition fees for services in identifying
Properties and structuring the terms of leases of the Properties and Mortgage
Loans equal to 4.5% of the gross proceeds of the offerings, loan proceeds from
permanent financing and amounts outstanding on the line of credit, if any, at
the time of listing, but excluding that portion of the permanent financing used
to finance Secured Equipment Leases. During the quarters ended March 31, 2000
and 1999, the Company incurred $3,284,373 and $2,106,510, respectively, of such
fees. Such fees are included in land, buildings and equipment on operating
leases, investment in unconsolidated subsidiary and other assets. 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 below, 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"). For the
quarter ended March 31,2000, the Company's operating expenses did not exceed the
Expense Cap.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
9. Related Party Transactions - Continued:
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
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 to any discretion of the Advisor. All or any
portion of the management fee not taken as fiscal year shall be deferred without
interest and may be taken in such other fiscal year, as the Advisor shall
determine. During the quarters ended March 31, 2000 and 1999, the Company
incurred $126,422 and $49,565, respectively, of such fees. 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
offerings), on a day-to-day basis. The expenses incurred for these services were
classified as follow quarters ended March 31:
<TABLE>
<CAPTION>
2000 1999
--------------- ----------------
<S><C>
Stock issuance costs $1,167,684 $ 883,881
General operating and
administrative expenses 104,024 85,731
Land, buildings and equipment on
operating leases and other
assets 735 3,806
--------------- ----------------
$ 1,272,443 $ 973,418
=============== ================
</TABLE>
The amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
March 31, 2000 December 31,1999
<S><C> ----------------- --------------------
Due to the Advisor:
Expenditures incurred on behalf
of the Company for accounting
and administrative services $ 193,167 $ 387,690
Acquisition fees 108,546 337,797
Management fees -- 19,642
-------------- ----------------
301,713 745,129
-------------- ----------------
Due to CNL Securities Corp.:
Commissions 191,863 229,834
Marketing support and due diligence
expense reimbursement fee 12,791 16,764
-------------- ----------------
204,654 246,598
-------------- ----------------
Due to other related party 123 3,773
-------------- ----------------
$ 506,490 $ 995,500
============== ================
</TABLE>
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 amount deposited with this
affiliate was $15,534,326 and $15,275,629 at March 31, 2000 and December 31,
1999, respectively.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
10. Concentration of Credit Risk:
STC Leasing Associates, LLC, which was acquired by Crestline Capital Corp. on
March 6, 2000, operates and leases two Properties, and City Center Annex Tenant
Corporation contributed more than ten percent of the Company's total rental
income for the quarter ended March 31, 2000. In addition, all of the Company's
rental income 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 this lessee 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
2000 and subsequent years.
11. Earnings Per Share:
Basic 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 quarters ended March 31, 2000 and 1999, approximately
7.4 and 1.4 million shares, respectively, related to the conversion of Hotel
Investors' Class A Preferred Stock into 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.
The following represents the calculation of earnings per share and the weighted
average number of shares of potentially dilutive common stock for the quarters
ended March 31:
<TABLE>
<CAPTION>
2000 1999
<S><C> -------------- ---------------
Basic Earnings Per Share:
Net earnings $3,945,084 $ 430,280
============== ===============
Weighted average number of shares outstanding 31,200,726 6,419,548
============== ===============
Basic earnings per share $ 0.13 $ 0.07
============== ===============
Diluted Earnings Per Share:
Net earnings $ 3,945,084 $ 430,280
Additional income attributable to investment in unconsolidated
subsidiary assuming all Class A Preferred Shares were converted 857,241 71,479
-------------- ---------------
Adjusted net earnings assuming dilution $4,802,325 $ 501,759
============== ===============
Weighted average number of shares outstanding 31,200,726 6,419,548
Assumed conversion of Class A Preferred Stock 7,422,148 1,392,900
-------------- ---------------
Adjusted weighted average number of
shares outstanding 38,622,874 7,812,448
============== ===============
Diluted earnings per share $ 0.12 $ 0.06
============== ===============
</TABLE>
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2000 and 1999
12. Commitments and Contingencies:
The Company has commitments to acquire six hotel Properties for an anticipated
aggregate purchase price of approximately $148 million. In connection with these
commitments, the Company has deposits of approximately $6.6 million held in
escrow. Additionally, the Company has refundable deposits on two hotel
properties that are currently under negotiations in the amount of $500,000.
In connection with the acquisition of two Properties in 1998,
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. As of March 31, 2000, approximately
$97,000 was payable under this agreement.
In addition, in connection with the acquisition of the 89% interest in the LLC,
the Company and the minority interest holder each have the right to obligate the
other to sell or buy, respectively, the 11% interest in the LLC. These rights
are effective five years after the hotel's opening which is November 2004. The
price for the 11% interest is equal to 11% of the lesser of (a) an amount equal
to the product of 8.5 multiplied times net house profit (defined as total hotel
revenues less property expenses) for the 13 period accounting year preceding the
notice of the option exercise, or (b) the appraised fair market value.
13. Subsequent Events:
During the period April 1, 2000 through April 24, 2000, the Company received
subscription proceeds for an additional 1,250,000 shares ($12,500,000) of common
stock.
On April 1, 2000, the Company declared distributions totaling $2,044,420, or
$0.0604 per share of common stock, payable in June 2000, to stockholders of
record on April 1, 2000.
On April 18, 2000, the Company announced its intent to purchase two hotel
properties for an aggregate purchase price of approximately $44 million. In
connection with these two properties, the Company may be required to make an
additional payment (the "Earnout Provision") not to exceed $2,471,500 if certain
earnout provisions are achieved by the thirty-sixth month following the closing
date of the two properties ("Earnout Termination Date"). After the Earnout
Termination Date, the Company will no longer be obligated to make any payments
under the earnout provision. The Earnout Provision is equal to the difference
between earnings before interest, taxes, depreciation and amortization expense
adjusted by the earnout factor (7.33), and the initial purchase price. Rental
income will be adjusted upward in accordance with the lease agreements for any
amount paid.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information contains 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.
Introduction
The Company
CNL Hospitality Properties, Inc. was organized in Maryland on June 12, 1996. CNL
Hospitality GP Corp. and CNL Hospitality LP Corp. are wholly owned subsidiaries
of CNL Hospitality Properties, Inc., organized in Delaware in June 1998. CNL
Hospitality Partners, LP is a Delaware limited partnership formed in June 1998.
CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are the general and
limited partner, respectively, of CNL Hospitality Partners, LP. The term
"Company" includes, unless the context otherwise requires, CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp., CNL
Hospitality LP Corp, and CNL Philadelphia Annex, LLC (formerly known as
Courtyard Annex, L.L.C.) (the "LLC"). 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 financing and furniture, fixture and
equipment financing 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 of $200,000 for 20,000 Shares of common stock from CNL Hospitality
Corp.. On July 9, 1997, the Company commenced an offering to the public of up to
16,500,000 Shares of common stock ($165,000,000) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended. Of the
16,500,000 Shares of common stock offered, 1,500,000 ($15,000,000) were
available only to stockholders who elected to participate in the Company's
Reinvestment Plan. Upon completion of the Initial Offering on June 17, 1999, the
Company had received aggregate subscription proceeds of $150,072,637 (15,007,264
Shares), including $72,637 (7,264 Shares) through the Company's Reinvestment
Plan. Following the completion of its Initial Offering, the Company commenced a
second offering of up to 27,500,000 Shares of common stock ($275,000,000). As of
March 31, 2000, the Company had received subscription proceeds of $188,661,114
(18,866,111 Shares) from its 1999 Offering and sale of warrants, including
67,599 Shares ($675,988) issued pursuant to 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 the Advisor for acquisition
fees, are substantially the same as those for the Initial Offering.
As of March 31, 2000, net proceeds to the Company from its Initial Offering and
1999 Offering 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 totaled
approximately $300,000,000. The Company has used net proceeds from the offerings
to invest, directly or indirectly, approximately $136,500,000 in 11 hotel
Properties, to pay $7,120,800 as deposits on eight additional hotel Properties,
to redeem 27,490 shares of common stock for $252,905 and to pay approximately
$16,700,000 in acquisition fees and expenses, leaving approximately $139,500,000
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) in an offering expected to commence immediately following the
completion of the 1999 Offering. Of the 45,000,000 Shares of common stock to be
offered, up to 5,000,000 will 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 substantially the
same as those for the Initial Offering and 1999 Offering.
During the period April 1, 2000 through April 24, 2000, the Company received
additional net offering proceeds of approximately $12,500,000 and had
approximately $150,000,000 available for investment in Properties and Mortgage
Loans. The Company expects to use the uninvested net proceeds, plus any
additional net proceeds from the sale of Shares from the 1999 Offering and 2000
Offering to purchase additional Properties and, to a lesser extent, invest in
Mortgage Loans. In addition, the Company intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay certain related fees. The Company intends to encumber assets in
connection with such borrowings. The Company currently has a $30,000,000 line of
credit available, as described below. Borrowings on 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.
Redemptions
In October 1998, the Board of Directors elected to implement the Company's
redemption plan. Under the redemption plan, the Company elected to redeem
Shares, subject to certain conditions and limitations. During the quarter ended
March 31, 2000, 14,605 Shares were redeemed at $9.20 per Share ($134,363) and
retired from Shares outstanding of common stock.
Indebtedness
The Company has a line of credit and security agreement in the amount of
$30,000,000 which expires in July 30, 2003. 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
connection with the line of credit, the Company incurred a commitment fee, legal
fees and closing costs of approximately $138,000. As of March 31, 2000 and
December 31, 1999, the Company had no amounts outstanding under the line of
credit.
During the quarter ended March 31, 2000, the Company through the LLC entered
into a Tax Increment Financing Agreement with the Philadelphia Authority for
Industrial Development ("TIF Note") for $10 million which is collateralized by
the LLC's hotel Property. The principal and interest on the TIF Note is expected
to be fully paid by the LLC's hotel Property's incremental property taxes over a
period of twenty years. The payment of the incremental property taxes is the
responsibility of the tenant of the hotel property. Interest on the TIF Note is
12.85% and payments are due each May, through May 2017. In the event that
incremental property taxes are insufficient to cover the principal and interest
due, Marriott International, Inc. is required to fund such shortfall pursuant to
its guarantee of the TIF Note.
Market 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. There were no amounts
outstanding on its variable line of credit at March 31, 2000 and December 31,
1999.
Property Acquisitions and Investments
As of December 31, 1998, the Company owned two Properties in the Atlanta,
Georgia area which were being operated by the tenant as Residence Inn(R) by
Marriott(R). During 1999, the Company, with Five Arrows Realty Securities II
L.L.C., formed a jointly owned real estate investment trust, CNL Hotel
Investors, Inc. ("Hotel Investors"), which acquired seven hotel Properties. In
order to fund the acqusition of the Properties, Five Arrows invested
approximately $48 million and the Company invested approximately $38 million in
Hotel Investors. Hotel Investors funded the remaining amount of approximately
$88 million with permanent financing, collateralized by Hotel Investors'
interests in the Properties. 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 and the Company received
37,979 shares of Hotel Investors' 9.76% Class B cumulative, 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.
Five Arrows also invested approximately $14 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 were used by the Company to fund approximately
38% of its funding commitment to Hotel Investors.
In November 1999, the Company acquired an 89% interest in CNL Philadelphia
Annex, LLC (formerly known as Courtyard Annex, L.L.C.) 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. The LLC is included with the accounts of the
Company except for the 11% interest which is reflected as minority interest in
the accompanying consolidated financial statements.
Additionally, in late 1999, the Company acquired a newly constructed Property
located in Mira Mesa, California for approximately $15.5 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."
Commitments
As of April 24, 2000, the Company had initial commitments to acquire directly
eight hotel Properties for an anticipated aggregate purchase price of
approximately $192 million. The acquisition of each of these Properties is
subject to the fulfillment of certain conditions. In order to acquire 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 five 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.
The Company is presently negotiating to acquire additional Properties, but as of
April 24, 2000, the Company had not acquired any such Properties or entered into
any Mortgage Loans. In addition, as of April 24, 2000, the Company had not
entered into any other arrangements creating a reasonable probability a
particular Property, Mortgage Loan or Secured Equipment Lease would be funded.
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 March 31, 2000, the
Company had $142,143,157 invested in such short-term investments as compared to
$101,972,441 at December 31, 1999. The increase in the amount invested in
short-term investments was primarily attributable to proceeds received from the
sale of common stock in the Initial Offering and 1999 Offering. These funds will
be used to purchase additional Properties, to make Mortgage Loans, to pay
offering and acquisition expenses, to pay distributions to stockholders and
other Company expenses and, in management's discretion, to create cash reserves.
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 quarters ended March 31, 2000 and 1999, the Company generated cash
from operations of $5,827,348 and $663,437, respectively. Based on cash from
operations and dividends due to the Company from Hotel Investors at March 31,
2000 (and received in April 2000), the Company declared and paid distributions
to its stockholders of $5,522,124 and $998,652 during the quarters ended March
31, 2000 and 1999, respectively. In addition, on April 1, 2000, the Company
declared distributions to stockholders of record on April 1, 2000 totaling
$2,044,420 ($0.0604 per share), payable in June 2000.
During the quarters ended March 31, 2000 and 1999, approximately 48 percent and
41 percent, respectively, of the distributions received by stockholders were
considered to be ordinary income and approximately 52 percent and 59 percent,
respectively, were considered a return of capital for federal income tax
purposes. No amounts distributed to the stockholders for the quarters ended
March 31, 2000 and 1999 are required to be or have been treated by the Company
as a return of capital for purposes of calculating the stockholders' return on
their invested capital.
Due to Related Parties
During the quarters ended March 31, 2000 and 1999, affiliates of the Company
incurred on behalf of the Company $933,778 and $587,498, respectively, for
certain organizational and offering expenses, $81,955 for certain acquisition
expenses, and $131,673 and $62,145 respectively, for certain operating expenses.
As of March 31, 2000 and 1999, the Company owed the Advisor and other related
parties $506,490 and $995,500, 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 (excluding commissions and
marketing support and due diligence expense reimbursement fees) in excess of
three percent of gross offering proceeds.
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 amount deposited with this
affiliate was $15,534,326 and $15,275,629 at March 31, 2000 and December 31,
1999, respectively.
Other
As of March 31, 2000 and 1999, the tenants of the Properties have established
reserve funds which will be used for the replacement and renewal of furniture,
fixtures and equipment relating to the hotel Properties (the "FF&E Reserve").
Funds in the FF&E Reserve have been paid, granted and assigned to the Company.
For the quarters ended March 31, 2000 and 1999, revenues relating to the FF&E
Reserve of the Properties directly owned by the Company totaled $159,237 and
$61,027, of which $133,908 and $61,027, respectively, is classified as
restricted cash. For the quarter ended March 31, 2000, revenues relating to the
FF&E Reserve of the Properties indirectly owned through Hotel Investors totaled
$176,221 of which $94,079 is classified as restricted cash. 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.
Results of Operations
Comparison of quarter ended March 31, 2000 to quarter ended March 31, 1999
As of March 31, 2000, the Company owned 11 Properties, either directly or
indirectly, consisting of land, buildings and equipment and had entered into
long-term, triple-net lease agreements relating to these Properties. The
Property leases provide for minimum base annual rental payments ranging from
approximately $1,204,000 to $6,500,000, which are payable in monthly
installments. In addition, certain of 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 tenant pays
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, have been reported as additional rent for the quarters ended March 31,
2000 and 1999.
During the quarters ended March 31, 2000 and 1999, the Company earned rental
income from operating leases and FF&E Reserve revenue of $2,885,131 and
$798,645, respectively. No contingent rental income was earned for the quarters
ended March 31, 2000 and 1999. The increase in rental income and FF&E Reserve
income is due to the fact that the Company owned four Properties during the
quarter ended March 31, 2000, as compared to two Properties during the quarter
ended March 31, 1999. Because the Company has not yet acquired all of its
Properties, revenues for the three months ended March 31, 2000, represent only a
portion of revenues which the Company is expected to earn in future periods.
During the quarter ended March 31, 2000, the Company acquired and leased seven
Properties indirectly through its investment in Hotel Investors, as described
above in "Liquidity Capital Resources - Property Acquisitions and Investments".
In connection with its investment, the Company recognized $926,817 in dividend
income and $119,803 in equity in loss of loss unconsolidated subsidiary after
deduction of preferred stock dividends, resulting in net earnings attributable
to this investment of $807,014.
During the quarters ended March 31, 2000 and 1999, the Company also earned
$1,769,209 and $292,864, respectively, in interest income from investments in
money market accounts and other short-term highly liquid investments and other
income. The increase in interest income was primarily attributable to increased
offering proceeds in the current year 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
offerings 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.
STC Leasing Associates, LLC, which was acquired by Crestline Capital Corp. on
March 6, 2000, operates and leases two Properties, and City Center Annex Tenant
Corporation contributed more than ten percent of the Company's total rental. In
addition, all of the Company's rental income was earned from Properties
operating as Marriott(R) brand chains. Although 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 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.
Operating expenses, including interest expense and depreciation and amortization
expense, were $1,391,580 and $718,533 for the quarters ended March 31, 2000 and
1999, respectively (24.9% and 53.9%, respectively, of total revenues). The
increase in the dollar amount of operating expenses during the quarter ended
March 31, 2000, as compared to the same period for 1999, was primarily as a
result of the Company and the LLC owning two Properties directly during the
quarter ended March 31, 1999 compared to four properties during the quarter
ended March 31, 2000. This resulted in an increase in asset management fees of
$76,857 and an increase in depreciation and amortization expense of $662,883 for
the quarter ended March 31, 2000, as compared to the same period for 1999.
Additionally, general operating and administrative expenses increased as a
result of Company growth, while interest expense, including loan cost
amortization, decreased from $200,573 for the quarter ended March 31, 1999 to
$8,110 for the quarter ended March 31, 2000. The decrease in interest expense
was a result of the Company not having any amounts outstanding on its line of
credit during the quarter ended March 31, 2000.
Pursuant to the advisory agreement, 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"). For the year ended March 31, 2000, the Company's operating expenses did
not exceed the Expense Cap.
The dollar amount of operating expenses is expected to increase as the Company
acquires additional Properties and invests in Mortgage Loans. However, general
operating and administrative expenses as a percentage of total revenues is
expected to decrease as the Company acquires additional Properties and invests
in Mortgage Loans.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations Market Risk for information related to quantitative and
qualitative disclosure about market risk.
<PAGE>
PART II
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities and Use of Proceeds. Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report.
1. Exhibits
3.1 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Included as Exhibit 3.2 to the Registration
Statement on Form S-11 (Registration No. 333-9943)
(the "1996 Form S-11") and incorporated herein by reference.)
3.2 CNL American Realty Fund, Inc. Bylaws (Included as Exhibit 3.3 to
the 1996 Form S-11 and incorporated herein by reference.)
3.3 CNL American Realty Fund, Inc. Articles of Amendment to the Amended
and Restated Articles of Incorporation (Included as
Exhibit 3.4 to the 1996 Form S-11 and incorporated herein
by reference.)
3.4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated
May 26, 1999 (Included as Exhibit 3.5 to the Registration
Statement on Form S-11 (Registration No. 333-67787) (the "1998
Form S-11") and incorporated herein by reference.)
4.1 Reinvestment Plan (Included as Exhibit 4.4 to the 1996 Form S-11 and
incorporated herein by reference.)
4.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Included as Exhibit 3.2 to the 1996 Form
S-11 and incorporated herein by reference.)
4.3 CNL American Realty Fund, Inc. Bylaws (Included as Exhibit 3.3
to the 1996 Form S-11 and incorporated herein by reference.)
4.4 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated
June 3, 1998 (Included as Exhibit 3.4 to the 1996 Form S-11
and incorporated the 1996 Form S-11 and incorporated
herein by reference.)
4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc.
(Included as Exhibit 3.5 to the 1998 Form S-11 and
incorporated herein by reference.)
10.1 Advisory Agreement, dated as of June 17, 1999, between CNL
Hospitality Properties, Inc. and CNL Hospitality
Advisors, Inc. (Formerly CNL Real Estate Advisors, Inc.)
(Included as Exhibit 10.1 to the June 30, 1999 Form 10-Q and
incorporated herein by reference.)
10.2 Indemnification Agreement between CNL Hospitality Properties, Inc.
and Lawrence A. Dustin dated February 24, 1999. Each of the
following directors and/or officers has signed a
substantially similar agreement as follows: James M. Seneff,
Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse,
Richard C. Huseman, Charles A. Muller, John T. Walker,
Jeanne A. Wall and Lynn E. Rose dated July 9, 1997, C. Brian
Strickland dated October 31, 1998, John A.Griswold dated
January 7, 1999, Charles E. Adams and Craig M. McAllaster
dated February 10, 1999 and Matthew W. Kaplan dated February
24, 1999 (Included as Exhibit 10.2 to the March 31,
1999 Form 10-Q and incorporated herein by reference.)
10.3 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Included as Exhibit 10.10 to the 1996 Form S-11 and incorporated
herein by reference.)
10.4 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Gwinnett Residence Associates, LLC, relating
to the Residence Inn(R) - Gwinnett Place (Included
as Exhibit10.11 to the 1996 Form S-11 and
incorporated herein by reference.)
10.5 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP,
relating to the Residence Inn(R) - Gwinnett Place
(Included as Exhibit 10.12 to the 1996 Form S-11 and
incorporated herein by reference.)
10.6 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Buckhead Residence Associates, LLC, relating to
the Residence Inn(R) - Buckhead (Lenox Park)
(Included as Exhibit 10.13 to the 1996 Form S-11 and
incorporated herein by reference.)
10.7 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP,
relating to the Residence Inn(R) - Buckhead (Lenox
Park) (Included as Exhibit 10.14 to the 1996 Form S-11 and
incorporated herein by reference.)
10.8 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to
the Residence Inn(R) - Gwinnett Place (Included as Exhibit
10.15 to the 1996 Form S-11 and incorporated herein by
reference.)
10.9 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to
the Residence Inn(R) - Buckhead (Lenox Park)
(Included as Exhibit 10.16 to the 1996 Form S-11 and
incorporated herein by reference.)
10.10 Master Revolving Line of Credit Loan Agreement with CNL
Hospitality Properties, Inc., CNL Hospitality
Partners, LP and Colonial Bank, dated July 31, 1998
(Included as Exhibit 10.17 to the 1996 Form S-11 and
incorporated herein by reference.)
10.11 Master Loan Agreement by and between CNL
Hotel Investors, Inc. and
Jefferson-Pilot Life Insurance Company, dated February 24,
1999 (Included as Exhibit 10.18 to the 1996 Form S-11 and
incorporated herein by reference.)
10.12 Securities Purchase Agreement between CNL Hospitality Properties,
Inc.and Five Arrows Realty Securities II L.L.C., dated
February 24, 1999 (Included as Exhibit 10.19 to the 1996
Form S-11 and incorporated herein by reference.)
10.13 Subscription and Stockholders' Agreement among CNL Hotel Investors,
Five Arrows Realty Securities II L.L.C., CNL Hospitality
Partners, LP and CNL Hospitality Properties, Inc.,
dated February 24, 1999 (Included as Exhibit 10.20 to
the 1996 Form S-11 and incorporated herein by reference.)
10.14 Registration Rights Agreement by and between CNL Hospitality
Properties, Inc.and Five Arrows Realty Securities II
L.L.C., dated February 24, 1999 (Included as Exhibit
10.21 to the 1996 Form S-11 and incorporated herein by
reference.)
10.15 First Amendment to Lease Agreement between CNL Hospitality
Partners, LP and STC Leasing Associates, LLC, dated
August 1, 1998, related to the Residence Inn - Gwinnett Place,
(amends Exhibit 10.8 above) and the First Amendment to
Agreement of Guaranty, dated August 1, 1998 (amends
Agreement of Guaranty attached as Exhibit I to 10.8 above)
(Included as Exhibit 10.15 to the September 30, 1999
Form 10-Q and incorporated herein by reference.)
10.16 First Amendment to Lease Agreement between CNL Hospitality
Partners, LP and STC Leasing Associates, LLC, dated
August 1, 1998, related to the Residence Inn - Buckhead
(Lenox Park) (amends Exhibit 10.9 above) and the First
Amendment to Agreement of Guaranty, dated August 1, 1998
(amends Agreement of Guaranty attached as Exhibit I to
10.9 above) (Included as Exhibit 10.16 to the September 30,
1999 Form 10-Q and incorporated herein by reference.)
10.17 Lease Agreement between Courtyard Annex, L.L.C. and City Center
Annex Tenant Corporation, dated November 15, 1999,
relating to the Courtyard - Philadelphia (Included as Exhibit
10.22 to the 1996 Form S-11 and incorporated herein by
reference.)
10.18 First Amended and Restated Limited Liability Company Agreement of
Courtyard Annex, L.L.C., relating to the Courtyard -
Philadelphia (Included as Exhibit 10.23 to the 1996 Form
S-11 and incorporated herein by reference.)
10.19 Purchase and Sale Agreement between Marriott International, Inc.,
CBM Annex, Inc., Courtyard Annex, Inc., as Sellers, and CNL
Hospitality Partners, LP, as Purchaser, dated November 15,
1999, relating to the Courtyard - Philadelphia (Included as
Exhibit 10.24 to the 1996 Form S-11 and incorporated herein
by reference.)
10.20 Lease Agreement between CNL Hospitality Partners, LP, and RST4 tenant
LLC, dated December 10, 1999, relating to the Residence
Inn - Mira Mesa (Included as Exhibit 10.25 to the 1996 Form
S-11 and incorporated herein by reference.)
10.21 Purchase and Sale Agreement between Marriott International, Inc.,
Towneplace Management Corporation, and Residence Inn by
Marriott, Inc., as Sellers, and CNL Hospitality Partners,
L.P., as Purchaser, dated November 24, 1999, relating
to the Residence Inn - Mira Mesa (Included as Exhibit
10.26 to the 1996 Form S-11 and incorporated herein
by reference).
27. Financial Data Schedule (Filed herewith.)
(b) No reports on Form 8-K were filed during the quarter ended March 31, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 1st day of May, 2000.
CNL HOSPITALITY PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
JAMES M. SENEFF, JR.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ C. Brian Strickland
C. BRIAN STRICKLAND
Vice President, Finance & Administration
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet of CNL Hospitality Properties, Inc. at March 31, 2000, and
its statement of income for the three months then ended and is qualified
in its entirety in its entirety by reference to the Form 10-Q of CNL
Hospitality Properties, Inc. for the three months ended March 31, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
<CASH> 142,143,157 <F1>
<SECURITIES> 0
<RECEIVABLES> 427,240
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 113,934,018
<DEPRECIATION> 2,484,663
<TOTAL-ASSETS> 309,122,011
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 338,733
<OTHER-SE> 291,692,861
<TOTAL-LIABILITY-AND-EQUITY> 309,122,011
<SALES> 0
<TOTAL-REVENUES> 5,581,157
<CGS> 0
<TOTAL-COSTS> 1,391,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,110
<INCOME-PRETAX> 3,945,084
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,945,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,945,084
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
<FN>
<F1>Cash inscludes certificates of deposit and restricted cash totaling
$5,000,000 and $409,538, respectively.
<F2>Due to the nature of this industry, CNL Hospitality Properties, Inc. has
an unclassified balance sheet, therefore, no values are listed above for
current assets and current liabilities.
</FN>
</TABLE>
