<PAGE>
Filed pursuant to Rule 424(b)(2)
Registration Nos. 33-64335 and 33-64335-01
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 9, 1996)
[LOGO]
10,000,000 PAIRED COMMON SHARES
STARWOOD LODGING
STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION
Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation (the
"Corporation" and, with the Trust, the "Company") is a fully integrated
owner/operator of hotels. Upon the completion of the Pending Acquisitions (as
defined herein), the Company will own interests in 73 hotel properties
containing approximately 19,000 rooms located in 24 states and the District of
Columbia. All of the securities offered hereby (the "Offering") consist of
shares of the Trust (the "Trust Shares") and shares of the Corporation (the
"Corporation Shares") which are "paired" and trade as units consisting of one
Trust Share and one Corporation Share (the "Paired Common Shares"). The Trust
intends to qualify as a real estate investment trust for federal income tax
purposes (a "REIT") beginning with its tax year ended December 31, 1995. The
Trust is the only publicly traded REIT with a paired share structure investing
in hotel properties. To ensure that the Trust qualifies as a REIT, ownership by
any person is limited to 8.0% of the Paired Common Shares, subject to certain
exceptions. Upon completion of the Offering, approximately 18.6% of the Paired
Common Shares on a fully diluted basis will be owned by Starwood Capital Group,
L.P. and its affiliates, subject to the ownership limitation provisions
described herein.
All of the Paired Common Shares offered hereby are being sold by the
Company. The Paired Common Shares are listed on the New York Stock Exchange
("NYSE") under the symbol "HOT." On August 6, 1996, the last reported sale price
of the Paired Common Shares on the NYSE was $36 1/8 per Paired Common Share.
SEE "RISK FACTORS" ON PAGE S-9 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT
IN THE COMPANY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Paired Common Share (3)......................... $35.875 $1.88 $33.995
Total (4)........................................... $358,750,000 $18,800,000 $339,950,000
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $2,000,000 payable by the Company.
(3) The Paired Common Shares offered hereby will be issued automatically upon
conversion of convertible notes being acquired by the Underwriters from the
Company. The price per Paired Common Share equals the conversion price of
the convertible notes. See "Convertible Notes" in the accompanying
Prospectus.
(4) The Company has granted the Underwriters a 30-day option to purchase
additional notes convertible into up to an aggregate of 1,500,000 additional
Paired Common Shares solely to cover over-allotments. If all of such
convertible notes are purchased, the total Price to Public, Underwriting
Discount and Proceeds to the Company will be $412,562,500, $21,620,000 and
$390,942,500, respectively. See "Underwriting."
---------------------
The Paired Common Shares are being offered by the several Underwriters,
subject to prior sale, when, as and if the convertible notes are delivered to
and accepted by them, subject to approval of certain legal matters by counsel
for the Underwriters. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Paired Common Shares offered hereby will be made in New York,
New York on or about August 12, 1996.
---------------------
MERRILL LYNCH & CO. LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
FURMAN SELZ
GOLDMAN, SACHS & CO.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
------------
The date of this Prospectus Supplement is August 6, 1996.
<PAGE>
[U.S. Map]
NEITHER THE NEVADA GAMING COMMISSION NOR THE NEVADA STATE GAMING CONTROL
BOARD HAS PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT AND
THE RELATED PROSPECTUS OR THE INVESTMENT MERITS OF THE SECURITIES OFFERED
HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PAIRED COMMON
SHARES
AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE>
The following is a description of the inside front gate fold cover pages:
[LOGO] Starwood Lodging
Properties to be Acquired*
Pictures on inside front cover (3)
1. EMBASSY SUITES, PALM DESERT CA.
2. RITZ CARLTON, KANSAS CITY MO.
3. ARLINGTON PARK HILTON, ARLINGTON HEIGHTS
4. DOUBLETREE HOTEL LAX, LOS ANGELES CA.
5. RITZ CARLTON, PHILADELPHIA PA.
Pictures on inside front cover (4)
1. THE WESTIN HOTEL, WALTHAM MA
2. DOUBLETREE GRAND HOTEL AT MALL OF AMERICA, BLOOMINGTON MN.
3. THE MARQUE OF ATLANTA, ATLANTA GA.
4. DOUBLETREE HOTEL HORTON PLAZA, SAN DIEGO CA.
5. SHERATON FORT LAUDERDALE AIRPORT HOTEL, DANIA FL.
* Assumes completion of the Pending Acquisitions. No assurances can be given
that the Pending Acquisitions will be consummated. See "Developments Since the
1995 Offering."
The following is a description of the inside back cover page:
Pictures on inside back cover
1. THE WESTIN HOTEL, WASHINGTON D.C.
2. DOUBLETREE GUEST SUITES, TAMPA FL.
3. BOSTON PARK PLAZA, BOSTON MA.
4. CLARION HOTEL, SAN FRANCISCO CA.
5. DOUBLETREE GUEST SUITES DFW, DALLAS TX.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR INCORPORATED HEREIN OR THEREIN BY REFERENCE. UNLESS OTHERWISE
INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT (I) REFLECTS
A PUBLIC OFFERING PRICE OF $35.875 PER PAIRED COMMON SHARE (AS DEFINED HEREIN),
(II) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, AND (III)
IS PRESENTED AS OF MARCH 31, 1996, EXCEPT THAT THE PROPERTY INFORMATION REFLECTS
THE COMPLETION OF THE PENDING ACQUISITIONS (AS DEFINED HEREIN). ALL REFERENCES
TO THE "COMPANY" REFER TO THE TRUST AND THE CORPORATION, AND ALL REFERENCES TO
THE "TRUST" AND TO THE "CORPORATION" INCLUDE THE TRUST AND THE CORPORATION AND
THOSE ENTITIES RESPECTIVELY OWNED OR CONTROLLED BY THE TRUST OR THE CORPORATION,
INCLUDING SLT REALTY LIMITED PARTNERSHIP (THE "REALTY PARTNERSHIP") AND SLC
OPERATING LIMITED PARTNERSHIP (THE "OPERATING PARTNERSHIP"). THE REALTY
PARTNERSHIP AND THE OPERATING PARTNERSHIP ARE REFERRED TO COLLECTIVELY AS THE
"PARTNERSHIPS." OTHER THAN WHEN USED IN THE FINANCIAL STATEMENTS INCORPORATED
HEREIN OR IN THE ACCOMPANYING PROSPECTUS BY REFERENCE, THE TERM "ON A FULLY
DILUTED BASIS" ASSUMES THE EXCHANGE BY STARWOOD CAPITAL GROUP, L.P., AND CERTAIN
OF ITS AFFILIATES (COLLECTIVELY, "STARWOOD CAPITAL") AND THE OTHER HOLDERS OF
ALL OF THEIR EXCHANGEABLE LIMITED PARTNER INTERESTS IN THE PARTNERSHIPS
("UNITS") FOR PAIRED COMMON SHARES BUT NOT THE EXERCISE OF OUTSTANDING OPTIONS
OR WARRANTS.
THE COMPANY
The Company is a fully integrated owner/operator of hotels which is
comprised of the Trust, which has owned hotel assets since 1969, and the
Corporation, which has managed hotel assets since 1980. Upon the completion of
the Pending Acquisitions, the Company will own, operate and manage a
geographically diversified portfolio of hotel assets (the "Hotel Assets"),
including fee, ground lease and first mortgage interests in 73 hotel properties,
comprising approximately 19,000 rooms located in 24 states and the District of
Columbia. Fifty-six of such hotels are operated under licensing, membership,
franchise or management agreements with national hotel organizations, including
Ritz Carlton-TM-, Westin-TM-, Marriott-TM-, Hilton-TM-, Sheraton-TM-, Omni-TM-,
Doubletree-TM-, Embassy Suites-TM-, Harvey-TM-, Radisson-TM-, Holiday Inn-TM-,
Residence Inn-TM-, Days Inn-TM-, Best Western-TM-, Ramada-TM- and Quality
Inn-TM-.
Since January 1995, the Company has been one of the fastest growing
owners/operators of hotels in the United States. Assuming completion of the
Pending Acquisitions, the Company will have invested approximately $842 million
in hotel acquisitions since January 1995, including approximately $778 million
since the 1995 Offering (as defined herein). See "Developments Since the 1995
Offering." The Company expects to continue to enhance, expand and diversify its
hotel portfolio by continuing to make opportunistic hotel acquisitions,
reinvesting strategically in its existing portfolio, and aggressively managing
the Company's hotels. The Company will continue to pursue the acquisition of
hotels, primarily in the upscale market segment, at prices which are below
replacement costs, and that have attractive yields on investment that the
Company believes can be sustained and improved over time. Commensurate with the
aggressive growth of the Company since the consummation of its reorganization in
January 1995, the Company has enhanced its executive management team and will
continue to enhance its management infrastructure and operational focus.
Management believes that the Company's unique "paired share" ownership
structure gives it a competitive advantage over other hotel REITs and other
hotel owner/operators with respect to owning and operating hotels. Hotel REITs
cannot operate their hotels and therefore other hotel REITs must enter into
agreements with third party lessees/operators. The Company's shareholders own
both the owner, the Trust, and the lessee/operator, the Corporation, of the
Company's hotels and retain the economic benefits of both the lease payments
received by the Trust and the operating profits realized by the Corporation
while maintaining the tax benefits of the Trust's REIT status. Furthermore, the
Company is able to prevent the erosion of value of its assets that results from
encumbering such properties with long term third party management contracts. The
pairing arrangement creates total commonality of ownership, as the shares of
beneficial interest of the Trust (the "Trust Shares") and the shares of common
stock of the Corporation (the "Corporation Shares") are paired on a one for one
S-3
<PAGE>
basis and may only be held or transferred as units consisting of one Trust Share
and one Corporation Share ("Paired Common Shares"). The Paired Common Share
structure eliminates certain potential conflicts of interest between the hotel
owner and the hotel operator. Although the Internal Revenue Code of 1986, as
amended (the "Code") has prohibited the pairing of shares between a REIT and an
operating company since 1983, this rule does not apply to the Company because
its Paired Common Share structure has existed since 1980. The Trust is the only
publicly traded hotel REIT which has a paired share structure.
In January 1995, the Company completed a reorganization (the
"Reorganization") which combined the hotel investment and operating business of
the Company with certain hotel investments of Starwood Capital, a private real
estate investment firm. Pursuant to the Reorganization, Starwood Capital
contributed to the Company several hotels, mortgages, cash and related assets in
exchange for Units. Subsequent to the Reorganization, in June 1995, the Company
sold Paired Common Shares through an offering (the "1995 Offering"), generating
net proceeds of $245.7 million, which were used to repay certain indebtedness
and purchase additional hotels.
DEVELOPMENTS SINCE THE 1995 OFFERING
Since the 1995 Offering, the Company has benefited from the following
developments:
PENDING ACQUISITIONS. As of July 15, 1996, the Company had entered into
agreements to purchase 18 full-service hotels containing 5,860 total rooms for
an aggregate purchase price of approximately $464 million (the "Pending
Acquisitions"). These hotels are generally located in major metropolitan markets
and primarily operate in the upscale market segment. The Company believes that
the Pending Acquisitions represent attractive investment opportunities because,
among other reasons, (i) the hotels are well located, primarily in major
metropolitan markets, with diverse demand generators, (ii) the hotels are being
acquired at significant discounts to estimated replacement cost, thereby
providing a competitive advantage over potential new construction, and (iii) the
hotels represent attractive initial returns with the potential for revenue and
cash flow growth. The Pending Acquisitions are described below.
TEACHERS PORTFOLIO: This portfolio (the "Teachers Portfolio") consists of
eight upscale and luxury full service hotels containing 3,141 total rooms owned
by subsidiaries of Teachers Insurance and Annuity Association to be acquired for
approximately $309 million in cash, representing an investment of approximately
$98,000 per room. The hotels are operated under franchise affiliations and
management agreements with Ritz Carlton-TM-, Westin-TM-, Sheraton-TM- and
Doubletree-TM-. The Company believes that the acquisition of this portfolio
represents an attractive investment opportunity because (i) the hotels benefit
from prime locations within their respective markets, (ii) there exists the
potential for cost savings and the potential for enhancement of revenues from
the implementation of alternative marketing strategies including, where
appropriate, changes in franchise affiliation, (iii) it presents a unique
opportunity to acquire first-class hotels that are not encumbered by long-term,
noncancellable management contracts, (iv) the acquisition price represents
approximately 65% of estimated replacement cost, and (v) the hotels are
generally in excellent physical condition. The Company expects to complete the
acquisition of the Teachers Portfolio during August 1996. For the twelve months
ended March 31, 1996, the weighted average daily rate ("ADR") and occupancy for
these hotels were $93.78 and 75.6%, respectively.
HOD PORTFOLIO: This portfolio (the "HOD Portfolio") consists of nine
upscale hotels containing 2,425 total rooms owned by Hotels of Distinction
Ventures, Inc., to be acquired for approximately $135 million in cash,
representing an investment of approximately $56,000 per room. The hotels are
generally operated under franchise affiliations with Hilton-TM-, Sheraton-TM-,
Embassy Suites-TM-, and Radisson-TM-. The Company believes that the acquisition
of this portfolio represents an attractive investment opportunity because (i)
many of these hotels have the potential for improvement in revenue per available
room ("REVPAR") as against their competitive set, (ii) the acquisition price
S-4
<PAGE>
represents approximately 65% of estimated replacement cost, (iii) the Company
will assume management of these hotels immediately upon closing, and (iv) the
historical results reflect an attractive initial yield. The Company expects to
complete the acquisition of the HOD Portfolio during August 1996. For the twelve
months ended March 31, 1996, the weighted average ADR and occupancy for these
hotels were $80.15 and 69.4%, respectively.
MARRIOTT FORRESTAL VILLAGE: The Company has entered into an agreement to
acquire this 294-room upscale hotel for approximately $19.6 million,
representing an investment of approximately $67,000 per room. The acquisition
price represents approximately 70% of estimated replacement cost and
opportunities exist to expand the number of rooms at this property. The Company
expects to complete the acquisition of this property during August 1996.
RECENT ACQUISITIONS. Since the 1995 Offering, the Company has acquired 13
hotels containing 4,574 total rooms at an aggregate cost of approximately $315
million (the "Recent Acquisitions"). The hotels are generally operated under
franchise affiliations with Westin-TM-, Sheraton-TM-, Omni-TM-, Doubletree-TM-,
Embassy Suites-TM-, Holiday Inn-TM-, and Days Inn-TM-. These acquisitions were
integral in establishing the Company's presence in major metropolitan markets,
including New York, Chicago, Boston, Washington, D.C., and Philadelphia, and are
operated in the upscale and mid-scale market segments. Furthermore, these
acquisitions demonstrate the Company's ability to creatively structure and
consummate complex, tax efficient transactions. For the twelve months ended
March 31, 1996, the weighted average ADR and occupancy for these hotels were
$91.34 and 73.1%, respectively.
MANAGEMENT AND ORGANIZATIONAL ENHANCEMENTS. The Corporation recently hired
Eric A. Danziger, formerly Executive Vice President of Wyndham Hotel Corporation
and President of Wyndham Hotels and Resorts, as the President and Chief
Executive Officer of the Corporation and Theodore W. Darnall, formerly Senior
Vice President of Operations of Interstate Hotels Company, as Executive Vice
President and Chief Operating Officer of the Corporation. See "Management." In
addition to these hirings, the Corporation has further reorganized its
management structure for hotel operations to provide a significant increase in
direct hotel supervision. In particular, expertise has been added in the areas
of food and beverage, sales and marketing, revenue management, accounting, MIS
and capital project management. Management of the Corporation believes that
these enhancements to its organizational structure have positioned the
Corporation to further improve its hotel operating results and support the
current portfolio and future acquisitions of the Company. Additionally, as part
of the Company's efforts to recruit and retain well-qualified senior management,
the Boards of the Trust and Corporation are considering amendments to their
respective compensation and long term incentive programs which would, subject to
stockholder approval, provide for the grant of awards of restricted Paired
Common Shares based upon the amount of shareholder value created over a five
year period. See "Management." The Company has recently relocated its corporate
headquarters to Phoenix, Arizona, a favorable operating environment for
corporate headquarters.
RENOVATIONS AND FRANCHISE REAFFILIATIONS. The Company has completed a $2.1
million renovation of the Portland Riverside Inn., Portland, OR. The Company has
undertaken renovations of the Dallas Park Central, Dallas, TX, the Sheraton
Colony Square, Atlanta, GA and the Terrace Garden Inn, Atlanta, GA. The Company
estimates that it will cost approximately $20 million to complete such
renovations. In addition, the Company has commenced the design phase for
renovations at the Doral Inn, New York, NY, The Westin Hotel, Washington, D.C.
and The Meany Tower, Seattle, WA, and has opportunities for renovation at, among
others, the Boston Park Plaza, Boston, MA, the Omni Hotel, Chapel Hill, NC, the
Tucson Plaza Hotel, Tucson, AZ, and the Radisson Hotel, Gainesville, FL. The
Company flagged the Grand Hotel in Washington, D.C. as a Westin effective
February 1, 1996 and flagged the French Quarter Suites Hotel in Lexington, KY as
a Doubletree Guest Suites effective March 31, 1996.
DISPOSITIONS. As part of its continuous evaluation of its portfolio and
efforts to redeploy capital in high growth assets, the Company has identified
certain long held properties for sale. These properties include the Company's
gaming assets and other hotels primarily in the budget and economy market
segments that the Company believes have limited growth potential. The Company
has completed the sale of the Best Western Columbus North in Columbus, OH for
approximately $3.1 million, and the Company has entered into an agreement to
sell the Bourbon Street Hotel & Casino in Las Vegas, NV,
S-5
<PAGE>
for an aggregate purchase price of approximately $7.8 million. There can be no
assurance that the Company will complete the sale of the Bourbon Street Hotel &
Casino or any of the other properties designated for sale.
FINANCING ACTIVITY. In April 1996, the Company sold additional Paired
Common Shares through an offering (the "April 1996 Offering") generating net
proceeds of $62.4 million, which were used to purchase additional hotels.
In October 1995, the Company increased the amount available under its
Mortgage Loan Funding Facility Agreement (as amended, the "Mortgage Facility"),
from $44.6 million to $71.0 million and entered into the $135.0 million Line of
Credit Agreement (as amended, the "Credit Facility"), both of which provide it
with acquisition financing. In March 1996, the Company obtained a $24.0 million
loan (the "Term Loan"). In April 1996, the Company increased the amount
available under the Term Loan to $94.0 million.
In January 1996, the Company entered into two interest rate hedging
agreements (the "Treasury Lock Transactions"), which have the effect of fixing
the base rate of interest at 5.7 percent for debt the Company intends to issue
in October, 1996 with an aggregate notional principal amount of $100 million and
a term to maturity of seven years. The actual interest rate will be determined
by reference to this base rate.
The Company has agreed to terms with an institutional lender with respect to
additional debt financing (the "Acquisition Facility") in an aggregate amount of
up to $300 million to finance a portion of the acquisition cost of the Teachers
Portfolio and the HOD Portfolio. This financing is subject to the satisfaction
of certain conditions, including the negotiation of definitive documentation.
THE OFFERING
<TABLE>
<S> <C>
Paired Common Shares Offered Hereby......... 10,000,000 shares (1)
Paired Common Shares Outstanding After the
Offering................................... 31,790,863 shares (2)
Use of Proceeds............................. The net proceeds of the Offering, which are
expected to be approximately $338.0 million
(approximately $388.9 million if the
Underwriter's over-allotment option is
exercised in full), will be used to fund a
portion of the acquisition costs of the
Teachers Portfolio and the HOD Portfolio.
New York Stock Exchange Symbol.............. "HOT"
</TABLE>
- ------------------------
(1) Assumes the Underwriters' over-allotment option to purchase up to 1,500,000
Paired Common Shares is not exercised. See "Underwriting."
(2) Includes 5,991,977 Paired Common Shares which are issuable upon the exchange
of outstanding Units. Excludes (i) 1,701,685 Paired Common Shares issuable
pursuant to outstanding options under the stock option plans of the Company,
(ii) 126,461 restricted Paired Common Shares issued or issuable to certain
senior executive officers and (iii) 276,662 Paired Common Shares issuable
pursuant to warrants which expire in September 1996 and which have an
exercise price of $101.70 per Paired Common Share.
S-6
<PAGE>
SUMMARY SELECTED FINANCIAL STATEMENTS
The following table sets forth selected combined historical and pro forma
financial information for the Company. The following information should be read
in conjunction with (i) the historical financial statements and notes thereto
for the Company, (ii) Management's Discussion and Analysis of Combined Financial
Condition and Results of Operations, which are included in the Company's Joint
Annual Report on Form 10-K/A for the year ended December 31, 1995 and the
Company's Joint Quarterly Report on Form 10-Q for the period ended March 31,
1996, and (iii) the Company's Reports on Form 8-K dated January 4, 1996, January
24, 1996, April 26, 1996 and June 28, 1996. The historical operating information
of the Company as of December 31, 1995, 1994, 1993, 1992, and 1991 and for the
years ended December 31, 1995, 1994, 1993, 1992 and 1991 have been derived from
financial statements that are not required to be included in this Prospectus
Supplement or the accompanying Prospectus. In the opinion of management, the
financial data as of March 31, 1996 and for the three months ended March 31,
1996 and 1995 include all adjustments necessary to present fairly the
information set forth therein.
The pro forma operations and other data for the three months ended March 31,
1996 and for the year ended December 31, 1995 have been prepared as if each of
the Recent Acquisitions, the Pending Acquisitions, the April 1996 Offering and
the Offering (assuming no exercise of the Underwriters' over-allotment option)
had been consummated at the beginning of the periods presented and the pro forma
balance sheet data has been prepared as if the each of the Recent Acquisitions,
the Pending Acquisitions, the April 1996 Offering and the Offering had been
consummated on March 31, 1996. The pro forma financial information is not
necessarily indicative of what the actual financial position and results of
operations of the Company would have been as of and for the periods indicated,
nor does it purport to represent the Company's future financial position and
results of operations.
STARWOOD LODGING
SUMMARY COMBINED SELECTED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA -----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenue................ $ 132,272 $ 54,885 $ 32,138 $ 515,616 $ 161,716 $ 113,997 $ 117,155 $ 117,656 $ 113,436
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Total expenses............... 120,806 49,141 32,059 479,635 143,578 118,660 124,187 137,399 135,520
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest in Partnership..... 11,466 5,744 79 35,981 18,138 (4,663) (7,032) (19,743) (22,084)
Net income (loss)............ $ 9,305 $ 4,090 $ 348 $ 29,199 $ 8,970 $ (4,663) $ (7,032) $ (19,743) $ (22,084)
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Net income (loss) per Paired
Common Share................ $ 0.36 $ 0.30 $ 0.17 $ 1.13 $ 1.15 $ (2.31) $ (3.48) $ (9.73) $ (10.92)
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total real estate
investments................. $1,084,268 $ 512,968 $ 246,113 $ 419,077 $ 165,496 $ 179,172 $ 187,753 $ 200,540
Total assets................. 1,136,396 565,096 279,765 459,994 183,955 195,352 210,945 221,917
Total debt................... 397,943 228,764 198,555 123,485 160,482 170,886 170,297 171,271
Shareholders' equity......... 572,786 212,130 7,756 215,468 8,708 13,326 20,351 40,083
OTHER DATA:
Cash flows from:
Operating activities....... $ 15,290 $ (686) $ 16,411 $ 8,893 $ 5,532 $ 4,690 $ (6,158)
Investing activities....... (100,041) (1,738) (181,995) 4,489 (3,645) (1,514) 12,159
Financing activities....... 96,065 9,479 169,851 (13,969) (6,752) (1,255) (7,139)
Funds from operations (1).... $ 27,289 13,125 3,055 $ 95,606 33,062 6,449 5,031 5,739 1,383
EBITDA (2)................... 35,159 16,627 8,882 126,828 46,745 24,055 20,218 19,947 17,841
</TABLE>
S-7
<PAGE>
- ------------------------------
(1) Management and industry analysts generally consider funds from operations
("FFO") to be one measure of the financial performance of an equity REIT
that provides a relevant basis for comparison among REITs and it is
presented to assist investors in analyzing the performance of the Company.
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as income before minority interest (computed in accordance with
generally accepted accounting principles), excluding gains (losses) from
debt restructuring and sales of property, and real estate related
depreciation and amortization (excluding amortization of financing costs).
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. FFO should not
be considered an alternative to net income as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities as a measure of liquidity. FFO includes $226,000 and $1,000,000
of interest income recognized in excess of the actual cash received on
mortgage notes receivable (as a result of the notes being purchased at a
discount) secured by the Atlantic City Quality Inn and by the Secaucus
Ramada Suites for the three months ended March 31, 1996 and year ended
December 31, 1995, respectively.
(2) Management considers EBITDA to be one measure of the cash flows from
operations of the Company before debt service that provides a relevant basis
for comparison among REITs and it is presented to assist investors in
analyzing the performance of the Company. EBITDA is defined as income before
minority interest excluding gains and losses from debt restructuring and
sales of property, provision for losses, interest and depreciation and
amortization. EBITDA should not be considered as an alternative to net
income as an indication of the Company's financial performance or as an
alternative to cash flows from operating activities as a measure of
liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's needs.
S-8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
This Prospectus Supplement and the accompanying Prospectus contain
statements which constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Those statements appear in a
number of places in this Prospectus Supplement and the accompanying Prospectus
and include statements regarding the intent, belief or current expectations of
the Company, its Trustees, Directors or its officers with respect to (i) the
declaration or payment of distributions, (ii) the finalization of the terms of,
or the consummation of, the acquisitions described in this Prospectus
Supplement, (iii) the management or operation of hotels to be acquired, (iv)
other potential acquisitions by the Company, (vi) the use of the proceeds of
this Offering, (vii) the Company's financing plans, (viii) the policies of the
Company regarding investments, dispositions, financings, conflicts of interest
or other matters, (ix) the Company's qualification and continued qualification
as a REIT or (x) trends affecting the Company's or any hotel's financial
condition or results of operations. Prospective investors are cautioned that any
such forward looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Prospectus Supplement, including
without limitation the information set forth below and the information under the
heading "The Company" identify important factors that could cause such
differences.
FAILURE TO CLOSE PENDING ACQUISITIONS
The Company has entered into agreements relating to the Pending
Acquisitions. However, the completion of these transactions remains subject to
certain conditions. If any such conditions are not satisfied with respect to any
of the Pending Acquisitions, the Company may be unable to complete the purchase
of the hotel(s) subject to such conditions. The Company has deposited with the
respective sellers approximately $13 million in the aggregate in connection with
the purchase of the Teachers Portfolio, the HOD Portfolio and the Marriott
Forrestal Village. If the Company is unable for any reason to complete any of
the Pending Acquisitions, the Company may be unable to recover some or all of
the amounts expended or deposited by it.
FAILURE TO MANAGE RAPID GROWTH
To successfully implement its acquisition strategy, the Company must
integrate the hotels acquired since the 1995 Offering and any other subsequently
acquired hotels into its existing operations. Since the closing of the 1995
Offering, the Company's portfolio of hotel properties increased from 47 to 73.
During such period, the Company also entered geographic markets where it
previously did not have any properties. As a result, the consolidation of
functions and integration of departments, systems and procedures of acquired
properties with the Company's existing operations presents a significant
management challenge, and the failure to integrate such properties into the
Company's management and operating structures could have a material adverse
effect on the results of operations and financial condition of the Company.
The Company's future success and its ability to manage future growth depends
in large part upon the efforts of its senior management and its ability to
attract and retain key executive officers and other highly qualified personnel.
Competition for such personnel is intense. Since January 1995, the Company has
experienced significant changes in its senior management, including the recent
hiring of a new Chief Executive Officer and Chief Operating Officer of the
Corporation. There can be no assurance that the Company will continue to be
successful in attracting and retaining qualified personnel. Accordingly, there
can be no assurance that the Company's senior management will be able to
successfully execute or implement the Company's growth and operating strategies.
TAX RISKS
FAILURE TO QUALIFY AS A REIT. The Trust believes that it has operated so as
to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable
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year ended December 31, 1995 and intends to continue to so operate. No
assurance, however, can be given that the Trust will qualify or remain qualified
as a REIT. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. The complexity of these provisions is greater in
the case of a REIT that owns hotels and leases them to a corporation with which
its stock is paired. The determination of various factual matters and
circumstances not entirely within the Trust's control may affect its ability to
qualify as a REIT. In addition, no assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Furthermore, the
qualification of the Trust as a REIT will depend on the Trust's continuing
ability to meet various requirements concerning, among other things, the
ownership of Paired Common Shares, the nature of its assets, the source of its
income and the amount of its distributions to its shareholders.
If in any taxable year the Trust were to fail to qualify as a REIT, the
Trust would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Trust would also be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. As a result, the funds available for distribution to the Trust's
shareholders would be reduced for each of the years involved.
REQUIRED DISTRIBUTIONS TO SHAREHOLDERS. In order to obtain and retain REIT
status, the Trust must distribute to its shareholders at least 95% of its REIT
taxable income (excluding any net capital gain). In addition, the Trust will be
subject to tax on its undistributed net taxable income and net capital gain, and
a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of (i) 85% of its ordinary income, (ii) 95% of its capital gain net income for
that year, and (iii) 100% of its undistributed income from prior years. The
Trust intends to make distributions to its shareholders to comply with the
distribution requirements of the Code and to avoid federal income taxes and the
nondeductible federal excise tax. The Trust (or the Realty Partnership) could be
required to borrow funds on a short-term basis to meet the REIT distribution
requirements, which borrowing may not otherwise be advisable for the Company.
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITS
LIMITS ON CHANGE OF CONTROL. Certain provisions of the Trust's Declaration
of Trust (the "Declaration of Trust") and the Corporation's Articles of
Incorporation (the "Articles of Incorporation") including, without limitation,
the ability to issue preferred shares and the maintenance of staggered terms for
trustees and directors, may have the effect of discouraging a third party from
making an acquisition proposal for the Trust and the Corporation and may thereby
inhibit a change in control under circumstances that could give the holders of
Paired Common Shares the opportunity to realize a premium over the
then-prevailing market prices.
OWNERSHIP LIMITATION. In order for the Trust to qualify and to maintain its
qualification as a REIT, not more than 50% in value of its outstanding shares
may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Code to include certain entities). Furthermore, actual or constructive
ownership of a sufficient number of the Paired Common Shares could cause the
Operating Partnership or the Corporation to become a related party tenant of the
Trust which would result in the loss of the Trust's REIT status. In order to
help preserve the Trust's REIT status, the Declaration of Trust and the Articles
of Incorporation prohibit actual or constructive ownership by any one person or
group of related persons of more than 8.0% of the Paired Common Shares (the
"Ownership Limitation"). Generally, the Paired Common Shares owned by related or
affiliated persons will be aggregated and certain options and warrants will be
treated as exercised for purposes of the Ownership Limitation.
The constructive ownership rules of the Code are extensive and complex and
may cause Paired Common Shares owned, directly or indirectly, by all direct or
indirect partners in any partnership,
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including the direct and indirect owners of interests in the Realty Partnership
and the Operating Partnership, and other classes of related individuals and/or
entities to be deemed to be constructively owned by one individual or entity. As
a result, the acquisition of less than 8.0% of the Paired Common Shares (or the
acquisition of an interest in an entity which owns Paired Common Shares) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 8.0% of the Paired
Common Shares, and thus subject such Paired Common Shares to the Ownership
Limitation. Direct or constructive ownership in excess of the Ownership
Limitation would cause the violative transfer or ownership to be void, or cause
such shares to be converted into "Excess Shares," which have limited economic
rights, to the extent necessary to ensure that the purported transfer or other
event does not result in a violation of the Ownership Limitation.
Notwithstanding the Ownership Limitation, given the breadth of the Code's
constructive ownership rules and that it is not possible for the Trust and the
Corporation to continuously monitor direct and constructive ownership of Paired
Common Shares, it is possible that an individual or entity could at some time
constructively own sufficient Paired Common Shares to cause termination of the
Trust's REIT status.
RISK OF INFLUENCE BY STARWOOD CAPITAL
Individuals employed by or otherwise affiliated with Starwood Capital hold
two positions on the Board of Trustees and two positions on the management
committee of the Operating Partnership and will hold at least two positions on
the Board of Directors subject to receipt of certain regulatory approvals.
Accordingly, although the Company has a policy requiring a majority of its
trustees and directors to be "independent," Starwood Capital may have the
ability to exercise certain influence over the affairs of the Company. Due to
its different tax situation, prior to the exchange of its Units, Starwood
Capital's objectives regarding the pricing, structure and timing of any sale of
certain properties or the restructuring or sale of certain mortgage loans may
differ from the objectives of the shareholders of the Company or current
management of the Company. Barry S. Sternlicht is the President and Chief
Executive Officer of, and controls, Starwood Capital. Mr. Sternlicht is a
trustee of the Trust and the Chairman and Chief Executive Officer of the Trust.
In addition, Mr. Sternlicht is a member of the management committee of the
Operating Partnership and, upon the receipt of certain regulatory approvals, he
will be a director of the Corporation. As a consequence, Mr. Sternlicht has the
ability to exercise certain influence over the affairs of the Company.
RISK OF DEBT FINANCING
As a result of incurring debt, the Company is subject to the risks normally
associated with debt financing, including the risk (i) that cash flow from
operations will be insufficient to meet required payments of principal and
interest and (ii) of fluctuations in interest rates. The Credit Facility, the
Mortgage Facility and the Term Loan, under which the Company has borrowed, as of
June 30, 1996, approximately $130 million, $71 million and $74 million,
respectively, mature in October 1998, July 1997 and April 1997, respectively.
See "Indebtedness of the Company." In addition, the Company expects to obtain
the Acquisition Facility in an amount sufficient, together with the proceeds of
the Offering, to complete the acquisition of the Teachers Portfolio and the HOD
Portfolio. Although the Company anticipates that it will be able to repay or
refinance the Credit Facility, Mortgage Facility, the Term Loan, the Acquisition
Facility and any other such indebtedness, there can be no assurance that it will
be able to do so or that the terms of such refinancings will be favorable to the
Company.
LIMITATION ON STARWOOD CAPITAL AND WESTIN OBLIGATIONS
Starwood Capital has agreed that, subject to certain exceptions and
limitations, until the later of June 1998 or the time at which no officer,
director, general partner or employee of Starwood Capital is on either the Board
of Trustees or the Board of Directors, Starwood Capital will not compete with
the Realty Partnership or the Operating Partnership (the "Starwood Noncompete")
and will present to the Partnerships certain investment opportunities in hotel
properties in the United States. Mr. Sternlicht is also bound by a similar
noncompete agreement. The termination of either of those noncompete agreements
and the exceptions to and limitations thereon could have a material adverse
effect on the Company. See "Management."
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In addition, Starwood Capital owns an interest in W&S, L.L.C., which owns a
controlling interest in Westin Hotel Company and certain affiliates ("Westin"),
which own equity interests in domestic and international hotels and which
manage, franchise or represent hotels worldwide. The Company has entered into an
agreement (the "Westin Agreement") with Westin pursuant to which Westin has
agreed that, subject to certain exceptions and limitations, Westin will not
acquire or seek to acquire United States hotel equity interests. The termination
of the Westin Agreement and the exceptions to and limitations on the Westin
Agreement could have a material adverse effect on the Company.
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
Both the Maryland statute governing real estate investment trusts formed
under the laws of that state (the "Maryland REIT Law") and the Declaration of
Trust provide that no shareholder of the Trust will be personally liable for any
obligation of the Trust solely as a result of his status as a shareholder of the
Trust. The Declaration of Trust further provides that the Trust shall indemnify
each shareholder against any claim or liability to which the shareholder may
become subject by reason of his being or having been a shareholder. In addition,
it is the Trust's policy to include a clause in its contracts which provides
that shareholders assume no personal liability for obligations entered into on
behalf of the Trust. However, with respect to tort claims, contractual claims
where shareholder liability is not so negated, claims for taxes and certain
statutory liability, the shareholders may, in some jurisdictions, be personally
liable to the extent that such claims are not satisfied by the Trust. Inasmuch
as the Trust does and will carry public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which the Trust's assets plus its insurance coverage would be
insufficient to satisfy the claims against the Trust and its shareholders.
HOTEL INDUSTRY RISKS
OPERATING RISKS. The properties of the Company are subject to all operating
risks common to the hotel industry. These risks include: changes in general
economic conditions; the level of demand for rooms and related services;
cyclical over-building in the hotel industry; restrictive changes in zoning and
similar land use laws and regulations or in health, safety and environmental
laws, rules and regulations; the inability to secure property and liability
insurance to fully protect against all losses or to obtain such insurance at
reasonable rates; and changes in travel patterns. In addition, the hotel
industry is highly competitive. The properties of the Company compete with other
hotel properties in their geographic markets. However, some of the Company's
competitors may have substantially greater marketing and financial resources
than the Company.
FRANCHISE AGREEMENT RISKS. Upon completion of the Pending Acquisitions, all
but 17 of the Hotel Assets will be operated pursuant to existing franchise or
license agreements with national hotel organizations (the "Franchise
Agreements"). Franchise agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of a hotel
property in order to maintain uniformity in the system created by the
franchisor. In addition, compliance with such standards could require a
franchisee to incur significant expenses or capital expenditures. Certain of the
Franchise Agreements require the Company to obtain the consent of the franchisor
to certain matters, including certain securities offerings. Although the Company
has been able to obtain similar consents under such agreements in the past, the
failure to obtain any such consent could be grounds for termination of such
Franchise Agreements.
SEASONALITY OF HOTEL BUSINESS. The hotel industry is seasonal in nature.
Generally, hotel revenues are greater in the second and third quarters than in
the first and fourth quarters. As a result, the Trust may be required from time
to time to borrow to provide funds necessary to make quarterly distributions.
REGULATION OF GAMING OPERATIONS. The Company's casino gaming facilities
located in Las Vegas, Nevada are subject to extensive licensing and regulatory
control by the Nevada Gaming Commission (the "Nevada Commission") and other
Nevada authorities. These regulatory authorities have broad powers with respect
to the licensing of gaming operations, and may revoke, suspend, condition or
limit the gaming approvals and licenses of the Corporation and its gaming
subsidiary, impose substantial
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fines and take other actions, any of which could have a material adverse affect
on the Corporation's business and the going concern value of the Trust's
hotel/casinos. Directors, officers and certain key employees of the Corporation
and its gaming subsidiary are subject to licensing or suitability determinations
by the Nevada Commission and local gaming authorities. If the Nevada Commission
were to find a person occupying any such position unsuitable, the Corporation
would be required to sever its relationship with that person. Any beneficial
holder of the Corporation's voting securities may be required to file an
application, be investigated, and have his suitability as a holder of such
securities determined if the Nevada Commission has reason to believe that such
ownership would be inconsistent with the policies of the State of Nevada. Any
person who acquires more than 5% of the Corporation Shares must report such
acquisition to the Nevada Commission. Beneficial owners of more than 10% of the
Corporation Shares must apply to be found suitable by the Nevada Commission. In
addition, changes in control of the Corporation may not occur without the prior
approval of the Nevada Commission. The Company has entered into an agreement to
sell the Bourbon Street Hotel & Casino and is actively marketing for sale its
other gaming property, however, there can be no assurance that the sale of the
Bourbon Street Hotel & Casino will be consummated.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred. If the
properties of the Company do not generate revenue sufficient to meet operating
expenses, including debt service and capital expenditures, the income of the
Company and its ability to make distributions to its shareholders will be
adversely affected. In addition, income from properties and real estate values
are also affected by a variety of other factors, such as governmental
regulations and applicable laws (including real estate, zoning, tax and eminent
domain laws), interest rate levels and the availability of financing. In
addition, equity real estate investments, such as the investments held by the
Company and any additional properties that may be acquired by the Company, are
relatively illiquid.
POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real property may become liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of hazardous or toxic substances, or
the failure properly to remediate such substances when present, may adversely
affect the owner's ability to sell or rent such real property or to borrow using
such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic wastes may be liable for the costs of removal or
remediation of such wastes at the disposal or treatment facility, regardless of
whether such facility is owned or operated by such person. Other federal, state
and local laws, ordinances and regulations require abatement or removal of
certain asbestos-containing materials in the event of demolition or certain
renovations or remodeling and govern emissions of and exposure to asbestos
fibers in the air. The operation and subsequent removal of certain underground
storage tanks also are regulated by federal and state laws.
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THE COMPANY
The Company is a fully integrated owner/operator of hotels which is
comprised of the Trust, which has owned hotel assets since 1969, and the
Corporation which has managed hotel assets since 1980. Upon the completion of
the Pending Acquisitions, the Company will own, operate and manage a
geographically diversified portfolio of hotel assets, including fee, ground
lease and first mortgage interests in 73 hotel properties, comprising
approximately 19,000 rooms located in 24 states and the District of Columbia.
Fifty-six of such hotels are operated under licensing, membership, franchise or
management agreements with national hotel organizations, including Ritz
Carlton-TM-, Westin-TM-, Marriott-TM-, Hilton-TM-, Sheraton-TM-, Omni-TM-,
Doubletree-TM-, Embassy Suites-TM-, Harvey-TM-, Radisson-TM-, Holiday Inn-TM-,
Residence Inn-TM-, Days Inn-TM-, Best Western-TM-, Ramada-TM-, and Quality
Inn-TM-.
Since January 1995, the Company has been one of the fastest growing
owners/operators of hotels in the United States. Assuming completion of the
Pending Acquisitions, the Company will have invested approximately $842 million
in hotel acquisitions since January 1995, including approximately $778 million
since the 1995 Offering. The Company expects to continue to enhance, expand and
diversify its hotel portfolio by continuing to make opportunistic hotel
acquisitions, reinvesting strategically in its existing portfolio, and
aggressively managing the Company's hotels. The Company will continue to pursue
the acquisition of hotels, primarily in the upscale market segment, at prices
which are below replacement costs, and that have attractive yields on investment
that the Company believes can be sustained and improved over time. The Company
is actively pursuing the acquisition of other primarily upscale hotels in major
metropolitan areas. See "--Business Objectives," "--Acquisition Strategies" and
"Developments Since the 1995 Offering."
Management believes that the Company's unique "paired share" ownership
structure gives it a competitive advantage over other hotel REITs and other
hotel owner/operators with respect to owning and operating hotels. Hotel REITs
cannot operate their hotels and therefore other hotel REITs must enter into
agreements with third party lessees/operators. The Company's shareholders own
both the owner, the Trust, and the lessee/operator, the Corporation, of the
Company's hotels. Therefore, the Company's shareholders retain the economic
benefits of both the lease payments received by the Trust and the operating
profits realized by the Corporation while maintaining the tax benefits of the
Trust's REIT status. Furthermore, the Company is able to prevent the erosion of
value of its assets that results from encumbering such properties with long term
third party management contracts. The pairing arrangement creates total
commonality of ownership, as the Trust Shares and the Corporation Shares are
paired on a one for one basis and may only be held or transferred as units
consisting of one Trust Share and one Corporation Share.
Under the REIT qualification requirements of the Code, REITs generally must
lease their hotels to third party operators. Since such leases must be
structured so that the third party operator captures a portion of each hotel's
current cash flow and future growth, the shareholders of a typical hotel REIT do
not receive all of the economic benefits of both hotel ownership and hotel
operations. Leases may create conflicts of interest between the REIT and the
operator of each hotel, particularly when insiders of the REIT own an economic
interest in the operator. The Paired Common Share structure eliminates potential
conflicts of interest between the hotel owner and the hotel operator. Although
the Code has prohibited the pairing of shares between a REIT and an operating
company since 1983, this rule does not apply to the Company because its Paired
Common Share structure has existed since 1980. The Trust is the only publicly
traded hotel REIT which has a paired share structure.
Commensurate with the aggressive growth of the Company's hotel portfolio
since the Reorganization, the Company has enhanced its executive management
team, and will continue to enhance its management infrastructure and operational
focus. In addition to the Corporation's recent hiring of a new chief executive
officer and a new chief operating officer, the Corporation has further
reorganized its management structure for hotel operations to provide a
significant increase in direct hotel supervision. In particular, expertise has
been added in the areas of food and beverage, sales and marketing,
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revenue management, MIS and capital project management. Management of the
Corporation believes that these enhancements to its organizational structure
have positioned the Corporation to further improve its hotel operating results
and support the current portfolio and future acquisitions of the Company.
Upon completion of the Offering, Starwood Capital will own approximately
18.6% of the Company's equity on a fully diluted basis. Starwood Capital is a
private real estate investment firm that since 1991 has acquired in excess of
$1.8 billion (at cost) of real estate assets. In January 1995, the Company
completed the Reorganization in which Starwood Capital contributed to the
Company several hotels, hotel mortgages, cash and other related assets. Starwood
Capital has entered into a noncompetition agreement with the Company relating to
the acquisition of new equity interests in hotel properties in the United
States. Starwood Capital's experienced real estate acquisition and finance
professionals, with their network of industry contacts, will continue to
actively assist management in identifying acquisitions and advantageous sources
of capital.
Each Partnership is a Delaware limited partnership formed in 1994. The Trust
conducts all of its business and operations through the Realty Partnership, and
the Corporation, upon receipt of certain regulatory gaming approvals, will
conduct all of its business and operations through the Operating Partnership,
which leases from the Realty Partnership all but three of the hotel properties
owned by the Realty Partnership. The Trust is the sole general partner of the
Realty Partnership and the Corporation is the managing general partner of the
Operating Partnership. As of June 30, 1996, the Trust and the Corporporation own
a controlling interest of approximately 72.5% in the Realty Partnership and the
Operating Partnership, respectively. The remaining 27.5% interest in each of the
Partnerships is owned predominantly by Starwood Capital. The Company currently
expects that future real estate acquisitions by the Trust will generally be made
through the Realty Partnership and will be leased to and operated by the
Operating Partnership. Certain assets are or may be held by partnerships or
limited liability companies owned or controlled by the Trust or the Corporation.
BUSINESS OBJECTIVES
The Company's primary objective is to increase per share funds from
operations and to maximize the long-term total return to its shareholders. The
Company believes it can continue to accomplish these objectives by (i) acquiring
attractively-priced full service upscale hotels, (ii) repositioning, renovating
and reflagging existing and acquired hotels, as appropriate, and (iii) enhancing
operational focus. The Company intends to maximize the advantages of its Paired
Common Share structure by operating the hotels it owns, thereby eliminating the
economic costs and conflicts of interests which arise when hotels are leased to
or managed by third party operators. The Company's mission is to be a
cost-efficient owner and operator of quality accommodations providing superior
service and value to the consumer.
ACQUISITION STRATEGIES
Management seeks to expand and diversify its hotel portfolio by continuing
to acquire full service hotels, primarily in the upscale market segment, in
selected markets throughout the United States. The Company believes the current
environment for acquisitions of full service hotels remains attractive for a
well capitalized, opportunistic investor. Management seeks to acquire well
located and constructed hotels at significant discounts to replacement cost and
at attractive returns with potential for cash flow growth and long term capital
appreciation. The Company has generally been able to avoid competitive bid
situations by establishing a track record for creatively structuring complex
transactions based upon the needs of particular sellers. The experience and real
estate and finance industry contacts of the management of the Company and
Starwood Capital will be used to continue to identify opportunistic situations
and negotiate acquisitions using some of the following criteria:
UPSCALE PROPERTIES. The Company will concentrate its acquisition efforts on
full service and all-suite properties primarily in the upscale market segment.
These properties generally are affiliated with such hotel chains as Ritz
Carlton-TM-, Westin-TM-, Marriott-TM-, Hyatt-TM-, Hilton-TM-, Sheraton-TM-,
Omni-TM-,
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Doubletree-TM-, Embassy Suites-TM- and Radisson-TM-. However, the Company has
also focused its acquisition efforts on urban properties that are not affiliated
with a major hotel chain. Although the Company has no current plans, management
believes that such hotels could serve as the basis for the development of a
proprietary hotel brand name. Management believes:
- this market segment offers opportunities to acquire hotels at discounts to
replacement cost and at attractive initial yields;
- current supply growth remains low and new construction of these types of
hotels is generally more costly and requires longer lead times to plan,
finance, and construct than lower scale hotels; and
- the Company is experienced in acquiring and operating these types of
properties.
PREFERRED MARKETS. The Company intends to target acquisitions of hotels in
markets:
- where favorable demographic trends exist, such as population, job and
corporate growth;
- near historically stable demand generators, such as major office or retail
complexes, airports, major universities, medical centers and government
agencies with convenient access to interstate highways and airports;
- near the Company's existing hotels, where the Company can draw on its
knowledge of local market conditions and may realize operating
efficiencies from ownership and management of multiple properties; or
- where barriers to new supply exist, such as restrictive zoning or scarcity
of land.
OPPORTUNISTIC SITUATIONS. The Company will seek investments where
competitive bidding can be minimized and where:
- the Company can employ its ready access to capital to satisfy sellers who
require certainty and speed to close a sale;
- the Company's can utilize the flexibility of its Paired Common Share
structure and the availability of Units to complete transactions on a tax
efficient basis to such owners; or
- hotel equity can either be acquired or controlled through the purchase of
debt.
SELF-MANAGEMENT. The Company intends to maximize the advantages of its
Paired Common Share structure by acquiring hotels that are not subject to
long-term, noncancellable third party management contracts in order to directly
manage hotels it acquires.
ADDITIONAL GROWTH STRATEGIES
RENOVATION/EXPANSION OF EXISTING HOTELS. Management believes that the
operating performance at certain hotels may be significantly improved by
undertaking major renovations, or constructing additional rooms or facilities.
Accordingly, the Company continuously monitors and reviews its portfolio for
repositioning, renovation and expansion opportunities.
CORPORATE OPPORTUNITIES. The hotel ownership business is extremely capital
intensive and therefore requires on-going access to capital on a cost-effective
basis. In addition to single asset and portfolio acquisitions, the Company may
consider corporate opportunities that arise in the future when undercapitalized
or poorly managed companies no longer have access to capital for growth.
THIRD PARTY MANAGEMENT. The expanded operational management infrastructure
of the Company coupled with its and Starwood Capital's extensive real estate and
finance industry contacts provide the Company with opportunities to manage
hotels on behalf of third parties. The Company believes that third party
management contracts could provide the Company with an additional source of
earnings as well as a source of potential acquisitions.
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BRAND ACQUISITION OR DEVELOPMENT. The Company is currently able to retain
profits associated with the ownership and management of its hotels. However,
many of these hotels are franchised with national hotel organizations to which
the Company must pay fees. Management believes that the acquisition or
development of a proprietary hotel brand name could permit the Company to
capture the franchise fees currently accruing to third parties.
NEW HOTEL DEVELOPMENT. In the future, the Company may selectively develop
new hotels in certain submarkets. In particular, the Company will evaluate the
competitive environment, including market room and occupancy rates, site
location and marketing, financial and operating issues, as well as the
opportunity to realize operating efficiencies from the ownership of multiple
hotels, in any market under consideration for new development. Development
activity, if pursued, may occur through joint ventures with strategic business
partners and such partners may contribute the land necessary for new development
in exchange for an ownership interest in the project.
OPERATING STRATEGIES
The Company operates or is in the process of assuming the operation of all
but two of the hotels owned by the Company as of June 30, 1996. The Company
intends to operate all of its properties. Self-management enables the Company to
capture the economic benefits otherwise retained by a third-party operator.
Furthermore, self-management enables the Company to directly control the
operations of its hotels, allowing the Company's management team to utilize its
experience in implementing renovations, repositionings, hotel chain affiliations
and other techniques designed to improve cash flow and asset values. The
Corporation operates its hotels efficiently by utilizing regional and
centralized support services to control costs, allocate resources and maintain
consistently high quality services to guests.
Management continually evaluates the position of its hotels in their
respective markets. In an effort to improve revenues, the Company may reposition
certain of its hotels by (i) adjusting the marketing strategies, (ii) changing
or initiating franchise affiliations, or (iii) completing minor renovations,
with respect to such hotels. When the Corporation assumes the management of a
hotel, it seeks to become a cost-efficient provider of quality accommodations
and service by standardizing and upgrading reporting and control systems and
implementing its operating systems and procedures, establishing consistent
performance-based compensation programs for hotel-level managers, and ensuring
that proper preventive maintenance and cost saving energy upgrades are timely
installed.
FINANCING STRATEGIES
The Company believes that in order to continue to maximize the value of its
shareholders' equity and to execute its growth strategies, it is essential to
implement and periodically review a diversified financing strategy that (i)
incorporates long-term, secured and unsecured corporate debt, (ii) minimizes
exposure to fluctuations of interest rates, and (iii) maintains maximum
flexibility to manage the Company's short-term cash needs. Furthermore, the
Company believes that its capital structure will be conducive to and allow
flexibility for the aggressive growth which the Company seeks to achieve.
Management currently plans to maintain a Ratio of Debt-to-Total Market
Capitalization (as defined herein) that does not exceed 50%. Upon consummation
of the Pending Acquisitions, the Company's Ratio of Debt-to-Total Market
Capitalization, on a pro forma basis, after giving effect to the Recent
Acquisitions, the Pending Acquisitions, the April 1996 Offering and the Offering
would be approximately 26%. The Company believes that a conservative leverage
policy, coupled with a diversified portfolio of assets, will position the
Company to access flexible and cost efficient forms of financing in the capital
markets. See "Indebtedness of the Company."
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<PAGE>
DEVELOPMENTS SINCE THE 1995 OFFERING
Since the 1995 Offering, the Company has benefited from the following
developments:
PENDING ACQUISITIONS
As of July 15, 1996, the Company had entered into agreements to purchase 18
full service hotels containing 5,860 total rooms for an aggregate purchase price
of approximately $464 million. These hotels are generally located in major
metropolitan markets and primarily operate in the upscale market segment. The
Company believes that the Pending Acquisitions represent attractive investment
opportunities because, among other reasons, (i) the hotels are well located,
primarily in major metropolitan markets, with diverse demand generators, (ii)
the hotels are being acquired at significant discounts to estimated replacement
cost, thereby providing a competitive advantage over potential new construction,
and (iii) the hotels represent attractive initial returns with the potential for
revenue and cash flow growth. The Pending Acquisitions are described below.
TEACHERS PORTFOLIO: This portfolio consists of eight upscale and luxury
full-service hotels containing 3,141 total rooms owned by subsidiaries of
Teachers Insurance and Annuity Association ("Teachers") to be acquired for
approximately $309 million in cash, representing an investment of approximately
$98,000 per room. The Company believes that the acquisition of this portfolio
represents an attractive investment opportunity because (i) the hotels benefit
from prime locations within their respective markets, (ii) there exists the
potential for cost savings and the potential for enhancement of revenues from
the implementation of alternative marketing strategies including, where
appropriate, changes in franchise affiliation, (iii) it presents a unique
opportunity to acquire first-class hotels that are not encumbered by long-term,
noncancelable management contracts, (iv) the acquisition price represents
approximately 65% of estimated replacement cost, and (v) the hotels are
generally in excellent physical condition. The Company expects to complete the
acquisition of the Teachers Portfolio during August 1996. For the twelve months
ended March 31, 1996, the weighted average daily rate ("ADR") and occupancy for
these hotels were $93.78 and 75.6%, respectively. The following sets forth a
brief description of each of the hotels which comprise the Teachers Portfolio:
RITZ CARLTON, KANSAS CITY, MISSOURI. This 12-story, 373-room luxury hotel
opened in 1973 and recently underwent an extensive $8 million renovation.
This hotel is located in the Country Club Plaza district, one of the City's
premier shopping, dining, arts and entertainment destinations. This hotel
represents the Company's first investment in the Kansas City metropolitan
area.
RITZ CARLTON, PHILADELPHIA, PENNSYLVANIA. This 18-story, 290-room luxury
hotel opened in 1990. Located in Philadelphia's central business district,
this hotel is connected to Liberty Place (office and high-end retail complex)
and is within close proximity to the new Pennsylvania Convention Center. This
hotel represents the Company's third investment in the Philadelphia
metropolitan area.
THE WESTIN HOTEL, WALTHAM, MASSACHUSETTS. This ten-story, 347-room upscale
hotel opened in 1990. Located 12 miles west of downtown Boston on Interstate
95, this hotel serves Boston's "Technology Corridor" which is the primary
location for the region's telecommunication, high technology and
biotechnology industries. Assuming the consummation of the acquisition of the
Sheraton Needham, the Company will own three hotels in the Boston
metropolitan area.
DOUBLETREE HOTEL LAX, LOS ANGELES, CALIFORNIA. This 12-story, 739-room
upscale hotel opened in 1986. Located approximately 1 mile east of Los
Angeles International Airport, this hotel is well-situated on Century
Boulevard, the primary thoroughfare to the airport. This is the Company's
first full service hotel investment in the Los Angeles metropolitan area and
assuming consummation of the acquisition of Sheraton Ft. Lauderdale Airport
Hotel, the Company will have acquired seven airport hotels since the 1995
Offering.
DOUBLETREE HOTEL HORTON PLAZA, SAN DIEGO, CALIFORNIA. This 17-story,
450-room upscale hotel opened in 1987. Located adjacent to Horton Plaza (a
retail and entertainment complex) in
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<PAGE>
downtown San Diego, this hotel is within close proximity to the San Diego
Convention Center and Gaslamp Historic District. This hotel is the Company's
second investment in the San Diego metropolitan area.
DOUBLETREE HOTEL AT CONCOURSE, ATLANTA, GEORGIA. This 20-story, 370-room
upscale hotel opened in 1986. Located in the Perimeter Center area north of
downtown Atlanta, this hotel is situated in the 64-acre Concourse Corporate
Park. Assuming consummation of the acquisition of The Marque of Atlanta, the
Company will own five hotels in the Atlanta metropolitan area and two hotels
in the Perimeter submarket.
DOUBLETREE GRAND HOTEL AT MALL OF AMERICA, BLOOMINGTON, MINNESOTA. This
15-story, 321-room upscale hotel opened in 1975. A $4.3 million renovation
was completed in 1994. Located five miles west of Minneapolis/St. Paul
International Airport, this hotel is adjacent to the 4.2 million square foot
Mall of America, which had approximately 40 million visitors in 1995.
Assuming consummation of the acquisition of the Sheraton Metrodome, the
Company will own two hotels in the Minneapolis metropolitan area.
SHERATON FT. LAUDERDALE AIRPORT HOTEL, DANIA, FLORIDA. This 12-story,
251-room upscale hotel opened in 1986. Located on Interstate 95, this hotel
is connected to the 550,000 square foot Design Center of the Americas and
within close proximity to the Ft. Lauderdale Airport and Broward County
Convention Center. This hotel is the Company's second investment in the Ft.
Lauderdale metropolitan area and assuming consummation of the acquisition of
the Doubletree Hotel LAX, the Company will have acquired seven airport hotels
since the 1995 Offering.
HOD PORTFOLIO: This portfolio consists of nine upscale hotels containing
2,425 total rooms owned by Hotels of Distinction Ventures, Inc. ("HOD") to be
acquired for approximately $135 million in cash, representing an investment of
approximately $56,000 per room. The Company believes that the acquisition of
this portfolio represents an attractive investment opportunity because (i) many
of these hotels have the potential for improvement in REVPAR as against their
competitive set, (ii) the acquisition price represents approximately 65% of
estimated replacement cost, (iii) the Company will assume management of these
hotels immediately upon closing, and (iv) the historical results reflect an
attractive initial yield. The Company expects to complete the acquisition of the
HOD Portfolio during August 1996. For the twelve months ended March 31, 1996,
the weighted average ADR and occupancy for these hotels were $80.15 and 69.4%,
respectively. The following sets forth a brief description of the hotels which
comprise the HOD Portfolio:
HOTEL PARK TUCSON, TUCSON, ARIZONA. This five-story, 215-room upscale hotel
opened in 1985. Refurbishments of all public areas and a portion of the guest
rooms during the last 2 years. Located adjacent to the Tucson Medical Center,
this hotel is the Company's second investment in the Tucson metropolitan
area.
EMBASSY SUITES, PALM DESERT, CALIFORNIA. This three-story, 198-suite upscale
hotel opened in 1984. Located on nine acres of land in the Coachella Valley,
a popular resort area in Southern California, this hotel is the Company's
first investment in the Palm Springs metropolitan area.
THE MARQUE OF ATLANTA, ATLANTA, GEORGIA. This 12-story, 275-room upscale
hotel opened in 1981. Located along the Georgia 400 corridor north of
downtown Atlanta, this hotel is situated within one of the City's fastest
growing commercial areas. Assuming consummation of the acquisition of the
Doubletree Hotel at Concourse, the Company will own five hotels in the
Atlanta metropolitan area and two hotels in the Perimeter submarket.
ARLINGTON PARK HILTON, ARLINGTON HEIGHTS, ILLINOIS. This 13-story, 422-room
upscale hotel opened in 1968. A major renovation of guest rooms, meeting
spaces and public spaces was completed in 1995, totalling approximately $3.0
million. This hotel is located 28 miles northwest of downtown Chicago and 15
miles from O'Hare International Airport. This hotel is the Company's second
investment in the Chicago metropolitan area.
S-19
<PAGE>
SHERATON NEEDHAM, NEEDHAM, MASSACHUSETTS. This five-story, 247-room upscale
hotel opened in 1986. Located 10 miles west of downtown Boston on Interstate
95, this hotel serves Boston's "Technology Corridor" which is the primary
location for the region's telecommunication, high technology and
biotechnology industries. Assuming the consummation of the acquisition of The
Westin Waltham, the Company will own three hotels in the Boston metropolitan
area.
SHERATON MINNEAPOLIS METRODOME, MINNEAPOLIS, MINNESOTA. This eight-story,
254-room upscale hotel opened in 1981. This hotel is located four miles
northeast of the Metrodome and within close proximity to the University of
Minnesota and the central business district of Minneapolis. Assuming
completion of the acquisition of the Doubletree Grand Hotel at Mall of
America, the Company will own two hotels in the Minneapolis metropolitan
area.
EMBASSY SUITES, ST. LOUIS, MISSOURI. This eight-story, 297-suite upscale
hotel opened in 1985 and is located at Laclede's Landing, a recreational
riverfront area on the Mississippi River. This hotel's immediate surrounding
market has undergone significant development with the addition of riverboat
gambling, live entertainment venues and the TWA Dome, home of the St. Louis
Rams. This hotel is the Company's first investment in the St. Louis
metropolitan area.
RADISSON MARQUE, WINSTON-SALEM, NORTH CAROLINA. This nine-story, 293-room
upscale hotel opened in 1974. Located in downtown Winston-Salem, this hotel
is connected via underground passage to the Benton Convention Center and
within close proximity to the Stevens Center for Performing Arts and the Omni
Sports Complex. This hotel is the Company's first investment in the
Winston-Salem metropolitan area.
ALLENTOWN HILTON, ALLENTOWN, PENNSYLVANIA. This nine-story, 224-room upscale
hotel opened in 1981, and HOD completed minor refurbishments to the public
areas and guest bathrooms. This hotel is located in downtown Allentown across
from the headquarters of the Pennsylvania Power & Light Company. This hotel
is the Company's first investment in the Allentown metropolitan area.
MARRIOTT FORRESTAL VILLAGE, PRINCETON, NEW JERSEY: The Company has entered
into an agreement to acquire this hotel for approximately $19.6 million,
representing an investment of approximately $67,000 per room. This six-story
294-room upscale hotel opened in 1987 as a component of Forrestal Village, a
600,000 square-foot mixed-use development. This hotel is located two miles east
of Princeton University on U.S. Route 1. The Company will become landlord in an
operating lease with Marriott International which can be terminated after
January 1, 1999. The Company expects to complete the acquisition of the Marriott
Forrestal Village in August 1996.
RECENT ACQUISITIONS
Since the 1995 Offering, the Company has acquired 13 hotels containing 4,574
total rooms at an aggregate cost of approximately $315 million. These
acquisitions were integral in establishing the Company's presence in major
metropolitan markets, including New York, Chicago, Boston, Washington, D.C., and
Philadelphia, and are operated in the upscale and mid-scale market segments.
Furthermore, these acquisitions demonstrate the Company's creative abilities to
structure and consummate complex, tax efficient transactions. For the twelve
months ended March 31, 1996, the weighted average ADR and occupancy for these
hotels were $91.34 and 73.1%, respectively. The following sets forth a brief
description of the hotels acquired since the 1995 Offering:
DORAL INN, NEW YORK, NEW YORK. In September 1995 the Company acquired a
mortgage note receivable secured by the Doral Inn and a fee interest in the
underlying land for approximately $43 million. The Company also entered into a
long-term lease agreement with the seller. The Company has an option to acquire
the building after 10 years.
TERRACE GARDEN INN, LENOX INN, ATLANTA, GEORGIA. The Company, in October
1995, acquired (i) the 364-room Terrace Garden Inn, an upscale hotel, and (ii)
the 180-room Lenox Inn, a mid-scale
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<PAGE>
hotel, each in Atlanta, Georgia, for an aggregate purchase price of
approximately $36.9 million. The Company acquired these hotels from an
institutional lender who had acquired the properties from its borrower.
HOLIDAY INN, BELTSVILLE, MARYLAND. The Company, in November 1995, acquired
this 206-room mid-scale hotel in Beltsville, Maryland for a purchase price of
approximately $11.5 million. The Company acquired this hotel from an
institutional lender who had previously acquired the property from its borrower.
GRAND HOTEL, WASHINGTON, D.C. The Company acquired a mortgage interest in
September 1995 for a purchase price of approximately $19.5 million and the
equity interest in January 1996 for a purchase price of approximately $13.5
million. Additionally, the Company has assumed the management of this 263-room
upscale hotel, subsequently renamed The Westin Hotel, Washington, D.C..
BOSTON PARK PLAZA, BOSTON, MASSACHUSETTS. The Company, in January 1996,
acquired a 58.2% interest in a joint venture that owns this 960-room upscale
hotel and an adjoining office complex in Boston, Massachusetts for a purchase
price of approximately $41.6 million. In addition the Company acquired the
long-term right to operate the property on behalf of the joint-venture and has
assumed the management of this hotel.
MIDLAND HOTEL, CHICAGO, ILLINOIS. The Company, in March 1996, acquired this
257-room upscale hotel and office complex in Chicago, Illinois for a purchase
price of approximately $21.5 million. Additionally, the Company has assumed the
management of this hotel.
CLARION HOTEL, SAN FRANCISCO, CALIFORNIA. The Company, in April 1996,
acquired this 442-room upscale hotel at the San Francisco Airport in Millbrae,
California for a purchase price of approximately $30.5 million. Additionally,
the Company has assumed the management of this hotel.
DOUBLETREE GUEST SUITES PORTFOLIO (DFW AIRPORT, CYPRESS CREEK, TAMPA). The
Company, in April 1996, acquired (i) a 308-suite upscale hotel at the DFW
Airport in Irving, Texas, (ii) a 254-suite upscale hotel in Ft. Lauderdale,
Florida and (iii) a 260-suite upscale hotel in Tampa, Florida, for an aggregate
purchase price of approximately $75 million. The portfolio was acquired from a
liquidating public partnership. The Company has assumed management of these
hotels.
DOUBLETREE GUEST SUITES; DAYS INN (PHILADELPHIA AIRPORT), PHILADELPHIA,
PENNSYLVANIA. The Company, in June 1996, acquired (i) the 251-suite Doubletree
Guest Suites, an upscale hotel, and (ii) the 177-room Days Inn, a mid-scale
hotel, each at the Philadelphia Airport, for an aggregate purchase price of
approximately $22.5 million, inclusive of $2 million of cash reserves and
including $1.8 million in Units. The properties benefit from the ability to
reissue $38.7 million principal amount of tax-exempt bonds.
The Company is evaluating numerous other hotel properties for acquisition in
addition to the Teachers Portfolio, the HOD Portfolio, and the Marriott
Forrestal Village, and as of June 30, 1996, had entered into agreements to
purchase and had made offers on seven other properties for purchase prices in
the aggregate amount of approximately $185 million, all of which are subject to
the satisfaction of a number of conditions prior to closing. The Company intends
to finance the acquisition of these or other hotel properties through cash flow
from operations and from proceeds of sale of properties,through borrowings under
credit facilities and, when market conditions warrant, through the issuance of
debt or equity securities.
MANAGEMENT AND ORGANIZATIONAL ENHANCEMENTS
The Corporation recently hired Eric A. Danziger, formerly President of
Wyndham Hotels and Resorts, as the President and Chief Executive Officer of the
Corporation and Theodore W. Darnall, formerly Senior Vice President of
Operations of Interstate Hotels Company, as Executive Vice President and Chief
Operating Officer of the Corporation. See "Management." In addition to these
hirings, the Corporation has further reorganized its management structure for
hotel operations to provide a significant increase in direct hotel supervision.
In particular, expertise has been added in the areas of
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<PAGE>
food and beverage, sales and marketing, revenue management, accounting, MIS and
capital project management. Management of the Corporation believes that these
enhancements to its organizational structure have positioned the Corporation to
further improve its hotel operating results and support the current portfolio
and future acquisitions of the Company. Additionally, as part of the Company's
efforts to recruit and retain well-qualified senior management, the Boards of
the Trust and Corporation are considering amendments to their respective
compensation and long term incentive programs which would, subject to
stockholder approval, provide for the grant of awards at the end of five years
of restricted Paired Common Shares based upon the amount of shareholder value
created over such five year period. See "Management." The Company has recently
relocated its corporate headquarters to Phoenix, Arizona, a favorable operating
environment for corporate headquarters.
RENOVATIONS AND FRANCHISE REAFFILIATIONS
The Company has completed a $2.1 million renovation of the Portland
Riverside Inn, Portland, Oregon. The Company has undertaken renovations of the
Dallas Park Central, Dallas, Texas, the Sheraton Colony Square, Atlanta,
Georgia, and the Terrace Garden Inn, Atlanta, Georgia. The Company estimates
that it will cost approximately $20 million to complete such renovations. In
addition, the Company has commenced the design phase for renovations at the
Doral Inn, New York, New York, The Westin Hotel, Washington, D.C., and The Meany
Tower, Seattle, Washington, and has opportunities for renovation at, among
others, the Boston Park Plaza, Boston, Massachusetts, the Omni Hotel, Chapel
Hill, North Carolina, the Tucson Plaza Hotel, Tucson, Arizona, and the Radisson
Hotel, Gainesville, Florida. The Company flagged the Grand Hotel in Washington,
D.C. as a Westin effective February 1, 1996 and flagged the French Quarter
Suites Hotel in Lexington, Kentucky as a Doubletree Guest Suites effective March
31, 1996.
DISPOSITIONS. As part of its continuous evaluation of its portfolio, the
Company has identified certain long held properties for sale. These properties
include the Company's gaming assets and other hotels primarily in the budget and
economy market segments that the Company believes have limited growth potential.
The Company has sold one such property, the Best Western Columbus North in
Columbus, Ohio for approximately $3.1 million, and the Company has entered into
an agreement to sell the Bourbon Street Hotel & Casino in Las Vegas, Nevada, for
an aggregate purchase price of approximately $7.8 million. There can be no
assurance that the Company will complete the sale of the Bourbon Street Hotel &
Casino or any of the other properties designated for sale.
FINANCING ACTIVITY. In April 1996, the Company sold additional Paired
Common Shares through an offering generating net proceeds of $62.4 million,
which were used to purchase additional hotels.
In October 1995, the Company increased the amount available under the
Mortgage Facility from $44.6 million to $71.0 million and entered into a $135.0
million Credit Facility, both of which provide it with acquisition financing. In
March 1996, the Company obtained the Term Loan in the amount of $24.0 million.
In April 1996, the Company increased the amount available under the Term Loan to
$94.0 million.
In January 1996, the Company entered into two interest rate hedging
agreements (the "Treasury Lock Transactions"), which have the effect of fixing
the base rate of interest at 5.7 percent for debt the Company intends to issue
in October, 1996 with an aggregate notional principal amount of $100 million and
a term to maturity of seven years. The actual interest rate will be determined
by reference to this base rate.
At settlement, the Trust will pay or receive an amount which will be
capitalized and amortized over the term of the related debt of seven years. Such
amount is not anticipated to have a material effect on the Trust's liquidity or
operating results. If the Trust did not issue any such debt, such amount would
still be payable or receivable and would be treated as a loss or gain,
accordingly. Such a gain or loss could have a material effect on the Trust's
results from operations; however, due to management's current intention to issue
$100 million of debt in October of 1996, with a term to maturity of seven years,
no such gain or loss is anticipated.
S-22
<PAGE>
The Company has agreed to terms with an institutional lender with respect to
the Acquisition Facility in an aggregate amount of up to $300 million to finance
a portion of the acquisition cost of the Teachers Portfolio and the HOD
Portfolio. This financing is subject to the satisfaction of certain conditions,
including the negotiation of definitive documentation.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting expenses
of the Offering, are estimated to be approximately $338.0 million (approximately
$388.9 million if the Underwriters' over-allotment option is exercised in full).
The Company will contribute the entire net proceeds from the Offering to the
Realty Partnership and the Operating Partnership in return for a number of Units
equal to the number of Paired Common Shares sold in the Offering. The Realty
Partnership will receive 95% and the Operating Partnership will receive 5% of
the net proceeds of the Offering.
The Company will use all of the foregoing proceeds (including the additional
net proceeds if the Underwriters' over-allotment option is exercised in full) to
fund a portion of the acquisition costs of the Teachers Portfolio and the HOD
Portfolio, the balance of which will be funded with borrowings under the
Acquisition Facility. In the event that either of such acquisitions is not
completed, any remaining proceeds of the Offering will be used to reduce debt
and for general corporate purposes including renovations and future
acquisitions. The Company does not expect to use any of the net proceeds of the
Offering for or in connection with its gaming assets.
Pending application of the net proceeds, the Realty Partnership and the
Operating Partnership will invest such portion of the net proceeds in
interest-bearing accounts and short-term, interest-bearing securities, such as
obligations of the Government National Mortgage Association, other governmental
and government agency securities, certificates of deposit, interest-bearing bank
deposits and mortgage loan participations.
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<PAGE>
PRICE RANGES OF PAIRED COMMON SHARES AND DISTRIBUTION HISTORY
The Paired Common Shares are traded principally on the New York Stock
Exchange (the "NYSE") under the symbol "HOT." The following table sets forth,
for the fiscal periods indicated, the high and low closing sales prices per
Paired Common Share on the NYSE (after giving effect to a one-for-six reverse
stock split in June 1995).
<TABLE>
<CAPTION>
DISTRIBUTIONS
PRICE DECLARED
------------------- BY THE
PERIOD HIGH LOW TRUST (1)
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
1996
Third Quarter (through
August 6)............... $ 36 1/8 $ 33 1/8 --
Second Quarter........... $ 38 5/8 $ 31 3/4 $ .49
First Quarter............ $ 34 7/8 $ 29 1/2 $ .47
1995
Fourth Quarter........... $ 30 $ 26 7/8 $ .47
Third Quarter............ $ 29 1/8 $ 23 5/8 $ .47
Second Quarter........... $ 24 3/4 $ 21 $ 0
First Quarter............ $ 24 $ 15 3/4 $ 0
1994
Fourth Quarter........... $ 19 1/2 $ 15 3/4 $ 0
Third Quarter............ $ 20 1/4 $ 17 1/4 $ 0
Second Quarter........... $ 18 $ 9 3/4 $ 0
First Quarter............ $ 15 $ 10 1/2 $ 0
</TABLE>
- ------------------------------
(1) Distributions are shown for the periods during which they were declared.
These distributions actually were or will be paid in the immediately
subsequent period.
On August 6, 1996, the last reported sale price for the Paired Common Shares
on the NYSE was $36 1/8 per Paired Common Share. As of August 6, 1996, there
were approximately 1,250 holders of record of Paired Common Shares.
Commencing with the quarter ended September 30, 1995, the Trust has declared
and paid regular quarterly distributions. The Trust intends to continue to pay
regular quarterly distributions. The Board of Trustees increased the Trust's
regular quarterly distributions from $.47 to $.49 per Paired Common Share in the
second quarter of 1996. The Corporation has not paid any distributions in the
periods set forth in the table above and does not anticipate that it will make
any such distributions in the near future.
In order to maintain its qualification as a REIT, the Trust must make annual
distributions to its shareholders of at least 95% of its taxable income (which
does not include net capital gains). Under certain circumstances, the Trust may
be required to make distributions in excess of cash available for distribution
in order to meet such distribution requirements. In such event, the Trust (or
the Realty Partnership) would seek to borrow the amount of the deficiency or
sell assets to obtain the cash necessary to make the distributions necessary to
retain the Trust's qualification as a REIT for federal income tax purposes.
Distributions made by the Trust will be determined by its Board of Trustees
and will depend on a number of factors, including the amount of cash flow from
operations, the Realty Partnership's financial condition, capital expenditure
requirements for the Company's properties, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Trustees deems relevant.
Under the terms of the Mortgage Facility, the Credit Facility, the Term Loan
and the Acquisition Facility, the Trust is generally permitted to distribute to
its shareholders on an annual basis an amount equal to the greatest of (1) 100%
of funds from operations for any four consecutive calendar quarters; (2) an
amount sufficient to maintain the Trust's tax status as a real estate investment
trust; and (3) the amount necessary for the Trust to avoid the payment of
federal income or excise tax.
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<PAGE>
CAPITALIZATION
The combined capitalization of the Trust and the Corporation as of March 31,
1996, and the pro forma capitalization as adjusted to reflect the Recent
Acquisitions, the Pending Acquisitions, the April 1996 Offering and the Offering
(assuming no exercise of the Underwriters' over-allotment option) is set forth
below. The information set forth below should be read in conjunction with the
combined historical financial statements and notes thereto, the unaudited pro
forma financial information and notes thereto, in each case included elsewhere
or incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
HISTORICAL PRO FORMA
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Collateralized notes payable and revolving line of credit............................. $ 223,985 $ 393,164
Mortgage and other notes payable...................................................... 4,779 4,779
Minority interest..................................................................... 91,569 133,034
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest; $.01 par value; authorized 100,000,000 shares;
outstanding 13,798,000 shares; 25,798,886 outstanding pro forma (1)(2)............... 138 258
Corporation shares of common stock; $.01 par value; authorized 100,000,000 shares;
outstanding 13,798,000 shares; 25,798,886 outstanding pro forma (1).................. 138 258
Excess shares (2).....................................................................
Additional paid-in capital............................................................ 434,104 794,520
Accumulated distributions in excess of earnings....................................... (222,250) (222,250)
----------- -------------
Total equity...................................................................... 212,130 572,786
----------- -------------
Total capitalization.............................................................. $ 532,463 $ 1,103,763
----------- -------------
----------- -------------
</TABLE>
- ------------------------
(1) Does not include (i) 5,991,977 Paired Common Shares issuable upon the
exchange of outstanding Units, (ii) 1,701,685 Paired Common Shares issuable
pursuant to outstanding options under the stock option plans of the Company,
(iii) 126,461 restricted Paired Common Shares issued or issuable to certain
senior executives and (iv) 276,662 Paired Common Shares issuable pursuant to
warrants which expire in September 1996 and which have an exercise price of
$101.70 per Paired Common Share.
(2) The Trust has authorized Excess Common Trust Shares and Excess Preferred
Trust Shares of 20,000,000 and 5,000,000, respectively, none outstanding.
The Corporation has authorized Excess Corporation Common Stock and Excess
Corporation Preferred Stock of 20,000,000 and 5,000,000 respectively, none
outstanding.
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<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following table sets forth selected combined historical and pro forma
financial information for the Company. The following information should be read
in conjunction with (i) the historical financial statements and notes thereto
for the Company, (ii) Management's Discussion and Analysis of Combined Financial
Condition and Results of Operations, which are included in the Company's Joint
Annual Report on Form 10-K/A for the year ended December 31, 1995 and the
Company's Joint Quarterly Report on Form 10-Q for the period ended March 31,
1996, and (iii) the Company's Reports on Form 8-K dated January 4, 1996, January
24, 1996, April 26, 1996 and June 28, 1996. The historical operating information
of the Company as of December 31, 1995, 1994, 1993, 1992, and 1991 and for the
years ended December 31, 1995, 1994, 1993, 1992 and 1991 have been derived from
financial statements that are not required to be included in this Prospectus
Supplement or the accompanying Prospectus. In the opinion of management, the
financial data as of March 31, 1996 and for the three months ended March 31,
1996 and 1995 include all adjustments necessary to present fairly the
information set forth therein.
The pro forma operations and other data for the three months ended March 31,
1996 and for the year ended December 31, 1995 have been prepared as if each of
the Recent Acquisitions, the Pending Acquisitions, the April 1996 Offering and
the Offering (assuming no exercise of the Underwriters' over-allotment option)
had been consummated at the beginning of the periods presented and the pro forma
balance sheet data has been prepared as if each of the Recent Acquisitions, the
Pending Acquisitions, the April 1996 Offering and the Offering had been
consummated on March 31, 1996. The pro forma financial information is not
necessarily indicative of what the actual financial position and results of
operations of the Company would have been as of and for the periods indicated,
nor does it purport to represent the Company's future financial position and
results of operations.
S-26
<PAGE>
STARWOOD LODGING
SUMMARY COMBINED SELECTED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND ROOM DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA -----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE
Hotel........................ $ 121,451 $ 44,064 $ 22,781 $ 471,816 $ 121,250 $ 82,668 $ 86,903 $ 88,812 $ 85,156
Gaming....................... 6,829 6,829 6,669 26,929 26,929 27,981 27,505 26,150 22,609
Interest from mortgage and
other notes................. 2,525 2,525 2,581 10,449 10,905 1,554 1,412 1,348 1,761
Income from joint venture and
rents from other leased
hotel properties............ 594 594 159 4,581 791 927 839 947 936
Management fees and other
income...................... 873 873 61 1,966 1,966 411 475 1,186 1,376
Gain (loss) on sales of hotel
assets...................... (113) (125) (125) 456 21 (787) 1,598
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
132,272 54,885 32,138 515,616 161,716 113,997 117,155 117,656 113,436
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
EXPENSES
Hotel operations............. 88,785 30,050 16,280 358,343 85,017 60,829 68,132 68,620 65,693
Gaming operations............ 5,835 5,835 6,021 24,242 24,242 24,454 24,055 23,699 21,948
Interest..................... 7,035 3,223 5,827 28,009 13,138 17,606 15,187 14,208 16,458
Depreciation and
amortization................ 16,658 7,660 2,863 62,838 15,469 8,161 9,232 10,196 11,688
Administrative and
operating................... 2,493 2,373 1,068 6,203 5,712 4,203 4,729 6,177 6,086
Shareholder litigation
expense..................... -- 2,648 483 188 --
Loan restructuring........... -- -- -- 10,892 3,797
Provision for losses......... -- 759 2,369 3,419 9,580
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
120,806 49,141 32,059 479,635 143,578 118,660 124,187 137,399 135,520
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Income (loss) before minority
interest in Partnership..... 11,466 5,744 79 35,981 18,138 (4,663) (7,032) (19,743) (22,084)
Minority interest in
Partnership (1)............. 2,161 1,654 94 6,782 7,013 -- -- -- --
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item.......... 9,305 4,090 (15) 29,199 11,125 (4,663) (7,032) (19,743) (22,084)
Extraordinary item........... 363 (2,155) -- -- -- --
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Net income (loss)............ $ 9,305 $ 4,090 $ 348 $ 29,199 $ 8,970 $ (4,663) $ (7,032) $ (19,743) $ (22,084)
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Net income (loss) per Paired
Share....................... $ 0.36 $ 0.30 $ 0.17 $ 1.13 $ 1.15 $ (2.31) $ (3.48) $ (9.73) $ (10.92)
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total real estate
investments................. $1,084,268 $ 512,968 $ 246,113 $ 419,077 $ 165,496 $ 179,172 $ 187,753 $ 200,540
Total assets................. 1,136,396 565,096 279,765 459,994 183,955 195,352 210,945 221,917
Total debt................... 397,943 228,764 198,555 123,485 160,482 170,886 170,297 171,271
Shareholders' equity......... 572,786 212,130 7,756 215,468 8,708 13,326 20,351 40,083
OTHER DATA:
Cash flows from:
Operating activities....... $ 15,290 $ (686) $ 16,411 $ 8,893 $ 5,532 $ 4,690 $ (6,158)
Investing activities....... (100,041) (1,738) (181,995) 4,489 (3,645) (1,514) 12,159
Financing activities....... 96,065 9,479 169,851 (13,969) (6,752) (1,255) (7,139)
Funds from operations (2).... $ 27,289 13,125 3,055 $ 95,606 33,062 6,449 5,031 5,739 1,383
EBITDA (3)................... 35,159 16,627 8,882 126,828 46,745 24,055 20,218 19,947 17,841
EBITDA margin (% of total
revenues)................... 27% 30% 28% 25% 29% 21% 17% 17% 16%
</TABLE>
S-27
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA -----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
---------- --------- --------- ----------- --------- --------- --------- --------- ---------
Dividends/Distributions...... $ 10,245 -- $ 18,549 -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividends/Distributions per
Paired Share................ 0.47 -- 0.94 -- -- -- --
Number of hotel rooms (Hotel
Assets)..................... 18,954 11,584 8,586 18,954 10,100 6,409 7,059 7,423 7,549
Revenue per available room
(Owned Hotels).............. $ 59.98 $ 53.22 $ 40.42 $ 59.06 $ 48.33 $ 38.60 $ 35.66 $ 33.07 $ 30.86
Average daily room rate
(Owned Hotels).............. $ 82.89 $ 81.67 $ 61.30 $ 81.35 $ 71.98 $ 55.55 $ 54.53 $ 53.04 $ 52.04
Average occupancy (Owned
Hotels)..................... 72% 65% 66% 73% 67% 69% 65% 62% 59%
</TABLE>
- ------------------------------
(1) Represents the 30.1% and the 18.9% minority interest in the Partnerships
after the 1995 Offering and the Offering, respectively.
(2) Management and industry analysts generally consider funds from operations
("FFO") to be one measure of the financial performance of an equity REIT
that provides a relevant basis for comparison among REITs and it is
presented to assist investors in analyzing the performance of the Company.
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as income before minority interest (computed in accordance with
generally accepted accounting principles), excluding gains (losses) from
debt restructuring and sales of property, and real estate related
depreciation and amortization (excluding amortization of financing costs).
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not
necessarily indicative of cash available to fund cash needs. FFO should not
be considered an alternative to net income as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities as a measure of liquidity. FFO includes $226,000 and $1,000,000
of interest income recognized in excess of the actual cash received on
mortgage notes receivable (as a result of the notes being purchased at a
discount) secured by the Atlantic City Quality Inn and by the Secaucus
Ramada Suites for the three months ended March 31, 1996 and year ended
December 31, 1995, respectively.
(3) Management considers EBITDA to be one measure of the cash flows from
operations of the Company before debt service that provides a relevant basis
for comparison among REITs and it is presented to assist investors in
analyzing the performance of the Company. EBITDA is defined as income before
minority interest excluding gains and losses from debt restructuring and
sales of property, provision for losses, interest and depreciation and
amortization. EBITDA should not be considered as an alternative to net
income as an indication of the Company's financial performance or as an
alternative to cash flows from operating activities as a measure of
liquidity, nor is it necessarily indicative of sufficient cash flow to fund
all of the Company's needs.
S-28
<PAGE>
INDEBTEDNESS OF THE COMPANY
As of March 31, 1996, the Company had outstanding indebtedness, on a pro
forma basis after giving effect to the Recent Acquisitions, the Pending
Acquisitions, the April 1996 Offering and the Offering, equal to approximately
$397.9 million, in the aggregate, consisting of (i) $70.6 million under the
Mortgage Facility, (ii) $129.6 million under the Credit Facility, (iii) $94.0
million under the Term Loan, (iv) $98.9 million under the Acquisition Facility
and (v) $4.8 million of mortgage and notes payable. The Company's Ratio of
Debt-to-Total Market Capitalization (the amount of debt as reflected on the
Company's consolidated and combined balance sheet plus obligations of the
Company relating to indebtedness of entities in which it owns a minority
interest ("Company Debt") to the market value of the issued and outstanding
Paired Common Shares (including Units exchangeable for Paired Common Shares)
plus Company Debt (collectively, "Market Capitalization"), on a pro forma basis
after giving effect to the Recent Acquisitions, the Pending Acquisitions, the
April 1996 Offering and the Offering (assuming no exercise of the Underwriters'
over-allotment option), would be approximately 26%.
The Company currently has two loan facilities and a term loan with an
institutional lender and certain of its affiliates (the "Lender"). In October
1995, the Company amended its Mortgage Loan Funding Facility Agreement, dated
July 25, 1995 (the "Mortgage Facility") with the Lender to increase the amount
available under this 18-month facility to $70.6 million from $45 million. The
Mortgage Facility is secured by certain mortgage loans owned by the Realty
Partnership and bears interest at a rate equal to 1.5% plus the one-month LIBOR
for the first 12 months, and 1.75% plus the one-month LIBOR thereafter. In
August 1996, the maturity date for the Mortgage Facility was extended to July
1997.
In October 1995, the Company entered into a three-year, $135 million secured
revolving credit facility (the "Credit Facility") with the Lender. The Credit
Facility is secured by certain properties of the Company and may be secured by
other properties acquired by the Company with proceeds of this facility, all on
a cross-collateralized basis within various pools and amounts drawn under the
Credit Facility bears interest at a rate equal to 1.625% plus the one, two- or
three-month LIBOR at the Company's option. The Credit Facility matures in
October 1998.
In March 1996, the Company entered into a $24 million one year secured term
loan (the "Term Loan") with the Lender. In April 1996, the Company amended the
Term Loan to increase the amount available under this facility to $94 million.
The Term Loan is secured by certain properties of the Company and bears interest
at a rate equal to the one, two or three-month LIBOR, at the Company's option,
plus (a) 1.95% for the first $24 million drawn, and (b) 1.75% for the balance
drawn. The Term Loan matures in April 1997.
In January 1996, the Company entered into two interest rate hedging
agreements (the "Treasury Lock Transactions"), which have the effect of fixing
the base rate of interest at 5.7% for debt the Company intends to issue in
October, 1996 with an aggregate notional principal amount of $100 million and a
term to maturity of seven years. The actual interest rate will be determined by
reference to this base rate.
At settlement, the Trust will pay or receive an amount which will be
capitalized and amortized over the term of the related debt of seven years. Such
amount is not anticipated to have a material effect on the Trust's liquidity or
operating results. If the Trust did not issue any such debt, such amount would
still be payable or receivable and would be treated as a loss or gain,
accordingly. Such a gain or loss could have a material effect on the Trust's
results from operations; however, due to management's current intention to issue
$100 million of debt in October of 1996, with a term to maturity of seven years,
no such gain or loss is anticipated.
In July 1996, the Company agreed to terms with an institutional lender (the
"Acquisition Lender") for a one-year $300 million loan to fund a portion of the
acquisition cost for the Teachers Portfolio and the HOD Portfolio (the
"Acquisition Facility"). The Acquisition Facility will bear interest at
one-month LIBOR plus 1.75%. The Acquisition Facility is subject to the
satisfaction of certain conditions, including the negotiation of definitive
documentation.
S-29
<PAGE>
BUSINESS AND PROPERTIES
LODGING INDUSTRY
The United States lodging industry has experienced significant improvement
in recent years. According to Coopers & Lybrand Hospitality Directions (January
1996) ("Hospitality Directions"), the lodging industry earned estimated pre-tax
profits of $7.6 billion in 1995, a 38% increase over 1994 pre-tax profit. The
lodging industry began its recovery in 1992 from an extended period of
unprofitable performance in the late 1980s and early 1990s. The industry
downturn resulted primarily from a dramatic increase in the supply of new hotel
rooms that significantly outpaced growth in demand. As new construction slowed
dramatically, percentage growth in room demand exceeded percentage point growth
in new room supply by 2.0%, 1.6%, 3.3%, and 1.4% in 1992, 1993, 1994, and 1995,
respectively. Consequently, industry-wide occupancy has increased from a 20-year
low of 60.9% in 1991 to 65.6% in 1995.
During the initial phase of the industry recovery, gains in profitability
were driven primarily by the increase in hotel occupancies. According to
Hospitality Directions, industry-wide ADR increases did not significantly
outpace the rate of inflation until 1995, when ADR increased 4.8% over 1994. The
current phase of the lodging industry recovery appears to be driven by an
increasing degree of pricing power, in which operators have the ability to
increase ADR without adversely affecting occupancy percentages. Hospitality
Directions estimates that hotel occupancies will continue to increase in 1996
and 1997 to 66.3% and 66.7%, respectively, and that ADR will increase 4.5% and
4.4% in 1996 and 1997, respectively.
THE HOTEL ASSETS
The Hotel Assets consist of a diversified portfolio located primarily in
metropolitan areas throughout the United States and represent numerous national
franchise affiliations. Although the Company intends to focus its future growth
primarily in the upscale market industry segment in metropolitan areas, the
Company has investments in upscale, mid-scale, economy and gaming properties.
The Hotel Assets generally are located near a variety of stable demand
generators, including major office or retail complexes, airports, major
universities, medical centers and government agencies with convenient access to
interstate highways and airports.
OWNED HOTELS
The following tables set forth certain summary information regarding the
Pending Acquisitions and the 41 hotels owned as of June 30, 1996 (the "Existing
Hotels" and collectively, with the Pending Acquisitions, the "Owned Hotels").
S-30
<PAGE>
<TABLE>
<CAPTION>
ADR ($)
--------------------------------
TWELVE YEAR ENDED DECEMBER
MONTHS 31,
# OF YEAR YEAR ENDED ----------------------
HOTEL LOCATION ROOMS OPENED ACQUIRED 3/31/96 1995 1994 1993
- ------------------------------------- ----------------------- ------ ------ -------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PENDING ACQUISITIONS:
Hotel Park Tucson.................... Tucson, AZ 215 1986 1996 75.80 74.12 69.29 66.07
Doubletree Hotel LAX................. Los Angeles, CA 739 1986 1996 57.32 55.82 56.87 74.36
Embassy Suites....................... Palm Desert, CA 198 1985 1996 100.41 97.30 96.81 92.18
Doubletree Hotel Horton Plaza........ San Diego, CA 450 1987 1996 101.07 98.64 92.44 87.55
Sheraton Ft. Lauderdale Airport
Hotel............................... Dania, FL 251 1986 1996 75.37 77.18 77.71 73.94
Doubletree Hotel at Concourse........ Atlanta, GA 370 1986 1996 97.97 96.25 87.32 78.26
The Marque of Atlanta................ Atlanta, GA 275 1980 1996 85.53 82.21 74.66 66.82
Arlington Park Hilton................ Arlington Heights, IL 422 1968 1996 78.40 77.76 71.55 71.72
Sheraton Needham..................... Needham, MA 247 1986 1996 86.43 84.60 80.01 76.52
The Westin Hotel..................... Waltham, MA 347 1990 1996 101.58 100.15 97.17 95.25
Doubletree Grand Hotel at Mall of
America............................. Bloomington, MN 321 1975 1996 88.67 88.34 79.28 N/A
Sheraton Minneapolis Metrodome....... Minneapolis, MN 254 1980 1996 72.54 72.00 66.96 61.92
Ritz Carlton......................... Kansas City, MO 373 1973 1996 123.33 122.82 116.76 115.55
Embassy Suites....................... St. Louis, MO 297 1985 1996 89.36 88.02 86.48 81.84
Radisson Marque...................... Winston-Salem, NC 293 1974 1996 72.92 71.88 69.32 69.17
Marriott Forrestal Village........... Princeton, NJ (1)(4) 294 1987 1996 95.94 94.46 89.47 88.12
Allentown Hilton..................... Allentown, PA 224 1981 1996 60.96 60.59 57.96 55.53
Ritz Carlton......................... Philadelphia, PA 290 1990 1996 154.83 153.28 144.13 133.86
------ ------- ------ ------ ------
Subtotal/Weighted Average............ 5,860 88.57 87.08 83.40 82.98
------ ------- ------ ------ ------
EXISTING HOTELS
Embassy Suites....................... Phoenix, AZ 227 1981 1983 91.13 85.14 80.23 74.04
Embassy Suites....................... Tempe, AZ 224 1984 1995 99.57 95.75 83.37 76.24
Plaza Hotel.......................... Tucson, AZ 149 1971 1983 48.61 48.34 46.12 45.05
Doubletree Club Hotel................ Rancho Bernardo, CA 209 1988 1995 72.12 71.02 65.68 63.62
Clarion San Francisco Airport
Hotel............................... Millbrae, CA (2) 442 1962 1996 63.03 60.36 55.09 N/A
Capitol Hill Suites.................. Washington, D.C. (3) 152 1955 1995 95.90 95.09 91.93 89.60
The Westin Hotel..................... Washington, D.C. 263 1984 1995 128.10 127.62 N/A 143.18
Doubletree Guest Suites.............. Ft. Lauderdale, FL 254 1985 1996 79.54 77.10 82.07 82.05
Radisson Hotel....................... Gainesville, FL 195 1974 1986 60.62 60.43 59.89 56.63
Doubletree Guest Suites.............. Tampa, FL 260 1987 1996 87.85 84.46 86.14 83.32
Holiday Inn.......................... Albany, GA 151 1989 1989 60.18 59.08 56.06 56.96
Sheraton Colony Square............... Atlanta, GA 462 1973 1995 94.29 89.59 86.57 81.47
Lenox Inn............................ Atlanta, GA 180 1965 1995 71.11 69.48 63.57 60.10
Terrace Garden Inn................... Atlanta, GA 364 1975 1995 95.78 93.51 88.39 82.62
Best Western......................... Savannah, GA (10) 142 1971 1986 47.46 46.75 47.27 46.21
The Midland Hotel.................... Chicago, IL 257 1934 1996 112.46 111.48 107.43 97.98
Harvey............................... Wichita, KS (3)(5) 259 1974 1995 62.08 62.52 50.62 43.92
Doubletree Guest Suites.............. Lexington, KY 155 1989 1995 84.74 82.93 84.96 81.13
Boston Park Plaza.................... Boston, MA (6) 960 1927 1996 102.42 101.42 98.12 91.40
<CAPTION>
OCCUPANCY (%) REVPAR ($)
-------------------------------- --------------------------------
TWELVE YEAR ENDED DECEMBER TWELVE YEAR ENDED DECEMBER
MONTHS 31, MONTHS 31,
ENDED ---------------------- ENDED ----------------------
HOTEL 3/31/96 1995 1994 1993 3/31/96 1995 1994 1993
- ------------------------------------- ------- ------ ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PENDING ACQUISITIONS:
Hotel Park Tucson.................... 69.4 70.4 71.3 70.8 52.59 52.18 49.40 46.78
Doubletree Hotel LAX................. 79.3 79.9 70.9 46.2 45.43 44.60 40.32 34.35
Embassy Suites....................... 72.4 72.2 69.1 69.2 72.71 70.25 66.90 63.79
Doubletree Hotel Horton Plaza........ 69.5 70.0 67.9 62.3 70.23 69.05 62.77 54.54
Sheraton Ft. Lauderdale Airport
Hotel............................... 82.2 82.4 76.2 76.0 61.98 63.60 59.22 56.19
Doubletree Hotel at Concourse........ 72.5 71.6 74.2 73.5 70.99 68.92 64.79 57.52
The Marque of Atlanta................ 68.5 69.2 68.0 64.0 58.61 56.89 50.77 42.76
Arlington Park Hilton................ 65.8 69.4 64.2 62.1 51.61 53.97 45.94 44.54
Sheraton Needham..................... 75.6 74.8 73.6 70.6 65.32 63.28 58.89 54.02
The Westin Hotel..................... 74.8 72.3 69.8 62.5 75.95 72.41 67.82 59.53
Doubletree Grand Hotel at Mall of
America............................. 78.0 77.2 74.7 N/A 69.19 68.20 59.22 N/A
Sheraton Minneapolis Metrodome....... 75.3 85.3 75.7 72.7 54.63 61.42 50.69 45.02
Ritz Carlton......................... 76.8 74.9 73.2 72.6 94.68 91.99 85.42 83.85
Embassy Suites....................... 72.2 72.0 71.7 63.4 64.50 63.37 62.01 51.89
Radisson Marque...................... 53.8 54.0 51.2 49.4 39.20 38.82 35.49 34.17
Marriott Forrestal Village........... 84.1 81.8 77.3 72.8 80.67 77.27 69.16 64.15
Allentown Hilton..................... 77.8 77.5 73.5 67.2 47.41 46.96 42.60 37.32
Ritz Carlton......................... 70.9 71.7 73.3 71.6 109.72 109.84 105.69 95.80
------- ------ ------ ------ ------- ------ ------ ------
Subtotal/Weighted Average............ 73.5 73.9 70.6 64.3 65.06 64.31 58.92 53.38
------- ------ ------ ------ ------- ------ ------ ------
EXISTING HOTELS
Embassy Suites....................... 79.8 80.3 75.6 71.9 72.70 68.34 60.63 53.20
Embassy Suites....................... 80.8 80.2 82.8 81.7 80.42 76.78 68.99 62.29
Plaza Hotel.......................... 77.2 77.3 77.1 74.5 37.54 37.37 35.58 33.54
Doubletree Club Hotel................ 68.1 68.3 65.6 60.8 49.13 48.52 43.09 38.68
Clarion San Francisco Airport
Hotel............................... 83.7 86.3 81.3 N/A 52.75 52.11 44.81 N/A
Capitol Hill Suites.................. 67.2 69.2 64.1 63.3 64.40 65.82 58.93 56.72
The Westin Hotel..................... 47.0 45.5 N/A 47.1 60.23 58.00 N/A 67.45
Doubletree Guest Suites.............. 71.3 71.8 65.1 74.3 56.69 55.36 53.43 60.96
Radisson Hotel....................... 59.4 58.0 59.4 62.2 36.01 35.07 35.57 35.21
Doubletree Guest Suites.............. 64.3 63.5 62.9 69.2 56.52 53.63 54.18 57.66
Holiday Inn.......................... 74.3 77.2 78.9 73.6 44.73 45.59 44.23 41.92
Sheraton Colony Square............... 70.2 72.4 72.4 67.4 66.18 64.84 62.64 54.91
Lenox Inn............................ 78.9 79.2 77.0 75.0 56.08 55.00 49.15 45.10
Terrace Garden Inn................... 64.6 65.4 65.2 63.0 61.91 61.16 57.73 51.98
Best Western......................... 62.2 63.7 56.9 54.6 29.50 29.78 26.92 25.23
The Midland Hotel.................... 72.6 73.5 71.2 70.1 81.67 81.96 76.53 68.69
Harvey............................... 65.6 63.7 57.7 58.6 40.75 39.85 29.21 25.74
Doubletree Guest Suites.............. 74.5 74.6 69.4 71.5 63.10 61.84 58.57 58.37
Boston Park Plaza.................... 77.9 76.0 76.0 71.6 79.75 77.10 74.55 65.41
</TABLE>
S-31
<PAGE>
<TABLE>
<CAPTION>
ADR ($)
--------------------------------
TWELVE YEAR ENDED DECEMBER
MONTHS 31,
# OF YEAR YEAR ENDED ----------------------
HOTEL LOCATION ROOMS OPENED ACQUIRED 3/31/96 1995 1994 1993
- -------------------------------------- ---------------------- ------ ------ -------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn........................... Beltsville, MD 206 1987 1995 68.38 67.49 63.37 56.92
Bay Valley Resort..................... Bay City, MI (10) 151 1973 1984 62.86 62.02 62.22 66.39
Omni.................................. Chapel Hill, NC 168 1981 1995 85.44 84.33 74.54 67.35
Omaha Marriott........................ Omaha, NE (7)(8) 303 1982 1982 95.44 94.40 87.21 82.56
Best Western Airport Inn.............. Albuquerque, NM 123 1980 1984 57.25 56.70 54.45 52.38
Best Western.......................... Las Cruces, NM (10) 166 1974 1982 46.40 44.94 42.74 41.67
Bourbon Street Hotel & Casino......... Las Vegas, NV (9) 150 1975 1988 34.77 33.21 32.89 31.63
King 8 Hotel & Gambling Hall.......... Las Vegas, NV (10) 300 1974 1988 32.85 31.88 32.80 29.46
The Doral Inn......................... New York, NY (3)(4) 652 1927 1995 98.18 96.34 88.31 87.71
Days Inn City Center.................. Portland, OR 173 1962 1984 62.60 60.71 53.12 57.50
The Riverside Inn..................... Portland, OR 137 1964 1984 72.77 71.35 64.69 63.96
Doubletree Guest Suites............... Philadelphia, PA 251 1985 1996 94.69 95.94 91.41 86.51
Days Inn.............................. Philadelphia, PA 177 1984 1996 65.62 67.20 66.14 61.03
Dallas Park Central................... Dallas, TX 445 1972 1972 55.31 55.03 59.97 62.34
Doubletree Guest Suites DFW Airport... Irving, TX 308 1985 1996 93.00 91.18 91.24 88.99
Best Western Airport.................. El Paso, TX (10) 175 1974 1985 36.14 36.12 34.76 35.56
Residence Inn......................... Tysons Corner, VA 96 1984 1984 106.08 103.87 99.68 103.07
WestCoast Tyee........................ Olympia, WA 155 1961 1987 62.11 61.64 60.63 56.28
Days Inn Town Center.................. Seattle, WA 90 1957 1984 64.44 62.73 60.99 60.85
Meany Tower........................... Seattle, WA 155 1932 1984 73.38 72.83 70.47 76.29
Sixth Avenue Inn...................... Seattle, WA 166 1959 1984 75.78 74.42 70.04 72.37
Milwaukee Marriott.................... Milwaukee, WI 393 1972 1990 72.84 72.19 67.91 71.99
------ ------- ------ ------ ------
Subtotal/Weighted Average............. 10,245 79.56 77.99 73.51 72.94
------ ------- ------ ------ ------
Owned Hotels (Total/Weighted
Average)............................. 16,105 82.89 81.35 77.15 76.42
------ ------- ------ ------ ------
------ ------- ------ ------ ------
<CAPTION>
OCCUPANCY (%) REVPAR ($)
-------------------------------- --------------------------------
TWELVE YEAR ENDED DECEMBER TWELVE YEAR ENDED DECEMBER
MONTHS 31, MONTHS 31,
ENDED ---------------------- ENDED ----------------------
HOTEL 3/31/96 1995 1994 1993 3/31/96 1995 1994 1993
- -------------------------------------- ------- ------ ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Holiday Inn........................... 63.7 63.0 58.0 58.0 43.59 42.39 36.43 32.94
Bay Valley Resort..................... 62.0 63.1 63.5 52.1 39.00 39.13 39.53 34.62
Omni.................................. 68.0 71.0 64.8 56.4 58.07 59.87 48.30 37.99
Omaha Marriott........................ 78.3 80.0 76.2 76.2 74.68 75.52 66.42 62.75
Best Western Airport Inn.............. 81.8 82.9 86.4 80.2 46.83 47.02 47.04 42.01
Best Western.......................... 73.3 75.1 71.2 70.6 34.01 33.73 30.42 29.44
Bourbon Street Hotel & Casino......... 88.1 88.0 90.0 92.0 30.64 29.09 29.62 29.16
King 8 Hotel & Gambling Hall.......... 80.3 81.0 82.0 82.0 26.39 25.77 26.76 24.15
The Doral Inn......................... 78.2 75.0 81.0 77.0 76.74 70.15 72.07 67.50
Days Inn City Center.................. 77.3 77.8 70.6 63.2 48.41 47.25 37.51 36.32
The Riverside Inn..................... 72.6 77.5 78.1 78.5 52.85 55.30 50.49 50.21
Doubletree Guest Suites............... 68.8 70.3 73.1 75.0 65.13 67.45 66.82 64.88
Days Inn.............................. 71.3 71.5 75.7 79.0 46.80 48.05 50.07 48.21
Dallas Park Central................... 39.8 36.0 42.3 62.4 21.99 19.82 25.37 38.89
Doubletree Guest Suites DFW Airport... 81.0 78.7 67.8 71.7 75.29 71.76 61.86 63.81
Best Western Airport.................. 76.8 79.4 80.4 70.3 27.77 28.68 27.96 25.01
Residence Inn......................... 84.3 85.0 83.0 78.2 89.40 88.25 82.70 80.55
WestCoast Tyee........................ 59.3 58.4 57.4 61.8 36.81 35.97 34.78 34.78
Days Inn Town Center.................. 80.8 81.4 79.4 75.3 52.05 51.08 48.40 45.81
Meany Tower........................... 70.6 72.9 71.2 61.5 51.79 53.07 50.14 46.92
Sixth Avenue Inn...................... 79.0 78.7 75.1 61.7 59.88 58.53 52.60 44.67
Milwaukee Marriott.................... 73.2 71.3 69.8 54.5 53.29 51.44 47.40 39.23
------- ------ ------ ------ ------- ------ ------ ------
Subtotal/Weighted Average............. 71.7 71.9 71.2 68.6 57.07 56.05 52.35 50.06
------- ------ ------ ------ ------- ------ ------ ------
Owned Hotels (Total/Weighted
Average)............................. 72.4 72.6 71.0 67.1 59.98 59.06 54.78 51.26
------- ------ ------ ------ ------- ------ ------ ------
------- ------ ------ ------ ------- ------ ------ ------
</TABLE>
- ------------------------------
(1) Data is presented for the three months ended April 19, 1996.
(2) Data is presented for the three months ended April 24, 1996.
(3) These Existing Hotels are currently managed by third parties.
(4) These hotels are leased to a third party and are the only owned hotels not
leased to the Corporation.
(5) Starwood Capital has guaranteed that the cash flow of this hotel (which is
defined for purposes of the guarantee as gross revenues (on a cash basis)
received by the Operating Partnership from the hotel, less management fees
and capital expenditures of the hotel) will be at least $700,000 in the
first year after January 1, 1995, $800,000 in the second year and $900,000
in the third year, with such cash flow in excess of those amounts being
applied to reduce the guaranteed amounts in later years. Such cash flow for
the year ended December 31, 1995 was approximately $1,226,000.
(6) The Trust owns a 58.2% general partnership interest in this hotel.
(7) Data is presented for the three years ended January 13, 1996 and for the
three month period ended March 29, 1996.
(8) The Trust owns a 5% general partnership interest in this hotel.
(9) Subject to existing sale agreement.
(10) Designated for sale.
S-32
<PAGE>
OTHER ASSETS
The Company owns ground lease interests in three Vagabond Inns containing a
total of 311 rooms, which are leased to and operated by an unaffiliated third
party. These hotels are located in Rosemead, Sacramento and Woodland Hills,
California.
The Company owns 17 mortgage notes secured by 11 hotels. In the future, the
Company will continue to invest in mortgage notes as a strategy for ultimately
acquiring the underlying hotel property as well as provide seller financing in
select circumstances consistent with the Company's disposition strategies. The
current portfolio as of March 31, 1996 includes: a $10.5 million 8% note, with
an outstanding balance of $10.0 million and a carrying value of $7.2 million,
secured by the Harvey Hotel (Addison) maturing in 2002; a $16.8 million 8% note,
with an outstanding balance of $16.0 million and a carrying value of $11.5
million, secured by the Harvey Bristol Suites (Dallas) maturing in 2002; a $26
million 8% note, with a $24.8 million outstanding balance and a carrying value
of $17.8 million, secured by the Harvey Hotel (DFW) and maturing in 2002 (the
three Harvey notes are cross-collateralized and benefit from certain personal
guarantees); a $11.4 million prime-based floating rate tax-exempt note with a
balance of $11.2 million and a carrying value of $4.4 million, secured by the
Quality Inn Atlantic City (New Jersey) and maturing in 2010; and a $12.4 million
LIBOR-based floating rate note with a balance of $12.3 million and a carrying
value of $8.8 million, secured by the Ramada Suites Secaucus (New Jersey)
maturing in 1999. Historically, the Company has provided seller financing of up
to 80% of the sales price as a means of facilitating its operating strategy to
dispose of assets with limited growth prospects. The Company currently holds
five seller notes secured by six hotels with an aggregate outstanding balance of
$9.1 million, a weighted average interest rate of 9.2% and a weighted average
maturity in 2000.
PORTFOLIO CHARACTERISTICS
MARKET SEGMENT
Since the completion of the 1995 Offering, the Company has significantly
improved the quality of its portfolio of hotels by acquiring, repositioning and
disposing of certain hotels. The following tables summarize certain information
with respect to the market segments of (i) the Owned Hotels and (ii) the
portfolio of owned hotels as of the 1995 Offering (the "1995 Offering
Portfolio"):
<TABLE>
<CAPTION>
PRO FORMA
GROSS REVENUES PRO FORMA
# OF # OF % OF TWELVE MONTHS % OF GROSS REVENUES % OF
HOTELS ROOMS TOTAL ENDING 3/31/96 TOTAL 1995 TOTAL
------ ------ ----- -------------- ----- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED HOTELS
Upscale/Luxury........... 40 12,714 78.9 $ 468,556,000 84.3 $ 457,351,000 84.1
Mid-scale/Economy........ 17 2,941 18.3 60,067,000 10.8 59,842,000 11.0
Gaming................... 2 450 2.8 27,089,000 4.9 26,929,000 4.9
--
------ ----- -------------- ----- -------------- -----
Total.................. 59 16,105 100.0 $ 555,712,000 100.0 $ 544,122,000 100.0
--
--
------ ----- -------------- ----- -------------- -----
------ ----- -------------- ----- -------------- -----
1995 OFFERING PORTFOLIO
Upscale.................. 12 2,843 50.1 $ 91,144,000 54.7 $ 89,758,000 54.4
Mid-scale/Economy........ 14 2,378 41.9 48,491,000 29.1 48,227,000 29.2
Gaming................... 2 450 8.0 27,089,000 16.2 26,929,000 16.3
--
------ ----- -------------- ----- -------------- -----
Total.................. 28 5,671 100.0 $ 166,724,000 100.0 $ 164,914,000 100.0
--
--
------ ----- -------------- ----- -------------- -----
------ ----- -------------- ----- -------------- -----
</TABLE>
GEOGRAPHIC DISTRIBUTION
The geographic distribution of the Owned Hotels, which are located in 24
states and the District of Columbia, reflects the Company's belief that
geographic distribution especially with respect to hotels, helps to insulate the
portfolio from local market fluctuations that are typical for the hotel
industry. The Company has also sought to increase its geographic distribution by
focusing on major
S-33
<PAGE>
metropolitan areas. The following tables summarize the increase in the Company's
presence in the 25 largest metropolitan statistical area ("MSA") markets with
respect to (i) the Owned Hotels and (ii) the 1995 Offering Portfolio:
<TABLE>
<CAPTION>
PRO FORMA
GROSS REVENUES PRO FORMA
# OF # OF % OF TWELVE MONTHS % OF GROSS REVENUES % OF
HOTELS ROOMS TOTAL ENDING 3/31/96 TOTAL 1995 TOTAL
----------- --------- --------- ---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED HOTELS
25 Largest MSA Markets.......... 31 10,087 62.6 $ 347,495,000 62.5 $ 338,940,000 62.3
Other Markets................... 28 6,018 37.4 208,217,000 37.5 205,182,000 37.7
--
--------- --------- ---------------- --------- ---------------- ---------
Total......................... 59 16,105 100.0 $ 555,712,000 100.0 $ 544,122,000 100.0
--
--
--------- --------- ---------------- --------- ---------------- ---------
--------- --------- ---------------- --------- ---------------- ---------
1995 OFFERING PORTFOLIO
25 Largest MSA Markets.......... 9 2,002 35.3 $ 52,400,000 31.4 $ 51,458,000 31.2
Other Markets................... 19 3,669 64.7 114,324,000 68.6 113,456,000 68.8
--
--------- --------- ---------------- --------- ---------------- ---------
Total......................... 28 5,671 100.0 $ 166,724,000 100.0 $ 164,914,000 100.0
--
--
--------- --------- ---------------- --------- ---------------- ---------
--------- --------- ---------------- --------- ---------------- ---------
</TABLE>
NATIONAL FRANCHISE AFFILIATIONS
The Company generally believes that franchise affiliations provide
advantages to certain hotels. Such advantages include brand recognition, access
to national reservations systems, national direct sales efforts and national
volume purchasing agreements, and technical and business assistance. Forty-two
of the Owned Hotels are represented by a national or regional franchise system.
The use of multiple franchise systems provides the Company with further
diversification, less dependence on the continued popularity of one brand and
less vulnerability to new requirements of any individual franchise system. The
Company expects to focus its franchise affiliations on upscale hotel chains. The
following tables summarize certain information with respect to the franchise
affiliations of the (i) Owned Hotels and (ii) the 1995 Offering Portfolio:
<TABLE>
<CAPTION>
PRO FORMA
GROSS REVENUES PRO FORMA
# OF # OF % OF TWELVE MONTHS % OF GROSS REVENUES % OF
HOTELS ROOMS TOTAL ENDING 3/31/96 TOTAL 1995 TOTAL
----------- --------- --------- ---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED HOTELS
Doubletree...................... 10 3,317 20.6 $ 112,917,000 20.3 $ 110,874,000 20.4
Sheraton........................ 4 1,214 7.5 48,795,000 8.8 48,504,000 8.9
Ritz Carlton.................... 2 663 4.1 45,496,000 8.2 44,614,000 8.2
Marriott........................ 3 990 6.1 43,569,000 7.8 42,663,000 7.8
Embassy Suites.................. 4 946 5.9 31,136,000 5.6 30,020,000 5.5
Westin.......................... 2 610 3.8 25,870,000 4.7 24,880,000 4.6
Hilton.......................... 2 646 4.0 23,235,000 4.2 22,333,000 4.1
Clarion......................... 1 442 2.7 11,977,000 2.2 11,575,000 2.1
Radisson........................ 2 488 3.0 10,825,000 1.9 10,644,000 2.0
Days Inn........................ 3 440 2.7 10,728,000 1.9 10,640,000 2.0
Best Western.................... 4 606 3.8 9,134,000 1.6 9,212,000 1.7
Holiday Inn..................... 2 357 2.2 6,389,000 1.1 6,594,000 1.2
Harvey.......................... 1 259 1.6 5,839,000 1.1 5,678,000 1.0
Omni............................ 1 168 1.0 5,095,000 0.9 5,236,000 1.0
Residence Inn................... 1 96 0.6 3,252,000 0.6 3,206,000 0.6
--
--------- --------- ---------------- --------- ---------------- ---------
Subtotal -- Affiliated.......... 42 11,242 69.8 394,257,000 70.9 386,673,000 71.1
--
--------- --------- ---------------- --------- ---------------- ---------
Other........................... 17 4,863 30.2 161,455,000 29.1 157,449,000 28.9
--
--------- --------- ---------------- --------- ---------------- ---------
Total......................... 59 16,105 100.0 $ 555,712,000 100.0 $ 544,122,000 100.0
--
--
--------- --------- ---------------- --------- ---------------- ---------
--------- --------- ---------------- --------- ---------------- ---------
Number of Brands................ 15
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
GROSS REVENUES PRO FORMA
# OF # OF % OF TWELVE MONTHS % OF GROSS REVENUES % OF
HOTELS ROOMS TOTAL ENDING 3/31/96 TOTAL 1995 TOTAL
----------- --------- --------- ---------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 OFFERING PORTFOLIO
Marriott........................ 2 696 12.3 $ 27,244,000 16.3 $ 26,951,000 16.3
Sheraton........................ 1 462 8.1 17,135,000 10.3 17,109,000 10.4
Embassy Suites.................. 2 451 8.0 14,714,000 8.8 13,922,000 8.4
Doubletree...................... 2 364 6.4 9,772,000 5.9 9,610,000 5.8
Best Western.................... 4 606 10.7 9,134,000 5.5 9,212,000 5.6
Days Inn........................ 2 263 4.6 6,580,000 3.9 6,424,000 3.9
Harvey.......................... 1 259 4.6 5,839,000 3.5 5,678,000 3.4
Omni............................ 1 168 3.0 5,095,000 3.1 5,236,000 3.2
Radisson........................ 1 195 3.4 4,331,000 2.6 4,200,000 2.5
Holiday Inn..................... 1 151 2.7 2,912,000 1.7 2,945,000 1.8
Residence Inn................... 1 96 1.7 3,252,000 2.0 3,206,000 1.9
--
--------- --------- ---------------- --------- ---------------- ---------
Subtotal -- Affiliated.......... 18 3,711 65.4 106,008,000 63.6 104,493,000 63.4
--
--------- --------- ---------------- --------- ---------------- ---------
Other........................... 10 1,960 34.6 60,716,000 36.4 60,421,000 36.6
--
--------- --------- ---------------- --------- ---------------- ---------
Total......................... 28 5,671 100.0 $ 166,724,000 100.0 $ 164,914,000 100.0
--
--
--------- --------- ---------------- --------- ---------------- ---------
--------- --------- ---------------- --------- ---------------- ---------
Number of Brands................ 11
</TABLE>
RITZ CARLTON-TM-, WESTIN-TM-, MARRIOTT-TM-, HILTON-TM-, SHERATON-TM-,
OMNI-TM-, DOUBLETREE-TM-, EMBASSY SUITES-REGISTERED TRADEMARK-, HARVEY-TM-,
RADISSON-TM-, HOLIDAY INN-REGISTERED TRADEMARK-, RESIDENCE INN-TM-, DAYS
INN-TM-, BEST WESTERN-TM-, RAMADA-TM-, CLARION-TM- AND QUALITY INN-TM- ARE
TRADEMARKS OF THIRD PARTIES, EXCEPT AS DESCRIBED HEREIN NONE OF WHICH IS
AFFILIATED WITH THE COMPANY, WHICH HAVE NOT ENDORSED OR APPROVED THE OFFERING OR
ANY OF THE FINANCIAL RESULTS OF THE HOTELS SET FORTH IN THIS PROSPECTUS
SUPPLEMENT. A GRANT OF ANY SUCH FRANCHISE LICENSE FOR CERTAIN OF THE HOTELS IS
NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR IMPLIED
APPROVAL OR ENDORSEMENT BY ANY SUCH FRANCHISOR OR LICENSOR (OR ANY OF THEIR
RESPECTIVE AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY OR THE PAIRED
COMMON SHARES OFFERED HEREBY.
S-35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND TRUSTEES OF THE TRUST
The following table sets forth certain information with respect to each of
the Trust's executive officers and trustees:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE TRUST
- --------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Barry S. Sternlicht.......................... 35 Chairman, Chief Executive Officer and Trustee
Ronald C. Brown.............................. 41 Senior Vice President and Chief Financial
Officer
Bruce W. Duncan.............................. 44 Trustee
Madison F. Grose............................. 42 Trustee
Stephen R. Quazzo............................ 36 Trustee
William E. Simms............................. 51 Trustee
Daniel H. Stern.............................. 35 Trustee
</TABLE>
The following is a biographical summary of the experience of the executive
officers of the Trust:
BARRY S. STERNLICHT. Mr. Sternlicht is Chairman and Chief Executive Officer
of the Trust. He is founder of Starwood Capital Group, L.P., a real estate
investment firm (and co-founder of its predecessor entity in September 1991),
and has been the President and CEO of Starwood Capital Group, L.P. since its
formation. Prior to forming Starwood Capital, he was Vice President and then
Senior Vice President (from 1989 to 1991) of JMB Realty Corporation, a real
estate investment firm. Mr. Sternlicht is currently a member of the Management
Committee of the Operating Partnership, a Trustee of each of Equity Residential
Properties Trust, a multi-family REIT, and Angeles Participating Mortgage Trust,
a REIT, and is a director of Westin Hotel Company and U.S. Franchise Systems.
Mr. Sternlicht is on the Board of Governors of NAREIT and is a member of the
Urban Land Institute and of the National Multi-Family Housing Council. Mr.
Sternlicht is a member of the Board of Directors of the Council for Christian
and Jewish Understanding, is a member of the Young Presidents Organization and
is on the Board of Directors of Junior Achievement for Fairfield County, CT.
RONALD C. BROWN. Mr. Brown has been Chief Financial Officer of the Trust
since July 1995. Prior to joining the Trust, Mr. Brown was President of Sonoran
Hotel Advisors, a hotel REIT advisory firm. From December 1993 to August 1994,
Mr. Brown was President of Doubletree Corporation, a public hotel operating
company. From January 1991 to December 1993, Mr. Brown was Executive Vice
President -- Finance & Planning and then Chairman of Doubletree Hotels
Corporation. From March 1988 to April 1992, Mr. Brown was Vice President --
Finance & Accounting for Canadian Pacific Hotels Corporation.
EXECUTIVE OFFICERS AND DIRECTORS OF THE CORPORATION
The following table sets forth certain information with respect to each of
the Corporation's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE CORPORATION
- ------------------------------------ --- ------------------------------------
<S> <C> <C>
Earle F. Jones...................... 69 Chairman of the Board of Directors
and Director (1)
Eric A. Danziger.................... 42 President and Chief Executive
Officer
Theodore W. Darnall................. 38 Executive Vice President and Chief
Operating Officer
Steven R. Goldman................... 35 Senior Vice President and Director
(2)
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE CORPORATION
- ------------------------------------ --- ------------------------------------
<S> <C> <C>
Alan M. Schnaid..................... 29 Vice President and Corporate
Controller
Jean-Marc Chapus.................... 37 Director (2)
Jonathan D. Eilian.................. 28 Director (2)
Bruce M. Ford....................... 56 Director (3)
Graeme W. Henderson................. 62 Director (3)
Michael A. Leven.................... 58 Director (2)
Barry S. Sternlicht................. 35 Director(2)
Daniel W. Yih....................... 38 Director (2)
</TABLE>
- ------------------------
(1) Current director who continues in office after receipt of required gaming
approvals.
(2) Becomes a director upon receipt of required gaming approvals.
(3) Serves as a director until required gaming approvals are received.
The following is a biographical summary of the experience of the executive
officers of the Corporation:
ERIC A. DANZIGER. Mr. Danziger became President and Chief Executive Officer
of the Corporation in July 1996. Mr. Danziger has been in the hotel industry for
over 26 years. Prior to joining the Corporation, he served as the Executive Vice
President of the Wyndham Hotel Corporation and President of Wyndham Hotels and
Resorts Division from August 1990 to June 1996. Prior thereto, from 1979 to
1990, Mr. Danziger served Doubletree Hotels Corporation in a variety of
positions, including Senior Vice President.
THEODORE W. DARNALL. Mr. Darnall has served as the Executive Vice President
and Chief Operating Officer of the Corporation since April 1996. Prior to
joining the Corporation, Mr. Darnall served as the Senior Vice
President-Operations of Interstate Hotel Company from August 1995 to April 1996.
From 1989 to August 1995, Mr. Darnall served as the Regional Vice
President-Operations of Interstate Hotel Company.
STEVEN R. GOLDMAN. Mr. Goldman has been Senior Vice President of the
Corporation since March 1995. Mr. Goldman was a Vice President of Starwood
Capital Group, L.P., specializing in hotel acquisitions and hotel asset
management, from August 1993 to February 1995. From 1990 to 1993, he was Senior
Development Manager of Disney Development Company, the real estate investment
development and management division of the Walt Disney Company. From 1986 to
1990, Mr. Goldman was Director of Development of The Hyatt Development
Corporation, a hotel development company.
ALAN M. SCHNAID. Mr. Schnaid has been with the Corporation since August
1994 and has been a Vice President since July 1996 and Corporate Controller
since February 1996. He is a Certified Public Accountant. Mr. Schnaid was
employed by Mazars and Company, an international accounting firm from January
1993 to August 1994 and by Kenneth Leventhal and Company, a national real estate
accounting firm from January 1991 to January 1993.
EMPLOYMENT AGREEMENTS
Eric A. Danziger and the Corporation entered into an employment agreement
dated as of June 27, 1996, pursuant to which Mr. Danziger was employed as
President and Chief Executive Officer of the Corporation at an annual salary of
$365,000 and was guaranteed a minimum bonus of $150,000 for 1996. Mr. Danziger
also received options to purchase 125,000 Paired Common Shares exercisable at
$36.75 per Paired Share, which vest in three equal annual increments, and 67,264
Paired Common Shares of restricted stock which also vest in three equal annual
increments. Mr. Danziger will also receive relocation expenses in connection
with moving his residence from Dallas, Texas to Phoenix,
S-37
<PAGE>
Arizona and in connection therewith will receive a one-year non-interest bearing
bridge loan from the Corporation for up to $250,000 secured by a second mortgage
on his new residence to be purchased in Phoenix, Arizona. Mr. Danziger's
employment is terminable by the Corporation or Mr. Danziger with or without
cause. In the event his employment is terminated by the Corporation without
cause or by Mr. Danziger in the event the Corporation assigns to him duties
inappropriate for his position or reduces his responsibilities, then Mr.
Danziger is entitled to a severance package of one-year's base salary, the
immediate vesting of all outstanding stock options and restricted shares and
company-paid medical benefits for 12-months.
Theodore W. Darnall entered into an employment agreement dated as of April
19, 1996 pursuant to which Mr. Darnall was employed as Executive Vice President
and Chief Operating Officer of the Corporation at an annual salary of $275,000
and was guaranteed a minimum bonus of $137,500 for 1996. Mr. Darnall also
received options to purchase 50,000 Paired Common Shares exercisable at $34.25
per Paired Common Share, which vest in three equal annual increments and 29,197
Paired Common Shares of restricted stock which also vest in three equal annual
increments. Mr. Darnall will also receive relocation expenses in connection with
moving his residence from Pittsburgh, Pennsylvania to Phoenix, Arizona, and in
connection therewith will receive a non-interest bearing bridge loan of up to
$250,000 secured by a second mortgage on his new residence to be purchased in
Phoenix, Arizona. The bridge loan will mature as to $100,000 upon the sale of
Mr. Darnall's home in Pittsburgh, and the balance upon termination of his
employment with the Corporation. Mr. Darnall's employment is terminable by the
Corporation or Mr. Darnall with or without cause. In the event his employment is
terminated by the Corporation without cause or by Mr. Darnall due to breach by
the Corporation, then Mr. Darnall is entitled to a severance package of
one-year's base salary, the immediate vesting of all outstanding stock options
and restricted shares and company-paid medical benefits for 12-months.
The Trust entered into a Separation Agreement dated as of June 18, 1996 (the
"Separation Agreement") with Jeffrey C. Lapin in connection with Mr. Lapin's
resignation as President and Chief Operating Officer of the Trust. The Trust
agreed to conditionally forgive, after one year, $150,000 of a $250,000 loan
from the Trust to Mr. Lapin. The Trust also agreed to immediately vest, in part,
the options held by Mr. Lapin and to grant him an additional option to purchase
5,000 Paired Common Shares exercisable at $37 7/8, which is vested two-thirds on
his termination date and the balance on January 31, 1997, and upon exercise of
the option, to pay to Mr. Lapin the difference between $16.50 and the lower of
the exercise price and the then market value of a Paired Common Share. All
options held by Mr. Lapin were amended to the extent required to permit them to
be exercised for their full maximum term. Mr. Lapin agreed to render consulting
services for 18 months for which he will be paid $235,000, and the Trust also
agreed to pay Mr. Lapin a fee of up to $250,000 in connection with the sale
within 18 months of the King 8 Hotel & Gambling Hall owned by the Trust in Las
Vegas, Nevada. Mr. Lapin agreed that for 3 years he would not participate or be
involved with others in any tender or exchange offer, proxy contest or
solicitation or purchase or be part of a group which purchases in excess of 4.9%
of the outstanding Paired Common Shares.
INCENTIVE COMPENSATION, FEES AND REIMBURSEMENTS
The following discussion presents an overview of certain matters that are
currently being considered by the Board of Trustees of the Trust and the Board
of Directors of the Corporation. Certain of these matters, if adopted, will
require shareholder approval. The Company expects, in the near future, to
prepare and distribute a definitive proxy statement relating to these and other
matters to be submitted for shareholder approval at the Company's 1996 Annual
Meeting. Prior to exchanging Units for Paired Common Shares, the holders of
Units are not entitled to exercise the rights of holders of Paired Common
Shares, including voting rights. Although the following discussion describes
certain elements of these proposals, the Boards are continuing to review these
and alternative proposals and, therefore, the following proposals remain subject
to change.
S-38
<PAGE>
EXECUTIVE COMPENSATION
The Board's goals for management compensation are to implement a set of
incentives that will enable the Company to attract, motivate and retain
well-qualified senior management in a manner consistent with maximizing
long-term shareholder returns. Accordingly, the Board of Trustees and the
Compensation and Options Committees of the Trust, and the Board of Directors and
the Compensation and Options Committees of the Corporation are currently
considering amending their entire compensation program for senior management to
provide incentive compensation for the creation of long term shareholder value.
The proposed program would involve, in addition to annual salary, an annual
bonus of up to 100% of base salary based on certain performance criteria, as
well as long-term incentives. In addition to options under the existing option
plans of the Trust and the Corporation, long-term incentives include other
awards such as Paired Common Shares which may or may not be vested over time or
based on performance criteria (subject to acceleration in the event of a change
of control).
The Company does not currently have an incentive plan that provides for the
grant of Paired Common Shares. The Company believes that it is important for it
to have the ability to grant Paired Common Shares in connection with
performance-based awards as well as in connection with the recruitment of
well-qualified senior management. Any new long-term incentive plan or
modification of the existing option plans to provide for the granting of Paired
Common Shares would be subject to shareholder approval. It is anticipated that
performance-based awards of Paired Common Shares would be made after five years
(subject to acceleration in the event of a change of control) in an amount equal
to (i) 4% of total shareholder return (stock price appreciation plus dividends,
assuming reinvestment of all dividends) up to 12% per annum shareholder return
over the five years after closing of the Offering but only if a 12% per annum
compounded total shareholder return is achieved plus, (ii) an amount of up to 8%
of any excess over such 12% per annum shareholder return; provided, however,
that the value of such performance-based awards, together with the increase in
value of all existing options and other awards during the five-year reference
period, may not exceed, in the aggregate, 10% of the total shareholder return
over such reference period. Unlike options, which, subject to vesting, may be
exercised at any time, the performance-based awards would require compounded
performance over the reference period in order for any Paired Common Shares to
be awarded. It is expected that the Paired Common Shares to be awarded pursuant
to performance-based awards would be to the Chairman and Chief Executive Officer
of the Trust, the President and Chief Executive Officer of the Corporation, and
other senior executives of the Trust and the Corporation. It is further
anticipated that the Chief Financial Officer of the Trust and the Senior Vice
President of the Corporation would each receive current awards of 15,000 Paired
Common Shares, which would vest in equal annual increments over three years. The
aggregate maximum number of Paired Common Shares that are expected to be subject
to the entire expanded incentive compensation program (including all options
under the Company's existing option plans, performance-based and other awards of
Paired Common Shares and all other long-term incentives, such as warrants) would
be fixed at 10% of the total number of outstanding Paired Common Shares as of
December 31, 1996, after giving effect to the exchange of all Units for Paired
Shares (instead of the existing "evergreen" maximum for the option plans of 8%
of the total number of outstanding Paired Common Shares from time to time, after
giving effect to the exchange of all Units for Paired Common Shares).
The Board of Trustees of the Trust and the Board of Directors of the
Corporation are also currently considering increasing their own annual fees to
$25,000 per annum payable at least 50% in Paired Common Shares (or a greater
percentage at the election of the Director or Trustee) in addition to annual
awards of options to purchase 6,000 Paired Common Shares. The fees for Chairmen,
for committee membership and for meetings would not be changed. However,
employees of the Trust or Corporation would not receive any compensation for
their services as Trustees or Directors.
S-39
<PAGE>
CERTAIN FEES AND REIMBURSEMENTS
The Company and Starwood Capital agreed in connection with the 1995 Offering
that subject to approval by the independent Trustees or Directors as
appropriate, Starwood Capital would be reimbursed for out-of-pocket costs and
expenses for any services provided to the Company; and that Starwood Capital
would also be reimbursed for its internal costs (including allocation of
overhead) for services provided to the Company, provided that where such
internal costs are currently expensed by the Company, such reimbursement would
not exceed $250,000 in the year ending June 30, 1996. The Board of Trustees of
the Trust and the Board of Directors of the Corporation are currently
considering the payment to Starwood Capital Group L.L.C. of a special one-time
fee equal to approximately $6 million payable in Paired Common Shares subject to
forfeiture of two-thirds of the number of such Paired Common Shares for one year
and one-third for two years in the event of a breach of the Starwood Noncompete.
Such a fee would be subject to shareholder approval. The Boards do not currently
intend to amend the terms of the Starwood Noncompete. In addition, if the above
expanded incentive compensation program is approved by the Board of Trustees and
shareholders of the Trust and the Board of Directors and stockholders of the
Corporation, the Company's reimbursement arrangement with Starwood Capital would
also be changed so as to eliminate reimbursement for internal costs of Starwood
Capital for any services of senior management of Starwood Capital (subject to
the same annual limitation of $250,000 as set forth above for services of other
than such senior management) and after one year for any services of any employee
of Starwood Capital.
S-40
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") among the Company and each of the underwriters named below
(the "Underwriters"), the Company has agreed to sell to each of the Underwriters
named below for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Lehman Brothers Inc., Bear, Stearns & Co. Inc., Furman Selz
Incorporated, Goldman, Sachs & Co., Prudential Securities Incorporated and Smith
Barney, Inc. are acting as representatives (the "Representatives"), and each of
the Underwriters severally has agreed, subject to the terms and conditions set
forth therein, to purchase from the Company, Notes convertible into the
respective number of Paired Common Shares set forth below opposite their
respective names.
<TABLE>
<CAPTION>
NUMBER OF
PAIRED COMMON
UNDERWRITER SHARES
- --------------------------------------------------------------------------------------- ---------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................................ 1,052,966
Lehman Brothers Inc.................................................................... 1,052,964
Bear, Stearns & Co. Inc................................................................ 1,052,964
Furman Selz LLC........................................................................ 1,052,964
Goldman, Sachs & Co.................................................................... 1,052,964
Prudential Securities Incorporated..................................................... 1,052,964
Smith Barney Inc....................................................................... 1,052,964
Alex. Brown & Sons Incorporated........................................................ 100,750
BT Securities Corporation.............................................................. 100,750
CS First Boston Corporation............................................................ 100,750
Dean Witter Reynolds Inc............................................................... 100,750
Donaldson, Lufkin & Jenrette Securities Corporation.................................... 100,750
A.G. Edwards & Sons, Inc............................................................... 100,750
Montgomery Securities.................................................................. 100,750
Morgan Stanley & Co. Incorporated...................................................... 100,750
Nesbitt Burns Securities Inc........................................................... 100,750
Oppenheimer & Co., Inc................................................................. 100,750
PaineWebber Incorporated............................................................... 100,750
Salomon Brothers Inc................................................................... 100,750
Schroder Wertheim & Co. Incorporated................................................... 100,750
Advest, Inc............................................................................ 50,750
Allen & Company Incorporated........................................................... 50,750
Robert W. Baird & Co. Incorporated..................................................... 50,750
William Blair & Company, L.L.C......................................................... 50,750
J.C. Bradford & Co..................................................................... 50,750
Cowen & Company........................................................................ 50,750
Crowell, Weedon & Co................................................................... 50,750
Dain Bosworth Incorporated............................................................. 50,750
Dominick & Dominick, Incorporated...................................................... 50,750
EVEREN Securities, Inc................................................................. 50,750
Fahnestock & Co. Inc................................................................... 50,750
First Albany Corporation............................................................... 50,750
Interstate/Johnson Lane Corporation.................................................... 50,750
Janney Montgomery Scott Inc............................................................ 50,750
Edward D. Jones & Co................................................................... 50,750
Legg Mason Wood Walker, Incorporated................................................... 50,750
McDonald & Company Securities, Inc..................................................... 50,750
Piper Jaffray Inc...................................................................... 50,750
Prime Charter LTD...................................................................... 50,750
Principal Financial Securities, Inc.................................................... 50,750
Ragen MacKenzie Incorporated........................................................... 50,750
Rauscher Pierce Refsnes, Inc........................................................... 50,750
Raymond James & Associates, Inc........................................................ 50,750
The Robinson-Humphrey Company, Inc..................................................... 50,750
Sutro & Co. Incorporated............................................................... 50,750
Wheat, First Securities, Inc........................................................... 50,750
---------------
Total.............................................................................. 10,000,000
---------------
---------------
</TABLE>
S-41
<PAGE>
In the Purchase Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Notes being sold
pursuant to such Purchase Agreement if any of such Notes are purchased. Under
certain circumstances, the commitments of non-defaulting Underwriters may be
increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the Notes (which will automatically be converted into Paired
Common Shares upon purchase by the public) to the public at the initial price
per Paired Common Share into which the Notes are convertible set forth on the
cover page of this Prospectus Supplement, and to certain dealers at such price
less a concession not in excess of $1.15 per Paired Common Share issuable upon
conversion of the Notes purchased by such dealers. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $.10 per Paired Common
Share issuable upon conversion of the Notes purchased by such dealers on sales
to certain other dealers. Upon completion of the Offering, the offering price
per Paired Common Share issuable upon conversion of the Notes purchased by such
dealers to the public and the concession and discount to dealers may be changed.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase
additional Notes convertible into up to 1,500,000 Paired Common Shares solely to
cover over-allotments, if any, at the initial price per Paired Common Share into
which the Notes are convertible to the public less the underwriting discount set
forth on the cover page of this Prospectus Supplement. To the extent that the
Underwriters exercise this option, each Underwriter will be obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional Notes which the number of Paired Common Shares into which Notes to be
purchased by it are convertible shown in the foregoing table bears to the Paired
Common Shares initially offered hereby.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof. The Purchase Agreement
contains certain provisions that are designed to ensure that the underwriting
complies with the Ownership Limitation.
The executive officers of the Company and the Trustees and Directors of the
Company and Starwood Capital, L.L.C. have agreed not to offer, sell, contract to
sell or otherwise dispose of any Paired Common Shares or any securities
convertible into or exercisable for Paired Common Shares (except for issuances
by the Company pursuant to the exchange of Units and for distribution of Units
to parties who have direct or indirect interests in Starwood Capital) for a
period of 90 days after the closing of the Offering without the prior written
consent of Merrill Lynch and the Company (which consent of the Company must be
approved by a majority of the independent Trustees/Directors). The Company has
agreed, subject to certain exceptions (including the exceptions referenced
above, the issuance of Paired Common Shares pursuant to existing options and
warrants, the grant of options under the Company's option plans, the grant of
Paired Common Shares under employee benefit plans and shares issued to Starwood
Capital, L.L.C. in connection with the acquisition of the Teachers Portfolio),
not to offer, sell, contract to sell or otherwise dispose of any Paired Common
Shares or issue Units unless the recipient thereof agrees to be bound by the
foregoing restrictions for a 90-day period after the date of this Prospectus
Supplement, without the prior written consent of Merrill Lynch.
The Underwriters have reserved up to 30,000 Paired Common Shares for sale
(at the public offering price) to certain Directors, Trustees, officers and
other employees of the Company who have expressed an interest in purchasing such
shares. The number of shares available for sale to the general public will be
reduced to the extent such persons purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as the other shares offered hereby. Certain Trustees
and officers of the Trust and Directors and officers of the Corporation have
indicated an intention to purchase Paired Common Shares in this Offering,
including, among others, Messrs. Sternlicht, Eilian, Grose, Danziger, Darnall,
Goldman and Brown.
S-42
<PAGE>
The Company and Starwood Capital retained Merrill Lynch for financial and
other advisory services in connection with the Reorganization and the Company
paid Merrill Lynch a fee of $1.95 million and $50,000 in reimbursement of
out-of-pocket expenses incurred in connection with its engagement.
In connection with the 1995 Offering the Company paid Merrill Lynch and
Lehman Brothers Inc. ("Lehman") and the other underwriters thereof, and in
connection with the April 1996 Offering, the Company paid Merrill Lynch,
customary underwriting discounts and commissions. In addition, the Company
repaid approximately $136.9 million of debt held by an affiliate of Merrill
Lynch from the proceeds of the 1995 Offering. In connection with such repayment,
such affiliate was paid aggregate fees of approximately $2.4 million.
Merrill Lynch from time to time provides investment banking and financial
advisory services to the Company and Starwood Capital and other entities
affiliated with Mr. Sternlicht and has explored and continues to explore other
business activities with the Company and Starwood Capital. In addition, the
Trust entered into one of the Treasury Lock Transactions with Merrill Lynch. See
"Indebtedness of the Company."
Affiliates of Lehman provided the Company with the Mortgage Facility, the
Credit Facility and the Term Loan. See "Indebtedness of the Company." The
Company paid an affiliate of Lehman a fee of 1% of the maximum amount of the
Credit Facility at the closing thereof, and will pay a fee of 0.25% per annum on
the unfunded portion of the Credit Facility. Additionally, the Company paid an
affiliate of Lehman fees equal to approximately $820,000 in connection with the
Term Loan. Furthermore, in connection with the April 1996 Offering, the Company
retained Lehman for financial advisory services and paid Lehman a fee of
$630,000. If defaults were to occur under the Mortgage Facility, the Credit
Facility or the Term Loan, the lenders would have the right to pursue various
remedies, including foreclosure upon collateral, which could have a material
adverse effect on the Company and the holders of the Paired Common Shares.
Affiliates of Starwood Capital and Goldman, Sachs & Co. (together with its
affiliates, "Goldman") beneficially own, in the aggregate, a controlling
interest in Westin. Furthermore, the Company and Goldman have agreed to terms
with respect to providing the Acquisition Facility, subject to the satisfaction
of certain conditions, including the negotiation of definite documentation. The
Company shall pay certain fees to Goldman in connection with the Acquisition
Facility.
S-43
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
INDEX TO PRO FORMA FINANCIAL STATEMENTS AND NOTES
<TABLE>
<S> <C>
Combined Pro Forma Balance Sheet at March 31, 1996.................................... F-3
Notes to Pro Forma Balance Sheet...................................................... F-4
Combined Pro Forma Statements of Operations for the Three Months ended March 31, 1996
and the Year ended December 31, 1995................................................. F-7
Notes to Pro Forma Statements of Operations........................................... F-9
</TABLE>
F-1
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
The following unaudited Pro Forma Combined Balance Sheet is presented as if
(i) the April 1996 Offering of 2,000,000 Paired Common Shares of the Company (as
defined below) at $31.50 per paired common share of the Company and the use of
the net proceeds therefrom (the "April 1996 Offering"), (ii) the 1996 Offering
of 10,000,000 Paired Common Shares at an initial offering price of $35.875 per
Paired Common Share and the use of the net proceeds therefrom (the "Offering")
and (iii) certain property acquisitions (the "Acquisitions"), had all occurred
as of March 31, 1996.
The unaudited Pro Forma Combined Balance Sheet should be read in conjunction
with the Separate and Combined Historical Financial Statements of Starwood
Lodging Trust ( the "Trust") and Starwood Lodging Corporation (the
"Corporation," and collectively with the Trust, the "Company") and the Notes
thereto included in its Annual Report on Form 10-K/A for the year ended December
31, 1995, the unaudited financial statements and related notes of the Company
included in their Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, and the Financial Statements and related notes of the properties acquired
by the Company included in the Current Reports on Form 8-K dated January 4,
1996, January 24, 1996, April 26, 1996 and June 28, 1996 (each, as may have been
amended) incorporated by reference in this Prospectus Supplement. In
management's opinion, all pro forma adjustments necessary to reflect the effects
of the April 1996 Offering, the Offering and the Acquisitions have been made.
The unaudited Pro Forma Combined Balance Sheet is not necessarily indicative
of what the actual financial position of the Company would have been at March
31, 1996, nor does it purport to represent the future financial position of the
Company.
F-2
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED COMBINED PRO FORMA BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL COMPLETED PENDING ACQUISITIONS
STARWOOD ACQUISITIONS -----------------------------------------
LODGING ------------- TEACHERS HOD OTHER
COMBINED PORTFOLIO PORTFOLIO ACQUISITIONS
------------- (B) ------------- ------------- -----------
(A) (B) (B) (B)
<S> <C> <C> <C> <C> <C>
ASSETS
Hotel assets held for sale -- net........................ $ 39,923,000 $ -- $ -- $ -- $ --
Hotel assets -- net...................................... 347,379,000 126,415,000(C) 309,000,000 135,000,000 20,000,000
------------- ------------- ------------- ------------- -----------
387,302,000 126,415,000 309,000,000 135,000,000 20,000,000
Mortgage notes receivable, net........................... 78,801,000 (21,115,000 (C) -- --
Investments.............................................. 46,865,000 -- -- --
------------- ------------- ------------- ------------- -----------
Total real estate investments.......................... 512,968,000 107,300,000 309,000,000 135,000,000 20,000,000
Cash and cash equivalents................................ 20,646,000 2,000,000 -- --
Accounts and interest receivable......................... 12,702,000 -- --
Notes receivable, net.................................... 1,776,000 -- --
Inventories, prepaid expenses and other assets........... 17,004,000 -- --
------------- ------------- ------------- ------------- -----------
$ 565,096,000 $ 107,300,000 $ 309,000,000 $ 135,000,000 $20,000,000
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Secured notes payable and revolving line of credit....... $ 223,985,000 $ 105,500,000 $ 309,000,000 $ 135,000,000 $20,000,000
Mortgage and other notes payable......................... 4,779,000 -- --
Accounts payable and other liabilities................... 22,388,000 -- --
Dividends and distributions payable...................... 10,245,000 -- --
------------- ------------- ------------- ------------- -----------
261,397,000 105,500,000 309,000,000 135,000,000 20,000,000
------------- ------------- ------------- ------------- -----------
Commitments and contingencies............................
MINORITY INTEREST........................................ 91,569,000 1,800,000(C) -- --
------------- ------------- ------------- ------------- -----------
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest, $.01 par value; 138,000 -- --
authorized 30,000,000 shares; outstanding 13,798,000;
25,798,886 outstanding pro forma shares.................
Corporation shares of common stock, $.01 par value; 138,000 -- --
authorized 30,000,000 shares; outstanding 13,798,000;
25,798,886 outstanding pro forma shares.................
Additional paid-in capital............................... 434,104,000 -- --
<CAPTION>
PRO FORMA
<S> <C> <C>
ASSETS
Hotel assets held for sale -- net........................ $ -- $ 39,923,000
Hotel assets -- net...................................... -- 937,794,000
-------------- --------------
-- 977,717,000
Mortgage notes receivable, net........................... -- 57,686,000
Investments.............................................. -- 46,865,000
-------------- --------------
Total real estate investments.......................... -- 1,082,268,000
Cash and cash equivalents................................ (1,000,000 (G) 21,646,000
Accounts and interest receivable......................... -- 12,702,000
Notes receivable, net.................................... -- 1,776,000
Inventories, prepaid expenses and other assets........... 1,000,000(G) 18,004,000
-------------- --------------
$ -- $1,136,396,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Secured notes payable and revolving line of credit....... $ (400,321,000 ) $ 393,164,000
Mortgage and other notes payable......................... -- 4,779,000
Accounts payable and other liabilities................... -- 22,388,000
Dividends and distributions payable...................... -- 10,245,000
-------------- --------------
(400,321,000) 430,576,000
-------------- --------------
Commitments and contingencies............................
MINORITY INTEREST........................................ 39,665,000(F) 133,034,000
-------------- --------------
SHAREHOLDERS' EQUITY
Trust shares of beneficial interest, $.01 par value; 20,000(D) 258,000
authorized 30,000,000 shares; outstanding 13,798,000; 100,000(E)
25,798,886 outstanding pro forma shares.................
Corporation shares of common stock, $.01 par value; 20,000(D) 258,000
authorized 30,000,000 shares; outstanding 13,798,000; 100,000(E)
25,798,886 outstanding pro forma shares.................
Additional paid-in capital............................... 62,331,000(D) 794,520,000
337,750,000(E)
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Accumulated deficit...................................... (222,250,000) -- --
------------- ------------- ------------- ------------- -----------
212,130,000 -- -- -- --
------------- ------------- ------------- ------------- -----------
$ 565,096,000 $ 107,300,000 $ 309,000,000 $ 135,000,000 $20,000,000
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------
<CAPTION>
(39,665,000 (F)
<S> <C> <C>
-------------- --------------
360,656,000 572,786,000
-------------- --------------
$ -- $1,136,396,000
-------------- --------------
-------------- --------------
<CAPTION>
Accumulated deficit...................................... -- (222,250,000)
</TABLE>
F-4
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA BALANCE SHEET
AT MARCH 31, 1996
NOTE 1. BASIS OF PRESENTATION
(A) The Trust and the Corporation have unilateral control of SLT Realty
Limited Partnership ("Realty") and SLC Operating Limited Partnership
("Operating" and, together with Realty, the "Partnerships"), respectively, and
therefore, the historical financial statements of Realty and Operating are
consolidated with those of the Trust and the Corporation. Unless the context
otherwise requires, all references herein to the "Company" refer to the Trust
and the Corporation, and all references to the "Trust" and the "Corporation"
include the Trust and the Corporation and those entities respectively owned or
controlled by the Trust or the Corporation, including Realty and Operating.
NOTE 2. ACQUIRED PROPERTIES
(B) The following properties were acquired subsequent to March 31, 1996, or
are expected to be acquired, and are therefore included as pro forma adjustments
to the balance sheet:
On April 24, 1996, the Company acquired the 442-room Clarion Hotel, located
at the San Francisco Airport, Millbrae, CA. On June 1, 1996, the Company
completed the purchase of the 251-room Doubletree Guest Suites located at the
Philadelphia Airport in Philadelphia, Pennsylvania. On June 28, 1996, the
Company completed the purchase of the 177-room Days Inn Hotel located at the
Philadelphia Airport in Philadelphia, Pennsylvania. On February 26, 1996 the
Company acquired the debt interest in the Doubletree Guest Suites and the Days
Inn Hotel, both located in Philadelphia, Pennsylvania. The aggregate
consideration paid for the Doubletree Guest Suites and the Days Inn Hotel, both
located in Philadelphia, Pennsylvania was cash of $21.1 million inclusive of $2
million reserve and the issuance of $1.8 million in paired units of the
Partnership's. On April 26, 1996, the Company completed the purchase of the FFCA
portfolio which includes the 260-room Doubletree Guest Suites in Tampa, Florida,
the 254-room Doubletree Guest Suites in Fort Lauderdale, Florida, and the
308-room Doubletree Guest Suites in Irving, Texas (the "FFCA Portfolio"). The
following properties shall hereinafter be referred to as the "Completed
Acquisitions." The cost of these properties was as follows:
<TABLE>
<S> <C>
Doubletree Guest Suites -- Philadelphia, PA.......... $ 14,983,000
Days Inn -- Philadelphia, PA......................... 5,932,000
The Clarion -- Millbrae, CA.......................... 30,500,000
FFCA Portfolio....................................... 75,000,000
-------------
Total............................................ $ 126,415,000
-------------
-------------
</TABLE>
The Companies expect to complete the acquisitions (the "Pending
Acquisitions") of the Teachers Portfolio and the HOD Portfolio in August, 1996,
and the other acquisition of the Marriott Forrestal Village in August, 1996. The
Pending Acquisitions and the above referenced property acquisitions shall
hereinafter be referred to as the "Acquisitions."
The Company have assumed that the above acquisitions are acquired through
the issuance of debt, partnership units, proceeds from the April 1996 Offering
(see note D) and proceeds from the Offering (see note E).
NOTE 3. PRO FORMA ADJUSTMENTS
(C) Reflects the reclassification of the debt interest in the Doubletree
Guest Suites and the Days Inn both located at the Philadelphia Airport. The
Company completed the acquisition of these hotels on June 1 and June 28,
respectively, through the issuance of $1.8 million of partnership units (see
Note 2(B)).
F-4
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA BALANCE SHEET
AT MARCH 31, 1996 (CONTINUED)
NOTE 3. PRO FORMA ADJUSTMENTS (CONTINUED)
(D) On April 12, 1996, the Trust and the Corporation completed a public
offering of 2,000,000 Paired Common Shares of the Company (the "April 1996
Offering"). Net proceeds to the Company from the April 1996 Offering were
approximately $62.4 million. The proceeds were used to partially fund the
acquisition of the FFCA Portfolio. Since the April 1996 Offering took place
after March 31, 1996, the effects of such offering are included as pro forma
adjustments.
(E) The Company intends to issue, in a take-down from a shelf registration
statement filed with the Securities and Exchange Commission in connection with a
a public offering (the "Offering"), of 10,000,000 Paired Common Shares of the
Company (exclusive of 1,500,000 Paired Common Shares subject to the
Underwriters' over-allotment options) at an initial offering price of $35.875
per Paired Common Share. Total net proceeds from the Offering, together with the
net proceeds from the April 1996 Offering, will be used to acquire, in part, the
Acquisitions. The balance of approximately $169 million required to fund the
total purchase price is assumed to be drawn on the Term Facility and the
Acquisition Facility. Proceeds from the Offering and the April 1996 Offering are
calculated as follows (in thousands):
<TABLE>
<CAPTION>
COMBINED TRUST CORPORATION
----------- ----------- -----------
<S> <C> <C> <C>
Gross proceeds from Offering.................................... $ 358,750 $ 340,813 $ 17,937
Less offering costs........................................... 20,800 19,760 1,040
----------- ----------- -----------
Net proceeds from Offering...................................... 337,950 321,053 16,897
Net proceeds from April 1996 Offering........................... 62,371 59,252 3,119
Proceeds from Corporation to reduce intercompany receivable..... 20,016 (20,016)
----------- ----------- -----------
Total proceeds used to acquire the Acquisitions................. $ 400,321 $ 400,321
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(F) Reflects the adjustment to minority interest to represent the minority
partnerships share (18.9%) after the effect of the net assets of the
Acquisitions.
(G) Represents the estimated financing costs of a new credit facility which
the Company is currently negotiating in conjunction with the Acquisitions.
F-5
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
The following unaudited Pro Forma Combined Statements of Operations are
presented as if (i) the April 1996 Offering of 2,000,000 Paired Common Shares of
the Company at $31.50 per paired share and the use of proceeds therefrom (the
"April 1996 Offering"), and (ii) the Offering of 10,000,000 Paired Common Shares
of the Company at an initial offering price of $35.875 per Paired Common Share
and the use of net proceeds therefrom (the "Offering") and (iii) certain
additional property acquisitions (the "Acquisitions") had all occurred at the
beginning of the periods presented.
The unaudited Pro Forma Combined Statements of Operations should be read in
conjunction with the Separate and Combined Historical Financial Statements of
Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation (the
"Corporation") and collectively with the Trust, the "Company" and Notes thereto
included in its Annual Report on Form 10-K/A for the year ended December 31,
1995, the unaudited financial statements and related notes of the Company
included in their Quarterly Report on Form 10-Q for the quarter ended March 31,
1996, and the Financial Statements and related notes of the properties acquired
by the Company included in the Current Reports on Form 8-K dated January 4,
1996, January 24, 1996, April 26, 1996 and June 28, 1996 (each, as may have been
amended) incorporated by reference in this Prospectus Supplement. In
management's opinion, all pro forma adjustments necessary to reflect the effects
of the April 1996 Offering, the Offering and the Acquisitions have been made.
The unaudited Pro Forma Combined Statements of Operations are not
necessarily indicative of what actual results of operations of the Company would
have been nor do they purport to represent the Company's results of operations
for future periods.
F-6
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL PENDING ACQUISITIONS
STARWOOD --------------------------------------
LODGING COMPLETED TEACHERS HOD OTHER
COMBINED ACQUISITIONS PORTFOLIO PORTFOLIO ACQUISITIONS
----------- ------------ ----------- ----------- ------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRO FORMA
STARWOOD
PRO FORMA LODGING
ADJUSTMENTS COMBINED
----------- ------------
</TABLE>
<TABLE>
<CAPTION>
REVENUE (A) (B) (D) (E) (F)
<S> <C> <C> <C> <C> <C>
Hotel.................................................... $44,064,000 $ 15,526,000 $36,224,000 $20,762,000 $4,875,000
Gaming................................................... 6,829,000 -- -- --
Interest from mortgage and other notes................... 2,525,000 -- -- --
Income from joint ventures and rents from leased hotel
properties.............................................. 594,000 -- -- --
Other income............................................. 873,000 -- -- --
----------- ------------ ----------- ----------- ------------
54,885,000 15,526,000 36,224,000 20,762,000 4,875,000
----------- ------------ ----------- ----------- ------------
EXPENSES
Hotel operations......................................... 30,050,000 10,779,000 29,623,000 16,969,000 3,950,000
Gaming operations........................................ 5,835,000 -- -- -- --
Interest................................................. 3,223,000 -- -- -- --
Depreciation and amortization............................ 7,660,000 2,134,000 4,201,000 1,835,000 272,000
Administrative and operating............................. 2,373,000 -- -- -- --
----------- ------------ ----------- ----------- ------------
49,141,000 12,913,000 33,824,000 18,804,000 4,222,000
----------- ------------ ----------- ----------- ------------
Income before minority interest in Partnerships.......... 5,744,000 $ 2,613,000 $ 2,400,000 $ 1,958,000 $ 653,000
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Minority interest in Partnerships........................ 1,654,000
-----------
Net income............................................... $ 4,090,000
-----------
-----------
Net income per paired share.............................. $ 0.30
-----------
-----------
Weighted average number of paired shares................. 13,798,000
-----------
-----------
<CAPTION>
REVENUE
<S> <C> <C>
Hotel.................................................... $ -- $121,451,000
Gaming................................................... -- 6,829,000
Interest from mortgage and other notes................... -- 2,525,000
Income from joint ventures and rents from leased hotel
properties.............................................. -- 594,000
Other income............................................. -- 873,000
----------- ------------
-- 132,272,000
----------- ------------
EXPENSES
Hotel operations......................................... (2,586,000 88,785,000
Gaming operations........................................ -- 5,835,000
Interest................................................. 3,812,000 (J) 7,035,000
Depreciation and amortization............................ 556,000 (K) 16,658,000
Administrative and operating............................. 120,000 (L) 2,493,000
----------- ------------
1,902,000 120,806,000
----------- ------------
Income before minority interest in Partnerships.......... $(1,902,000) 11,466,000
-----------
-----------
Minority interest in Partnerships........................ 2,161,000(M)
------------
Net income............................................... $ 9,305,000
------------
------------
Net income per paired share.............................. $ 0.36(N)
------------
------------
Weighted average number of paired shares................. 25,798,000
------------
------------
</TABLE>
F-7
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
UNAUDITED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PENDING ACQUISITIONS
STARWOOD ---------------------------------------
LODGING COMPLETED TEACHERS HOD OTHER
COMBINED ACQUISITIONS PORTFOLIO PORTFOLIO ACQUISITIONS
------------- ------------- ------------- ----------- ------------
<CAPTION>
<S> <C> <C> <C> <C> PRO FORMA
STARWOOD
PRO FORMA LODGING
ADJUSTMENTS COMBINED
------------ -------------
</TABLE>
<TABLE>
<CAPTION>
REVENUE (A) (B) (D) (E) (F)
<S> <C> <C> <C> <C> <C>
Hotel........................................................ $ 121,250,000 $ 113,170,000 $ 141,797,000 $79,887,000 $15,712,000
Gaming....................................................... 26,929,000 -- -- --
Interest from mortgage and other notes....................... 10,905,000 -- -- --
Income from joint ventures and rents from leased hotel
properties.................................................. 791,000 331,000(C) -- --
Other income................................................. 1,966,000 -- -- --
Loss on sales of hotel assets................................ (125,000) -- -- --
------------- ------------- ------------- ----------- -----------
161,716,000 113,501,000 141,797,000 79,887,000 15,712,000
------------- ------------- ------------- ----------- -----------
EXPENSES
Hotel operations............................................. 85,017,000 86,408,000 118,701,000 67,252,000 12,462,000
Gaming operations............................................ 24,242,000 -- -- --
Interest..................................................... 13,138,000 3,219,000 -- --
Depreciation and amortization................................ 15,469,000 19,543,000 16,803,000 7,341,000 1,014,000
Administrative and operating................................. 5,712,000 -- -- --
------------- ------------- ------------- ----------- -----------
143,578,000 109,170,000 135,504,000 74,593,000 13,476,000
------------- ------------- ------------- ----------- -----------
Income before minority interest in Partnerships.............. 18,138,000 $ 4,331,000 $ 6,293,000 $ 5,294,000 $ 2,236,000
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Minority interest in Partnerships............................ 7,013,000
-------------
Net income................................................... $ 11,125,000
-------------
-------------
Net income per paired share.................................. $ 1.43
-------------
-------------
Weighted average number of paired shares..................... 7,771,000
-------------
-------------
<CAPTION>
REVENUE
<S> <C> <C>
Hotel........................................................ $ -- $ 471,816,000
Gaming....................................................... -- 26,929,000
Interest from mortgage and other notes....................... (456,000 (G) 10,449,000
Income from joint ventures and rents from leased hotel
properties.................................................. 3,459,000(H) 4,581,000
Other income................................................. -- 1,966,000
Loss on sales of hotel assets................................ -- (125,000)
------------ -------------
3,003,000 515,616,000
------------ -------------
EXPENSES
Hotel operations............................................. (11,497,000 (I) 358,343,000
Gaming operations............................................ 24,242,000
Interest..................................................... (16,357,000 (J) 28,009,000
28,009,000(J)
Depreciation and amortization................................ 2,668,000(K) 62,838,000
Administrative and operating................................. 491,000(L) 6,203,000
------------ -------------
3,314,000 479,635,000
------------ -------------
Income before minority interest in Partnerships.............. $ (311,000) 35,981,000
------------
------------
Minority interest in Partnerships............................ 6,782,000(M)
-------------
Net income................................................... $ 29,199,000
-------------
-------------
Net income per paired share.................................. $ 1.13(N)
-------------
-------------
Weighted average number of paired shares..................... 25,798,000
-------------
-------------
</TABLE>
F-8
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 1. BASIS OF PRESENTATION
The Trust and the Corporation have unilateral control of SLT Realty Limited
partnership ("Realty") and SLC Operating Limited Partnership ("Operating" and,
together with Realty, the "Partnership"), respectively, and therefore, the
historical financial statements of Realty and Operating are consolidated with
those of the Trust and the Corporation. Unless the context otherwise requires,
all references herein to the "Company" refer to the Trust and the Corporation,
and all references to the "Trust" and the "Corporation" include the Trust and
the Corporation, and those entities respectively owned or controlled by the
Trust or the Corporation, including Realty and Operating.
(A) Reflects the historical statements of operations of the Companies.
Operations for properties sold or pending sale are not considered material
to the pro forma presentation.
NOTE 2. PRO FORMA ADJUSTMENTS
(B) Reflects the pro forma statements of operations (reflecting the Company's
cost basis) of the properties acquired subsequent to the beginning of the
periods presented (the "Completed Acquisitions").
Listed below are the effects the Completed Acquisitions had on the Combined
Pro Forma Statements of Operations for the three months ended March 31, 1996 and
for the year ended December 31, 1995 (in thousands):
For the three months ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
HOTEL HOTEL INCOME BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ------------------------------------------------------- --------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
FFCA Properties........................................ $ 7,229 $ 3,859 $ 1,140 $ 2,230
Midland Hotel.......................................... 2,398 2,100 292 6
Clarion Hotel.......................................... 2,841 2,223 415 203
Doubletree Guest Suites................................ 2,134 1,775 213 146
Days Inn............................................... 924 822 74 28
--------- --------- ------------ -------
TOTAL.............................................. $ 15,526 $ 10,779 $ 2,134 $ 2,613
--------- --------- ------------ -------
--------- --------- ------------ -------
</TABLE>
For the year ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
INCOME (LOSS)
HOTEL HOTEL BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ----------------------------------------------------- ----------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Omni Chapel Hill..................................... $ 1,265 $ 887 $ 163 $ 215(1)
Sheraton Colony Square............................... 9,557 7,127 2,073 357(1)
Embassy Suites Tempe................................. 4,032 2,271 1,229 532(1)
FFCA Properties...................................... 22,567 16,036 4,561 1,970
Midland Hotel........................................ 12,186 11,552 1,168 (534)
Clarion Hotel........................................ 11,875 8,230 1,659 1,986
Doubletree Guest Suites.............................. 9,513 7,437 850 1,226
Days Inn............................................. 4,216 3,321 372 523
Doral Inn............................................ 13,312 11,362 3,192 (1,242)(1)
Terrace Garden Inn................................... 9,289 6,007 1,419 1,863(1)
Lenox Inn............................................ 3,415 2,079 300 1,036(1)
Holiday Inn Calverton................................ 3,465 2,117 789 559(1)
The Westin Hotel, Washington, D.C.................... 8,478 7,982 1,768 (1,272)(1)
----------- --------- ------------ -------
TOTAL............................................ $ 113,170 $ 86,408 $ 19,543 $ 7,219
----------- --------- ------------ -------
----------- --------- ------------ -------
</TABLE>
(1) Does not reflect a full period.
(C) Reflects the Company's 58.2% share of the results of operations of the
Boston Park Plaza Hotel Complex acquired January 4, 1996.
F-9
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
(D) Reflects the pro forma statements of operations (reflecting the Company's
cost basis) of the Teachers Portfolio.
Listed below are the effects each hotel in the Teachers Portfolio had on the
Combined Pro Forma Statement of Operations for the three months ended March 31,
1996 and for the year ended December 31, 1995:
For the three months ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
INCOME (LOSS)
HOTEL HOTEL BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ------------------------------------------------------------- --------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Ritz Carlton -- Philadelphia, PA............................. $ 5,421 $ 4,786 $ 462 $ 173
Ritz Carlton -- Kansas City, MO.............................. 5,005 4,420 578 7
Westin -- Waltham, MA........................................ 3,874 3,428 557 (111)
Doubletree LAX -- Los Angeles, CA............................ 5,970 5,473 462 35
Doubletree Horton Plaza -- San Diego, CA..................... 5,082 3,568 632 882
Doubletree Mall of America -- Bloomington, MN................ 3,057 2,285 504 268
Doubletree Concourse -- Atlanta, GA.......................... 4,587 3,330 707 550
Sheraton Ft. Lauderdale Airport -- Ft. Lauderdale, FL........ 3,228 2,333 299 596
--------- --------- ------------ -------
TOTAL.................................................... $ 36,224 $ 29,623 $ 4,201 $ 2,400
--------- --------- ------------ -------
--------- --------- ------------ -------
</TABLE>
For the year ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
INCOME (LOSS)
HOTEL HOTEL BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ---------------------------------------------------------- ----------- ----------- ------------ -------------------
<S> <C> <C> <C> <C>
Ritz Carlton -- Philadelphia, PA.......................... $ 22,231 $ 20,239 $ 1,849 $ 143
Ritz Carlton -- Kansas City, MO........................... 23,222 18,738 2,311 2,173
Westin -- Waltham, MA..................................... 16,634 13,772 2,229 633
Doubletree LAX -- Los Angeles, CA......................... 22,209 21,932 1,849 (1,572)
Doubletree Horton Plaza -- San Diego, CA.................. 16,632 12,519 2,529 1,584
Doubletree Mall of America -- Bloomington, MN............. 13,802 9,767 2,012 2,023
Doubletree Concourse -- Atlanta, GA....................... 16,505 12,482 2,828 1,195
Sheraton Ft. Lauderdale Airport --
Ft. Lauderdale, FL....................................... 10,562 9,252 1,196 114
----------- ----------- ------------ -------
TOTAL................................................. $ 141,797 $ 118,701 $ 16,803 $ 6,293
----------- ----------- ------------ -------
----------- ----------- ------------ -------
</TABLE>
F-10
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
(E) Reflects the pro forma statements of operations (reflecting the Company's
cost basis) of the HOD Portfolio.
Listed below are the effects each hotel in the HOD Portfolio had on the
Combined Pro Forma Statements of Operations for the three months ended March 31,
1996 and for the year ended December 31, 1995:
For the three months ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
INCOME (LOSS)
HOTEL HOTEL BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ------------------------------------------------------- --------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
The Marque -- Atlanta, GA.............................. $ 2,060 $ 1,320 $ 313 $ 427
Sheraton -- Needham, MA................................ 2,569 2,122 272 175
Embassy Suites -- St. Louis, MO........................ 2,092 1,743 272 77
Sheraton -- Minneapolis, MN............................ 2,516 2,091 245 180
Embassy Suites -- Palm Desert, CA...................... 2,478 1,563 190 725
Hilton -- Arlington Heights, IL........................ 3,600 3,749 177 (326)
Hotel Park -- Tucson, AZ............................... 2,380 1,541 150 689
Radisson Marque -- Winston-Salem, NC................... 1,492 1,384 102 6
Hilton -- Allentown, PA................................ 1,575 1,456 114 5
--------- --------- ------------ -------
TOTAL.............................................. $ 20,762 $ 16,969 $ 1,835 $ 1,958
--------- --------- ------------ -------
--------- --------- ------------ -------
</TABLE>
For the year ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
HOTEL HOTEL INCOME BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ------------------------------------------------------- --------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
The Marque -- Atlanta, GA.............................. $ 7,342 $ 4,892 $ 1,250 $ 1,200
Sheraton -- Needham, MA................................ 10,276 8,351 1,087 838
Embassy Suites -- St. Louis, MO........................ 9,284 7,480 1,088 716
Sheraton -- Minneapolis, MN............................ 10,545 8,628 979 938
Embassy Suites -- Palm Desert, CA...................... 6,745 5,460 762 523
Hilton -- Arlington Heights, IL........................ 15,490 14,607 707 176
Hotel Park -- Tucson, AZ............................... 6,943 6,108 597 238
Radisson Marque -- Winston-Salem, NC................... 6,442 5,791 408 243
Hilton -- Allentown, PA................................ 6,820 5,935 463 422
--------- --------- ------------ -------
TOTAL.............................................. $ 79,887 $ 67,252 $ 7,341 $ 5,294
--------- --------- ------------ -------
--------- --------- ------------ -------
</TABLE>
(F) Reflects the pro forma statements of operations (reflecting the Company's
cost basis) of the Marriott Forrestal Village located in Princeton, New
Jersey.
Listed below are the effects the Marriott Forrestal Village had on the
Combined Pro Forma Statement of Operations for the three months ended March 31,
1996 and for the year ended December 31, 1995:
For the three months ended March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
HOTEL HOTEL INCOME BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- -------------------------------------------------------- ----------- ----------- ------------- ---------------------
<S> <C> <C> <C> <C>
Marriott Forrestal Village -- Princeton, NJ............. $ 4,875 $ 3,950 $ 272 $ 653
</TABLE>
F-11
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
For the year ended December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
HOTEL HOTEL INCOME BEFORE
HOTEL REVENUES EXPENSES DEPRECIATION MINORITY INTEREST
- ------------------------------------------------------- --------- --------- ------------ -------------------
<S> <C> <C> <C> <C>
Marriott Forrestal Village -- Princeton, NJ............ $ 15,712 $ 12,462 $ 1,014 $ 2,236
</TABLE>
(G) Reflects the elimination of interest income on a mortgage note receivable
secured by the Grand Hotel, recognized in 1995. The Trust had purchased the
mortgage interest in September 1995 and, in January 1996, the Company
completed the purchase of the Grand Hotel (renamed The Westin Hotel,
Washington, D.C.).
(H) Pro Forma adjustment to reflect management fees earned ($833,000) and share
of savings from administrative and operating expenses ($2,626,000)
eliminated following the acquisition of the Boston Park Plaza joint venture.
(I) The Corporation's policy is, generally, to operate the Company's hotels and
terminate existing third party management contracts at the earliest
practicable date. Accordingly, certain costs directly attributable to
existing third party management contracts included in the pro forma
statements of operations have been eliminated. Such cost savings are
reflected in the pro forma statements of operations as if such contracts had
been canceled as of the beginning of the periods presented. Listed below are
the hotels on which third party management contracts have been or are
anticipated to be terminated and the related management and other fees
incurred in each period.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED YEAR ENDED
HOTEL 3/31/96 12/31/95 STATUS
- -------------------------------------------- ------------------- -------------- ------------------------------
<S> <C> <C> <C>
FEES PAID (1)
-------------------------------------------------------------------
Holiday Inn -- Albany, GA................... $ $ 9,000 Terminated
Best Western -- Columbus, OH................ 33,000 Terminated
Best Western -- Savannah, GA 21,000 Terminated
Radisson -- Gainesville, FL................. 19,000 Terminated
Park Central -- Dallas, TX.................. 34,000 Terminated
Capitol Hill -- Washington, DC.............. 43,000 Cancelable in 1996
French Quarter -- Lexington, KY............. 21,000 Terminated
Doubletree -- Rancho Bernardo, CA........... 67,000 Terminated
Colony Square -- Atlanta, GA................ 139,000 Terminated
Omni -- Chapel Hill, NC..................... 23,000 Terminated
Embassy Suites -- Tempe, AZ................. 406,000 Terminated
Doral Inn -- New York, NY................... 432,000 Cancelable in 1996
Terrace Garden -- Atlanta, GA............... 247,000 Terminated
Lenox Inn -- Atlanta, GA.................... 107,000 Terminated
Holiday Inn Calverton -- Beltsville, MD..... 330,000 Terminated
The Midland Hotel -- Chicago, IL............ 573,000 Terminated
The Clarion San Francisco Airport Hotel --
Millbrae, CA............................... 85,000 Terminated
FFCA Properties............................. 304,000 941,000 Terminated
</TABLE>
F-12
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED YEAR ENDED
HOTEL 3/31/96 12/31/95 STATUS
- -------------------------------------------- ------------------- -------------- ------------------------------
FEES PAID (1)
-------------------------------------------------------------------
<S> <C> <C> <C>
Doubletree Guest Suites -- Philadelphia,
PA......................................... 105,000 472,000 Cancelable in 1996
Days Inn -- Philadelphia, PA................ 36,000 167,000 Cancelable in 1996
Ritz Carlton -- Philadelphia, PA............ 189,000 778,000 Cancelable in 1996
Ritz Carlton -- Kansas City, MO............. 122,000 358,000 Cancelable in 1996
Westin -- Waltham, MA....................... 263,000 651,000 Cancelable in 1998
Doubletree LAX -- Los Angeles, CA........... 172,000 453,000 Cancelable in 1996
Doubletree Horton Plaza -- San Diego, CA.... 152,000 498,000 Cancelable in 1996
Doubletree Mall of America -- Bloomington,
MN......................................... 95,000 489,000 Cancelable in 1996
Doubletree Concourse -- Atlanta, GA......... 161,000 575,000 Cancelable in 1996
Sheraton Ft. Lauderdale Airport -- Ft.
Lauderdale................................. 65,000 208,000 Cancelable in 1996
The Marque -- Atlanta, GA................... 123,000 458,000 Termination upon closing
Sheraton -- Needham, MA..................... 98,000 471,000 Termination upon closing
Embassy Suites -- St. Louis, MO............. 80,000 433,000 Termination upon closing
Sheraton -- Minneapolis, MN................. 98,000 477,000 Termination upon closing
Embassy Suites -- Palm Desert, CA........... 151,000 311,000 Termination upon closing
Hilton -- Arlington Park, IL................ 60,000 485,000 Termination upon closing
Hotel Park -- Tucson, AZ.................... 141,000 266,000 Termination upon closing
Radisson Marque -- Winston-Salem, NC........ 42,000 233,000 Termination upon closing
Hilton -- Allentown, PA..................... 44,000 269,000 Termination upon closing
------------------- --------------
$ 2,586,000 $ 11,497,000
------------------- --------------
------------------- --------------
</TABLE>
- ------------------------
(1) Fees include base and incentive management fees.
F-13
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
(J) Reflects the elimination of historical and pro forma interest expense
related to the debt repaid from the proceeds of the Offering and the April
Offering and the addition of interest expense on pro forma amounts
outstanding calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED 3/31/96
--------------------------
<S> <C>
PRO FORMA ADJUSTMENTS TO INTEREST EXPENSE
Interest expense relating to the acquisition of the Midland Hotel..................... $ 390,000
Reduction in interest expense resulting from paydown of debt with proceeds from April
1996 Offering........................................................................ (1,131,000)
Interest expense relating to the acquisition of the Clarion San Francisco Airport
Hotel................................................................................ 553,000
Interest expense relating to the acquisition of FFCA Properties....................... 1,332,000
Interest expense relating to the acquisition of the Philadelphia Doubletree Guest
Suites and Days Inn.................................................................. 383,000
Interest expense relating to the acquisition of the Marriott Forrestal Village........ 363,000
Interest expense relating to the acquisition of the Teachers Portfolio................ 5,601,000
Interest expense relating to the acquisition of the HOD Portfolio..................... 2,446,000
Reduction in interest expense resulting from paydown of debt with proceeds from
Offering............................................................................. (6,125,000)
-------------
Total adjustments to pro forma interest expense....................................... $ 3,812,000
-------------
-------------
</TABLE>
F-14
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED 12/31/95
--------------------------
CALCULATION OF PRO FORMA INTEREST EXPENSE:
<S> <C>
Interest on GSI note.................................................................. $ 97,000
Interest expense on amount outstanding under line of credit (subsequent to
Offering)............................................................................ 2,120,000
Reduction in interest expense resulting from pay down of debt with proceeds from April
Offering(2).......................................................................... (4,524,000)
Interest expense relating to the acquisition of Boston Park Plaza(1).................. 3,016,000
Interest expense relating to the acquisition of the FFCA Properties(1)................ 5,329,000
Interest expense relating to the acquisition of the Doral Inn(1)...................... 2,083,000
Interest expense relating to the acquisition of the Terrace Garden Inn(1)............. 1,686,000
Interest expense relating to the acquisition of the Lenox Inn(1)...................... 544,000
Interest expense relating to the acquisition of the Holiday Inn Calverton(1).......... 764,000
Interest expense relating to the acquisition of the Westin(1)......................... 2,393,000
Interest expense relating to amount drawn to purchase the Grand note(1)............... (471,000)
Interest expense relating to the acquisition of the Midland Hotel(1).................. 1,559,000
Interest expense relating to the acquisition of the Clarion San Francisco Airport
Hotel(1)............................................................................. 2,211,000
Interest expense relating to the acquisition of the Philadelphia Doubletree Guest
Suites and Days Inn(1)............................................................... 1,531,000
Interest expense relating to the acquisition of the Marriott Forrestal Village(1)..... 1,450,000
Interest expense relating to the acquisition of the Teachers Portfolio(1)............. 22,403,000
Interest expense relating to the acquisition of the HOD Portfolio(1).................. 9,788,000
Reduction in interest expense resulting from pay down of debt with proceeds from
Offering(2).......................................................................... (24,500,000)
Interest expense relating to additional draw down on line(3).......................... 530,000
-------------
Total pro forma interest expense...................................................... $ 28,009,000
-------------
-------------
</TABLE>
- ------------------------------
(1) Assumes draw down on credit facilities to acquire properties on January 1,
1995
(2) Assumes 1995 Offering, April 1996 Offering and Offering took place on
January 1, 1995
(3) Assumes draw down on credit facility of $9.8 million on January 1, 1995 to
reflect actual draw down in third quarter
(K) Reflects amortization of financing costs of a new line of credit facility
needed to complete pending acquisitions.
(L) Pro Forma administrative and operating expenses reflect (i) increases in
operating expenses resulting principally from additional corporate office
personnel and (ii) decreases in operating
F-15
<PAGE>
STARWOOD LODGING TRUST AND STARWOOD LODGING CORPORATION
NOTES TO THE UNAUDITED COMBINED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
THE YEAR ENDED DECEMBER 31, 1995
NOTE 2. PRO FORMA ADJUSTMENTS (CONTINUED)
expenses resulting from a decrease in director's and officers' liability
insurance. Such cost adjustments are reflected in the pro forma statements
of operations as follows and do not include anticipated corporate personnel
changes unrelated to the Pending Acquisitions:
<TABLE>
<CAPTION>
ADMINISTRATIVE AND
OPERATING EXPENSES
--------------------------------
THREE MONTHS ENDED YEAR ENDED
3/31/96 12/31/95
------------------- -----------
<S> <C> <C>
Additional personnel costs and corporate travel................................. $ 97,000
Decrease in directors' and officers' liability insurance........................ (87,000)
Additional personnel costs -- 1996 Acquisitions................................. $ 120,000 481,000
---------- -----------
$ 120,000 $ 491,000
---------- -----------
---------- -----------
</TABLE>
(M) Reflects Starwood Capital Group, L.P.'s and affiliates' and other limited
partners' minority interest of 18.9% in the income of the Partnerships.
(N) Net income per Paired Common Share of the Companies has been computed using
the weighted average number of paired common shares of the Companies and
equivalent Paired Common Shares outstanding.
Pro forma paired common shares of the Companies outstanding are calculated
as follows:
<TABLE>
<S> <C>
Paired Common Shares of the Company outstanding as of 12/31/95......... 13,798,000
Paired Common Shares of the Company issued on April 12, 1996........... 2,000,000
Paired Common Shares of the Company expected to be issued in August
1996.................................................................. 10,000,000
----------
Pro forma Paired Common Shares outstanding............................. 25,798,000
----------
----------
</TABLE>
All paired share information has been adjusted to reflect a one-for-six
reverse split effective June 12, 1995.
F-16
<PAGE>
PROSPECTUS
STARWOOD LODGING
<TABLE>
<S> <C>
STARWOOD LODGING TRUST STARWOOD LODGING CORPORATION
$400,000,000 $100,000,000
</TABLE>
COMMON STOCK, WARRANTS, PREFERRED STOCK AND DEBT SECURITIES
Starwood Lodging Trust (the "Trust") and Starwood Lodging Corporation (the
"Corporation" and, with the Trust, the "Company") may from time to time offer in
one or more series securities with an aggregate public offering price of up to
$500,000,000 (or its equivalent in another currency based on the exchange rate
at the time of sale) in amounts, at prices and on terms to be determined at the
time of offering, including: (i) shares of beneficial interest, $.01 par value,
of the Trust (the "Trust Shares") and shares of common stock, $.01 par value, of
the Corporation (the "Corporation Shares") which are "paired" and traded as
units consisting of one Trust Share and one Corporation Share (the "Paired
Common Shares"); (ii) convertible notes of the Trust and the Corporation (the
"Convertible Notes"); (iii)(A) warrants to purchase Trust Shares and warrants to
purchase Corporation Shares which are "paired" and traded as units consisting of
one warrant to purchase Trust Shares and one warrant to purchase a like number
of Corporation Shares, (B) warrants to purchase shares of preferred stock of the
Trust or the Corporation, or (C) warrants to purchase debt securities of the
Trust or the Corporation (collectively, the "Warrants"); (iv) shares of
preferred stock, $.01 par value, of the Trust (the "Trust Preferred Shares") and
shares of preferred stock, $.01 par value, of the Corporation (the "Corporation
Preferred Shares" and, with the Trust Preferred Shares, the "Preferred Shares")
which may, but are not required to, be "paired" with preferred stock of the
other entity; and (v) unsecured debt securities of the Trust or the Corporation
(the "Debt Securities"). The Trust or the Corporation may from time to time
offer in one or more series unsecured Debt Securities which may, but are not
required to, be paired with Debt Securities of the other entity. The Paired
Common Shares, Convertible Notes, Warrants, Preferred Shares and Debt
Securities, (collectively, the "Securities") may be offered, separately or
together, in separate series in amounts, at prices and on terms to be set forth
in one or more supplements to this Prospectus (each a "Prospectus Supplement").
Of the $500,000,000 aggregate public offering price of Securities, up to
$400,000,000 will be offered by the Trust and up to $100,000,000 will be offered
by the Corporation.
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Paired Common Shares, any
initial public offering price; (ii) in the case of Convertible Notes, any
initial public offering price; (iii) in the case of Warrants, the duration,
offering price, securities purchasable upon exercise, exercise price and
detachability, if applicable; (iv) in the case of Preferred Shares, the specific
title and stated value, any dividend, liquidation, redemption, conversion,
voting and other rights, and any initial public offering price; and (v) in the
case of Debt Securities, the specific title, aggregate principal amount,
currency, form (which may be registered or bearer, or certificated or global),
authorized denominations, maturity, rate (or manner of calculation thereof) and
time of payment of interest, terms for redemption at the option of the issuer or
repayment at the option of the holder, terms for sinking fund payments,
covenants and any initial public offering price. In addition, such specific
terms may include limitations on direct or beneficial ownership and restrictions
on transfer of the Securities, in each case as may be appropriate to preserve
the status of the Trust as a real estate investment trust ("REIT") for United
States federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, relating to any listing on a securities exchange of the securities
covered by such Prospectus Supplement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The Securities may be offered directly, through agents designated from time
to time by the Trust or the Corporation or to or through underwriters or
dealers. If any agents or underwriters are involved in the sale of any of the
Securities, their names, and any applicable purchase price, fee, commission or
discount arrangement between or among them, will be set forth, or will be
calculable from the information set forth, in an accompanying Prospectus
Supplement. See "Plan of Distribution." No Securities may be sold without
delivery of a Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
THE DATE OF THIS PROSPECTUS IS APRIL 9, 1996.
<PAGE>
NEITHER THE NEVADA GAMING COMMISSION NOR THE NEVADA STATE GAMING CONTROL
BOARD HAS PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE
INVESTMENT MERITS OF THE SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
AVAILABLE INFORMATION
The Trust and the Corporation are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy or information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy or information statements and other information can be inspected
and copied at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy
statements and other information concerning the Trust and the Corporation can
also be inspected at the offices of the New York Stock Exchange, Public
Reference Section, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information with
respect to the Trust, the Corporation and the Securities offered hereby,
reference is made to the Registration Statement and exhibits thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (SEC File Nos. 1-6828 and
1-7959) with the Commission under the Securities Act and the Exchange Act are
incorporated in this Prospectus by reference and are made a part hereof:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1995 (as amended by Form 10-K/A filed on March 29, 1996).
2. The Company's Current Reports on Form 8-K, dated January 4, 1996 (as
amended by Form 8-K/A filed on March 19, 1996) and February 5, 1996 (as
amended by Form 8-K/A filed on February 12, 1996).
3. The description of the Company's Paired Common Shares contained in
the Company's Registration Statement on Form 8-A, filed on October 3, 1986
and any amendments or reports filed for the purpose of updating such
descriptions which have been filed by the Company with the Commission.
Each document filed by the Trust or the Corporation subsequent to the date
of this Prospectus pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act and prior to termination of the offering of all Securities to which this
Prospectus relates shall be deemed to be incorporated by reference in this
Prospectus and shall be part hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously-filed document
2
<PAGE>
incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement relating to a specific offering of Securities
or in any other subsequently filed document that is also incorporated or deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus or any
accompanying Prospectus Supplement. Subject to the foregoing, all information
appearing in this Prospectus and each accompanying Prospectus Supplement is
qualified in its entirety by the information appearing in the documents
incorporated by reference.
Copies of all documents incorporated by reference, other than exhibits to
such documents not specifically incorporated by reference therein, will be
provided without charge to each person to whom this Prospectus is delivered,
upon oral or written request to Jayne Gordon, 11835 West Olympic Boulevard,
Suite 695, Los Angeles, California 90064.
3
<PAGE>
THE COMPANY
The Company was reorganized, effective January 1, 1995, to combine the hotel
investment and operating businesses of the Company with certain hotel
investments of Starwood Capital Group, L.P. and certain of its affiliates
(collectively, "Starwood Capital"). Management believes that the Company's
unique "paired share" ownership structure gives it a competitive advantage over
other hotel REITs and other hotel owner/operators with respect to owning and
operating hotels, as discussed below. The Company has owned hotel assets since
1969 and has managed hotel assets since 1980. Starwood Capital has been an
active opportunistic investor in the hotel industry over the last three years.
As of December 31, 1995, the Company owned, operated and managed a
geographically diversified portfolio of hotel assets (the "Hotel Assets"),
including fee, ground lease and first mortgage interests in 49 hotel properties,
comprising over 10,500 rooms located in 21 states and the District of Columbia.
Thirty-four of such hotels are operated under licensing, membership or franchise
agreements with national hotel organizations, including Sheraton-TM-,
Marriott-TM-, Doubletree-TM-, Omni-TM-, Radisson-TM-, Embassy
Suites-Registered Trademark-, Holiday Inn-Registered Trademark-, Residence
Inn-TM-, Days Inn-TM-, Best Western-TM-, Ramada-TM-, Quality Inn-TM- and
Harvey-TM-. None of the foregoing organizations nor any of their parents,
subsidiaries, divisions or affiliates has endorsed or approved this Prospectus
or any Prospectus Supplement or any sale of Securities.
Substantially all of the Company's interests in the Hotel Assets are held by
and its operations conducted through SLT Realty Limited Partnership (the "Realty
Partnership") or SLC Operating Partnership (the "Operating Partnership"),
respectively. Accordingly, substantially all of the income of the Trust and the
Corporation is derived from distributions of the Realty Partnership and the
Operating Partnership, respectively. The Company is the sole general partner of
each of the Realty Partnership and the Operating Partnership and as of December
31, 1995, owned a controlling interest of approximately 69.9% in each of the
Realty Partnership and Operating Partnership. The remaining 30.1% interest in
each of the Realty Partnership and the Operating Partnership is owned by
Starwood Capital. As of December 31, 1995, Starwood Capital owned 30.5% of the
equity interests of the Company on a fully diluted basis.
The Company's paired share ownership structure is unique for a hotel REIT
because its shareholders own both the owner, the Trust, and the operator, the
Corporation, of the Company's hotels. Therefore, the Company's shareholders
retain the economic benefits of both the lease payments received by the Trust
and the operating profits realized by the Corporation while maintaining the tax
benefits of the Trust's REIT status. The pairing arrangement creates total
commonality of ownership, as the shares of beneficial interest of the Trust (the
"Trust Shares") and the shares of common stock of the Corporation (the
"Corporation Shares") are paired on a one for one basis and may only be held or
transferred as units consisting of one Trust Share and one Corporation Share
("Paired Common Shares").
The Trust was organized in 1969 as a Maryland real estate investment trust.
The Trust's executive offices are located at 11835 West Olympic Boulevard, Suite
695, Los Angeles, California 90064; telephone (310) 575-3900.
The Corporation is a Maryland corporation formed in 1980. The Corporation's
executive offices are located at 11835 West Olympic Boulevard, Suite 675, Los
Angeles, California 90064; telephone (310) 575-3900.
USE OF PROCEEDS
The Company will use the net proceeds of any sale of Securities to (i)
either repay loans owing to the Realty Partnership or the Operating Partnership,
or (ii) make contributions to the Realty Partnership and the Operating
Partnership in return for securities of the Realty Partnership and the Operating
Partnership. The allocation of the net proceeds of any sale of Securities
between the Realty Partnership and the Operating Partnership shall be set forth
in the Prospectus Supplement relating to the sale of such Securities.
4
<PAGE>
Except as otherwise provided in the applicable Prospectus Supplement, the
Company, the Realty Partnership and the Operating Partnership intend to use any
such net proceeds for working capital and general business purposes, which may
include the reduction of certain outstanding indebtedness, the financing of
future acquisitions and the improvement of certain properties in their
portfolio.
Pending application of the net proceeds, the Realty Partnership and the
Operating Partnership will invest such portion of the net proceeds in
interest-bearing accounts and short-term, interest-bearing securities, which, in
the case of the Realty Partnership, are consistent with the Trust's intention to
qualify for taxation as a REIT. Such investments may include, for example,
obligations of the Government National Mortgage Association, other governmental
and government agency securities, certificates of deposit, interest-bearing bank
deposits and mortgage loan participations.
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's consolidated ratios of earnings
to fixed charges for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
2.31x .74x(1) .54x(1) (.39x)(1) (.34x)(1) (.68x)(1)
</TABLE>
- ------------------------
(1) Earnings were inadequate to cover fixed charges by $27,586,000 in 1990,
$22,084,000 in 1991, $19,743,000 in 1992, $7,032,000 in 1993 and $4,663,000
in 1994. These deficiencies occurred prior to the Reorganization in January
1995 and the public offering of Paired Common Shares in July 1995.
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings represent pretax income from
continuing operations. Fixed charges consist of interest expense (including
interest costs capitalized) and amortization of debt issuance costs. To date,
the Company has not issued any preferred stock; therefore, the ratios of
earnings to combined fixed charges and preferred stock dividends are the same as
the ratios presented above.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will be issued under one or more indentures (an
"Indenture"), in each case among the Trust or the Corporation, as the case may
be, the Corporation, as guarantor (if applicable), and a trustee (a "Trustee").
Any Indenture will be subject to, and governed by, the Trust Indenture Act of
1939, as amended (the "TIA"). The statements made hereunder relating to any
Indenture and the Debt Securities to be issued thereunder are summaries of the
anticipated provisions thereof and do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all provisions of the
Indentures and such Debt Securities.
GENERAL
The Debt Securities will be direct, unsecured obligations of the Trust or
the Corporation, as the case may be, and will either rank equally with all other
unsecured and unsubordinated indebtedness of the issuing entity ("Senior
Securities") or, if so provided in the applicable Prospectus Supplement, be
subordinated in right of payment to the prior payment in full of the Senior Debt
(as defined below) of the issuing entity as described under "-- Subordination"
("Subordinated Securities"). The Debt Securities may be issued without limit as
to aggregate principal amount, in one or more series, in each case as
established from time to time in or pursuant to authority granted by a
resolution of the governing board of the Trust or the Corporation, respectively,
or as established in one or more indentures supplemental to the applicable
Indenture. All Debt Securities of one series need not be issued at the same time
and, unless otherwise provided, a series may be reopened, without the consent of
the holders of the Debt Securities of such series, for issuances of additional
Debt Securities of such series.
5
<PAGE>
Debt securities issued by the Trust may be guaranteed by the Corporation;
however, the Trust may not guarantee Debt Securities issued by the Corporation.
It is anticipated that any Indenture will provide that there may be more
than one Trustee thereunder, each with respect to one or more series of Debt
Securities. Any Trustee under an Indenture may resign or be removed with respect
to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. In the event that two or more
persons are acting as Trustee with respect to different series of Debt
Securities, each such Trustee shall be a trustee of a trust under the applicable
Indenture separate and apart from the trust administered by any other Trustee,
and, except as otherwise indicated herein, any action described herein to be
taken by a Trustee may be taken by each such Trustee with respect to, and only
with respect to, the one or more series of Debt Securities for which it is
Trustee under the applicable Indenture.
Reference is made to the Prospectus Supplement relating to the series of
Debt Securities being offered for the specific terms thereof, including:
(1) the title of such Debt Securities;
(2) the aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) whether such Debt Securities are Senior Securities or Subordinated
Securities;
(4) if such Debt Securities will be issued by the Trust, whether such
Debt Securities will be guaranteed by the Corporation;
(5) the percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the portion
of the principal amount thereof payable upon declaration of acceleration of
the maturity thereof, or (if applicable) the portion of the principal amount
of such Debt Securities that is convertible into Paired Common Shares or
Preferred Shares, or the method by which any such portion shall be
determined;
(6) if convertible, the terms on which such Debt Securities are
convertible, including the initial conversion price or rate and the
conversion period and any applicable limitations on the ownership or
transferability of the Paired Common Shares or Preferred Shares receivable
on conversion;
(7) the date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(8) the rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt Securities
will bear interest, if any;
(9) the date or dates, or the method for determining such date or dates,
from which any interest will accrue, the dates on which any such interest
will be payable, the record dates for such interest payment dates, or the
method by which any such date shall be determined, the person to whom such
interest shall be payable, and the basis upon which interest shall be
calculated if other than that of a 360-day year of twelve 30-day months;
(10) the place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and where notices or demands to or upon the Trust or the
Corporation, as the case may be, in respect of such Debt Securities, any
applicable Guarantees and the applicable Indenture may be served;
(11) the period or periods within which, the price or prices at which
and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of the Trust or the
Corporation, as the case may be, if the issuer is to have such an option;
6
<PAGE>
(12) the obligation, if any, of the issuer to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a holder thereof, and the period or periods within which,
the price or prices at which and the terms and conditions upon which such
Debt Securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(13) if other than United States dollars, the currency or currencies in
which such Debt Securities are denominated and payable, which may be a
foreign currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto;
(14) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
(15) the events of default or covenants of such Debt Securities, to the
extent different from or in addition to those described herein;
(16) whether such Debt Securities will be issued in certificated and/or
book-entry form;
(17) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(18) the applicability, if any, of the defeasance and covenant
defeasance provisions described herein, or any modification thereof;
(19) whether and under what circumstances the Trust or the Corporation,
as the case may be, will pay additional amounts on such Debt Securities in
respect of any tax, assessment or governmental charge and, if so, whether
such issuer will have the option to redeem such Debt Securities in lieu of
making such payment; and
(20) any other terms of such Debt Securities.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). If material or applicable, special
United States federal income tax, accounting and other considerations applicable
to Original Issue Discount Securities will be described in the applicable
Prospectus Supplement.
Except as described under "Merger, Consolidation or Sale" or as may be set
forth in any Prospectus Supplement, an Indenture will not contain any other
provisions that would limit the ability of either the Trust or the Corporation
to incur indebtedness or that would afford holders of the Debt Securities
protection in the event of (i) a highly leveraged or similar transaction
involving the Trust or the Corporation, the management of the Trust or the
Corporation, or any affiliate of any such party, (ii) a change of control, or
(iii) a reorganization, restructuring, merger or similar transaction involving
the Trust or the Corporation that may adversely affect the holders of the Debt
Securities. Restrictions on ownership and transfers of the Paired Common Shares
and Preferred Shares are designed to preserve the Trust's status as a REIT and,
therefore, may act to prevent or hinder a change of control. See "Description of
Paired Common Shares -- Ownership Limits; Restrictions on Transfer; Repurchase
and Redemption of Shares" and "Description of Preferred Shares -- Ownership
Limits; Restrictions on Transfer; Repurchase and Redemption of Shares."
Reference is made to the applicable Prospectus Supplement for information with
respect to any deletions from, modifications of or additions to the events of
default or covenants that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
7
<PAGE>
GUARANTEES
The Corporation may unconditionally and irrevocably guarantee, on a senior
or subordinated basis, the due and punctual payment of principal of, premium, if
any, and interest on Debt Securities issued by the Trust, and the due and
punctual payment of any sinking fund payments thereon, when and as the same
shall become due and payable, whether at a maturity date, by declaration of
acceleration, call for redemption or otherwise. The applicability and terms of
any such guarantee relating to a series of Debt Securities will be set forth in
the Prospectus Supplement relating to such Debt Securities.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the Debt
Securities of any series which are registered securities (other than registered
securities issued in global form, which may be of any denomination), shall be
issuable in denominations of $1,000 and any integral multiple thereof.
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium, if any) and interest on any series of Debt Securities
will be payable at the corporate trust office of the Trustee, the address of
which will be stated in the applicable Prospectus Supplement, provided that, at
the option of the Trust or the Corporation, as the case may be, payment of
interest may be made by check mailed to the address of the person entitled
thereto as it appears in the applicable register for such Debt Securities or by
wire transfer of funds, provided that payment by wire transfer of immediately
available funds will be required with respect to principal of (and premium, if
any) and interest on all Global Securities.
Any interest not punctually paid or duly provided for on any interest
payment date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the relevant regular record date
and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the holder of such Debt Security not
less than 10 days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the applicable
Indenture.
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the Trustee referred to above.
In addition, subject to certain limitations imposed upon Debt Securities issued
in book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the corporate trust office of
the Trustee referred to above. Every Debt Security surrendered for conversion,
registration of transfer or exchange shall be duly endorsed or accompanied by a
written instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but the Trustee,
the Trust or the Corporation may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. If the
applicable Prospectus Supplement refers to any transfer agent (in addition to
the Trustee) initially designated by the Trust or the Corporation, as the case
may be, with respect to any series of Debt Securities, such entity may at any
time rescind the designation of any such transfer agent or approve a change in
the location through which any such transfer agent acts, except that the Trust
or the Corporation, as the case may be, will be required to maintain a transfer
agent in each place of payment for such series. The Trust or the Corporation, as
the case may be, may at any time designate additional transfer agents with
respect to any series of Debt Securities.
Neither the Trust, the Corporation nor the Trustee shall be required (i) to
issue, register the transfer of or exchange any Debt Security if such Debt
Security may be among those selected for redemption during a period beginning at
the opening of business 15 days before the day of the mailing of a notice of
redemption of the Debt Securities to be redeemed and ending at the close of
business on
8
<PAGE>
(A) if such Debt Securities are issuable only as registered securities, the day
of the mailing of the relevant notice of redemption and (B) if such Debt
Securities are issuable as bearer securities, the day of the first publication
of the relevant notice of redemption or, if such Debt Securities are also
issuable as registered securities and there is no publication, the mailing of
the relevant notice of redemption, or (ii) to register the transfer of or
exchange any registered security so selected for redemption in whole or in part,
except, in the case of any registered security to be redeemed in part, the
portion thereof not to be redeemed, or (iii) to exchange any bearer security so
selected for redemption except that such a bearer security may be exchanged for
a registered security of that series and like tenor, provided that such
registered security shall be simultaneously surrendered for redemption, or (iv)
to issue, register the transfer of or exchange any Debt Security which has been
surrendered for repayment at the option of the holder, except the portion, if
any, of such Debt Security not to be so repaid.
MERGER, CONSOLIDATION OR SALE
Any of the Trust and the Corporation may consolidate with, or sell, lease or
convey all or substantially all of its assets to, or merge with or into, any
other entity, provided that (a) either the Trust or the Corporation, as the case
may be, shall be the continuing entity, or the successor entity (if other than
the Trust or the Corporation, as the case may be) formed by or resulting from
any such consolidation or merger or which shall have received the transfer of
such assets shall expressly assume payment of the principal of (and premium, if
any) and interest on all the Debt Securities and the due and punctual
performance and observance of all of the covenants and conditions contained in
the applicable indenture (b) immediately after giving effect to such
transaction, no event of default under the indentures, and no event which, after
notice or the lapse of time, or both, would become such an event of default,
shall have occurred and be continuing; and (c) an officer's certificate and
legal opinion covering such conditions shall be delivered to the Trustee.
If this Prospectus is being delivered in connection with a series of Debt
Securities that provides for the optional redemption, prepayment or conversion
of such Debt Securities upon the occurrence of a change of control of the
Company, the applicable Prospectus Supplement will disclose: (i) the effects
that such provisions may have in deterring certain mergers, tender offers or
other takeover attempts, as well as any possible adverse effect on the market
price of the Company's securities or the ability to obtain additional financing
in the future; (ii) that the Company will comply with the requirements of Rule
14e-1 under the Exchange Act and any other applicable securities laws in
connection with such provisions and any related offers by the Company and, to
the extent that convertible securities are the subject of a Prospectus
Supplement, that the Company will comply with Rule 13e-4 under the Exchange Act;
(iii) whether the occurrence of the specified events may give rise to
cross-defaults on other indebtedness such that payment on such Debt Securities
may be effectively subordinated; (iv) any limitations on the Company's financial
or legal ability to repurchase such Debt Securities upon the triggering of an
event risk provision requiring such a repurchase or offer to repurchase; (v) the
impact, if any, under the governing instrument of the failure to repurchase,
including whether such failure to make any required repurchases in the event of
that change of control will create an event of default with respect to such Debt
Securities or will become an event of default only after the continuation of
such failure for a specified period of time after written notice is given to the
Company by the trustee or to the Company and the trustee by the holders of a
specified percentage in aggregate principal amount of such Debt Securities then
outstanding; (vi) that there can be no assurance that sufficient funds will be
available at the time of the triggering of an event risk provision to make any
required repurchases; (vii) if such Debt Securities are to be subordinated to
other obligations of the Company or its subsidiaries that would be accelerated
upon the triggering of a change in control, fundamental change or poison put
feature, the material effect thereof on the change in control, fundamental
change or poison put option and such Debt Securities; (viii) the extent that
there is a definition of "Change in Control" that includes the concept of "all
or substantially all," a quantification of such term or, in the alternative, the
established meaning of the phrase under the applicable governing law of the
Indenture. If an established meaning for the phrase is not available, then the
effects of such an uncertainty on the ability of a holder of such Debt
Securities to determine when a
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"Change of Control" has occurred; and (ix) if applicable, whether the "Change of
Control" provisions will be triggered if change in control of the Board of
Directors occurs as a result of a proxy contest involving the solicitation of
revocable proxies.
CERTAIN COVENANTS
EXISTENCE. Except as permitted under "-- Merger, Consolidation or Sale,"
each of the Trust and the Corporation will be required to do or cause to be done
all things necessary to preserve and keep in full force and effect its
existence, rights and franchises; provided, however, that each of the Trust and
the Corporation shall not be required to preserve any right or franchise if it
determines that the preservation thereof is no longer desirable in the conduct
of its business.
MAINTENANCE OF PROPERTIES. Each of the Trust and the Corporation will be
required to cause all of its material properties used or useful in the conduct
of its business or the business of any subsidiary to be maintained and kept in
good condition, repair and working order and supplied with all necessary
equipment and to cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Trust or the
Corporation, as the case may be, may be necessary so that the business carried
on in connection therewith may be properly and advantageously conducted at all
times; provided, however, that each of the Trust and the Corporation shall not
be required to continue the operation or maintenance of any such property or
prevented from disposing of such property if it determines that such
discontinuance or disposal is desirable in the conduct of the business.
INSURANCE. Each of the Trust and the Corporation will be required to, and
will be required to cause each of its subsidiaries to, keep all of its insurable
properties insured against loss or damage at least equal to their then full
insurable value with insurers of recognized responsibility.
PAYMENT OF TAXES AND OTHER CLAIMS. Each of the Trust and the Corporation,
as the case may be, will be required to pay or discharge or cause to be paid or
discharged before the same shall become delinquent, (i) all material taxes,
assessments and governmental charges levied or imposed upon it or any subsidiary
or upon its income, profits or property or that of any subsidiary, and (ii) all
lawful claims for labor, materials and supplies which, if unpaid, might by law
become a material lien upon the property of the Trust, the Corporation or any
subsidiary; provided, however, that the Trust and the Corporation, as the case
may be, shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.
PROVISION OF FINANCIAL INFORMATION. Whether or not the Trust or the
Corporation, as the case may be, is subject to Section 13 or 15(d) of the
Exchange Act, the Trust or the Corporation, as the case may be, will, be
required within 15 days of each of the respective dates by which the Company
would have been required to file annual reports, quarterly reports and other
documents with the Commission if the Company were so subject to (i) transmit by
mail to all Holders of its Debt Securities, as their names and addresses appear
in the security register for such Debt Securities, without cost to such Holders,
copies of the annual reports and quarterly reports which the Trust or the
Corporation, as the case may be, would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Trust or
the Corporation, as the case may be, were subject to such Sections and (ii) file
with any Trustee copies of the annual reports, quarterly reports and other
documents which the Trust or the Corporation, as the case may be, would have
been required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act if the Trust or the Corporation, as the case may be, were subject
to such Sections and (iii) promptly upon written request and payment of the
reasonable cost of duplication and delivery, supply copies of such documents to
any prospective holder.
ADDITIONAL COVENANTS. Any additional or different covenants of the Trust or
the Corporation with respect to any series of Debt Securities will be set forth
in the Prospectus Supplement relating thereto.
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EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will provide that the following events are "Events of
Default" with respect to any series of Debt Securities issued thereunder: (a)
default for 30 days in the payment of any installment of interest on any Debt
Security of such series; (b) default in the payment of the principal of (or
premium, if any, on) any Debt Security of such series at its maturity; (c)
default in making any sinking fund payment as required for any Debt Security of
such series; (d) default in the performance, or breach, of any other covenant of
the Trust or the Corporation contained in the applicable Indenture (other than a
covenant added to such Indenture solely for the benefit of a series of Debt
Securities issued thereunder other than such series), such default having
continued for 60 days after written notice as provided in such Indenture; (e)
default in the payment of an aggregate principal amount exceeding a specified
amount of any evidence of indebtedness of the Trust or the Corporation, as the
case may be, or any mortgage, indenture or other instrument under which such
indebtedness is issued or by which such indebtedness is secured, such default
having occurred after the expiration of any applicable grace period and having
resulted in the acceleration of the maturity of such indebtedness, but only if
such indebtedness is not discharged or such acceleration is not rescinded or
annulled; (f) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Trust or the
Corporation, as the case may be, or any Significant Subsidiary or any of their
respective property; and (g) any other event of default provided with respect to
a particular series of Debt Securities. The term "Significant Subsidiary" means
each significant subsidiary (as defined in Regulation S-X promulgated under the
Securities Act) of the Trust or the Corporation, as the case may be.
If an Event of Default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series may declare
the principal amount (or, if the Debt Securities of that series are Original
Issue Discount Securities or indexed securities, such portion of the principal
amount as may be specified in the terms thereof) of all of the Debt Securities
of that series to be due and payable immediately by written notice thereof to
the Trust or the Corporation, as the case may be (and to the applicable Trustee
if given by the holders). However, at any time after such a declaration of
acceleration with respect to Debt Securities of such series (or of all Debt
Securities then outstanding under any Indenture, as the case may be) has been
made, but before a judgment or decree for payment of the money due has been
obtained by the applicable Trustee, the holders of not less than a majority in
principal amount of outstanding Debt Securities of such series (or of all Debt
Securities then outstanding under the applicable Indenture, as the case may be)
may rescind and annul such declaration and its consequences if (a) the Trust or
the Corporation, as the case may be, shall have deposited with the applicable
Trustee all required payments of the principal of (and premium, if any) and
interest on the Debt Securities of such series (or of all Debt Securities then
outstanding under any Indenture, as the case may be), plus certain fees,
expenses, disbursements and advances of the applicable Trustee and (b) all
events of default, other than the non-payment of accelerated principal of (or
specified portion thereof), with respect to Debt Securities of such series (or
of all Debt Securities then outstanding under the applicable Indenture, as the
case may be) have been cured or waived as provided in the Indenture. Any
Indenture will also provide that the holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under the applicable Indenture, as the case may
be) may waive any past default with respect to such series and its consequences,
except a default (x) in the payment of the principal of (or premium, if any) or
interest on any Debt Security or such series or (y) in respect of a covenant or
provision contained in the applicable Indenture that cannot be modified or
amended without the consent of the holder of each outstanding Debt Security
affected thereby.
Each Trustee will be required to give notice to the holders of Debt
Securities within 90 days of a default under the applicable Indenture unless
such default has been cured or waived; provided, however, that such Trustee may
withhold notice to the holders of any series of Debt Securities of any
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default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of such Trustee
consider such withholding to be in the interest of such holders.
Each Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
applicable Indenture or for any remedy thereunder, except in the case of failure
of the applicable Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an event of default from the
holders of not less than 25% in principal amount of the outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it. This provision will not prevent, however, any holder of Debt
Securities from instituting suit for the enforcement of payment of the principal
of (and premium, if any) and interest on such Debt Securities at the respective
due dates thereof.
Subject to provisions in each Indenture relating to its duties in case of
default, no Trustee will be under any obligation to exercise any of its rights
or powers under an Indenture at the request or direction of any holders of any
series of Debt Securities then outstanding under such Indenture, unless such
holders shall have offered to the Trustee thereunder reasonable security or
indemnity. The holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series (or of all Debt Securities then
outstanding under an Indenture, as the case may be) shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the applicable Trustee, or of exercising any trust or power
conferred upon such Trustee. However, a Trustee may refuse to follow any
direction which is in conflict with any law or the applicable Indenture, which
may involve such Trustee in personal liability or which may be unduly
prejudicial to the holders of Debt Securities of such series not joining
therein.
Within 120 days after the close of each fiscal year, the Trust or the
Corporation, as the case may be, will be required to deliver to each Trustee a
certificate, signed by one of several specified officers of the Company, stating
whether or not such officer has knowledge of any default under the applicable
Indenture and, if so, specifying each such default and the nature and status
thereof.
MODIFICATION OF THE INDENTURES
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding Debt Securities or series of outstanding Debt
Securities which are affected by such modification or amendment, provided,
however, that no such modification or amendment may, without the consent of the
holder of each such Debt Security affected thereby: (a) change the stated
maturity of the principal of, or premium (if any) or any installment of interest
on, any such Debt Security; (b) reduce the principal amount of, or the rate or
amount of interest on, or any premium payable on redemption of, any such Debt
Security, or reduce the amount of principal of an Original Issue Discount
Security that would be due and payable upon declaration of acceleration of the
maturity thereof or would be provable in bankruptcy, or adversely affect any
right of repayment of the holder of any such Debt Security; (c) change the place
of payment, or the coin or currency, for payment of principal of, premium, if
any, or interest on any such Debt Security; (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any such Debt
Security; (e) reduce the above-stated percentage of outstanding Debt Securities
of any series necessary to modify or amend the applicable Indenture, to waive
compliance with certain provisions thereof or certain defaults and consequences
thereunder or to reduce the quorum or voting requirements set forth in such
Indenture; (f) modify any of the provisions set forth in such Indenture relating
to subordination; (g) change the redemption provisions set forth in such
Indenture in a manner adverse to the holders of Debt Securities; or (h) modify
any of the foregoing provisions or any of the provisions relating to the waiver
of certain past defaults or certain covenants, except to increase the required
percentage to effect such action or to provide that certain other provisions may
not be modified or waived without the consent of the holder of such Debt
Security.
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The holders of not less than a majority in principal amount of a series of
outstanding Debt Securities have the right to waive compliance by the Trust or
the Corporation, as the case may be, with certain covenants relating to such
series of Debt Securities in the Indenture.
Modifications and amendments of an Indenture will be permitted to be made by
the Trust or the Corporation, as the case may be, and the respective Trustee
thereunder without the consent of any holder of Debt Securities for any of the
following purposes: (i) to evidence the succession of another person to the
Trust, or the Corporation, as the case may be, as obligor under such Indenture;
(ii) to add to the covenants of the Trust or the Corporation, as the case may
be, for the benefit of the holders of all or any series of Debt Securities or to
surrender any right or power conferred upon the Trust or the Corporation, as the
case may be, in such Indenture; (iii) to add events of default for the benefit
of the holders of all or any series of Securities; (iv) to add or change any
provisions of an Indenture to facilitate the issuance of, or to liberalize
certain terms of, Debt Securities in bearer form, or to permit or facilitate the
issuance of Debt Securities in uncertificated form, provided that such action
shall not adversely affect the interests of the holders of the Debt Securities
of any series in any material respect; (v) to change or eliminate any provisions
of an Indenture, provided that any such change or elimination shall become
effective only when there are no Debt Securities outstanding of any series
created prior thereto which are entitled to the benefit of such provision; (vi)
to secure the Debt Securities; (vii) to establish the form or terms of Debt
Securities of any series, including the provisions and procedures, if
applicable, for the conversion of such Debt Securities into Paired Common Shares
or Preferred Shares of the Company; (viii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under the Indenture by more than one Trustee; (ix) to cure any ambiguity,
defect or inconsistency in an Indenture, provided that such action shall not
adversely affect the interests of holders of Debt Securities of any series in
any material respect; or (x) to supplement any of the provisions of an Indenture
to the extent necessary to permit or facilitate defeasance and discharge of any
series of such Debt Securities or of any applicable guarantees, provided that
such action shall not adversely affect the interests of the holders of the Debt
Securities of any series in any material respect.
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of a Debt Security denominated in a foreign currency that shall be deemed
outstanding shall be the United States dollar equivalent, determined on the
issue date for such Debt Security, of the principal amount (or, in the case of
an Original Issue Discount Security, the United States dollar equivalent on the
issue date of such Debt Security of the amount determined as provided in (i)
above), (iii) the principal amount of an indexed security that shall be deemed
outstanding shall be the principal face amount of such indexed security at
original issuance, unless otherwise provided with respect to such indexed
security pursuant to such indenture, and (iv) Debt Securities owned by the
Trust, the Corporation or any other obligor upon the Debt Securities or any
affiliate of the Trust, the Corporation or of such other obligor shall be
disregarded.
Each Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series. A meeting will be permitted to be called at any
time by the Trustee, and also, upon request, by the Trust, the Corporation, or
other obligor of such Debt Securities or the holders of at least 10% in
principal amount of the outstanding Debt Securities of such series, in any such
case upon notice given as provided in such Indenture. Except for any consent
that must be given by the holder of each Debt Security affected by certain
modifications and amendments of an Indenture, any resolution presented at a
meeting or adjourned meeting duly reconvened at which a quorum is present will
be permitted to be adopted by the affirmative vote of the holders of a majority
in principal amount of the outstanding Debt Securities of that series; provided,
however, that, except as referred to above, any resolution with
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respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the holders of a
specified percentage, which is less than a majority, in principal amount of the
outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the holders of such specified percentage in principal amount of the outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
an Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series, will constitute a quorum.
Notwithstanding the foregoing provisions, any Indenture will provide that if
any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver or other action that such Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting and (ii) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture.
SUBORDINATION
Upon any distribution to creditors of the Trust or the Corporation, as the
case may be, in a liquidation, dissolution or reorganization, the payment of the
principal of and interest on any Subordinated Securities will be subordinated to
the extent provided in the applicable Indenture in right of payment to the prior
payment in full of all Senior Debt (as defined below), but the obligation of the
Trust or the Corporation, as the case may be, to make payment of the principal
and interest on such Subordinated Securities will not otherwise be affected. No
payment of principal or interest will be permitted to be made on Subordinated
Securities at any time if a default on Senior Debt exists that permits the
holders of such Senior Debt to accelerate its maturity and the default is the
subject of judicial proceedings or the Trust or the Corporation, as the case may
be, receives notice of the default. By reason of such subordination, in the
event of a distribution of assets upon insolvency, certain general creditors of
the Trust or the Corporation, as the case may be, may recover more, ratably,
than holders of Subordinated Securities.
Unless otherwise specified in the applicable Prospectus Supplement, Senior
Debt will be defined in the applicable Indenture as the principal of and
interest on, or substantially similar payments to be made by the Trust or the
Corporation, as the case may be, in respect of, the following, whether
outstanding at the date of execution of the applicable indenture or thereafter
incurred, created or assumed: (a) indebtedness of the Trust or the Corporation,
as the case may be, for money borrowed or represented by purchase-money
obligations, (b) indebtedness of the Trust or the Corporation, as the case may
be, evidenced by notes, debentures, or bonds, or other securities issued under
the provisions of an indenture, fiscal agency agreement or other agreement, (c)
obligations of the Trust or the Corporation, as the case may be, as lessee under
leases of property either made as part of any sale and leaseback transaction to
which the Trust or the Corporation, as the case may be, is a party or otherwise,
(d) indebtedness of partnerships and joint ventures which is included in the
consolidated financial statements of the Company, (e) indebtedness, obligations
and liabilities of others in respect of which the Trust or the Corporation, as
the case may be, is liable contingently or otherwise to pay or
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advance money or property or as guarantor, endorser or otherwise or which the
Trust or the Corporation, as the case may be, has agreed to purchase or
otherwise acquire, and (f) any binding commitment of the Trust or the
Corporation, as the case may be, to fund any real estate investment or to fund
any investment in any entity making such real estate investment, in each case
other than (1) any such indebtedness, obligation or liability referred to in
clauses (a) through (f) above as to which, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is
expressly provided that such indebtedness, obligation or liability is not
superior in right of payment to the subordinated Securities or ranks pari passu
with the Subordinated Securities, (2) any such indebtedness, obligation or
liability which is subordinated to indebtedness of the Trust or the Corporation,
as the case may be, to substantially the same extent as or to a greater extent
than the Subordinated Securities are subordinated, and (3) the Subordinated
Securities. There will not be any restrictions in an Indenture relating to
Subordinated Securities upon the creation of additional Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Debt outstanding as of the end of the most recent fiscal
quarter of the Trust or Corporation, as the case may be.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Trust or the Corporation, as the case may be, may be permitted under the
applicable Indenture to discharge certain obligations to holders of any series
of Debt Securities that have not already been delivered to the Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Trustee, in trust, funds in such currency or
currencies, currency unit or units or composite currency or currencies in which
such Debt Securities are payable in an amount sufficient to pay the entire
indebtedness on such Debt Securities in respect of principal (and premium, if
any) and interest to the date of such deposit (if such Debt Securities have
become due and payable) or to the stated maturity or redemption date, as the
case may be.
An Indenture may provide that, if certain provisions thereof are made
applicable to the Debt Securities of or within any series pursuant to such
Indenture, each of the Trust or the Corporation, as the case may be, may elect
either (a) to defease and be discharged from any and all obligations with
respect to such Debt Securities except for the obligation to pay additional
amounts, if any, upon the occurrence of certain events of tax, assessment or
governmental charge with respect to payments on such Debt Securities and the
obligations to register the transfer or exchange of such Debt Securities, to
replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to
maintain an office or agency in respect of such Debt Securities and to hold
moneys for payment in trust) ("defeasance") or (b) to be released from its
obligations with respect to such Debt Securities under certain sections, of such
Indenture (including the restrictions described under "Certain Covenants") and,
if provided pursuant to such Indenture, its obligations with respect to any
other covenant, and any omission to comply with such obligations shall not
constitute a default or an event of default with respect to such Debt Securities
"covenant defeasance"), in either case upon the irrevocable deposit by the Trust
or the Corporation, as the case may be, with the Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at stated
maturity, or Government Obligations (as defined below), or both, applicable to
such Debt Securities which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium, if any) and interest on such
Debt Securities, and any mandatory sinking fund or analogous payments thereon,
and the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Trust or the Corporation, as the case may be, has delivered to the
Trustee an opinion of counsel (as specified in the applicable indenture) to the
effect that the holders of such Debt Securities will not recognize income,
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gain or loss for United States federal income tax purposes as a result of such
defeasance or covenant defeasance and will be subject to United States federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred, and such opinion of counsel, in the case of defeasance, must refer to
and be based upon a ruling of the Internal Revenue Service (the "IRS") or a
change in applicable United States federal income tax law occurring after the
date of the applicable Indenture.
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the foreign
currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged or (ii) obligations of
a person controlled or supervised by and acting as an agency or instrumentality
of the United States of America or such government which issued the foreign
currency in which the Debt Securities of such series are payable, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or such other government, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Trust or the Corporation, as the case may be, has deposited funds and/or
Government Obligations to effect defeasance or covenant defeasance with respect
to Debt Securities of any series, (a) the holder of a Debt Security of such
series is entitled to, and does elect pursuant to the applicable Indenture or
the terms of such Debt Security to receive payment in a currency, currency unit
or composite currency other than that in which such deposit has been made in
respect of such Debt Security, or (b) a Conversion Event (as defined below)
occurs in respect of the currency, currency unit or composite currency in which
such deposit has been made, the indebtedness represented by such Debt Security
shall be deemed to have been, and will be, fully discharged and satisfied
through the payment of the principal of (and premium, if any) and interest on
such Debt Security as they become due out of the proceeds yielded by converting
the amount so deposited in respect of such Debt Security into the currency,
currency unit or composite currency in which such Debt Security becomes payable
as a result of such election or such Conversion Event based on the applicable
market exchange rate. "Conversion Event" means the cessation of use of (i) a
currency, currency unit or composite currency both by the government of the
country which issued such currency and for the settlement of transactions by a
central bank or other public institution of or within the international banking
community, (ii) the ECU both within the European Monetary System and for the
settlement of transactions by public institutions of or within the European
Community or (iii) any currency unit or composite currency other than the ECU
for the purposes for which it was established. Unless otherwise provided in the
applicable Prospectus Supplement, all payments of principal of (and premium, if
any) and interest on any Debt Security that is payable in a foreign currency
that ceases to be used by its government of issuance shall be made in United
States dollars.
In the event the Trust or the Corporation, as the case may be, effects
covenant defeasance with respect to any Debt Securities and such Debt Securities
are declared due and payable because of the occurrence of any Event of Default
other than the Event of Default described in clause (d) under "Events of
Default, Notice and Waiver" with respect to specified sections of the Indenture
(which sections would no longer be applicable to such Debt Securities) or
described in clause (g) under "Events of Default, Notice and Waiver" with
respect to any other covenant as to which there had been covenant defeasance,
the amount in such currency, currency unit or composite currency in which Such
Debt Securities are payable, and Government Obligations on deposit with the
applicable Trustee, will
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be sufficient to pay amounts due on such Debt Securities at the time of their
stated maturity but may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such Event of Default.
However, the Trust or the Corporation, as the case may be, would remain liable
to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Debt Securities
is convertible into Paired Common Shares or Preferred Shares will be set forth
in the applicable Prospectus Supplement relating thereto. Such terms will
include whether such Debt Securities are convertible into Paired Common Shares
or Preferred Shares, the conversion price (or manner of calculation thereof),
the conversion period, provisions as to whether conversion will be at the option
of the holders or the Trust or the Corporation, as the case may be, the events
requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such series of Debt Securities and
any restrictions on conversion, including restrictions directed at maintaining
the Trust's REIT status.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the applicable Prospectus Supplement relating to such series. Global Securities
may be issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depositary arrangement with respect to
a series of Debt Securities will be described in the applicable Prospectus
Supplement relating to such series.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Declaration of Trust authorizes the Trust to issue 135 million shares of
beneficial interests in the Trust, including (i) 100 million Trust Shares, with
a par value of $0.01 per share, (ii) 20 million excess trust shares, with a par
value of $0.01 per share ("Excess Common Trust Shares") and (iii) 5 million
excess Preferred Shares, with a par value of $0.01 per share ("Excess Preferred
Trust Shares" and, together with the Excess Common Trust Shares, the "Excess
Trust Shares"). The Declaration of Trust grants the Board of Trustees the power
to create and authorize the issuance of up to 110 million shares (less any Trust
Shares) of preferred shares ("Trust Preferred Shares") in one or more classes or
series, having such voting rights, such rights to dividends and distribution and
rights in liquidation, such conversion, exchange and redemption rights and such
designations, preferences and participations and other limitations and
restrictions as are not prohibited by the Declaration of Trust or applicable law
and as are specified by the Board of Trustees in its discretion. As of September
30, 1995, the Board of Trustees had not created or authorized any class or
series of Trust Preferred Shares and no Excess Trust Shares were outstanding.
The Articles of Incorporation authorize the Corporation to issue 135 million
shares, consisting of (i) 10 million shares of preferred stock, with a par value
of $0.01 per share ("Corporation Preferred Shares"), (ii) 100 million
Corporation Shares, (iii) 20 million shares of excess common stock, with a par
value of $0.01 per share ("Excess Corporation Common Stock"), and (iv) 5 million
shares of excess preferred stock, with a par value of $0.01 per share ("Excess
Corporation Preferred Stock" and, together with the Excess Corporation Common
Stock, the "Excess Corporation Stock"). The Corporation Preferred Shares are
issuable in classes or series with such rights, preferences, privileges and
restrictions as the Board of Directors may determine, including voting rights,
redemption provisions, dividend rates, liquidation preferences and conversion
rights. As of September 30, 1995, no such class or series of Corporation
Preferred Shares had been established and no Excess Corporation Stock was
outstanding.
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As of September 30, 1995 there were 13,809,658 Paired Common Shares
outstanding. Each outstanding Paired Common Share entitles the holder to one
vote on all matters presented to shareholders for a vote. The Trust and the
Corporation have reserved for issuance 5,943,578 Paired Common Shares upon
exchange of units of partnership interest ("Units") of the Realty Partnership
and the Operating Partnership currently held by Starwood Capital.
PREEMPTIVE RIGHTS
Holders of Trust Shares and Corporation Shares do not have preemptive rights
with respect to the issuance of additional shares. Accordingly, any issuance of
authorized but unissued shares could have the effect of diluting the earnings
per share and book value per share of currently outstanding shares.
DESCRIPTION OF PREFERRED SHARES
The following description of the Preferred Shares sets forth certain general
terms and provisions of the Preferred Shares to which any Prospectus Supplement
may relate. The statements below describing the Preferred Shares are in all
respects subject to and qualified in their entirety by reference to the
applicable provisions of the Declaration of Trust and the Articles of
Incorporation and any applicable amendment to the Declaration of Trust or the
Articles of Incorporation designating terms of a series of Preferred Shares (a
"Designating Amendment").
The Trust may authorize and issue Trust Preferred Shares without the
issuance by the Corporation of corresponding shares, and the Corporation may
authorize and issue Corporation Preferred Shares without the issuance by the
Trust of corresponding shares. Furthermore, the Pairing Agreement does not limit
the power of the Boards of the Trust and the Corporation to independently
determine the rights, preferences and restrictions of such shares. However, if
either the Trust or the Corporation were to issue Preferred Shares for which the
other entity did not issue corresponding (i.e., paired) shares in such an amount
that greater than 50% of such entity's beneficial equity interests were
represented by such unpaired Preferred Shares, then the Trust and the
Corporation could lose their status as "grandfathered" from the application of
Section 269B of the Internal Revenue Code of 1986 as amended (the "Code") and
jeopardize the Trust's ability to qualify as a REIT. Neither the Trust nor the
Corporation intends to issue unpaired Preferred Shares in excess of such
limitation.
TERMS
Subject to the limitations prescribed by the Declaration of Trust and the
Articles of Incorporation, respectively, each of the Board of Trustees and the
Board of Directors is authorized to fix the number of shares constituting each
series of Preferred Shares and the designations and powers, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including such provisions as may be desired
concerning voting, redemption, dividends, dissolution or the distribution of
assets, conversion or exchange, and such other subjects or matters as may be
fixed by resolution of the Board of Trustees and the Board of Directors. The
Preferred Shares will, when issued, be fully paid and nonassessable by the Trust
or the Corporation, as the case may be, (except as described under "--
Shareholder Liability" below) and will have no preemptive rights.
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for specific terms, including:
(1) The title and stated value of such Preferred Shares and whether such
Preferred Shares are paired;
(2) The number of shares of such Preferred Shares offered, the
liquidation preference per share and the offering price of such Preferred
Shares;
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(3) The dividend rate(s), periodic and/or payment date(s) or method(s)
of calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Shares;
(6) The provision for a sinking fund, if any, for such Preferred Shares;
(7) The provision for redemption, if applicable, of such Preferred
Shares;
(8) Any listing of such Preferred Shares on any securities exchange.
(9) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Paired Common Shares, including the
conversion price (or manner of calculation thereof);
(10) Whether interests in such Preferred Shares will be represented by
Depositary Shares;
(11) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(12) A discussion of federal income tax considerations applicable to
such Preferred Shares;
(13) The relative ranking and preferences of such Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Trust or the Corporation, respectively;
(14) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of the Trust or the Corporation, respectively; and
(15) Any limitations on direct or beneficial ownership and restrictions
on transfer, in each case as may be appropriate to preserve the status of
the Trust as a REIT.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Shares will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Trust or the Corporation, respectively, rank
(i) senior to all classes or series of Paired Common Shares, and to all equity
securities ranking junior to such Preferred Shares; (ii) on a parity with all
equity securities issued by the Trust or the Corporation, respectively, the
terms of which specifically provide that such equity securities rank on a parity
with the Preferred Shares; and (iii) junior to all equity securities issued by
the Trust or the Corporation, respectively, the terms of which specifically
provide that such equity securities rank senior to the Preferred Shares. The
term "equity securities" does not include convertible debt securities.
DIVIDENDS
Holders of the Preferred Shares of each series will be entitled to receive,
when, as and if declared by the Board of Trustees or the Board of Directors, as
the case may be, out of the respective assets of the Trust and the Corporation
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Each such dividend
shall be payable to holders of record as they appear on the share transfer books
of the Trust or the Corporation, as the case may be, on such record dates as
shall be fixed by the Board of Trustees or the Board of Directors.
Dividends on any series of the Preferred Shares may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement, if the Board of Trustees or the Board of
Directors fails to declare a dividend payable on a dividend payment date on any
series of the Preferred Shares for which dividends are non-cumulative, then the
holders of such series of the Preferred Shares will have no right to receive a
dividend in respect of the dividend period ending on such
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dividend payment date, and the Trust or the Corporation, as the case may be,
will have no obligation to pay the dividend accrued for such period, whether or
not dividends on such series are declared payable on any future dividend payment
date.
If Preferred Shares of any series are outstanding, no dividends will be
declared or paid or set apart for payment on any capital stock of the Trust or
the Corporation, as the case may be, of any other series ranking, as to
dividends, on a parity with or junior to the Preferred Shares of such series for
any period unless (i) if such series of Preferred Shares has a cumulative
dividend, full cumulative dividends have been or contemporaneously are declared
and paid or declared and a sum sufficient for the payment thereof set apart for
such payment on the Preferred Shares of such series for all past dividend
periods and the then current dividend period or (ii) if such series of Preferred
Shares does not have a cumulative dividend, full dividends for the then current
dividend period have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on the
Preferred Shares of such series. When dividends are not paid in full (or a sum
sufficient for such full payment is not so set apart) upon Preferred Shares of
any series and the shares of any other series of Preferred Shares ranking on a
parity as to dividends with the Preferred Shares of such series, all dividends
declared upon Preferred Shares of such series and any other series of Preferred
Shares ranking on a parity as to dividends with such Preferred Shares shall be
declared pro rata so that the amount of dividends declared per share of
Preferred Shares of such series and such other series of Preferred Shares shall
in all cases bear to each other the same ratio that accrued dividends per share
on the Preferred Shares of such series (which shall not include any accumulation
in respect of unpaid dividends for prior dividend periods if such Preferred
Shares does not have a cumulative dividend) and such other series of Preferred
Shares bear to each other. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on Preferred
Shares of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period, and (ii) if such series of Preferred Shares does not have a
cumulative dividend, full dividends on the Preferred Shares of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in shares of Paired Common Shares or other
capital shares ranking junior to the Preferred Shares of such series as to
dividends and upon liquidation) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Paired Common
Shares, or any other capital shares of the Trust or the Corporation, as the case
may be, ranking junior to or on a parity with the Preferred Shares of such
series as to dividends or upon liquidation, nor shall any shares of Paired
Common Shares, or any other capital shares of the Trust or the Corporation, as
the case may be, ranking junior to or on a parity with the Preferred Shares of
such series as to dividends or upon liquidation be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by the Trust
or the Corporation, as the case may be, except by conversion into or exchange
for other capital shares of the Trust or the Corporation, as the case may be,
ranking junior to the Preferred Shares of such series as to dividends and upon
liquidation).
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred Shares
will be subject to mandatory redemption or redemption at the option of the Trust
or the Corporation, as the case may be, as a whole or in part, in each case upon
the terms, at the times and at the redemption prices set forth in such
Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of shares of such
Preferred Shares that shall be redeemed by the
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Trust or the Corporation, as the case may be, in each year commencing after a
date to be specified, at a redemption price per share to be specified, together
with an amount equal to all accrued and unpaid dividends thereon (which shall
not, if such Preferred Shares do not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Shares of any series is payable only from the net
proceeds of the issuance of capital shares of the Trust or the Corporation, as
the case may be, the terms of such Preferred Shares may provide that, if no such
capital shares shall have been issued or to the extent the net proceeds from any
issuance are insufficient to pay in full the aggregate redemption price then
due, such Preferred Shares shall automatically and mandatorily be converted into
the applicable capital shares of the Trust or the Corporation, as the case may
be, pursuant to conversion provisions specified in the applicable Prospectus
Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred Shares
has a cumulative dividend, full cumulative dividends on all shares of any series
of Preferred Shares shall have been or contemporaneously are declared and paid
or declared and a sum sufficient for the payment thereof set apart for payment
for all past dividend periods and the then current dividend period, and (ii) if
such series of Preferred Shares does not have a cumulative dividend, full
dividends of the Preferred Shares of any series have been or contemporaneously
are declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for the then current dividend period, no shares of any
series of Preferred Shares shall be redeemed unless all outstanding Preferred
Shares of such series is simultaneously redeemed; provided, however, that the
foregoing shall not prevent the purchase or acquisition of Preferred Shares of
such series to preserve the REIT status of the Trust or pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series. In addition, unless (i) if such series of Preferred
Shares has a cumulative dividend, full cumulative dividends on all outstanding
shares of any series of Preferred Shares have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for all past dividends periods and the then current dividend
period, and (ii) if such series of Preferred Shares does not have a cumulative
dividend, full dividends on the Preferred Shares of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend period, the
Trust or the Corporation, as the case may be, shall not purchase or otherwise
acquire directly or indirectly any shares of Preferred Shares of such series
(except by conversion into or exchange for capital shares of the Trust or the
Corporation, as the case may be, ranking junior to the Preferred Shares of such
series as to dividends and upon liquidation); provided, however, that the
foregoing shall not prevent the purchase or acquisition of Preferred Shares of
such series to preserve the REIT status of the Trust or pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding Preferred
Shares of such series.
If fewer than all of the outstanding shares of Preferred Shares of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Trust or the Corporation, as the case may be, and such shares
may be redeemed pro rata from the holders of record of such shares in proportion
to the number of such shares held or for which redemption is requested by such
holder (with adjustments to avoid redemption of fractional shares) or by lot in
a manner determined by the Trust or the Corporation, as the case may be.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares of
any series to be redeemed at the address shown on the share transfer books of
the Trust or the Corporation, as the case may be. Each notice shall state: (i)
the redemption date, (ii) the number of shares and series of the Preferred
Shares to be redeemed; (iii) the redemption price; (iv) the place or places
where certificates for such Preferred Shares are to be surrendered for payment
of the redemption price; (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date; and (vi) the date upon which the
holder's conversion rights, if any, as to such shares shall terminate, if fewer
than all the shares of Preferred
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Shares of any series are to be redeemed, the notice mailed to each such holder
thereof shall also specify the number of shares of Preferred Shares to be
redeemed from each such holder. If notice of redemption of any Preferred Shares
has been given and if the funds necessary for such redemption have been set
aside by the Trust or the Corporation, as the case may be, in trust for the
benefit of the holders of any Preferred Shares so called for redemption, then
from and after the redemption date dividends will cease to accrue on such
Preferred Shares, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Trust or the Corporation, as the case may be, then, before
any distribution or payment shall be made to the holders of any Paired Common
Shares or any other class or series of capital shares of the Trust or the
Corporation, as the case may be, ranking junior to the Preferred Shares in the
distribution of assets upon any liquidation, dissolution or winding up of the
Trust or the Corporation, as the case may be, the holders of each series of
Preferred Shares shall be entitled to receive out of assets of the Trust or the
Corporation, as the case may be, legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable Prospectus Supplement), plus
an amount equal to all dividends accrued and unpaid thereon (which shall not
include any accumulation in respect of unpaid dividends for prior dividend
periods if such Preferred Shares do not have a cumulative dividend). After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Preferred Shares will have no right or claim to any of
the remaining assets of the Trust or the Corporation, as the case may be. In the
event that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Trust or the Corporation, as the case
may be, are insufficient to pay the amount of the liquidating distributions on
all outstanding Preferred Shares and the corresponding amounts payable on all
shares of other classes or series of capital shares of the Trust or the
Corporation, as the case may be, ranking on a parity with the Preferred Shares
in the distribution of assets, then the holders of the Preferred Shares and all
other such classes or series of capital shares shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Shares, the remaining assets of the Trust or the Corporation, as the
case may be, shall be distributed among the holders of any other classes or
series of capital shares ranking junior to the Preferred Shares upon
liquidation, dissolution or winding up, according to their respective rights and
preferences and in each case according to their respective number of shares. For
such purposes, the consolidation or merger of the Trust or the Corporation, as
the case may be, with or into any other corporation, trust or entity, or the
sale, lease or conveyance of all or substantially all of the property or
business of the Trust or the Corporation, as the case may be, shall not be
deemed to constitute a liquidation, dissolution or winding up of the Trust or
the Corporation, as the case may be.
VOTING RIGHTS
Holders of the Preferred Shares will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Whenever dividends on any shares of Preferred Shares shall be in arrears for
six or more consecutive quarterly periods, the holders of such shares of
Preferred Shares (voting separately as a class with all other series of
preferred stock upon which like voting rights have been conferred and are
exercisable) will be entitled to vote for the election of two additional
trustees or directors of the Trust or the Corporation, as the case may be, at a
special meeting called by the holders of record of at least ten percent (10%) of
any series of Preferred Shares so in arrears (unless such request is received
less than 90 days before the date fixed for the next annual or special meeting
of the shareholders) or at the next annual meeting of stockholders. Directors so
elected shall serve until the next annual meeting or until their respective
successors are elected and qualify, or if sooner until all dividends in arrears
have
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been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment. In such case, the entire board of the Trust or the
Corporation, as the case may be, will be increased by two trustees or directors.
Unless provided otherwise for any series of Preferred Shares, so long as any
shares of Preferred Shares remain outstanding, the Trust or the Corporation, as
the case may be, will not, without the affirmative vote or consent of the
holders of at least two-thirds of the shares of each series of Preferred Shares
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (such series voting separately as a class), (i) authorize or create, or
increase the authorized or issued amount of any class or series of capital stock
ranking prior to such series of Preferred Shares with respect to payment of
dividends or the distribution of assets upon liquidation, dissolution or winding
up or reclassify any authorized capital stock of the Trust or the Corporation,
as the case may be, into such shares, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (ii) amend, alter or repeal the provisions of the Declaration of
Trust or the Articles of Incorporation or the Designating Amendment for such
series of Preferred Shares, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of such series of Preferred Shares or the holders
thereof; provided, however, with respect to the occurrence of any of the Events
set forth in (ii) above, so long as the Preferred Shares remain outstanding with
the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event, the Trust or the Corporation, as the case may be, may
not be the surviving entity, the occurrence of any such Event shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting power of holders of Preferred Shares and provided further that (x) any
increase in the amount of the authorized Preferred Shares or the creation or
issuance of any other series of Preferred Shares, or (y) any increase in the
amount of authorized shares of such series or any other series of Preferred
Shares, in each case ranking on a parity with or junior to the Preferred Shares
of such series with respect to payment of dividends or the distribution of
assets upon liquidation, dissolution or winding up shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of such series of Preferred Shares shall
have been redeemed or called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of Preferred Shares
is convertible into Paired Common Shares will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number of
Paired Common Shares into which the shares of Preferred Shares are convertible,
the conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders or the
Trust or the Corporation, as the case may be, the events requiring an adjustment
of the conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Shares and any restrictions on
conversion, including restrictions directed at maintaining the Trust's REIT
status.
OWNERSHIP LIMITS; RESTRICTIONS ON TRANSFER; REPURCHASE AND REDEMPTION OF SHARES
As discussed below under "Description of Paired Common Shares -- Ownership
Limits; Restrictions on Transfer; Repurchase and Redemption of Shares," for the
Trust to qualify as a REIT under the Code, the Trust must meet several
requirements concerning the ownership of its shares. To assist the Trust in
meeting this requirement, the Trust may take certain actions to limit the
beneficial ownership, directly or indirectly, by a single person of the Trust's
outstanding equity securities, including any Preferred Shares of the Trust.
Therefore, the Designating Amendment for each series of Preferred Shares may
contain provisions restricting the ownership and transfer of the Preferred
Shares. The applicable Prospectus Supplement will specify any additional
ownership limitation relating to a series of Preferred Shares.
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REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Preferred Shares will be set forth
in the applicable Prospectus Supplement.
DESCRIPTION OF PAIRED COMMON SHARES
GENERAL
All Paired Common Shares offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other shares or
series of shares of beneficial interest and to the provisions of the Declaration
of Trust regarding Excess Trust Shares and the Articles of Incorporation
regarding Excess Corporation Stock, holders of Paired Common Shares will be
entitled to receive dividends if, as and when authorized and declared by the
Board of Trustees or the Board of Directors, as the case may be, out of assets
legally available therefor and to share ratably in the assets of the Trust or
the Corporation legally available for distribution to its shareholders in the
event of its liquidation, dissolution or winding-up after payment of, or
adequate provision for, all known debts and liabilities of the Trust or the
Corporation.
The Paired Common Shares currently outstanding are listed for trading on the
New York Stock Exchange (the "NYSE"). The Trust and the Corporation will apply
to the NYSE to list the additional Paired Common Shares to be sold pursuant to
any Prospectus Supplement, and the Trust and the Corporation anticipate that
such shares will be so listed.
Subject to the provisions of the Declaration of Trust regarding Excess Trust
Shares and the Articles of Incorporation regarding Excess Corporation Stock,
each outstanding Paired Common Share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of trustees
or directors, and, except as otherwise required by law or except as provided
with respect to any other class or series of shares of beneficial interest, the
holders of such Paired Common Shares will possess the exclusive voting power.
There is no cumulative voting in the election of trustees or directors, which
means that the holders of a majority of the outstanding Paired Common Shares can
elect all of the trustees or directors then standing before election and the
holders of the remaining shares of beneficial interest, if any, will not be able
to elect any trustees or directors.
Holders of Paired Common Shares have no conversion, sinking fund, redemption
or preemptive rights to subscribe for any securities of the Trust of the
Corporation, as the case may be.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares and the Articles of Incorporation regarding Excess Corporation Stock,
Paired Common Shares will have equal dividend, distribution, liquidation and
other rights, and will have no preference, exchange, or except as expressly
required by the Maryland statute governing real estate investment trusts formed
under Maryland law (the "Maryland REIT Law") and the Maryland General
Corporation Law, as amended (the "MGCL"), appraisal rights.
THE PAIRING AGREEMENT
The Trust and the Corporation have entered into an agreement dated June 25,
1980, as amended (the "Pairing Agreement") pursuant to which all outstanding
Trust Shares and Corporation Shares are "paired" on a one-for-one basis. The
following is a summary of certain provisions of the Pairing Agreement. This
summary does not purport to be complete and is qualified in its entirety by
reference to the text of the Pairing Agreement, a copy of which is incorporated
by reference as an exhibit to the Registration Statement.
TRANSFER OF PAIRED COMMON SHARES. Under the Pairing Agreement, Trust Shares
are transferable only together with an equal number of Corporation Shares, and
Corporation Shares are transferable only together with an equal number of Trust
Shares. Certificates evidencing Trust Shares and Corporation Shares are required
by the Pairing Agreement to include a reference to this transfer restriction.
The Declaration of Trust and the Articles of Incorporation contain similar
restrictions on the transfer of Trust Shares and Corporation Shares, as well as
other restrictions on the transfer and
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ownership of Trust Shares and Corporation Shares. The Pairing Agreement also
provides that any Excess Trust Shares and any Excess Corporation Stock which may
be issued will be paired in the same manner as the Trust Shares and Corporation
Shares are paired.
ISSUANCE OF SHARES. Under the Pairing Agreement, the Trust may not issue
Trust Shares and the Corporation may not issue Corporation Shares unless
provision is made for the acquisition by the same person of the same number of
shares of the other entity. The Trust and the Corporation must agree on the
manner and basis of allocating the consideration to be received upon such
issuance, or on the payment by one entity to the other of cash or other
consideration in lieu of a portion of the consideration to be received upon
issuance of such Paired Common Shares.
SHARE DIVIDENDS, RECLASSIFICATIONS AND OTHER SIMILAR EVENTS. Neither the
Trust nor the Corporation may declare or pay any dividend or other distribution
payable in Trust Shares or Corporation Shares, issue any rights or warrants to
purchase Trust Shares or Corporation Shares, or subdivide, combine or otherwise
reclassify such shares, unless the other entity concurrently takes the same
action.
AMENDMENT AND TERMINATION. The Pairing Agreement may be amended by the
Board of Trustees and the Board of Directors, provided that an amendment
permitting the separate issuance and transfer of Trust Shares and Corporation
Shares must be approved by a majority of each of the outstanding Trust Shares
and the outstanding Corporation Shares. The Pairing Agreement may be terminated
only with the affirmative vote of the holders of a majority of each of the
outstanding Trust Shares and the outstanding Corporation Shares. Upon such
termination, the Trust Shares and the Corporation Shares could be delisted by
the NYSE if the Trust and the Corporation, respectively, did not as separate
entities then meet the listing requirements of such Exchange.
PREFERRED SHARES. The Trust may authorize and issue other classes or series
of shares of beneficial interest in addition to the Trust Shares without the
issuance by the Corporation of corresponding shares, and the Corporation may
authorize and issue shares of Corporation Preferred Stock without the issuance
by the Trust of corresponding shares. Furthermore, the Pairing Agreement does
not limit the power of the Boards of the Trust and the Corporation to
independently determine the rights, preferences and restrictions of such shares.
MARYLAND TAKEOVER LEGISLATION
Under the MGCL, certain "business combinations" (including mergers,
consolidations, share exchanges, or, in certain circumstances, asset transfers
or issuances or reclassifications of equity securities) between a Maryland
corporation or a Maryland real estate investment trust and any person who
beneficially owns 10% or more of the voting power of the corporation's or
trust's shares or an affiliate of the corporation or trust who, at any time
within the two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then-outstanding voting shares
of the corporation or trust (an "Interested Stockholder") or an affiliate
thereof, are prohibited or restricted unless exempted. The Company has exempted
all "business combinations" involving any party from the business combination
provisions of the MGCL.
Under Maryland law, under certain circumstances "control shares" of a
Maryland corporation or a Maryland real estate investment trust acquired in a
"control share acquisition" may have no voting rights. The Company has exempted
all control share acquisitions involving any person from the MGCL.
OWNERSHIP LIMITS; RESTRICTIONS ON TRANSFER; REPURCHASE AND REDEMPTION OF SHARES
The Declaration of Trust and the Articles of Incorporation provide that,
subject to certain exceptions specified in the Declaration of Trust and the
Articles of Incorporation, no shareholder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 8.0% of the capital stock,
whether measured by vote, value or number of Paired Common Shares (other than
for shareholders who owned in excess of 8.0% as of the date the Reorganization
closed, who may not so own or be deemed to own more than the lesser of 9.9% or
the number of Paired Common Shares they
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held on such date) of the outstanding Paired Common Shares or Preferred Shares
which may be issued, or any combination thereof. The Board of Trustees and the
Board of Directors may waive the Ownership Limitation if evidence satisfactory
to the Board of Trustees and the Board of Directors and the tax counsel to the
Trust and the Corporation is presented that such ownership will not jeopardize
the Trust's status as a REIT. As a condition of such waiver, each of the Board
of Trustees and the Board of Directors may require opinions of counsel
satisfactory to it and/or an undertaking from the applicant with respect to
preserving the REIT status of the Trust. If shares which would cause the Trust
to be beneficially owned by fewer than 100 persons are issued or transferred to
any person, such issuance or transfer shall be null and void and the intended
transferee will acquire no rights to the stock. Any acquisition of capital stock
of the Trust or the Corporation and continued holding or ownership of capital
stock of the Trust or the Corporation constitutes, under the Declaration of
Trust and the Articles of Incorporation, a continuous representation of
compliance with the Ownership Limitation.
In the event of a purported transfer or other event that would, if
effective, result in the ownership of Paired Common Shares or Preferred Shares
in violation of the Ownership Limitation, such transfer with respect to that
number of shares that would be owned by the transferee in excess of the
Ownership Limitation would be deemed void ab initio and such Paired Common
Shares or Preferred Shares would automatically be exchanged for Excess Shares or
Excess Preferred Stock, respectively (collectively, "Excess Stock"), authorized
by the Declaration of Trust and the Articles of Incorporation, according to
rules set forth in the Declaration of Trust and the Articles of Incorporation,
to the extent necessary to ensure that the purported transfer or other event
does not result in ownership of Paired Common Shares or Preferred Shares or
Excess Stock in violation of the Ownership Limitation. Any purported transferee
or other purported holder of Excess Stock is required to give written notice to
the Trust and the Corporation of a purported transfer or other event that would
result in the issuance of Excess Stock.
Any Excess Trust Shares and Excess Corporation Stock which may be issued
will be "paired" in the same manner that the Trust Shares and the Corporation
Shares are currently paired. Excess Stock is not Treasury stock but rather
continues as issued and outstanding capital stock of the Trust and the
Corporation. While outstanding, Excess Stock will be held in trust. The trustees
of such trusts shall be appointed by the Trust and the Corporation and shall be
independent of the Trust, the Corporation and the holder of Excess Stock. The
beneficiary of such trust shall be one or more charitable organizations selected
by the trustee. If, after the purported transfer or other event resulting in an
exchange of Paired Common Shares or Preferred Shares for Excess Stock and prior
to the discovery by the Trust and the Corporation of such exchange, dividends or
distributions are paid with respect to the Paired Common Shares or Preferred
Shares that were exchanged for Excess Stock, then such dividends or
distributions are to be repaid to the trustee upon demand for payment to the
charitable beneficiary. While Excess Stock is held in trust, an interest in that
trust may be transferred by the trustee only to a person whose ownership of
Paired Common Shares or Preferred Shares will not violate the Ownership
Limitation, at which time the Excess Stock will be automatically exchanged for
the same number of Paired Common Shares or Preferred Shares of the same type and
class as the Paired Common Shares or Preferred Shares for which the Excess Stock
was originally exchanged. The Declaration of Trust and the Articles of
Incorporation contain provisions that are designed to ensure that the purported
transferee or other purported holder of the Excess Stock may not receive in
return for such a transfer an amount that reflects any appreciation in the
Paired Common Shares or Preferred Shares for which such Excess Stock was
exchanged during the period that such Excess Stock was outstanding. Any amount
received by a purported transferee or other purported holder in excess of the
amount permitted to be received must be turned over to the charitable
beneficiary of the trust. If the foregoing restrictions are determined to be
void or invalid by virtue of any legal decision, statute, rule or regulation,
then the intended transferee or holder of any Excess Stock may be deemed, at the
option of the Trust and the Corporation, to have acted as an agent on behalf of
the Trust and the Corporation in acquiring or holding such Excess Stock and to
hold such Excess Stock on behalf of the Trust and the Corporation.
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The Declaration of Trust and the Articles of Incorporation further provide
that the Trust and the Corporation may purchase, for a period of 90 days during
the time the Excess Stock is held in trust, all or any portion of the Excess
Stock from the original transferee-shareholder at the lesser of the price paid
for the Paired Common Shares or Preferred Shares by the purported transferee (or
if no notice of such purchase price is given, at a price to be determined by the
Board of Trustees and the Board of Directors, in their sole discretion, but no
lower than the lowest market price of such stock (based on the market price of
the Paired Common Shares or Preferred Shares) at any time during the period in
which the Excess Stock is held in trust) and the closing market price for the
Paired Common Shares or Preferred Shares on the date the Trust and the
Corporation exercise their option to purchase. The 90-day period begins on the
date of the violative transfer if the original transferee-shareholder gives
notice to the Trust and the Corporation of the transfer or (if no notice is
given) the date the Board of Trustees and the Board of Directors determine that
a violative transfer has been made.
The Ownership Limitation will not be removed automatically even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the ownership concentration limitation is
increased. Except as otherwise described above, any change in the Ownership
Limitation would require an amendment to the Declaration of Trust and the
Articles of Incorporation. Amendments to the Declaration of Trust and to the
Articles of Incorporation generally require the affirmative vote of holders
owning a majority of the outstanding Trust Shares and Corporation Shares
respectively, except that changes to the Ownership Limitation require two-thirds
approval. In addition to preserving the Trust's status as a REIT, the Ownership
Limitation may have the effect of precluding an acquisition of control of the
Trust and the Corporation without the approval of the Board of Trustees and the
Board of Directors.
All persons who own, directly or by virtue of the attribution provisions of
the Code, 5% or more (or such other percentage as may be required by the Code or
regulations promulgated thereunder) of the outstanding Paired Common Shares,
Preferred Shares or Excess Stock must file an affidavit with the Trust and the
Corporation containing the information specified in the Declaration of Trust and
the Articles of Incorporation before January 30 of each year. In addition, each
shareholder shall upon demand be required to disclose to the Trust and the
Corporation in writing such information with respect to the direct, indirect and
constructive ownership of shares as the Board of Trustees or the Board of
Directors deems necessary to comply with the provisions of the Declaration of
Trust and the Articles of Incorporation or the Code applicable to a REIT or to
comply with the requirements of any taxing authority or governmental agency.
CONVERTIBLE NOTES
In order to facilitate an underwritten offering by the Company of Paired
Common Shares or any other equity securities of the Trust or the Corporation,
underwriters may purchase a series of Starwood Lodging Convertible Notes (the
"Notes"). The Notes will be automatically converted into Paired Common Shares or
other equity securities (at a conversion price equal to the public offering
price of the Paired Common Shares or such other securities, as the case may be)
upon certification to the Trustee (defined below) of the transfer of beneficial
ownership of the Notes to any person or entity which is not an underwriter or a
selected dealer in the offering or an affiliate of any of either. The automatic
conversion will take place without physical delivery of the Notes to any
transferee of an underwriter, selected dealer or affiliate: such transferee will
receive only a certificate for the Paired Common Shares issued upon such
conversion. The structure of such an offering is designed to avoid the
possibility that the underwriters, selected dealers and the affiliates of
either, or any of them, acquire 8.0% or more of the Paired Common Shares in
violation of the Ownership Limitation. See "Description of Paired Common Shares
- -- Ownership Limits; Restrictions on Transfer; Repurchase and Redemption of
Shares."
Because the Notes automatically will be converted into Paired Common Shares
upon sale to the public, no market for the Notes is expected to develop. The
following description of the Notes is
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provided in the event that any Notes are acquired and held by any underwriter,
selected dealer or affiliate of any of either, in whose hands the Notes do not
automatically convert into Paired Common Shares.
The Notes are to be issued under an indenture (the "Note Indenture") to be
dated as of the date of such underwritten offering between the Company and the
trustee (the "Note Trustee"). The following statements relating to the Notes and
the Note Indenture are summaries, do not purport to be complete and are
qualified in their entirety by reference to the Notes and the Note Indenture.
The Notes will not bear interest. The Notes will be issued in registered
form in denominations of the same dollar amount as a multiple of the public
offering price of the Paired Common Shares and will be unsecured, several
obligations of the Trust and the Corporation maturing on the date six months
after the date of the Note Indenture. At the option of the Company, the maturity
date of the Notes may be extended at any time or from time to time, by written
notice to the Note Trustee prior to the maturity date, including any extension
thereof, to a date not later than the second anniversary of the initial maturity
date.
There are no redemption or sinking fund provisions applicable to the Notes
and the Notes are not subject to redemption prior to maturity by the Trust and
the Corporation or either of them.
The following are Events of Default under the Note Indenture: failure of the
Trust or the Corporation to pay principal owing by it in respect of any Note
when due; failure of the Trust or the Corporation to comply with any of its
other agreements in the Notes or the Note Indenture, continued for 90 days after
notice is given as provided in the Note Indenture; and certain events of
bankruptcy, insolvency or reorganization. If an Event of Default occurs and is
continuing, either the Note Trustee or the holders of at least 25% in aggregate
principal amount of the Notes outstanding may declare the entire principal
amount of the Notes to be due and payable immediately.
The Note Indenture provides that, subject to the duty of the Note Trustee
during default to act with the required standard of care, the Note Trustee will
be under no obligation to exercise any of its rights or powers under the Note
Indenture unless it shall have received reasonable security and indemnity from
the holders of the Notes against any costs, expenses or liabilities. Subject to
such provisions for the indemnification of the Note Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Note Trustee or exercising any trust or power conferred
on the Note Trustee.
The Note Indenture does not require the Company to furnish to the Note
Trustee any periodic evidence as to the absence of any default under the Note
Indenture or the compliance by the Company with the terms of the Note Indenture.
The Note Indenture or the Notes may be amended or supplemented without the
consent of the noteholders in certain circumstances and with the consent of
holders of at least a majority of the principal amount of the Notes at the time
outstanding, subject to certain exceptions. Any past default, or compliance with
any provision may be waived with the consent of the holders of a majority of the
principal amount of the Notes at the time outstanding.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Paired Common Shares is First
Interstate Bank, Ltd., Los Angeles, California.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Debt Securities,
Preferred Shares or Paired Common Shares. Warrants may be issued independently
or together with Debt Securities, Preferred Stock or Paired Common Shares
offered by any Prospectus Supplement and may be attached to or separate from
such Securities. Each series of Warrants will be issued under a separate warrant
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agreement (a "Warrant Agreement") to be entered into between the Company and a
bank or trust company, as warrant agent (the "Warrant Agent"), all as set forth
in the Prospectus Supplement relating to the particular issue of offered
Warrants. The Warrant Agent will act solely as an agent of the Company in
connection with the Warrants of such series and will not assume any obligation
or relationship of agency or trust for or with any holders or beneficial owners
of Warrants. The following summaries of certain provisions of the Warrant
Agreements and Warrants do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all the provisions of the
Warrant Agreement and the Warrant certificates relating to each series of the
Warrants which will be filed with the Commission and incorporated by reference
as an exhibit to the Registration Statement of which this Prospectus is a part
at or prior to the time of the issuance of such series of Warrants.
The applicable Prospectus Supplement will describe the terms of such
Warrants, including the following where applicable: (i) the title of such
Warrants; (ii) the aggregate number of such Warrants; (iii) the price or prices
at which such Warrants will be issued; (iv) the currencies in which the price of
such Warrants may be payable; (v) the designation, aggregate principal amount
and terms of the securities purchasable upon exercise of such Warrants; (vi) the
designation and terms of the series of Debt Securities, Preferred Shares or
Paired Common Shares with which such Warrants are being offered and the number
of such Warrants being offered with each such security; (vii) the date, if any,
on and after which such Warrants and the related securities will be transferable
separately; (viii) the price at which and currency or currencies, including
composite currencies, in which the securities purchasable upon exercise of such
Warrants may be purchased; (ix) the date on which the right to exercise such
Warrants shall commence and the date on which such right shall expire (the
"Expiration Date"); (x) any material United States federal income tax
consequences; (xi) the terms, if any, on which the Company may accelerate the
date by which the Warrants must be exercised; and (xii) any other terms of such
Warrants, including terms, procedures and limitations relating to the exchange
and exercise of such Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax considerations
that may be relevant to a prospective holder of Securities. This summary is for
information purposes only and is not tax advice. Except as discussed below, no
ruling or determination letters from the IRS have been or will be requested by
the Company on any tax issue connected with this Registration Statement. This
summary is based upon the Code, as currently in effect, applicable Treasury
Regulations thereunder and judicial and administrative interpretations thereof,
all of which are subject to change, including changes that may be retroactive.
No assurance can be given that the IRS will not challenge the propriety of one
or more of the tax positions described herein or that such a challenge would not
be successful.
The tax treatment of a holder of any of the Securities will vary depending
upon the terms of the specific securities acquired by such holder, as well as
such holder's particular situation. The discussion below addresses federal
income tax considerations to holders of Paired Common Shares. Federal income tax
considerations relevant to holders of Securities other than Paired Common Shares
will be provided in the applicable Prospectus Supplement relating thereto. This
summary does not purport to deal with all aspects of taxation that may be
relevant to particular holders of Paired Common Shares or other Securities in
light of their personal investment or tax circumstances. Except as specifically
provided, the discussion below does not address foreign, state, or local tax
consequences, nor does it specifically address the tax consequences to taxpayers
subject to special treatment under the federal income tax laws (including
dealers in securities, foreign persons, life insurance companies, tax-exempt
organizations, financial institutions, and taxpayers subject to the alternative
minimum tax). The discussion below assumes that the Paired Common Shares are or
will be held as capital assets within the meaning of Section 1221 of the Code.
No assurance can be given that legislative, judicial or administrative changes
will not affect the accuracy of any statements in this Prospectus with respect
to transactions entered into or contemplated prior to the effective date of such
changes.
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EACH PROSPECTIVE PURCHASER OF SECURITIES IS ADVISED TO CONSULT HIS OR HER
OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN THE APPLICABLE TAX LAWS.
FEDERAL INCOME TAXATION OF THE TRUST
BACKGROUND
In 1980, prior to the establishment of the Corporation and the pairing of
its shares with the shares of the Trust, the IRS issued a Private Letter Ruling
(the "Ruling") to the Trust in which the IRS held that the pairing of the Trust
Shares and the Corporation Shares and the operation of the Corporation would not
preclude the Trust from qualifying as a REIT. Subsequent to the issuance of the
Ruling, (i) the IRS announced that it would no longer issue rulings to the
effect that a REIT whose shares are paired with those of a non-REIT will qualify
as a REIT if the activities of the paired entities are integrated, and (ii)
Congress, in 1984, enacted Section 269B of the Code, which treats a REIT and a
non-REIT, the paired shares of which were not paired on or before June 30, 1983,
as one entity for purposes of determining whether either company qualifies as a
REIT. Section 269B of the Code has not applied to the Trust and the Corporation
(since the Trust Shares and the Corporation Shares were paired prior to that
date), and the Ruling's conclusions were not adversely affected thereby.
In 1994, the Trust requested and received a determination letter from the
IRS (the "IRS Letter"). The IRS Letter provides that the Trust's failure to send
the shareholder demand letters required by the REIT Provisions (defined below)
terminated its election to be taxed as a REIT beginning with the Trust's taxable
year ended December 31, 1991 and permits the Trust to re-elect to be taxed as a
REIT commencing with its taxable year ended December 31, 1995. The IRS Letter
also directed the Trust to file amended federal income tax returns for its
taxable years ended December 31, 1991 and 1992 as a C corporation (and not as a
REIT) and to file its federal income tax returns for its taxable years ended
December 31, 1993 and 1994 as a C corporation. The Trust has filed such returns.
Because the Trust had net losses for federal income tax purposes and did not pay
any dividends during its taxable years ended December 31, 1991, 1992, 1993 and
1994, the IRS Letter did not result in the Trust owing any federal income tax.
The Trust has instituted REIT compliance controls that are intended to prevent
the reoccurrence of any such failure to comply with the reporting and
recordkeeping requirements for REITs.
GENERAL
The Trust will elect to be taxed as a REIT under Sections 856 through 860 of
the Code and applicable Treasury Regulations (the "REIT Requirements" or "REIT
Provisions"), commencing with its taxable year ended December 31, 1995. The
Trust believes that, commencing with such taxable year, it was organized and
operated in such a manner so as to qualify for taxation as a REIT and the Trust
intends to continue to operate in such a manner; however no assurance can be
given that the Trust has qualified as a REIT or will continue to so qualify.
The REIT Provisions are highly technical and complex. The following sets
forth the material aspects of the REIT Provisions that govern the federal income
tax treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the REIT Provisions and administrative and judicial interpretations
thereof.
Prior to the issuance of any of the Securities, Sidley & Austin, counsel to
the Company, will render an opinion to the effect that, commencing with the
Trust's taxable year ended December 31, 1995, the Trust was organized and has
operated in conformity with the requirements for qualification as a REIT, and
its proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code for its
subsequent taxable years. It must be emphasized that Sidley & Austin's opinion
will be based on the IRS Letter and various assumptions and will be conditioned
upon certain representations made by the Trust and the Corporation as to
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factual matters. In particular, Sidley & Austin's opinion will be based upon
factual representations of the Trust concerning its business and properties.
Moreover, such qualification and taxation as a REIT depends upon the Trust's
ability to meet, through actual annual operating results, certain distribution
levels, specified diversity of stock ownership, and various other qualification
tests imposed under the REIT Provisions, as discussed below. The Trust's annual
operating results will not be reviewed by Sidley & Austin. Accordingly, no
assurance can be given that the actual results of the Trust's operation for any
particular taxable year will satisfy such requirements. Further, the anticipated
federal income tax treatment described in this Prospectus may be changed,
perhaps retroactively, by legislative, administrative, or judicial action at any
time. For a discussion of the tax consequences of failure to qualify as a REIT,
see "-- Failure to Qualify."
As long as the Trust qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on net income that it currently
distributes to shareholders. This treatment substantially eliminates the "double
taxation" (once at the corporate level and again at the shareholder level) that
generally results from investment in a regular corporation.
Even if the Trust qualifies for taxation as a REIT, however, it may be
subject to federal income or excise tax as follows. First, the Trust will be
taxed at regular corporate rates on any undistributed REIT taxable income (as
discussed below), including undistributed net capital gains. Second, under
certain circumstances, the Trust may be subject to the "alternative minimum tax"
on its items of tax preference, if any. Third, if the Trust has (i) net income
from the sale or other disposition of "foreclosure property" (which is, in
general, property acquired on foreclosure or otherwise on default on a loan
secured by such property or a lease of such property) or (ii) other
non-qualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Trust has net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property, other than foreclosure property, held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Trust should fail to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Trust fails the 75% or
95% test, multiplied by a fraction intended to reflect the Trust's
profitability. Sixth, if the Trust should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Trust will be subject to a
4% excise tax on the excess of such required distributions over the amounts
actually distributed. Seventh, pursuant to IRS Notice 88-19, if the Trust has a
net unrealized built-in gain, with respect to any asset (a "Built-in Gain
Asset") held by the Trust on January 1, 1995 or acquired by the Trust from a
corporation that is or has been a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in certain transactions in which the basis
of the Built-in Gain Asset in the hands of the Trust is determined by reference
to the basis of the asset in the hands of the C corporation, and the Trust
directly or indirectly recognizes gain on the disposition of such asset during
the 10-year period (the "Recognition Period") beginning on January 1, 1995 with
respect to assets held by the Trust on such date or, with respect to other
assets, the date on which such asset was acquired by the Trust, then, to the
extent of the Built-in Gain (i.e., the excess of (a) the fair market value of
such asset over (b) the Trust's adjusted basis in such asset, determined as of
the beginning of the Recognition Period), such gain will be subject to tax at
the highest regular corporate rate pursuant to Treasury Regulations that have
not yet been promulgated. The results described above with respect to the
recognition of Built-in Gain assume that the Trust will make an election
pursuant to IRS Notice 88-19. The Trust believes that it will have Built-in-Gain
Assets as of January 1, 1995 and, thus, direct or indirect sales of assets by
the Trust after 1994 could result in a federal income tax liability to the
Trust.
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REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Trust must elect to be so treated and must meet on
a continuing basis certain requirements (as discussed below) relating to the
Trust's organization, sources of income, nature of assets, and distribution of
income to shareholders.
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for the REIT Provisions; (iv) that is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, directly or indirectly, by five or fewer individuals (defined in the
Code to include certain entities); (vii) as of the close of the taxable year,
has no earnings and profits accumulated in any non-REIT year; (viii) is not
electing to be taxed as a REIT prior to the fifth taxable year which begins
after the first taxable year for which its REIT status terminated or was revoked
or the IRS has waived the applicability of such waiting period; (ix) that has
the calendar year as its taxable year; and (x) that meets certain other tests,
described below, regarding the nature of its income and assets. The REIT
Provisions provide that conditions (i) to (iv), inclusive, must be met during
the entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made by the REIT to be taxed as
a REIT.
The Trust believes that it satisfies conditions (i) through (x) (described
above). In addition, the Declaration of Trust and the Articles of Incorporation
provide for restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist the Trust in continuing to satisfy the share
ownership requirements described in conditions (v) and (vi) above. See
"Description of Paired Common Shares -- Ownership Limits: Restrictions on
Transfer; Repurchase and Redemption of Shares." In order to elect to be taxed as
a REIT, the Trust must also maintain certain records and request certain
information from its shareholders designed to disclose the actual ownership of
its stock. The Trust believes that it has and will comply with these
requirements.
In the case of a REIT that is a partner in a partnership, the REIT
Provisions provide that the REIT is deemed to own its proportionate share of the
assets of the partnership and is deemed to be entitled to the income of the
partnership attributable to such share. In addition, the character of the assets
and gross income of the partnership shall retain the same character in the hands
of the REIT for purposes of the REIT Requirements, including satisfying the
gross income tests and the asset tests, described below. Similar treatment
applies with respect to lower-tier partnerships which the REIT indirectly owns
through its interests in higher-tier partnerships. Thus, the Trust's
proportionate share of the assets, liabilities and items of income of the Realty
Partnership and the other partnerships and limited liability companies in which
the Trust owns a direct or indirect interest (collectively, the "Subsidiary
Entities"), will be treated as assets, liabilities and items of income of the
Trust for purposes of applying the requirements described herein, provided that
the Realty Partnership and the Subsidiary Entities are treated as partnerships
for federal income tax purposes. See "-- Federal Income Tax Aspects of the
Partnerships and the Subsidiary Entities" below.
PAIRED SHARES. Section 269B of the Code provides that if the shares of a
REIT and a non-REIT are paired, then the REIT and the non-REIT shall be treated
as one entity for purposes of determining whether either company qualifies as a
REIT. If Section 269B applied to the Trust and the Corporation, then the Trust
would not be able to satisfy the gross income tests (described below) and thus
would not be eligible to be taxed as a REIT. Section 269B does not apply,
however, if the shares of the REIT and the non-REIT were paired on or before
June 30, 1983 and the REIT was taxable as a REIT on or before June 30, 1983. As
a result of this grandfathering rule, Section 269B has not applied to the Trust
and the Corporation. This grandfathering rule does not, by its terms, require
that the Trust be taxed
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as a REIT at all times after June 30, 1983. Prior to the issuance of any of the
Securities, Sidley & Austin will render an opinion to the effect that the IRS
Letter and the termination of the Trust's REIT election for the taxable years
ended December 31, 1991 through 1994 did not result in Section 269B becoming
applicable to the Trust. There are, however, no judicial or administrative
authorities interpreting this grandfathering rule. Therefore, Sidley & Austin's
opinion will be based solely on the literal language of the statutory
grandfathering rule.
Even though Section 269B of the Code does not apply to the Trust and the
Corporation, the IRS could assert that the Trust and the Corporation should be
treated as one entity under general tax principles. In general, such an
assertion should only be upheld if the separate corporate identities are a sham
or unreal. Not all of the trustees of the Trust are also directors of the
Corporation and no individual serves as an officer of both the Trust and the
Corporation. In addition, the Trust, the Corporation, the Realty Partnership,
the Operating Partnership, each Subsidiary Entity and each partnership or
limited liability company owned in whole or in part by the Operating Partnership
("Operating Subsidiary Entity") have separate creditors and are subject to
different state law licensing and regulatory requirements. The Trust and the
Corporation have represented that they and the Realty Partnership, the Operating
Partnership, the Subsidiary Entities and the Operating Subsidiary Entities will
each maintain separate books and records and all material transactions among
them have been and will be negotiated and structured with the intention of
achieving an arm's-length result. Prior to the issuance of any of the
Securities, Sidley & Austin will render an opinion to the effect that, based on
the foregoing, the separate corporate identities of the Trust and the
Corporation will be respected.
Due to the paired structure, the Trust, the Corporation, the Realty
Partnership, the Operating Partnership, the Subsidiary Entities and the
Operating Subsidiary Entities are controlled by the same interests. As a result,
the IRS could, pursuant to Section 482 of the Code, seek to distribute,
apportion or allocate gross income, deductions, credits or allowances between or
among them if it determines that such distribution, apportionment or allocation
is necessary in order to prevent evasion of taxes or to clearly reflect income.
The Trust and the Corporation believe that all material transactions between
them and among them and the Realty Partnership, the Operating Partnership, the
Subsidiary Entities and the Operating Subsidiary Entities have been and will be
negotiated and structured with the intention of achieving an arm's-length
result. As a result, the potential application of Section 482 of the Code should
not have a material effect on the Trust or the Corporation.
INCOME TESTS. In order to maintain qualification as a REIT, the Trust must
annually satisfy three gross income requirements (the "gross income tests").
First, at least 75% of the Trust's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real property," as
described below, and in certain circumstances, interest) or from certain types
of qualified temporary investments. Second, at least 95% of the Trust's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from the same items which qualify under the 75% income test
and from dividends, interest, and gain from the sale or disposition of stock or
securities that do not constitute dealer property or from any combination of the
foregoing. Third, short-term gain from the sale or other disposition of stock or
securities, gain from prohibited transactions and gain on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Trust's gross income (including gross income from prohibited
transactions) for each taxable year.
Rents received or deemed to be received by the Trust will qualify as "rents
from real property" for purposes of the gross income tests only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales (or items thereof). Second, the Code provides that rents received from
a tenant will not qualify as "rents from real property" in
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satisfying the gross income tests if the REIT, or a direct or indirect owner of
10% or more of the REIT directly or indirectly, owns 10% or more of such tenant
(a "Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
a REIT may provide services to its tenants and the income will qualify as "rents
from real property" only if the services are of a type that a tax-exempt
organization can provide to its tenants without causing its rental income to be
unrelated business taxable income under the Code. Services that would give rise
to unrelated business taxable income if provided by a tax-exempt organization
("Prohibited Services") must be provided by an "independent contractor" who is
adequately compensated and from whom the REIT does not derive any income.
Payments for services furnished (whether or not rendered by an independent
contractor) that are not customarily provided to tenants in properties of a
similar class in the geographic market in which the REIT's property is located
will not qualify as "rents from real property."
Substantially all of the Trust's income will be derived from its partnership
interest in the Realty Partnership and the Subsidiary Entities. The Realty
Partnership and the Subsidiary Entities lease for a fixed period all of their
fee and leasehold interests in their hotels and associated property to the
Operating Partnership, to the Operating Subsidiary Entities or to unrelated
persons (the "Leases"). The Leases are net leases which generally provide for
payment of rent equal to the greater of a fixed rent or a percentage rent. The
percentage rent is calculated by multiplying fixed percentages of the gross room
revenues and, for certain hotels, fixed percentages of other types of gross
revenues in excess of certain levels.
In order for the rents paid under the Leases to constitute "rents from real
property," the Leases must be respected as true leases for federal income tax
purposes and not treated as service contracts, joint ventures or some other type
of arrangement. The determination of whether the Leases are true leases depends
upon an analysis of all of the surrounding facts and circumstances. In making
such a determination, courts have considered a variety of factors, including the
intent of the parties, the form of the agreement, the degree of control over the
property that is retained by the property owner and the extent to which the
property owner retains the risk of loss with respect to the property.
Prior to the issuance of any of the Securities, Sidley & Austin will render
an opinion to the effect that the Leases will be treated as true leases for
federal income tax purposes. This opinion will be based, in part, on the
following facts: (i) the lessors and the lessees intend for their relationship
to be that of lessor and lessee and each such relationship will be documented by
a lease agreement; (ii) the lessees will have the right to exclusive possession
and use and quiet enjoyment of the leased premises during the term of the
Leases; (iii) the lessees will bear the cost of, and be responsible for,
day-to-day maintenance and repair of the leased premises, other than the cost of
certain capital expenditures, and will dictate how the leased premises are
operated and maintained; (iv) the lessees will bear all of the costs and
expenses of operating the leased premises during the term of the Leases; (v) the
term of the Leases is less than the economic life of the leased premises and the
lessees do not have purchase options with respect to the leased premises; (vi)
the lessees are required to pay substantial fixed rent during the term of the
Leases; and (vii) each lessee stands to incur substantial losses or reap
substantial profits depending on how successfully it operates the leased
premises.
Investors should be aware, however, that there are not controlling
authorities involving leases with terms substantially the same as the Leases.
Therefore, the opinion of Sidley & Austin will be based upon an analysis of the
facts and circumstances and upon rulings and judicial decisions involving
situations that are analogous. If any significant Lease is recharacterized as a
service contract or a partnership agreement, rather than as a true lease, the
Trust would not be able to satisfy either the 75% or 95% gross income tests and,
as a result, would lose its REIT status.
In order for rent payments under the Leases to qualify as "rents from real
property," the rent must not be based on the income or profits of any person.
The percentage rent under the Leases will qualify as "rents from real property"
if it is based on percentages of receipts or sales and the
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percentages (i) are fixed at the time the Leases are entered into; (ii) are not
renegotiated during the term of the Leases in a manner that has the effect of
basing percentage rent on income or profits; and (iii) conform with normal
business practice. More generally, percentage rent will not qualify as "rents
from real property" if, considering the Leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing the percentage rent on income or
profits. The Trust and the Corporation believe that the Leases conform with
normal business practice and the percentage rent will be treated as "rents from
real property" under this requirement. The Trust has further represented with
respect to hotel properties that the Realty Partnership may directly or
indirectly acquire in the future that it will not charge rent that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a fixed percentage of receipts or sales, as described above).
Another requirement for rent payments under a Lease to constitute "rents
from real property" is that the rent attributable to personal property under the
Lease must not be greater than 15% of the rent received under the Lease. For
this purpose, rent attributable to personal property is the amount that bears
the same ratio to the total rent for the taxable year as the average of the
adjusted basis of the personal property at the beginning and at the end of the
taxable year bears to the average of the aggregate adjusted basis of both the
real property and personal property leased under, or in connection with, such
lease. The Trust believes that under each of the Leases less than 15% of the
total rent is attributable to personal property and, as a result, no portion of
such rent will be treated as being for rental of personal property for purposes
of the 75% and 95% gross income tests. If the IRS were to successfully assert
that with respect to one or more of the Leases rent attributable to personal
property is greater than 15% of the total rent, then it is possible that the
Trust would not be able to satisfy either the 75% or 95% gross income tests and,
as a result, would lose its REIT status. With respect to both the Leases and
future acquisitions, the Trust has represented that it will monitor the 15% test
to ensure continued qualification as a REIT.
A third requirement for qualification of rent under the Leases as "rents
from real property" is that the Trust must not own, directly or constructively,
10% or more of the Operating Partnership or any Operating Subsidiary Entity (or
any other tenant under a Lease). If the Trust were to own directly or
indirectly, 10% or more of the Operating Partnership or any Operating Subsidiary
Entity (or such tenant), the rent paid by the tenant with respect to the leased
property would not qualify as income of the type that can be received by a REIT.
In order to prevent such a situation, which would likely result in the
disqualification of the Trust as a REIT, the Declaration of Trust and the
Articles of Incorporation contain restrictions on the amount of Trust Shares and
Corporation Shares that any one person can own. These restrictions generally
provide that any attempt by any one person to actually or constructively acquire
8.0% or more of the outstanding Paired Common Shares will be ineffective. See
"Description of Paired Common Shares -- Ownership Limits; Restrictions on
Transfer; Repurchase and Redemption of Shares." However, notwithstanding such
restrictions, because the Code's constructive ownership rules for purposes of
the 10% ownership limit are broad and it is not possible to continually monitor
direct and indirect ownership of Paired Common Shares, it is possible that some
person may at some time own sufficient Paired Common Shares to cause the
termination of the Trust's REIT status.
Finally, rent under the Leases will not qualify as "rents from real
property" if either the Trust, the Realty Partnership or any Subsidiary Entity
renders or furnishes Prohibited Services to the occupants of the properties. So
long as the Leases are treated as true leases, none of the Trust, the Realty
Partnership or any Subsidiary Entity should be treated as rendering or
furnishing Prohibited Services to the occupants of the properties.
Based on the foregoing, prior to the issuance of any of the Securities,
Sidley & Austin will render an opinion to the effect that the rent payable under
the Leases will be treated as "rents from real property" for purposes of the 75%
and 95% gross income tests. There can, however, be no assurance that the IRS
will not successfully assert a contrary position or that there will not be a
change in circumstances (such as the entering into of new leases) which would
result in a portion of the rent
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received to fail to qualify as "rents from real property." In such case, it is
possible that the Trust would not be able to satisfy either the 75% or 95% gross
income test and, as a result, would lose its REIT status.
For purposes of the gross income tests, the term "interest" generally does
not include any amount received or accrued (directly or indirectly) if the
determination of such amount depends in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not
be excluded from the term "interest" solely by reason of being based on a fixed
percentage or percentages of receipts or sales. The Realty Partnership and
certain of the Subsidiary Entities hold notes and may advance money from time to
time to tenants for the purpose of financing tenant improvements, making real
estate loans or holding or acquiring additional notes. None of the notes
currently held by the Realty Partnership or the Subsidiary Entities provide for
the payment of any amount based on the income or profits of any person other
than amounts based, on a fixed percentage or percentages of receipts or sales.
In addition, none of the Trust, the Realty Partnership or the Subsidiary
Entities intend to charge interest that will depend in whole or in part on the
income or profits of any person or to make loans (not secured in substantial
part by real estate mortgages) in amounts that could jeopardize the Trust's
compliance with the 75% and 5% asset tests, discussed below. To the extent the
notes held by the Realty Partnership or the Subsidiary Entities are secured by
real property, the interest received or accrued with respect to such notes
should be treated as qualifying income for both the 75% and the 95% gross income
tests. Certain of the notes held by the Realty Partnership are not secured by
real property. Interest received or accrued with respect to such notes should be
treated as qualifying income for the 95% gross income test but should not be
treated as qualifying income for the 75% gross income tax. However, the Company
believes that the amount of such interest will not cause the Trust to fail to
satisfy the 75% gross income test.
Any gross income derived from a prohibited transaction is taken into account
in applying the 30% income test necessary to qualify as a REIT, and the net
income from that transaction is subject to a 100% tax. The Trust believes that
no asset directly or indirectly owned by it is held for sale to customers and
that sale of any such property will not be in the ordinary course of business of
the Trust, the Realty Partnership or any Subsidiary Entity.
If the Trust fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. It is not
possible to state whether in all circumstances the Trust would be entitled to
the benefit of these relief provisions. Even if these relief provisions apply, a
tax would be imposed with respect to the excess net income. No similar
mitigation provision applies if the Trust fails the 30% income test. In such
case, the Trust will cease to qualify as a REIT.
ASSET TESTS. In order to maintain qualification as a REIT, the Trust, at
the close of each quarter of its taxable year, must also satisfy three tests
relating to the nature of its assets. First, at least 75% of the value of the
Trust's total assets must be represented by "real estate assets" (including
stock or debt instruments held for not more than one year purchased with the
proceeds of a stock offering or long-term (at least five years) debt offering of
the Trust), cash, cash items and government securities. Second, not more than
25% of the Trust's total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by the Trust may not
exceed 5% of the value of the Trust's total assets, and the Trust may not own
more than 10% of any one issuer's outstanding voting securities.
The Trust believes that commencing with its taxable year ended December 31,
1995 it has complied with the asset tests. Substantially all of the Trust's
investments are in properties owned by the Realty Partnership and the Subsidiary
Entities, at least 75% of which represent qualifying real estate assets. A
substantial portion of the indebtedness of the Operating Partnership to the
Realty Partnership may not be qualifying assets under the 75% asset test.
However, such portion does not exceed 5% of the value of the assets of the
Realty Partnership and, thus, will not cause the Trust to fail the 5% asset
test.
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After initially meeting the asset tests at the close of any quarter, the
Trust will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of securities
or other property during a quarter, the failure can be cured by disposition of
sufficient non-qualifying assets within 30 days after the close of that quarter.
The Trust intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take such actions within 30 days
after the close of any quarter as may be required to cure any non-compliance.
ANNUAL DISTRIBUTION REQUIREMENTS. The Trust, in order to qualify as a REIT,
is required to distribute dividends (other than capital gain dividends) to its
shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Trust's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Trust's net capital gain) and (b) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. In addition, if the Trust directly or indirectly disposes of
any Built-in Gain Asset during its Recognition Period, the Trust will be
required, pursuant to IRS regulations that have not yet been promulgated, to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized on
the disposition of such asset. Distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the Trust
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the Trust
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax thereon at regular ordinary and capital gain corporate tax rates.
Furthermore, if the Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year, and (iii) any undistributed taxable
income from prior periods, the Trust will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements and to the extent practical, avoid payment of
material amounts of federal income or excise tax by the Trust. It is possible,
however, that the Trust, from time to time may not have sufficient cash or other
liquid assets to meet the distribution requirements described above. In order to
meet the distribution requirements in such cases, the Trust, the Realty
Partnership or a Subsidiary Entity may find it necessary to arrange for
short-term or possible long-term borrowings or to pay dividends in the form of
taxable stock dividends.
Under certain circumstances, the Trust may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to shareholders in a later year, which may be included in the Trust's deduction
for dividends paid for the earlier year. Thus, the Trust may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Trust
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
FAILURE TO QUALIFY
If the Trust fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Trust will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which the
Trust fails to qualify will not be deductible by the Trust nor will they be
required to be made. As a result, the Trust's failure to qualify as a REIT could
reduce the cash available for distribution by the Trust to its shareholders. In
addition, if the Trust fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income to the extent of the Trust's
current and accumulated earnings and profits, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific statutory
provisions, the Trust will also be disqualified from taxation as a REIT for the
four taxable years following the year during which qualification was lost. It is
not possible to state whether in all circumstances the Trust would be entitled
to such statutory relief.
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FEDERAL INCOME TAXATION OF THE CORPORATION
The Corporation is the common parent of an affiliated group of corporations
filing a consolidated return (the "Corporation Group"). After obtaining certain
necessary licenses and regulatory approvals of certain gaming authorities,
substantially all of the Corporation Group's taxable income will consist of its
distributive share of the Operating Partnership's taxable income. The
Corporation Group will be subject to federal income tax on its taxable income.
FEDERAL INCOME TAXATION OF HOLDERS OF PAIRED COMMON SHARES
FEDERAL INCOME TAXATION OF TAXABLE U.S. HOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Paired Common
Shares who is: (i) a citizen or resident of the United States; (ii) a
corporation, partnership, or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof; or (iii) an
estate or trust the income of which is subject to U.S. federal income taxation
regardless of its source. As long as the Trust qualifies as a REIT,
distributions made to the Trust's U.S. Shareholders up to the amount of the
Trust's current or accumulated earnings and profits (and not designated as
capital gain dividends) will be taken into account by them as ordinary income
and will not be eligible for the dividends-received deduction for corporations.
Distributions that are properly designated by the Trust as capital gain
dividends will be taxed as long-term capital gain (to the extent they do not
exceed the Trust's actual net capital gain for the taxable year) without regard
to the period for which the holder has held its stock. However, corporate
holders may be required to treat up to 20% of certain capital gain dividends as
ordinary income, and capital gains dividends are not eligible for the
dividends-received deduction. Distributions in excess of the Trust's current and
accumulated earnings and profits will not be taxable to a holder to the extent
that they do not exceed the adjusted basis of the holder's Trust Shares, but
rather will reduce the adjusted basis of such Trust Shares. To the extent that
such distributions exceed the adjusted basis of a holder's Trust Shares they
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less). In addition, any dividend
declared by the Trust in October, November or December of any year payable to a
holder of record on a specified date in any such month shall be treated as both
paid by the Trust and received by the holder on December 31 of such year,
provided that the dividend is actually paid by the Trust during January of the
following calendar year.
The Trust will be treated as having sufficient earnings and profits to treat
as a dividend any distribution by the Trust up to the amount required to be
distributed in order to avoid imposition of the 4% excise tax discussed above.
As a result, holders may be required to treat certain distributions that would
otherwise result in a tax-free return of capital as taxable distributions.
Moreover, any "deficiency dividend" will be treated as a "dividend" (either as
ordinary or capital gain dividend, as the case may be), regardless of the
Trust's earnings and profits.
Distributions from the Trust and gain from the disposition of the Trust
Shares will not be treated as passive activity income and, therefore,
shareholders will not be able to apply any "passive losses" against such income.
Dividends from the Trust (to the extent they do not constitute a return of
capital) will generally be treated as investment income for purposes of the
investment interest expense limitation. Gain from the disposition of shares and
capital gains dividends will not be treated as investment income unless the
holders elect to have the gain taxed at ordinary income rates.
Distributions from the Corporation up to the amount of the Corporation's
current or accumulated earnings and profits will be taken into account by U.S.
Shareholders as ordinary income and will be eligible for the dividends-received
deduction for corporations. Distributions in excess of the Corporation's current
and accumulated earnings and profits will not be taxable to a holder to the
extent that they do not exceed the adjusted basis of the holder's Corporation
Shares, but rather will reduce the adjusted basis of such Corporation Shares. To
the extent that such distributions exceed the adjusted basis of a holder's
Corporation Shares they will be included in income as long-term capital gain (or
short-term capital gain if the stock has been held for one year or less).
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In general, a U.S. Shareholder will realize capital gain or loss on the
disposition of Paired Common Shares equal to the difference between the amount
realized on such disposition and the holder's adjusted basis in such Paired
Common Shares. Such gain or loss will generally constitute long-term capital
gain or loss if the holder held such Paired Common Shares for more than one
year. However, any loss upon a sale or exchange of Trust Shares by a holder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from the Trust required to be treated by such holder as long-term
capital gain.
U.S. Shareholders may not include in their individual income tax returns any
net operating losses or capital losses of the Trust or the Corporation.
FEDERAL TAXATION OF TAX-EXEMPT HOLDERS OF PAIRED COMMON SHARES
The IRS has ruled that amounts distributed as dividends by a REIT to a
tax-exempt employee's pension trust do not constitute unrelated business taxable
income ("UBTI"). Based on this ruling and the analysis therein, distributions by
the Trust should not, subject to certain exceptions described below, be UBTI to
a qualified plan, IRA or other tax-exempt entity (a "Tax-Exempt Shareholder")
provided the Tax-Exempt Shareholder has not held its shares as "debt financed
property" within the meaning of the Code and the shares are not otherwise used
in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Trust Shares should not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Shareholder has held such
Trust Shares as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt-financed property" within the meaning of Section 514 of the Code. Revenue
rulings are interpretive in nature and subject to revocation or modification by
the IRS.
For Tax-Exempt Shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans, exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code respectively, income from an
investment in the Trust will constitute UBTI unless the organization is able to
deduct properly amounts set aside or placed in reserve for certain purposes so
as to offset the income generated by its investment in the Trust. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall (subject to a de minimis exception) be treated as UBTI
as to any trust that (i) is described in Section 401(a) of the Code, (ii) is
tax-exempt under Section 501(a) of the Code, and (iii) holds more than 10% (by
value) of the interests in the REIT. Due to the Ownership Limitation, the Trust
does not expect to be a "pension held REIT" within the meaning of the Code.
FEDERAL TAXATION OF NON-U.S. HOLDERS OF PAIRED COMMON SHARES
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
non-resident alien individuals, foreign corporations, foreign partnerships, or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Shareholder in light of its particular
circumstances. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the effect of federal, state, local, and foreign
income tax laws with regard to an investment in Paired Common Shares, including
any reporting requirements.
In general, a Non-U.S. Shareholder will be subject to regular United States
income tax with respect to its investment in Paired Common Shares if such
investment is "effectively connected" with the Non-U.S. Shareholder's conduct of
a trade or business in the United States. A corporate Non-U.S. Shareholder that
receives income that is (or is treated as) effectively connected with a United
States
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trade or business may also be subject to the branch profits tax under Section
884 of the Code, which is payable in addition to regular United States corporate
income tax. The following discussion will apply to Non-U.S. Shareholders whose
investment in Paired Common Shares is not so effectively connected.
DISTRIBUTIONS. Distributions by the Trust to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Trust of United
States real property interests nor designated by the Trust as capital gains
dividends and distributions by the Corporation will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Trust or the Corporation, as the case may be. Such
distributions ordinarily will be subject to United States withholding tax on a
gross basis at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Distributions in excess of current or accumulated
earnings and profits of the Trust or the Corporation, as the case may be, will
not be taxable to a Non-U.S. Shareholder to the extent that they do not exceed
the adjusted basis of the Non-U.S. Shareholder's Trust Shares or Corporation
Shares, as the case may be, but rather will reduce the adjusted basis of such
shares. To the extent that such distributions exceed the adjusted basis of a
Non-U.S. Shareholder's Trust Shares or Corporation Shares, as the case may be,
they will give rise to gain from the sale or exchange of Non-U.S. Shareholder's
Paired Common Shares if the Non-U.S. Shareholder otherwise would be subject to
tax on any gain from the sale or other disposition of Paired Common Shares, as
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current or accumulated
earnings and profits, the distribution will generally be treated as a dividend
for withholding purposes. However, amounts thus withheld are generally
refundable if it is subsequently determined that such distribution was, in fact,
in excess of current or accumulated earnings and profits of the Trust or the
Corporation, as the case may be. The Trust and the Corporation expect to
withhold United States income tax at the rate of 30% on the gross amount of any
such distributions made to a Non-U.S. Shareholder unless (i) a lower rate is
provided for under an applicable tax treaty and the shareholder files the
required form evidencing eligibility for that reduced rate with the Trust and
the Corporation, or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with
the Trust and the Corporation claiming that the distribution is "effectively
connected" income.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Trust of United States real property interests will
cause the Non-U.S. Shareholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Shareholders would thus generally be taxed at the same rates applicable to U.S.
Shareholders (subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien individuals). Also,
such gain may be subject to a 30% branch profits tax in the hands of a Non-U.S.
Shareholder that is a corporation, that is not entitled to an exemption under a
tax treaty. The Trust is required to withhold and remit to the IRS 35% of any
distribution that could be designated a capital gains dividend. That amount is
creditable against the Non-U.S. Shareholder's United States federal income tax
liability.
SALE OF PAIRED COMMON SHARES. Gain recognized by a Non-U.S. Shareholder
upon a sale or other disposition of Paired Common Shares generally will not be
subject to United States federal income tax, if (i) in the case of Trust Shares,
the Trust is a "domestically controlled REIT" or (ii) (A) the Paired Common
Shares are regularly traded on an established securities market (e.g., the NYSE,
where the Paired Common Shares are currently traded) and (B) the Selling
Non-U.S. Shareholder held 5% or less of the outstanding Paired Common Shares at
all times during specified period, unless, in the case of a Non-U.S. Shareholder
who is a non-resident alien individual, such individual is present in the United
States for 183 days or more and certain other conditions apply. A domestically
controlled REIT is defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. The Trust believes that it qualifies as a
domestically controlled REIT.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or on cash
proceeds of a sale or exchange of, Paired Common Shares. Backup withholding will
apply only if the holder: (i) fails to furnish its taxpayer identification
number ("TIN") (which, for an individual, would be his or her Social Security
number); (ii) furnishes an incorrect TIN; (iii) is notified by the IRS that the
holder has failed to report properly payments of interest and dividends; or (iv)
under certain circumstances, fails to certify, under penalty of perjury, that
the holder has furnished a correct TIN and has not been notified by the IRS that
the holder is subject to backup withholding for failure to report interest and
dividend payments. Backup withholding will not apply with respect to payments
made to certain exempt recipients, such as corporations and tax-exempt
organizations. In addition, the Trust and the Corporation may be required to
withhold a portion of capital gain distributions made to any holders who fail to
certify their non-foreign status. Additional issues may arise pertaining to
information reporting and withholding with respect to Non-U.S. Shareholders and
each Non-U.S. Shareholder should consult his or her tax advisor with respect to
any such information reporting and withholding requirements.
FEDERAL INCOME TAX ASPECTS OF THE PARTNERSHIPS AND THE SUBSIDIARY ENTITIES
Substantially all of the Trust's assets are held directly or indirectly
through the Realty Partnership and, after obtaining certain necessary licenses
and regulatory approvals of certain gaming authorities, substantially all of the
Corporation's (and its subsidiaries') assets will be held directly or indirectly
through the Operating Partnership.
The Realty Partnership, the Operating Partnership, the Subsidiary Entities
and the Operating Subsidiary Entities involve special tax considerations,
including the possibility of a challenge by the IRS of the status of any of such
partnerships or limited liability companies as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. If any of
such partnerships or limited liability companies were to be treated as an
association, it would be taxable as a corporation and, therefore, subject to an
entity level tax on its income. Such an entity level tax is likely to
substantially reduce the amount of cash available for distribution to holders of
Paired Common Shares. See "-- Federal Income Taxation of the Corporation" above.
In addition, if the Realty Partnership or any Subsidiary Entity were to be
taxable as a corporation, the Trust would not qualify as a REIT. Furthermore,
any change in the status of a partnership or limited liability company for tax
purposes might be treated as a taxable event in which case the Trust or the
Corporation might incur a tax liability without any related cash distributions.
The Company has not requested and does not intend to request, a ruling from
the IRS regarding treatment of any partnership or limited liability company in
which it owns an interest as a partnership for federal income tax purposes.
Instead, prior to the issuance of any of the Securities, Sidley & Austin will
render an opinion to the effect that, based on certain factual assumptions and
representations, each of the Realty Partnership, the Operating Partnership, the
Subsidiary Entities and the Operating Subsidiary Entities will be classified as
a partnership for federal income tax purposes. Unlike a private letter ruling,
an opinion of counsel is not binding on the IRS, and no assurance can be given
that the IRS will not challenge the status of a partnership or limited liability
company as a partnership for federal income tax purposes. If such a challenge
were sustained by a court, the subject partnership or limited liability company
would be treated as an association taxable as a corporation for federal income
tax purposes. In addition, the opinion of Sidley & Austin will be based on
existing law. No assurance can be given that administrative or judicial changes
would not modify the conclusions expressed in the opinion.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
Pursuant to Section 704(c) of the Code, income, gain, loss and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the
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time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The Realty Partnership and the Operating Partnership have been formed
by way of contributions of the Company's property and certain property held by
Starwood Capital. Consequently, allocations with respect to such contributed
property must be made in a manner consistent with Section 704(c) of the Code.
The Treasury Regulations under Section 704(c) of the Code allow partnerships
to use any reasonable method of accounting for Book-Tax Differences so that the
contributing partner receives the tax benefits and burdens of any built-in gain
or loss associated with the contributed property. However, the special
allocation rules of Section 704(c) of the Code do not always entirely eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands of the Realty Partnership or the Operating Partnership may cause
the Trust or the Corporation, as the case may be, to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or book
income allocated to it as a result of such sale. This may cause the Trust or the
Corporation to recognize taxable income in excess of cash proceeds, which, in
the case of the Trust, might adversely affect the Trust's ability to comply with
the REIT distribution requirements. See "-- Federal Income Taxation of the Trust
- -- Requirements For Qualification -- Annual Distribution Requirements." The
foregoing principles also apply in determining the earnings and profits of the
Trust and the Corporation for purposes of determining the portion of
distributions taxable as dividend income. See "-- Federal Income Taxation of
Holders of Paired Common Shares." The application of these rules over time may
result in a higher portion of distributions being taxed as dividends than would
have occurred had the Trust and the Corporation contributed assets with an
adjusted tax basis equal to their fair market values.
PARTNERSHIP ANTI-ABUSE RULE
The IRS has published regulations that provide an anti-abuse rule (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions"). Under the Anti-Abuse Rule, if a partnership is formed
or availed of in connection with a transaction a principal purpose of which is
to reduce substantially the present value of the partners' aggregate federal tax
liability in a manner that is inconsistent with the intent of the Partnership
Provisions, the IRS can recast the transaction for federal tax purposes to
achieve tax results that are consistent with the intent of the Partnership
Provisions. This analysis is to be made based on all facts and circumstances.
The Anti-Abuse Rule states that the intent of the Partnership Provisions
incorporates the following requirements: (i) the partnership must be bona fide
and each partnership transaction or series of related transactions must be
entered into for a substantial business purpose; (ii) the form of each
partnership transaction must be respected under substance over form principles;
and (iii) with certain exceptions, the tax consequences under the Partnership
Provisions to each partner of partnership operations and the transactions
between the partner and the partnership must accurately reflect the partner's
economic agreement and clearly reflect the partner's income.
Prior to the issuance of any of the Securities, Sidley & Austin will render
an opinion to the effect that the Company's structure is not inconsistent with
the intent of the Partnership Provisions and that, therefore, the IRS should not
be able to invoke the Anti-Abuse Rule to recast the structure of the Company for
federal income tax purposes. This opinion will be based on examples contained in
the Anti-Abuse Rule. However, no assurance can be given that the IRS or a court
will concur with such opinion.
The Anti-Abuse Rule also provides that, unless a provision of the Code or
the Treasury Regulations prescribes the treatment of a partnership as an entity,
in whole or in part, and that treatment and the ultimate tax results, taking
into account all the relevant facts and circumstances, are clearly
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contemplated by that provision, the IRS can treat a partnership as an aggregate
of its partners, in whole or in part, as appropriate to carry out the purpose of
any provision of the Code or the Treasury Regulations. Treatment of either
Partnership or any of the Subsidiary Entities, in whole or in part, as an
aggregate rather than an entity is unlikely to materially change the federal tax
consequences to any partner. In addition, the REIT Provisions generally treat a
partnership as an aggregate rather than an entity for purposes of applying the
REIT Requirements. Therefore, the Anti-Abuse Rule should not have a material
adverse effect on the federal income tax consequences to any partner or on the
ability of the Trust to qualify as a REIT.
OTHER TAX CONSEQUENCES
The Company and the holders of Securities may be subject to state or local
taxation in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Trust, the
Corporation and the holders of Securities may not conform to the federal income
tax consequences discussed above. CONSEQUENTLY, HOLDERS OF SECURITIES SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS
ON THE PURCHASE, OWNERSHIP AND SALE OF SECURITIES.
PLAN OF DISTRIBUTION
The Trust and the Corporation may sell Securities to or through
underwriters, and also may sell Securities directly to either purchasers or
through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Securities, underwriters may receive
compensation from the Trust, the Corporation, or from purchasers of Securities,
for whom they may act as agents, in the form of discounts, concessions, or
commissions. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions, or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers, and agents that participate
in the distribution of Securities may be deemed to be underwriters, and any
discounts or commissions they receive from the Trust or the Corporation and any
profit on the resale of Securities they realize may be deemed to be underwriting
discounts and commissions under the Securities Act. Any such underwriter or
agent will be identified, and any such compensation received from the Trust or
the Corporation will be described, in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, each series
of Securities will be a new issue with no established trading market, other than
the Paired Common Shares which are listed on the NYSE. Any Paired Common Shares
sold pursuant to a Prospectus Supplement will be listed on such exchange. The
Trust or the Corporation may elect to list any series of Debt Securities or
Preferred Shares on an exchange, but is not obligated to do so. It is possible
that one or more underwriters may make a market in a series of Securities, but
will not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of the
trading market for any of the Securities.
Under agreements the Trust and the Corporation may enter into, underwriters,
dealers, and agents who participate in the distribution of Securities may be
entitled to indemnification by the Trust or the Corporation against certain
liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, or be customers of, the Trust or the Corporation in the ordinary
course of business.
If so indicated in the applicable Prospectus Supplement, the Trust or the
Corporation, as the case may be, will authorize underwriters or other persons
acting as the Trust's or the Corporation's agents
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to solicit offers by certain institutions to purchase Securities from the Trust
or the Corporation pursuant to contracts providing for payment and delivery at a
future date. Institutions with which such contracts may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all cases
such institutions must be approved by the Trust or the Corporation, as the case
may be. The obligations of any purchaser under any such contract will be subject
to the condition that the purchase of the Securities shall not at the time of
delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
LEGAL MATTERS
Sidley & Austin, Chicago, Illinois, has passed upon the validity of the
issuance of the Securities offered pursuant to this Prospectus. Lawyers at
Sidley & Austin own or hold options to purchase an aggregate of approximately
18,000 Paired Common Shares. Rogers & Wells, New York, New York will act as
counsel to any underwriters, dealers or agents. Rogers & Wells acted as counsel
to Starwood Capital in connection with the Reorganization. Sidley & Austin and
Rogers & Wells will rely upon the opinion of Piper & Marbury L.L.P., Baltimore,
Maryland, as to certain matters of Maryland law.
EXPERTS
The separate and combined financial statements and financial statement
schedules of Starwood Lodging Trust and Starwood Lodging Corporation as of
December 31, 1995 and for the year then ended, appearing in the Company's Annual
Report on Form 10-K for the year December 31, 1995, and the financial statements
of the Terrace Gardens and Lenox Inn for the year ended December 31, 1995,
appearing in the Company's Current Report on Form 8-K, dated January 4, 1996,
incorporated by reference in this Prospectus, have been audited by Coopers &
Lybrand L.L.P., independent auditors, as stated in their reports also
incorporated by reference herein. Such financial statements and financial
statement schedules have been incorporated by reference herein in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The separate and combined financial statements and financial statement
schedules of Starwood Lodging Trust and Starwood Lodging Corporation as of
December 31, 1994 and for each of the two years in the period ended December 31,
1994 incorporated by reference in this Prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports also incorporated
by reference herein. Such financial statements and financial statement schedules
have been incorporated by reference herein in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
REGISTERED SECURITIES OF THE COMPANY OFFERED BY THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES BY ANYONE IN ANY JURISDICTION WHERE SUCH AN OFFER
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary........................ S-3
Risk Factors......................................... S-9
The Company.......................................... S-14
Developments Since the 1995 Offering................. S-18
Use of Proceeds...................................... S-23
Price Ranges of Paired Common Shares and Distribution
History............................................. S-24
Capitalization....................................... S-25
Selected Combined Financial Data..................... S-26
Indebtedness of the Company.......................... S-29
Business and Properties.............................. S-30
Management........................................... S-36
Underwriting......................................... S-41
Index to Pro Forma Financial Statements and Notes.... F-1
PROSPECTUS
Available Information................................ 2
Incorporation of Certain Documents by Reference...... 2
The Company.......................................... 4
Use of Proceeds...................................... 4
Ratios of Earnings to Fixed Charges.................. 5
Description of Debt Securities....................... 5
Description of Capital Stock......................... 17
Description of Preferred Shares...................... 18
Description of Paired Common Shares.................. 24
Description of Warrants.............................. 28
Federal Income Tax Considerations.................... 29
Plan of Distribution................................. 43
Legal Matters........................................ 44
Experts.............................................. 44
</TABLE>
10,000,000 PAIRED
COMMON SHARES
[LOGO]
STARWOOD LODGING
TRUST
STARWOOD LODGING
CORPORATION
PAIRED COMMON SHARES
-------------------
PROSPECTUS SUPPLEMENT
-------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
BEAR, STEARNS & CO. INC.
FURMAN SELZ
GOLDMAN, SACHS & CO.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
AUGUST 6, 1996
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