UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION PERIOD PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-16991
HOTEL PROPERTIES L.P.
Exact name of registrant as specified in its charter
Delaware
State or other jurisdiction of 13-3430078
incorporation or organization I.R.S. Employer Identification No.
ATTN: Andre Anderson
3 World Financial Center, 29th Floor,
New York, New York 10285
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
DEPOSITARY UNITS OF LIMITED PARTNERSHIP INTEREST
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (x)
Documents Incorporated by Reference:
Portions of Parts I, II, III and IV are incorporated by reference to the
Partnership's Annual Report to Unitholders for the year ended December 31,
1997, filed as an exhibit under Item 14.
PART I
Item 1. Business
(a) General Development of Business.
Hotel Properties L.P. (the "Partnership" or the "Registrant"), formerly
EQ/Shearson Hotel Properties L.P. (see Item 10. "Certain Matters Involving
Affiliates of EHP/GP Inc."), is a Delaware limited partnership formed on
September 24, 1987 for the purpose of acquiring four hotel properties: the
Los Angeles Airport Marriott Hotel, the St. Louis Airport Marriott Hotel,
the Nashville Airport Marriott Hotel and Marriott's Tan-Tar-A Resort Hotel
(collectively, the "Properties" or "Hotels"). The Partnership purchased
the Properties on June 3, 1988 from The Equitable Life Assurance Society of
the United States ("Equitable") for a total cost of $104,238,200. Each
Property is subject to a separate operating lease with Marriott Hotel
Services, Inc. (the "Hotel Manager"), a wholly-owned subsidiary of Marriott
International Inc. EHP/GP Inc., formerly Shearson EHP/GP Inc. (See Item
10. "Certain Matters Involving Affiliates of EHP/GP Inc."), a Delaware
corporation, is the general partner of the Partnership (the "General
Partner") and is an affiliate of Lehman Brothers Inc. ("Lehman"), formerly
Shearson Lehman Brothers Inc. (See Item 10. "Certain Matters Involving
Affiliates of EHP/GP Inc."). E.H.P. Depositary Corp. (the "Depositary") is
the sole limited partner of the Partnership.
Additional information relating to the Partnership's general development of
business is incorporated by reference to Note 1 "Organization" of the Notes
to the Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997, filed as an exhibit under
Item 14. Additional information relating to the current status of the
Partnership is incorporated by reference to Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated herein.
(b) Financial Information about Industry Segments - The Partnership's
sole business is the ownership of the Properties. All of the
Partnership's revenues relate solely to one industry segment.
(c) Narrative Description of Business. - Incorporated by reference to Note
1 "Organization," Note 2 "Significant Accounting Policies" and Note 3
"Real Estate" of the Notes to the Financial Statements contained in the
Partnership's Annual Report to Unitholders for the year ended
December 31, 1997, filed as an exhibit under Item 14.
Employees - The Partnership has no employees. The affairs of the
Partnership are conducted by the General Partner.
Competition - Incorporated by reference to the section entitled Property
Update in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1997, filed as an exhibit under Item 14.
Item 2. Properties
A description of the Properties is incorporated by reference to the
Property Update section and Note 3 "Real Estate" of the Notes to the
Financial Statements contained in the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997, filed as an exhibit under
Item 14, and in Schedule III contained herein.
The Properties are subject to mortgage financing in the original principal
amount of $80,438,000. On June 28, 1995, the Partnership refinanced and
amended the $80,438,000 in mortgage loans and $2,531,417 revolving credit
loans payable. Details of the refinancing are incorporated by reference to
Note 4 "Mortgage Loans Payable" of the Notes to the Financial Statements
contained in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1997, filed as an exhibit under Item 14.
On June 28, 1995, the Partnership terminated its June 3, 1988 Asset
Management Agreement with Equitable Real Estate Investment Management, Inc.
("EREIM"). Details of the termination are incorporated by reference to
Note 8 "Asset Management Agreement" of the Notes to the Financial
Statements contained in the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997, filed as a exhibit under Item 14.
Item 3. Legal Proceedings
There are no pending material legal proceedings to which the Partnership is
a party or to which any of its assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the holders of Units (the "Unitholders")
for a vote during the fourth quarter of the Partnership's past fiscal year.
PART II
Item 5. Market for the Partnership's Limited Partnership Interests and
Related Stockholder Matters
(a) Market Information - There is no established trading market for the Units.
(b) Number of Unitholders - The number of Unitholders as of December 31, 1997
was 2,276.
(c) Dividends - No distributions of Net Cash Flow (as defined in the
Partnership Agreement) to Unitholders were paid by the Partnership during
the year ended December 31, 1996. A cash distribution in the amount of
$0.40 per Unit was paid on February 14, 1997 from the Partnership's
operations during the prior year. The distribution was paid to Unitholders
of record as of each month-end in 1996. It represented a one-time
distribution of 1996 annual cash flow and did not indicate the
reinstatement of regular cash distributions. Given the anticipated sale of
the Hotels (as discussed in detail in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained
herein), any future payments to limited partners will be in the form of one
or more distributions following the sale of the Hotels.
Item 6. Selected Financial Data
Incorporated by reference to the section entitled "Financial Highlights" in
the Partnership's Annual Report to Unitholders for the year ended
December 31, 1997, filed as an exhibit under Item 14.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
On June 28, 1995, the Partnership refinanced and amended its $80,438,000
mortgage loans payable and the $2,531,417 revolving credit loans payable
(collectively, the "Loan") with The Equitable Life Assurance Society of the
United States ("Equitable"), and terminated its Asset Management Agreement
with Equitable Real Estate Investment Management, Inc. ("EREIM"). The Loan
was consolidated into a new mortgage loan with Equitable totaling
$82,469,417 (the "New Mortgage"). The New Mortgage is collateralized by
four separate deeds of trust with respect to the Hotels and has a term of
five years.
As a condition of the New Mortgage, the Partnership entered into an escrow
agreement with Equitable requiring the Partnership to provide additional
collateral for the New Mortgage (the "Loan Reserve"). As of
December 31, 1997, the Loan Reserve balance was maintained at $2.5 million,
and there were no defaults on the New Mortgage. The Loan Reserve may be
used by the Partnership to meet Marriott Hotel Services, Inc.'s ("Marriott"
or the "Hotel Manager") request for additional funds for furniture,
fixtures and equipment ("FF&E") or building additions or expansions in
excess of those available in the Hotels' reserve accounts. In each case,
Marriott is obligated to contribute a portion of such funds.
After considering a number of factors, including the recently improved
operating performance of the Hotels, the improving hospitality industry
nationwide and the significantly strengthened market for the acquisition of
full-service hotel properties, the General Partner decided during the
second quarter of 1997 to begin marketing the Hotels for sale. In
July 1997, the Partnership retained Eastdil Realty Company ("Eastdil"), a
nationally-recognized real estate firm, to assist with the marketing
efforts. Eastdil completed the preparation of marketing brochures during
the third quarter of 1997, and commenced the active marketing of the Hotels
in the fourth quarter. The Hotel operating leases give Marriott the right
of first refusal in the event the Partnership receives an offer to purchase
the Hotels and desires to accept such offer. Pursuant to the terms of the
Hotel operating leases, the Partnership must give notice of such offer to
Marriott, and Marriott may elect to purchase the Hotels at the same price
and under the same conditions. The goal is to maximize the selling price
of the Hotels and distribute the net sales proceeds to partners in
accordance with the terms of the Partnership Agreement.
On January 9, 1998, the Partnership entered into a non-binding letter of
intent with a major independent hotel buyer, pursuant to which the parties
agreed to negotiate in good faith an agreement to purchase the Hotels for a
cash purchase price of approximately $114 million (the "Offer"), subject to
Marriott's right of first refusal. On that same day, the General Partner
notified Marriott of the Offer, and by letter dated February 5, 1998,
Marriott notified the General Partner that it would exercise its right of
first refusal to purchase the Hotels at the same price and under the same
terms and conditions as those set forth in the Offer (the "Proposed Sale").
The Partnership and Marriott are negotiating a formal Purchase and Sale
Contract (the "Contract") which is expected to be executed in March 1998.
The Proposed Sale is subject to the satisfaction of certain conditions,
including the Partnership obtaining the approval of a majority in interest
of the outstanding Unitholders. Should the Proposed Sale be approved, it
is currently anticipated that the closing will occur during the second or
third quarter of 1998. If the closing occurs after June 2, 1998, the
Partnership will incur a prepayment penalty on its Loan with Equitable,
currently estimated at $700,000. Upon completion of the Proposed Sale,
distributions will be made to Limited Partners in accordance with the
Partnership Agreement. If the Proposed Sale occurs, the General Partner
currently estimates that proceeds available for distribution may exceed
$10.00 per Unit. The amount will be dependent on operations of the Hotels
and the Partnership until closing, the timing of the closing and other
factors, all of which are uncertain at this time. While it is expected
that the Hotels will be sold during 1998, there can be no assurance that
the Proposed Sale will be consummated, or that the Proposed Sale will
result in any particular level of distributable cash.
In view of the anticipated sale of the Hotels, the Partnership's real
estate has been recorded at cost, less accumulated depreciation and
amortization at December 31, 1997 on the Partnership's Balance Sheet as
"Real estate held for disposition." Real estate held for disposition at
December 31, 1997 was $101,883,177. Upon reclassification, depreciation
expense is no longer recorded.
The Partnership's cash balance is invested in an interest-bearing account
and is used as a working capital reserve for operating expenses, debt
service and Partnership liabilities. At December 31, 1997, the Partnership
had cash and cash equivalents of $3,334,906, compared to $3,590,188 at
December 31, 1996. The decrease is due to cash used for investing and
financing activities, primarily due to the distribution paid to limited
partners on February 14, 1997, the timing of debt service payments and
additions and replacements made at each of the Hotels.
A reserve account for each of the Hotels has been established to cover
certain costs of improvements, replacements, refurbishments and renewals,
as well as FF&E upgrades. For the Los Angeles, St. Louis and Tan-Tar-A
Hotels, the reserve is maintained on behalf of the Partnership at each
Hotel and is classified as "Replacement reserve receivable" on the
Partnership's balance sheet. Replacement reserve receivable decreased from
$3,426,722 at December 31, 1996 to $1,783,963 at December 31, 1997 due to
expenditures exceeding contributions to the reserve. For the Nashville
Hotel, the reserve is held by the Partnership and is classified as
"Restricted cash" on the Partnership's balance sheet. Restricted cash
decreased to $938,376 at December 31, 1997, compared to $1,297,810 at
December 31, 1996 as a result of expenditures exceeding contributions to
the reserve. Rent receivable decreased to $454,951 at December 31, 1997,
compared to $488,415 at December 31, 1996 due to the timing of receipt of
payments. Deferred charges - refinancing costs decreased to $813,626 at
December 31, 1997, compared to $1,139,076 at December 31, 1996, due to the
scheduled amortization of the New Mortgage. Accounts payable and accrued
expenses decreased to $72,916 at December 31, 1997, compared to $85,067 at
December 31, 1996 due to the timing of payments for legal and
administrative expenses. Due to affiliates increased to $40,000 at
December 31, 1997, compared to $1,000 at December 31, 1996, primarily due
to administrative reimbursement accruals due through December 31, 1997.
Such expenses were not reimbursable in prior periods.
On October 18, 1996, the Partnership entered into a loan agreement and
executed a promissory note in an amount up to $1,100,000 (the "Line of
Credit") with Marriott International Capital Corporation (the "Lender").
The purpose of such financing was to provide the Partnership with the
required capital to implement certain upgrades to furniture, fixtures and
equipment and to make certain non-structural repairs and renovations
(collectively, the "Renovations") at the St. Louis Hotel. The Lender will
fund to the Partnership from time-to-time amounts necessary (up to the
maximum amount of the Line of Credit) to complete the Renovations at the
St. Louis Hotel. The Line of Credit is unsecured and non-recourse to the
Partnership. During 1997, the Partnership borrowed $1,100,000 under the
Line of Credit and funded the replacement reserve to make the Renovations.
The Partnership has directed the Hotel Manager, the St. Louis Hotel's
tenant, to make payments on behalf of the Partnership solely from the St.
Louis Hotel's FF&E Replacement Reserve account in an amount equal to
$61,986 per period commencing with the second accounting period in fiscal
1997 until the maturity of the Line of Credit. The Line of Credit bears
interest at a rate of 9% per annum on all outstanding amounts and can be
prepaid by the Partnership without premium or penalty. The Hotel Manager
will fund all interest payments into the FF&E Replacement Reserve account
from the Hotel Manager's own funds prior to making any interest payments to
the Lender. Consequently, the payment from the tenant will offset the
interest as if this were an interest-free loan to the Partnership. The
Partnership made principal payments on the Line of Credit from the
replacement reserve totaling $679,727 during 1997, leaving a balance due of
$420,273 as of December 31, 1997.
At December 31, 1997, mortgage loans interest payable was $0, compared to
$601,796 at December 31, 1996. The decrease is due to a difference in the
timing of interest payments.
Prior to 1994, cash distributions were paid on a quarterly basis from net
cash flow provided by operating activities to Unitholders based on the
seasonal performance of the Hotels. The General Partner suspended the
payment of cash distributions in the fourth quarter of 1994. This action
was taken in order to increase Partnership cash reserves to provide for the
various costs of securing replacement financing related to the maturity of
the Partnership's outstanding indebtedness in June 1995. Distributions
remained suspended through 1996 in order for the Partnership to meet
certain requirements under the terms of the New Mortgage. Due to the
satisfaction of such requirements, and improved operations during 1996 at
both the Partnership and Hotel levels, a cash distribution in the amount of
$0.40 per Unit was paid to Limited Partners on February 14, 1997 from the
Partnership's operations during the prior year. The distribution was paid
to Limited Partners of record as of each month-end in 1996. This
represented a one-time distribution of 1996 annual cash flow and did not
indicate the reinstatement of regular cash distributions. The General
Partner expects to distribute the proceeds from the anticipated sale of the
Hotels to limited partners in accordance with the terms of the Partnership
Agreement.
Other than from a sale of the Hotels, the primary source of ongoing cash
and liquidity is from rental revenue under the operating leases and the
Partnership's cash reserves. The Partnership knows of no trends, demands,
commitments, events or uncertainties, other than the Partnership's cash
requirements pursuant to the terms of the New Mortgage, that will result in
or that are reasonably likely to result in the Partnership's liquidity
increasing or decreasing in any material way, other than the normal
seasonal fluctuation in hotel operations which, in turn, causes
fluctuations in rental income throughout the year.
Results of Operations
1997 versus 1996
The Partnership generated net income of $5,875,244 for the year ended
December 31, 1997, compared to net income of $1,922,133 for the year ended
December 31, 1996. The increase is due to an increase in total income and
a decrease in total expenses, primarily depreciation. After adding back
the non-cash items of depreciation and amortization and subtracting the
amount of rental income from the FF&E replacement escrow, the Partnership
had adjusted net operating income of $4,031,529 for the year ended
December 31, 1997, compared with $3,283,994 for the year ended
December 31, 1996, reflecting improved operational activity.
Total income for the year ended December 31, 1997 was $17,261,090, compared
with $16,324,943 for the year ended December 31, 1996. The increase is due
to higher rents from operating profit earned at the Hotels, higher rents
from replacement escrow, and higher interest and other income. Rent from
replacement escrow, which is calculated as a percentage of the Hotels'
gross revenues, was $5,694,279 for the year ended December 31, 1997,
compared with $5,557,759 for the year ended December 31, 1996. Interest
income totaled $439,230 for the year ended December 31, 1997, compared with
$416,202 for the year ended December 31, 1996. The increase is primarily
attributable to higher operating and restricted cash balances during the
1997 periods.
Total expenses for the year ended December 31, 1997 were $11,385,846,
compared with $14,402,810 for the year ended December 31, 1996. The
decrease is due primarily to lower interest expense and depreciation and
amortization expense, which were partially offset by higher general and
administrative expenses and professional fees. Interest expense decreased
to $7,137,238, compared with $7,288,757 for the year ended
December 31, 1996, due to the scheduled amortization of the New Mortgage.
Depreciation and amortization expenses for the year ended December 31, 1997
were $3,850,564, compared with $6,919,620 for the year ended
December 31, 1996. The decrease is due primarily to the Hotels no longer
being depreciated as a result of being classified as "Real estate held for
disposition" as of June 30, 1997. General and administrative expenses for
the year ended December 31, 1997 were $272,242, compared with $122,397 for
the year ended December 31, 1996. During the 1997 period, certain expenses
incurred by the General Partner, its affiliates, and an unaffiliated third
party service provider in servicing the Partnership, which were voluntarily
absorbed by affiliates of the General Partner in prior periods, were
reimbursable to the General Partner and its affiliates. To a lesser
extent, the increase is due to expenses relating to the sale of the Hotels.
Professional fees totaled $125,802 for the year ended December 31, 1997,
compared with $72,036 for the year ended December 31, 1996. The increase
is due primarily to higher expenses relating to engineering studies
performed at the Hotels during 1997 and higher legal accruals.
The following table summarizes the Hotels' performance for the period from
January 1 to December 31 of the indicated years:
1997 1996 % Change
Weighted Average Occupan 75.2% 79.6% (5.5)
Weighted Average Room Rate $96.65 $87.99 9.8
Total Hotel Sales $120,908,961 $118,131,587 2.4
Hotel Operating Profit 21,344,582 18,785,538 13.6
Rent Earned by the Partnership 11,127,581 10,350,982 7.5
1996 versus 1995
For the year ended December 31, 1996, net cash provided by operating
activities was $4,056,348, compared with $2,603,536 for the year ended
December 31, 1995. The increase is primarily due to the increase in net
income in 1996. The Partnership generated net income of $1,922,133 for the
year ended December 31, 1996, compared with net income of $274,859 for the
year ended December 31, 1995. The increase is due to an increase in rental
operating profit, replacement escrow and interest income, as well as a
decrease in total expenses. After adding back the non-cash items of
depreciation and amortization and subtracting the amount of rental income
from the FF&E replacement escrow, the Partnership had adjusted net
operating income of $3,283,994 for the year ended December 31, 1996,
compared with $2,052,968 for the year ended December 31, 1995.
Total income for the year ended December 31, 1996 was $16,324,943, compared
with $15,740,651 for the year ended December 31, 1995. The increase is due
to higher rents from operating profit earned at the St. Louis and Los
Angeles Hotels, higher rent from replacement escrow and, to a lesser
extent, higher interest income. Rent from replacement escrow, which is
calculated as a percentage of the Hotels' gross revenues, increased to
$5,557,759 for the year ended December 31, 1996, compared to $5,219,071 for
the year ended December 31, 1995. The increase is due to higher gross
revenues at the St. Louis and Los Angeles Hotels. Interest income totaled
$416,202 for the year ended December 31, 1996, compared to $365,855 for the
year ended December 31, 1995. The increase is primarily attributable to
higher loan reserve and restricted cash balances in 1996.
Total expenses for the year ended December 31, 1996 were $14,402,810,
compared to $15,465,792 for the year ended December 31, 1995. The decline
is due primarily to decreases in interest expense, depreciation and
amortization, general and administrative expenses, and asset management
fees, which were partially offset by an increase in professional fees.
Asset management fees were eliminated as a result of the termination of the
Asset Management Agreement upon refinancing. Interest expense decreased to
$7,288,757 for the year ended December 31, 1996, compared to $7,975,815 for
the year ended December 31, 1995. The decrease is due to the terms of the
New Mortgage which require principal amortization and a lower interest rate
than the original mortgage loan. The decrease also is due to the
consolidation of the previous revolving credit loans into the New Mortgage
and termination of interest accruals on the unpaid fees due under the Asset
Management Agreement. General and administrative expenses totaled $122,397
for the year ended December 31, 1996, compared with $148,466 for the year
ended December 31, 1995. The decrease is due primarily to the 1995 payment
of the Los Angeles Commercial Rent Tax, which was partially offset by
higher Partnership accounting and administrative expenses being recognized
in 1996. Professional fees totaled $72,036 for the year ended
December 31, 1996, compared to $55,803 for the year ended December 31, 1995.
The increase is due primarily to engineering consulting services associated
with the room renovations at the St. Louis Hotel.
The following table summarizes the Hotels' performance for the period from
January 1 to December 31 of the indicated years:
1996 1995 % Change
Weighted Average Occupancy 79.6% 76.7% 3.8
Weighted Average Room Rate $87.99 $85.19 3.3
Total Hotel Sales $118,131,587 $110,709,040 6.7
Hotel Operating Profit $18,785,538 $17,144,830 9.6
Rent Earned by the Partnership $10,350,982 $10,155,725 1.9
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Financial Information section of the
Partnership's Annual Report to Unitholders for the year ended December 31,
1997, filed as an exhibit under Item 14, and Schedule III.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no officers or directors. The General Partner manages
and controls substantially all of the Partnership's affairs and has general
responsibility and ultimate authority in all matters affecting the
Partnership's business.
Certain officers and directors of the General Partner are now serving (or
in the past have served) as officers or directors of entities which act as
general partners of a number of real estate limited partnerships which have
sought protection under the provisions of the federal Bankruptcy Code. The
partnerships which have filed bankruptcy petitions own real estate which
has been adversely affected by the economic conditions in the markets in
which that real estate is located and, consequently, the partnerships
sought the protection of the bankruptcy laws to protect the partnerships'
assets from loss through foreclosure.
The directors and principal executive officers of the General Partner of
the Partnership as of December 31, 1997 were as follows:
Name Office
Jeffrey C. Carter President, Director and Chief Financial Officer
Rocco F. Andriola Director
Michael T. Marron Vice President
There is no family relationship among any of the foregoing directors or
officers. The business experience of each of the directors and officers of
the General Partner is as follows:
Jeffrey C. Carter, 52, is a Senior Vice President of Lehman Brothers in the
Diversified Asset Group. Mr. Carter joined Lehman Brothers in September
1988. From 1972 to 1988, Mr. Carter held various positions with
Helmsley-Spear Hospitality Services, Inc. and Stephen W. Brener Associates,
Inc. including Director of Consulting Services at both firms. From 1982
through 1987, Mr. Carter was President of Keystone Hospitality Services, an
independent hotel consulting and brokerage company. Mr. Carter received
his B.S. degree in Hotel Administration from Cornell University and an
M.B.A. degree from Columbia University.
Rocco F. Andriola, 39, is a Managing Director of Lehman Brothers Inc. in
its Diversified Asset Group and has held such position since October 1996.
Since joining Lehman in 1986, Mr. Andriola has been involved in a wide
range of restructuring and asset management activities involving real
estate and other direct investment transactions. From June 1991 through
September 1996, Mr. Andriola held the position of Senior Vice President in
Lehman's Diversified Asset Group. From June 1989 through May 1991, Mr.
Andriola held the position of First Vice President in Lehman's Capital
Preservation and Restructuring Group. From 1986-89, Mr. Andriola served as
a Vice President in the Corporate Transactions Group of Shearson Lehman
Brothers' office of the general counsel. Prior to joining Lehman, Mr.
Andriola practiced corporate and securities law at Donovan Leisure Newton &
Irvine in New York. Mr. Andriola received a B.A. from Fordham University,
a J.D. from New York University School of Law, and an LL.M in Corporate Law
from New York University's Graduate School of Law.
Michael T. Marron, 34, is a Vice President of Lehman Brothers and has been
a member of the Diversified Asset Group since 1990 where he has actively
managed and restructured a diverse portfolio of syndicated limited
partnerships. Prior to joining Lehman Brothers, Mr. Marron was associated
with Peat Marwick Mitchell & Co. serving in both its audit and tax
divisions from 1985 to 1989. Mr. Marron received his B.S. degree from the
State University of New York at Albany and an M.B.A. from Columbia
University.
Certain Matters Involving Affiliates of EHP/GP Inc.
On July 31, 1993, Shearson Lehman Brothers Inc. ("Shearson") sold certain
of its domestic retail brokerage and asset management businesses to Smith
Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to
this sale, Shearson changed its name to Lehman Brothers Inc. ("Lehman").
The transaction did not affect the ownership of the Partnership's General
Partner. However, the assets acquired by Smith Barney included the name
"Shearson." Consequently, the name of the Partnership was changed to Hotel
Properties L.P., and the Shearson EHP/GP Inc. general partner changed its
name to EHP/GP Inc. to delete any reference to "Shearson."
Item 11. Executive Compensation
The Partnership has no directors or officers. Its affairs are managed by
EHP/GP Inc., its General Partner.
The General Partner is entitled to receive a share of income, profits or
losses, sale proceeds and cash distributions generated by the Partnership,
as described in Note 7 "Partnership Agreement" of the Notes to Financial
Statements contained in the Partnership's Annual Report to Unitholders for
the year ended December 31, 1997, filed as an exhibit under Item 14.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners. The Partnership
knows of no person who beneficially owns more than 5% of the Units.
(b) Security ownership of management. Under the terms of the limited
partnership agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns the equivalent of 100 Units.
None of the General Partner's officers own Units in the Partnership.
(c) Changes in control. None
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others. Incorporated by reference
to Notes 4, 5, 6, 7 and 8 of the Notes to the Financial Statements
contained in the Partnership's Annual Report to Unitholders for the year
ended December 31, 1997, filed as an exhibit under Item 14.
(b) Certain Business Relationships. There have been no business
transactions between any of the Directors and the Partnership.
(c) Indebtedness of Management. No management person is indebted in any
amount to the Partnership.
(d) Transactions with Promoters. Certain officers and directors of the
General Partner are employees of Lehman Brothers Inc.
Effective as of January 1, 1997, the Partnership began reimbursing
certain expenses incurred by the General Partner and its affiliates in
servicing the Partnership to the extent permitted by the partnership
agreement. In prior years, affiliates of the General Partner had
voluntarily absorbed these expenses.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
Report of Independent Accountants (1)
Balance Sheets - At December 31, 1997 and 1996 (1)
Statements of Operations - For the years ended
December 31, 1997, 1996 and 1995 (1)
Statements of Partners' Capital (Deficit) - For the years ended
December 31, 1997, 1996 and 1995 (1)
Statements of Cash Flows - For the years ended
December 31, 1997, 1996 and 1995 (1)
Notes to the Financial Statements (1)
(1)Incorporated by reference to the Partnership's Annual Report to
Unitholders for the year ended December 31, 1997, which is filed as
an exhibit under Item 14.
(a)(2) Financial Statement Schedules: Independent Accountant's Report on
Schedule III - Real Estate and Accumulated Depreciation.
(a)(3) Exhibits.
3.1 Form of Agreement of Limited Partnership of the Registrant
(filed as Exhibit A to Prospectus) - incorporated by reference to
Exhibit 3.2 to Registration Statement No. 33-17557.
4.1 Prospectus dated November 12, 1987, incorporated by reference from
Amendment No. 1 to the Partnership's Registration Statement No.
33-17557.
10.1 Form of Depositary Agreement between the Registrant and E.H.P.
Depositary Corp., as Depositary - incorporated by reference to
Exhibit 10.3 to Registration Statement No. 33-17557.
10.2 Form of Purchase Agreement concerning the acquisition of the
Properties - incorporated by reference to Exhibit 10.4 to Registration
Statement No. 33-17557.
10.3 Form of Deed of Trust, Security Agreement and Fixture Financing
Statement (filed as Exhibit C-2 to Exhibit 10.2 above) - incorporated
by reference to Exhibit 10.5 to Registration Statement No. 33-17557.
10.4 Form of Loan Agreement (filed as Exhibit U-2 to Exhibit 10.2 above)
- incorporated by reference to Exhibit 10.6 to Registration Statement
No. 33-17557.
10.5 Indemnification Agreement - incorporated by reference to Exhibit 10.9
to Registration Statement No. 33-17557.
10.6 Form of Purchase Money Promissory Note (filed as Exhibit C-1 to
Exhibit 10.2 above) - incorporated by reference to Exhibit 10.11 to
Registration Statement No. 33-17557.
10.7 Leases between The Equitable Life Assurance Society of the United
States (the "Equitable") and The Marriott Corporation (filed as Exhibit
E to Exhibit 10.2 above) - incorporated by reference to Exhibit 10.12
to Registration Statement No. 33-17557.
10.8 Form of Assignment and Assumption of Leases (filed as Exhibit Q to
Exhibit 10.2 above) - incorporated by reference to Exhibit 10.14 to
Registration Statement No. 33-17557.
10.9 Form of Lease between Equitable and Registrant with respect to the Los
Angeles Airport Marriott Hotel (filed as Exhibit R to Exhibit 10.2
above) - incorporated by reference to Exhibit 10.15 to Registration
Statement No. 33-17557.
10.10 Form of Lease between Equitable and Registrant with respect to the
St. Louis Airport Marriott Hotel (filed as Exhibit S to Exhibit 10.2
above) - incorporated by reference to Exhibit 10.16 to Registration
Statement No. 33-17557.
10.11 Form of Revolving Credit Note (filed as Exhibit U-1 to Exhibit 10.2
above) - incorporated by reference to Exhibit 10.17 to Registration
Statement No. 33-17557.
10.12 Mortgage Loan Refinancing Agreements - incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 1995.
13.1 Annual Report to Unitholders for the year ended December 31, 1997.
27.1 Financial Data Schedule.
b. Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of the
calendar year 1997.
On March 13, 1998, the Partnership filed a Form 8-K reporting the
notification of Limited Partners of the negotiation of the potential
sale of the Hotels.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOTEL PROPERTIES L.P.
BY: EHP/GP Inc.
General Partner
Date: March 19, 1998
BY: /s/Jeffrey C. Carter
Name: Jeffrey C. Carter
Title: President, Director and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EHP/GP Inc.
General Partner
Date: March 19, 1998
BY: /s/Jeffrey C. Carter
Name: Jeffrey C. Carter
Title: President, Director and
Chief Financial Officer
Date: March 19, 1998
BY: /s/Rocco F. Andriola
Name: Rocco F. Andriola
Title: Director
Date: March 19, 1998
BY: /s/Michael T. Marron
Name: Michael T. Marron
Title: Vice President
EXHIBIT 13.1
HOTEL PROPERTIES L.P.
1997 ANNUAL REPORT TO UNITHOLDERS
Hotel Properties L.P.
Hotel Properties L.P. was established in 1987 to
acquire four hotel properties: the Los Angeles Airport
Marriott Hotel; the St. Louis Airport Marriott Hotel;
the Nashville Airport Marriott Hotel; and Marriott's
Tan-Tar-A Resort Hotel, located on Lake of the Ozarks
in Osage Beach, Missouri (the "Hotels"). The
Partnership's overall operations are managed by its
General Partner, EHP/GP Inc. The Hotels are leased to
and managed by Marriott Hotel Services, Inc.
("Marriott"), a wholly-owned subsidiary of Marriott
International Inc.
The weighted average occupancy and room rate for the
Partnership's four Hotels for the years ended
December 31, 1997 and 1996 were as follows:
1997 1996 % Change
Average Occupancy 75.2% 79.6% (5.5%)
Average Room Rate $96.65 $87.99 9.8%
Contents
1 Message to Investors
3 Property Update
5 Financial Highlights
6 Financial Statements
9 Notes to the Financial Statements
20 Report of Independent Accountants
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
Message to Investors
Presented for your review is the 1997 Annual Report for Hotel
Properties L.P. (the "Partnership"). This report contains an
update on operations at the Partnership's four Marriott Hotels,
including the status of our efforts to sell the Hotels, and the
Partnership's audited financial statements for the year ended
December 31, 1997.
Sales Update
As discussed in previous correspondence, the General Partner
commenced marketing the Hotels for sale and has retained Eastdil
Realty Company ("Eastdil"), a nationally-recognized real estate
firm, to assist with these efforts. Eastdil completed the
preparation of marketing brochures during the third quarter of
1997, and commenced the active marketing of the Hotels in the
fourth quarter. The Hotel operating leases give Marriott the
right of first refusal, which means the Partnership must notify
Marriott of any sales offers it intends to accept, and Marriott
may elect to purchase the Hotels at the same price and under the
same conditions.
We are pleased to report that on January 9, 1998, the Partnership
entered into a non-binding letter of intent with a major
independent hotel buyer, pursuant to which the parties agreed to
negotiate in good faith an agreement to purchase the Hotels for a
cash purchase price of approximately $114 million (the "Offer"),
subject to Marriott's right of first refusal. On that same day,
the General Partner notified Marriott of the Offer, and by letter
dated February 5, 1998, Marriott notified the General Partner
that it would exercise its right of first refusal to purchase the
Hotels at the same price and under the same terms and conditions
as those set forth in the Offer (the "Proposed Sale"). The
Partnership and Marriott are negotiating a formal Purchase and
Sale Contract (the "Contract") which we expect to execute in
March 1998.
The Proposed Sale is subject to the satisfaction of certain
conditions, including the Partnership obtaining the approval of a
majority in interest of the outstanding Unitholders. Should the
Proposed Sale be approved, it is currently anticipated that the
closing will occur during the second or third quarter of 1998.
Given the anticipated sale of the Hotels, future distributions to
the Partners will be made following the receipt of sale proceeds.
If the Proposed Sale occurs, the General Partner currently
estimates that such distributions may exceed $10.00 per Unit.
The amount will be dependent on the operations of the Hotels and
the Partnership until closing, the timing of the closing and
other factors, all of which are uncertain at this time. While it
is expected that the Hotels will be sold during 1998, there can
be no assurance that the Proposed Sale will be consummated, or
that the Proposed Sale will result in any particular level of
distributable cash.
Market/Property Update
Operating conditions for hotels nationwide remained strong during
1997, as average daily room rates increased and average occupancy
levels remained stable. For the year ended December 31, 1997,
market analysts Smith Travel Research reported that average
occupancy and daily room rates for U.S. hotels were 64.5% and
$75.16, respectively, compared with 65.0% and $70.81,
respectively, for 1996. The combined operating results at the
Partnership's Hotels during 1997 were reflective of these strong
industry conditions. Although the Hotels are affected by
conditions specific to the market in which each operates, their
performance as a whole improved over last year. Please refer to
the Property Update section beginning on page 3 of this report
for a discussion of the Hotels' 1997 performance.
General Information
As you are probably aware, various third parties have commenced
tender offers to purchase Units of the Partnership at prices
which are below the Partnership's estimate of net asset value per
Unit. In response, we recommended that Limited Partners reject
these offers because we believe that they do not reflect the
underlying value of the Partnership's assets. According to
published industry sources, most of the investors who hold units
of limited partnerships similar to the Partnership have rejected
these types of tender offers due to their inadequacy.
Summary
Pending approval from the Limited Partners, the General Partner
expects that the Proposed Sale will be consummated during the
second or third quarter of 1998. Thereafter, the net sale
proceeds and cash reserves after payment of Partnership
liabilities and establishment of any reserve for contingencies,
will be distributed to Partners. Please be assured we will
continue to work in conjunction with Marriott management to
maximize operations until the Proposed Sale is completed. We
will inform you of our progress in future reports.
Very truly yours,
EHP/GP Inc.
The General Partner
/s/Jeffrey C. Carter
Jeffrey C. Carter
President
March 19, 1998
Property Update
Marriott's Tan-Tar-A Resort
Located on Lake of the Ozarks in Osage Beach, Missouri,
Marriott's Tan-Tar-A Hotel is a full-service resort comprised of
26 buildings with 365 guest rooms. It is situated on two parcels
of land, extending over a total of 150 acres with approximately
5,000 feet of shoreline. In addition to operating the guest
rooms, Marriott also manages approximately 610 private estates
under agreements with the individual owners, bringing the total
number of available guest units to 975. The resort's extensive
recreational amenities feature 27 holes of golf, a health club,
tennis courts, three swimming pools and full water sports
facilities. There are also several retail and gift shops in the
hotel lobby. Tan-Tar-A's wide array of food and beverage options
include two upscale restaurants, a Burger King, a Sbarro's, and
four TCBY outlets. Additionally, there are eight lounges and a
number of banquet areas and ballrooms.
Operations at Tan-Tar-A improved in 1997 compared with the
previous year. Despite facing additional competition during
1997, Tan-Tar-A posted increases in both average occupancy and
room rate, resulting in a 4% increase in the hotel's total sales.
This improvement, combined with the containment of expenses, led
to a 10% increase in hotel operating profit and a 6% increase in
rent from operating profit.
Historically, the resort has faced limited competition in its
market. There is only one other full-service resort hotel in the
vicinity and the General Partner believes that Tan-Tar-A offers a
higher quality product. Although there are several additional
hotels and motels located in the area, in the past they have not
been perceived as being directly competitive with Tan-Tar-A due
to disparities in markets served, quality of facilities, rate
structure, location and/or lack of affiliation with a major hotel
chain. Over the last few years, however, certain new and
expanded limited service hotels have gained market share. Even
with this additional competition, Tan-Tar-A maintains its
dominant position.
The Nashville Airport Marriott Hotel
The Nashville Marriott Hotel is a 399-room hotel located
approximately two-and-one-half miles north of the Nashville
Airport. Amenities at the hotel include a health club, tennis
courts, a game room and an indoor/outdoor swimming pool with a
poolside outdoor entertainment area and barbecue pit. The food
and beverage facilities are comprised of a full-service
restaurant and lounge, and the banquet facilities include two
ballrooms and several meeting rooms which can accommodate up to
1,500 people. The hotel's main ballroom, the Capital Ballroom,
was renovated during 1997. The improvements consisted of the
installation of new lighting and "air walls" to control the noise
level between rooms, and were funded out of the hotel's reserve
for furniture, fixtures and equipment ("FF&E").
The sustained strength of the Nashville hospitality market has
encouraged significant development over the last few years. Even
with the increased room supply, however, the Nashville market
remained strong during 1997, as average occupancy for the city's
hotels remained stable and the average daily room rate increased.
For the year ended December 31, 1997, Smith Travel Research
reported that the average occupancy and average daily room rate
for Nashville hotels were 66.8% and $73.20, respectively,
compared with 67.3% and $69.21, respectively, for the year ended
December 31, 1996. The Partnership's hotel maintains a prominent
position in its local market, posting a 3.4% increase in
occupancy, a 3.5% increase in average daily room rates and a 4.9%
increase in total hotel sales in 1997 over 1996. The higher
sales, combined with management's efforts to contain operating
expenses, resulted in a 13.8% improvement in hotel operating
profit and a 13.2% increase in rent from operating profit in 1997
relative to 1996.
There are nine hotels which compete to varying degrees with the
Nashville Hotel. Although the supply of rooms continues to
increase in the Nashville market, we believe that the impact on
the hotel will remain minimal, due to the disparities in markets
served, quality of facilities, rate structure, location and/or
lack of affiliation with a major hotel chain.
The St. Louis Airport Marriott
The St. Louis Marriott Hotel is a 601-room hotel located on Pear
Tree Lane in St. Louis, Missouri, directly adjacent to Lambert
International Airport. The hotel was originally opened in 1972
with a total of 423 rooms and 178 rooms were later added with the
completion of the east tower in 1981. The hotel offers extensive
amenities to its guests, including two lighted tennis courts, a
health facility with a whirlpool and sauna, and indoor and
outdoor swimming pools. Food and beverage facilities include a
rooftop JW's Steakhouse, a full-service restaurant and two
lounges, and banquet facilities include two major ballrooms which
can accommodate up to 2,100 people. Soft-goods renovations were
completed during the first quarter of 1997 on the remaining rooms
that had not been refurbished during 1996. These improvements
were funded from a line of credit provided to the Partnership by
Marriott International Capital Corporation (the "Line of
Credit"). During the first quarter of 1997, the Partnership
borrowed $1,100,000 under the Line of Credit and funded the
hotel's FF&E to make the renovations. The Line of Credit is to
be repaid solely from the hotel's FF&E. During 1997, principal
payments on the Line of Credit from the hotel's FF&E totaling
$679,727 were made.
Operating conditions for hotels in St. Louis remained strong
during 1997. Smith Travel Research reported that for the year
ended December 31, 1997, the average occupancy and room rates for
the city's hotels were 63.1% and $68.80, respectively, compared
with 64.9% and $65.98, respectively, in 1996. The St. Louis
Hotel posted similar improvement, as stable average occupancy and
a 4.6% increase in the average daily room rate led to a 1.5%
increase in total sales. This improvement, coupled with the
containment of expenses, resulted in a 5.8% increase in hotel
operating profit and a 2.9% increase in rent from operating
profit.
The Partnership has identified six hotels in the St. Louis
Airport market which currently compete directly with the St.
Louis Airport Marriott. Two other Marriott hotels are also
located in the greater St. Louis area, which, due to their
affiliation with Marriott, compete to a certain degree with the
Partnership's hotel. During 1997, a new 400-room hotel and casino
opened, however, it has had minimal impact on the Partnership's
hotel. Although there are many additional hotels in the St.
Louis market, they are not considered to be directly competitive
with the Partnership's hotel due to disparities in markets
served, quality of facilities, rate structure, location and/or
lack of affiliation with a major hotel chain.
The Los Angeles Airport Marriott
The Los Angeles Airport Marriott is a 1,012-room convention-type
hotel located on Century Boulevard, just one-half mile east of
the entrance to the Los Angeles International Airport. The hotel
features extensive amenities, including an outdoor swimming pool,
a hydrotherapy pool, a health club with a sauna and a game room.
The hotel also offers two full-service restaurants, a sports
bar/lounge, a gourmet coffee shop and a lobby and pool lounge.
Additionally, there are several banquet and group meeting
facilities that can accommodate more than 2,000 people. A
soft-goods renovation of all guest rooms was completed during the
third quarter of 1997. These improvements included the
replacement of carpeting, draperies, bedspreads and other
soft-goods, and were funded out of the hotel's FF&E reserve.
The operating environment for hotels in the Los Angeles Airport
hotel submarket continued to strengthen during 1997. Smith
Travel Research reported that for the year ended
December 31, 1997, average occupancy and room rates for hotels in
the Los Angeles Airport submarket increased to 74.5% and $66.69,
compared to 73.5% and $61.00, respectively, for 1996. The
overall performance of the Partnership's hotel also improved.
The average daily room rate increased considerably, which offset
a decrease in the average occupancy rate, and as result, total
hotel sales were largely unchanged in 1997 compared with 1996.
Even with flat sales, a 2% reduction in total hotel expenses led
to a 18.6% improvement in hotel operating profit and a 6.4%
increase in rent paid to the Partnership.
There are seven hotels in the Los Angeles Airport submarket which
compete to varying degrees with the Partnership's hotel,
including a 750-room Westin Hotel at the Airport which was
formerly known as a Doubletree. One competitor, located three
miles south of the airport in Manhattan Beach, was owned until
August 1997 by a limited partnership that was sponsored by an
affiliate of the General Partner. While there are several
additional hotels in the market area, due to disparities in
markets served, quality of facilities, rate structure, location
and/or lack of affiliation with a major hotel chain, they are not
considered to be directly competitive with the Partnership's
hotel.
Financial Highlights
The following chart summarizes the financial results of the
Hotels and the Partnership for the periods ended December 31 of
the indicated years:
1997 1996 % Change
Total hotel sales $ 120,908,961 $ 118,131,587 2.4%
Total hotel operating profit 21,344,582 18,785,538 13.6%
Partnership rental income
from operations 11,127,581 10,350,982 7.5%
Net income 5,875,244 1,922,133 205.7%
Adjusted net income 4,031,529 3,283,994 22.8%
Total hotel sales increased 2.4% in 1997 over 1996, primarily as
a result of the Hotels' higher weighted average room rates. This
increase, combined with management's efforts to contain operating
expenses, led to a 13.6% increase total hotel operating profit
and a 7.5% increase in rental income earned by the Partnership in
1997 compared with 1996. The higher rental income, coupled with
decreases in interest and depreciation expenses, led to a
substantial increase in the Partnership's net income for 1997
compared with 1996. After adding back the non-cash expense of
depreciation, the Partnership's adjusted net income (excluding
rent from the replacement escrow which is restricted for making
improvements to the Hotels) increased 22.8% in 1997 over the
prior year.
Selected Financial Data
Selected Partnership financial data for the five years ended
December 31 is shown below. This data should be read in
conjunction with the Partnership's financial statements included
in this report.
For the periods ended December 31,
1997 1996 1995 1994 1993
Rental income from
operations $ 11,127,581 $10,350,982 $10,155,725 $9,860,623 $ 9,652,455
Replacement escrow 5,694,279 5,557,759 5,219,071 5,021,649 4,898,950
Interest 439,230 416,202 365,855 227,886 144,584
Total Income 17,261,090 16,324,943 15,740,651 15,110,158 14,695,989
Total Assets at
December 31 112,367,947 109,954,205 108,887,742 108,853,719 109,693,913
Mortgage loans
payable at
December 31 78,332,542 80,239,491 81,714,517 80,438,000 80,438,000
Revolving credit
loans payable
at December 31 -- -- -- 2,531,417 2,531,417
Net income (loss)(1) 5,875,244 1,922,133 274,859 (1,099,424) (1,215,178)
Net income (loss)
per unit(2) 1.68 .55 .05 (.31) (.35)
Cash distributions declared
per unit(2) -- .40 -- .19 .45
(1)Includes non-cash items such as depreciation, amortization,
deferred asset management fees and a one-time write off of
undepreciated personal property of $357,819 in 1993, replaced
during renovations.
(2)There are 3,464,700 units outstanding.
Balance Sheets At December 31, At December 31,
1997 1996
Assets
Real estate, at cost: (Notes 3 and 4)
Land $ _ $ 22,569,415
Buildings _ 72,645,014
Furniture, fixtures and equipment _ 48,892,073
_ 144,106,502
Less accumulated depreciation _ (47,206,347)
_ 96,900,155
Real estate held for disposition 101,883,177 _
Cash and cash equivalents (Note 6) 3,334,906 3,590,188
Restricted cash (Note 3) 938,376 1,297,810
Restricted cash - loan reserve (Note 4) 2,535,447 2,534,317
Due from hotel managers, net (Note 3) 623,501 577,522
Replacement reserve receivable (Note 3) 1,783,963 3,426,722
Rent receivable (Note 3) 454,951 488,415
Deferred charges - refinancing costs,
net of accumulated amortization of
$813,626 in 1997 and $488,176 in 1996 813,626 1,139,076
Total Assets $112,367,947 $109,954,205
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 72,916 $ 85,067
Due to affiliates (Note 6) 40,000 1,000
Mortgage loans payable (Note 4) 78,332,542 80,239,491
Mortgage loans interest payable _ 601,796
Refinancing fee payable (Note 8) 412,500 412,500
Distributions payable (Note 10) _ 1,399,879
Deferred management fees payable (Note 8) 4,187,505 4,187,505
Deferred interest payable (Note 8) 1,849,185 1,849,185
Promissory notes payable (Note 5) 420,273 _
Total Liabilities 85,314,921 88,776,423
Partners' Capital:
General Partner 58,752 _
Limited Partners (3,464,700 limited
partnership units authorized, issued
and outstanding) 26,994,274 21,177,782
Total Partners' Capital 27,053,026 21,177,782
Total Liabilities and Partners' Capital $112,367,947 $109,954,205
Statement of Partners' Capital
For the years ended December 31, 1997, 1996 and 1995
Limited General
Partners Partner Total
Balance at December 31, 1994 $20,466,498 $(85,829) $20,380,669
Net Income 189,030 85,829 274,859
Balance at December 31, 1995 $20,655,528 $ _ $20,655,528
Net Income 1,908,134 13,999 1,922,133
Distributions (1,385,880) (13,999) (1,399,879)
Balance at December 31, 1996 $21,177,782 $ _ $21,177,782
Net Income 5,816,492 58,752 5,875,244
Balance at December 31, 1997 $26,994,274 $ 58,752 $27,053,026
Statements of Operations
For the years ended December 31, 1997 1996 1995
Income
Rent: (Note 3)
Operating profit $ 11,127,581 $ 10,350,982 $ 10,155,725
Replacement escrow 5,694,279 5,557,759 5,219,071
Interest 439,230 416,202 365,855
Total Income 17,261,090 16,324,943 15,740,651
Expenses
Interest (Note 4) 7,137,238 7,288,757 7,975,815
Depreciation and amortization 3,850,564 6,919,620 6,997,180
Asset management fee (Note 8) _ _ 288,528
General and administrative (Note 6) 272,242 122,397 148,466
Professional fees 125,802 72,036 55,803
Total Expenses 11,385,846 14,402,810 15,465,792
Net Income $ 5,875,244 $ 1,922,133 $ 274,859
Net Income Allocated:
To the General Partner $ 58,752 $ 13,999 $ 85,829
To the Limited Partners 5,816,492 1,908,134 189,030
$ 5,875,244 $ 1,922,133 $ 274,859
Per limited partnership unit
(3,464,700 outstanding) $ 1.68 $ .55 $.05
Statements of Cash Flows
For the years ended December 31, 1997 1996 1995
Cash Flows From Operating Activities:
Net Income $ 5,875,244 $ 1,922,133 $ 274,859
Adjustments to reconcile net income to
net cash provided by operating activities:
Rental income from replacement escrow (5,694,279) (5,557,759) (5,219,071)
Depreciation and amortization 3,850,564 6,919,620 6,997,180
Increase (decrease) in cash arising
from changes in operating assets
and liabilities:
Due from hotel managers, net (45,979) (42,853) (45,278)
Rent receivable 33,464 195,851 (5,718)
Accounts payable and accrued expenses (12,151) 19,022 (20,152)
Due to affiliates 39,000 (1,462) 311
Mortgage loans interest payable (601,796) 601,796 _
Deferred management fees _ _ 288,528
Deferred interest payable _ _ 332,877
Net cash provided by operating activities 3,444,067 4,056,348 2,603,536
Cash Flows From Investing Activities:
Additions to real estate, net of
disposals (8,508,136) (5,137,319) (4,891,419)
Proceeds from replacement reserve
receivable 7,337,038 4,648,984 4,360,894
Proceeds from restricted cash 359,434 488,335 530,525
Net cash used for investing activities (811,664) _ _
Cash Flows From Financing Activities:
Principal payments on mortgage loans
payable (1,906,949) (1,475,026) (1,254,900)
Cash distributions paid (1,399,879) _ _
Proceeds from promissory note payable 1,100,000 _ _
Principal payments on promissory note
payable (679,727) _ _
Net increase in restricted cash - loan
reserve (1,130) 4,301 _
Deferred charges - refinancing costs _ _ (1,214,752)
Funding of loan reserve _ _ (2,538,618)
Net cash used for financing activities (2,887,685) (1,470,725) (5,008,270)
Net increase (decrease) in cash and
cash equivalents (255,282) 2,585,623 (2,404,734)
Cash and cash equivalents, beginning
of period 3,590,188 1,004,565 3,409,299
Cash and cash equivalents, end
of period $3,334,906 $3,590,188 $1,004,565
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $7,739,034 $6,686,961 $7,642,938
Notes to the Financial Statements
December 31, 1997, 1996 and 1995
1. Organization
Hotel Properties L.P. (the "Partnership") was formed on
September 24, 1987 for the purpose of acquiring four hotel
properties: the Los Angeles Airport Marriott Hotel, the St.
Louis Airport Marriott Hotel, the Nashville Airport Marriott
Hotel and Marriott's Tan-Tar-A Resort Hotel (the "Properties" or
the "Hotels").
Initial capital of $1,000 was contributed by EHP/GP Inc. (the
General Partner), a Delaware corporation and wholly-owned
subsidiary of Lehman Brothers Inc., formerly Shearson Lehman
Hutton Inc. The Partnership commenced operations on June 3,
1988 with the issuance of a maximum 3,464,700 depository units
(the "Units") which represent limited partnership interests (the
"Limited Partners").
On July 31, 1993, Shearson Lehman Brothers Inc. ("Shearson")
sold certain of its domestic retail brokerage and asset
management businesses to Smith Barney, Harris Upham & Co.
Incorporated ("Smith Barney"). Subsequent to the sale, Shearson
changed its name to Lehman Brothers Inc. ("Lehman Brothers").
The transaction did not affect the ownership of the General
Partner. However, the assets acquired by Smith Barney included
the name "Shearson." Consequently, effective October 22, 1993,
the General Partner, Shearson EHP/GP Inc., changed its name to
EHP/GP Inc. and effective January 5, 1994, EQ/Shearson Hotel
Properties L.P. changed its name to Hotel Properties L.P.
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements of the
Partnership have been prepared on the accrual basis of
accounting.
Depreciation - Real estate investments, which consist of land,
building and personal property, are recorded at cost less
accumulated depreciation. Cost includes the initial purchase
price of the property plus closing costs, acquisition and legal
fees, and capital improvements. Depreciation of the real
property is computed using the straight-line method based on the
estimated useful life of 40 years. Depreciation of the personal
property is computed under the straight-line method over an
estimated useful life of 7 years.
Real estate held for disposition - On June 30, 1997, the
Partnership began the process of marketing the Properties, and
accordingly, reclassified the Properties as "Real estate held
for disposition" at their net book value. Upon
reclassification, depreciation expense is no longer recorded.
Accounting for Impairment - Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"),
requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. FAS 121 also
addresses the accounting for long-lived assets that are expected
to be disposed of. The Partnership adopted FAS 121 in the
fourth quarter of 1995.
Fair Value of Financial Instruments - Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("FAS 107"), requires that the
Partnership disclose the estimated fair values of its financial
instruments. Fair values generally represent estimates of
amounts at which a financial instrument could be exchanged
between willing parties in a current transaction other than in
forced liquidation.
Fair value estimates are subjective and are dependent on a
number of significant assumptions based on management's judgment
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. In addition, FAS 107 allows a
wide range of valuation techniques, therefore, comparisons
between entities, however similar, may be difficult.
Deferred Charges - Refinancing Costs Deferred charges -
refinancing costs are amortized on a straight-line basis over
the five year term of the mortgage loans payable.
Income Taxes - No income tax provision (benefit) has been recorded
on the books of the Partnership, as the respective shares of
taxable income (loss) are reportable by the partners on their
individual tax returns.
Offering Costs - Offering costs are nonamortizable and have been
deducted from the Limited Partners' capital.
Cash and Cash Equivalents - Cash and cash equivalents consist of
highly liquid short-term investments with maturities of three
months or less from the date of issuance. The carrying amount
approximates fair value because of the short maturity of these
instruments.
Concentration of Credit Risk - Financial instruments which
potentially subject the Partnership to a concentration of credit
risk principally consist of cash in excess of the financial
institutions' insurance limits. The Partnership invests
available cash with high credit quality financial institutions.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
3. Real Estate
The Partnership's real estate, which was purchased on June 3, 1988,
consists of the following four hotel properties:
Los Angeles Airport Marriott Hotel - The Los Angeles Airport
Marriott Hotel (the "Los Angeles Hotel") is a 1012-room hotel
located on Century Boulevard, near the Los Angeles International
Airport in Los Angeles, California.
The Los Angeles Hotel was purchased subject to an operating
lease with Marriott Hotel Services, Inc. (the "Hotel Manager"),
formerly The Marriott Corporation (see below), which was
restated on June 2, 1988, and provides for a term expiring on
July 25, 2003 and five 10-year renewal options by the Hotel
Manager.
Rent payable under the lease equals the greater of (i) 50% of
Operating Profit (as defined in the lease) up to a maximum of
$3,626,183 plus an amount equal to a 10% return on all of the
Landlord's Additional Contributions and Additional Building
Contributions (as defined in the lease), provided if, in any
year, 50% of the Operating Profit exceeds $3,626,183 plus such
10% return, then the Hotel Manager must pay additional rent
equal to one-half of the excess, or (ii) if 50% of the Operating
Profit is insufficient to pay the sum of $3,626,183, plus a 9%
return on all of the Landlord's Additional Contributions and
Additional Building Contributions, then the Hotel Manager must
pay up to $3,626,183, plus an amount equal to a 9% return on all
of the Landlord's Additional Contributions and Additional
Building Contributions to the extent of up to 100% of Operating
Profit.
St. Louis Airport Marriott Hotel - The St. Louis Airport Marriott
Hotel (the "St. Louis Hotel") is a 601-room hotel located
directly across from the St. Louis Airport in St. Louis,
Missouri.
The St. Louis Hotel was purchased subject to an operating lease
with the Hotel Manager, formerly The Marriott Corporation (see
below), which was restated on June 2, 1988, and provides for a
term expiring on July 25, 2003 and five 10-year renewal options
by the Hotel Manager.
Rent payable under the lease equals the greater of (i) 50% of
the Operating Profit (as defined in the lease) up to a maximum
of $1,352,500 plus an amount equal to a 10% return on all of the
Landlord's Additional Contributions and Additional Building
Contributions (as defined in the lease) provided if, in any
year, 50% of the Operating Profit exceeds $1,352,500 plus such
10% return, then the Hotel Manager must pay additional rent
equal to one-half of the excess, or (ii) if 50% of the Operating
Profit is insufficient to pay the sum of $1,217,250 plus a 9%
return on all of the Landlord's Additional Contributions and
Additional Building Contributions, then the Hotel Manager must
pay up to $1,217,250, plus an amount equal to a 9% return on all
of the Landlord's Additional Contributions and Additional
Building Contributions to the extent of up to 100% of Operating
Profit.
Nashville Airport Marriott Hotel - The Nashville Airport Marriott
Hotel (the "Nashville Hotel") is a 399-room hotel located in
Nashville, Tennessee.
The Nashville Airport Hotel was purchased subject to an
operating lease with the Hotel Manager, formerly The Marriott
Corporation (see below), which was assumed by the Partnership.
The Nashville Hotel's lease had a remaining term of 18 years on
June 3, 1988, expires December 29, 2006 and contains five
10-year renewal options by the Hotel Manager.
Rent payable under the lease equals 60% of the Operating Profit
(as defined in the lease), provided if (i) 60% of the Operating
Profit is less than the Landlord's First Priority (as defined in
the lease), rent shall be increased by the difference, from up
to 80% of the Operating Profit, or (ii) if 60% of the Operating
Profit is greater than the Landlord's Second Priority (as
defined in the lease), rent shall be reduced by 25% of such
excess, but rent shall not be less than 50% of the Operating
Profit.
Marriott's Tan-Tar-A Resort Hotel - Marriott's Tan-Tar-A Resort
("Tan-Tar-A"), located in Lake of the Ozarks, Missouri,
encompasses 26 buildings on two parcels of land; overall, there
are 365 guest rooms. Tan-Tar-A also has available for rental
private homes (Estates), bringing the total number of available
rooms to 975.
Tan-Tar-A was purchased subject to an operating lease with the
Hotel Manager, formerly The Marriott Corporation (see below),
which was assumed by the Partnership. The lease, which had a
remaining term of 17 years as of June 3, 1988, expires
December 30, 2005 and contains five 10-year renewal options by
the Hotel Manager.
Rent payable under the lease equals 60% of the Operating Profit
(as defined in the lease), provided if (i) 60% of the Operating
Profit is less than the Landlord's First Priority (as defined in
the lease), rent shall be increased by the difference, from up
to 80% of the Operating Profit, or (ii) if 60% of the Operating
Profit is greater than the Landlord's Second Priority (as
defined in the lease), rent shall be reduced by 25% of such
excess, but rent shall not be less than 50% of the Operating
Profit.
During 1997, the Partnership increased its investment in Tan-Tar-A.
The funding came in the form of contributions to the Furniture,
Fixtures, & Equipment ("FF & E") escrow fund for the purpose of
garage repair.
Reserve Funds for Replacement-Pursuant to the terms of the
operating leases, the Hotel Manager is required on behalf of the
Partnership to maintain reserve funds for replacement of
furnishings and equipment on the Properties from the Operating
Profit of the Properties, ranging from 4.5% to 5%. The reserve
funds for the Los Angeles, St. Louis and Tan-Tar-A Hotels are
maintained on behalf of the Partnership at those properties by
the Hotel Manager, while the Nashville Hotel fund is held by the
Partnership. At December 31, 1997, the Partnership had $938,376
of the Nashville Hotel fund invested in an interest-bearing
account (included in restricted cash in the accompanying
financial statements). Additionally, at December 31, 1997,
$1,783,963 of reserve funds for the three remaining Hotels were
held at the Hotels on behalf of the Partnership (included in
replacement reserve receivable in the accompanying financial
statements). During the year ended December 31, 1997, the
Partnership earned replacement escrow rental income of
$5,694,279 which either remained in the reserve accounts or was
used to fund fixed asset additions.
The St. Louis and Los Angeles Hotel Operating Leases require the
Hotel Manager to maintain sufficient funds necessary to provide
the respective Properties with adequate levels of working
capital. In addition, under the leases, the Hotel Manager will
retain control of the working capital throughout the lease term
and upon termination thereof. Equitable Real Estate Investment
Management, Inc. (the "Seller" or "EREIM") advanced the Hotel
Manager $850,000 of working capital for Tan-Tar-A and $480,000
of working capital for Nashville. These noninterest-bearing
working capital advances shall be paid to the Partnership by the
Hotel Manager after termination of the respective Operating
Lease. As the advances do not provide for interest, they have
been discounted using the effective borrowing rate of 9.5%
associated with the mortgage loans payable and have been
included under due from hotel managers at the discounted value
of $569,408. Included in due from hotel managers for the
periods ended December 31, 1997 and 1996, is interest income of
$54,093 and $49,400, respectively.
Hotel Operations - The following presents summarized information
with respect to the operations of the Properties as provided by
the Hotel Manager for the periods ended December 31, 1997, 1996
and 1995:
Los Angeles St. Louis Nashville Tan-Tar-A
Hotel Hotel Hotel Hotel Total
1997:
Hotel Revenues $46,469,035 $23,764,846 $19,259,481 $31,415,599 $120,908,961
Hotel Expenses 37,170,031 19,510,903 14,321,720 28,561,725 99,564,379
Operating Profit 9,299,004 4,253,943 4,937,761 2,853,874 21,344,582
Rental income
to owner 4,441,773 2,024,250 2,949,234 1,712,324 11,127,581
Add -
Real estate
additions
and reserve
funds for
replacement
owned by the
Partnership,
included in
hotel expenses 2,091,107 1,069,418 962,974 1,570,780 5,694,279
Total Rental
Income $ 6,532,880 $ 3,093,668 $ 3,912,208 $ 3,283,104 $ 16,821,860
1996:
Hotel Revenues $46,243,470 $23,419,438 $18,363,779 $30,104,900 $118,131,587
Hotel Expenses 38,407,331 19,398,340 14,022,954 27,517,424 99,346,049
Operating
Profit 7,836,139 4,021,098 4,340,825 2,587,476 18,785,538
Rental income
to owner 4,173,258 1,965,901 2,604,495 1,607,328 10,350,982
Add - Real
estate additions
and reserve funds
for replacement
owned by the
Partnership,
included in
hotel expenses 2,080,956 1,053,370 918,188 1,505,245 5,557,759
Total
Rental Income $6,254,214 $3,019,271 $3,522,683 $3,112,573 $15,908,741
1995:
Hotel Revenues $42,447,026 $20,829,490 $18,040,956 $29,391,568 $110,709,040
Hotel Expenses 35,639,057 17,397,505 13,630,938 26,896,710 93,564,210
Operating
Profit 6,807,969 3,431,985 4,410,018 2,494,858 17,144,830
Rental income
to owner 4,173,258 1,729,128 2,646,011 1,607,328 10,155,725
Add - Real
estate additions
and reserve
funds for
replacement owned
by the
Partnership,
included in
hotel expenses 1,910,117 937,328 902,048 1,469,578 5,219,071
Total Rental
Income $ 6,083,375 $ 2,666,456 $ 3,548,059 $ 3,076,906 $ 15,374,796
On June 19, 1993, The Marriott Corporation assigned its interests
in the Amended and Restated Leases for the four hotel properties
owned by the Partnership to the Hotel Manager, a wholly-owned
subsidiary of Marriott International. The assignment has no
effect on the Partnership's operations.
After considering a number of factors, including the recently
improved operating performance of the Hotels, the improving
hospitality industry nationwide and the significantly
strengthened market for the acquisition of full-service hotel
properties, the General Partner has decided to begin marketing
the Hotels for sale on June 30, 1997. The Partnership retained
Eastdil Realty Company, a nationally-recognized real estate firm,
to assist with the marketing efforts.
On January 9, 1998, the Partnership entered into a non-binding
letter of intent with a major independent hotel buyer, pursuant
to which the parties agreed to negotiate in good faith an
agreement to purchase the Hotels for a cash purchase price of
$114 million (the "Offer"), subject to Marriott's right of first
refusal. On that same day, the General Partner notified Marriott
of the Offer, and by letter dated February 5, 1998, Marriott
notified the General Partner that it would exercise its right of
first refusal to purchase the Hotels at the same price and the
same terms and conditions as those set forth in the Offer (the
"Proposed Sale "). The Partnership and Marriott are negotiating
a formal Purchase and Sale Contract (the "Contract") which is
expected to be executed in March 1998.
The Proposed Sale is subject to the satisfaction of certain
conditions, including the Partnership obtaining the approval of a
majority in interest of the outstanding Unitholders. Should the
Proposed Sale be approved, it is currently anticipated that the
closing will occur during the second or third quarter of 1998.
Upon completion of the Proposed Sale, distributions will be made
to Limited Partners in accordance with the Partnership Agreement.
If the Proposed Sale occurs, the General Partner currently
estimates that proceeds available for distribution may exceed
$10.00 per Unit. The amount will be dependent on operations of
the Hotels and the Partnership until closing, the timing of the
closing and other factors, all of which are uncertain at this
time. While it is expected that the Hotels will be sold during
1998, there can be no assurance that the Proposed Sale will be
consummated, or that the Proposed Sale will result in any
particular level of distributable cash.
In view of the anticipated sale of the Hotels, the Partnership's
real estate has been recorded at cost, less accumulated
depreciation and amortization at December 31, 1997 on the
Partnership's Balance Sheet as "Real estate held for
disposition." Real estate held for disposition at
December 31, 1997 was $101,883,177. Upon reclassification,
depreciation expense is no longer recorded.
4. Mortgage Loans Payable
The mortgage loans payable were made by The Equitable Life
Assurance Society of the United States ("Equitable"), the Seller,
in the amount of $80,438,000 on June 3, 1988. A separate
mortgage loan was issued with respect to each property, each
collateralized by a property. An event of default under each
mortgage loan constituted an event of default under the other
mortgage loans. The loans bore interest at a rate of 9.5% per
annum. The loans provided for monthly payments of interest only
until maturity on June 2, 1995, at which time the entire
principal balances were due. Equitable had committed to loan to
the Partnership such funds, as necessary, to meet the Hotel
Manager request for additional funding. In connection therewith,
Equitable made lines of credit aggregating $27,162,000 available
to the Partnership. Funds drawn on the lines of credit, totaling
$2,531,417, bore interest at 2% over prime with principal due
June 2, 1995.
On June 28, 1995 (the "Effective Date"), the Partnership
refinanced and amended the $80,438,000 in mortgage loans and the
$2,531,417 revolving credit loans payable (collectively, the
"Loan") with Equitable, and terminated its Asset Management
Agreement with EREIM. The Loan, which originally matured on
June 2, 1995, was extended under the existing terms to the
Effective Date. At closing, the Partnership made a $500,000
principal payment and the Loan was consolidated into a new
mortgage loan with Equitable totaling $82,469,417 (the "New
Mortgage"). The New Mortgage is collateralized by four separate
deeds of trust with respect to the Los Angeles, St. Louis,
Nashville, and Tan-Tar-A Marriott Hotels of which the Hotel
Manager is the lessee and operator.
Under the terms of the New Mortgage with Equitable, the
Partnership is required to make monthly payments of principal and
interest in the amount of $741,999 at a rate of 9% per annum
based on a 20-year amortization term, commencing on August 1,
1995 until maturity on June 2, 2000, at which time the entire
outstanding principal balance is due. The New Mortgage may be
prepaid in whole or in part at anytime prior to June 2, 1998 in
connection with a sale or refinancing of one or more of the
Hotels without paying a prepayment premium. Subsequent to June
2, 1998, prepayment of the New Mortgage will be subject to a
prepayment premium as set forth in the New Mortgage agreement.
Interest expense for each of the years ended December 31, 1997,
1996 and 1995 was $7,137,238, $7,288,757 and $7,975,815,
respectively.
The following is a schedule of principal payments for the next
three years:
Year Amount
1998 $ 1,764,742
1999 2,098,025
2000 74,469,775
Total $78,332,542
As a condition of the New Mortgage, the Partnership entered into
an escrow agreement with Equitable which requires the Partnership
to provide additional collateral for the New Mortgage. The
Partnership agreed to direct the Hotel Manager to forward rent
from operating profit ("Rent") generated by the Hotels,
subsequent to the Effective Date, to an escrow account (the "Loan
Reserve") maintained by Equitable's escrow agent (the "Escrow
Agent"). The Hotel Manager was directed to forward Rent to the
Loan Reserve until a balance of $2.5 million was reached and
maintained. The Escrow Agent used these funds to pay the
Partnership's monthly debt service payments. Until the balance
of $2.5 million was reached, the Escrow Agent forwarded 10% of
the Rent generated by the Hotels to the Partnership, provided
there were no existing defaults on the New Mortgage. As of
December 31, 1997, the Partnership has funded the Loan Reserve in
the amount of $2,535,447, and is included as "Restricted cash -
loan reserve" on the Partnership's balance sheet. The funds in
excess of the $2.5 million requirement represent interest earned
on the Loan Reserve and are transferred to the Partnership
quarterly.
Total costs incurred by the Partnership related to the
refinancing of the Loan and termination of the Asset Management
Agreement were approximately $1.6 million and have been reflected
in "Deferred charges - refinancing costs" on the Partnership's
balance sheet. The refinancing costs consist of a 1% refinancing
fee of $825,000 paid to Equitable, a refinancing fee payable to
EREIM of $412,500 and legal and other refinancing costs of
approximately $362,500. These costs are being amortized on a
straight-line basis over the five-year term of the New Mortgage.
Based on the borrowing rates currently available to the
Partnership for mortgage loans with similar maturities, the fair
value of long-term debt approximates carrying value.
5. Promissory Note
On October 18, 1995, the Partnership entered into a loan
agreement and executed a promissory note in an amount up to
$1,100,000 (the "Note") with Marriott International Capital
Corporation (the "Lender"). The purpose of such financing was to
provide the Partnership with the required capital to implement
certain upgrades to furniture, fixtures and equipment ("FF&E")
and to make certain non-structural repairs and renovations
(collectively, the "Renovations") at the St. Louis Hotel. The
Lender will fund to the Partnership from time-to-time amounts
necessary (up to the maximum amount of the Line of Credit) to
complete the Renovations at the St. Louis Hotel. The Line of
Credit is unsecured and non-recourse to the Partnership. During
the first half of 1997, the Partnership borrowed $1,100,000 under
the Line of Credit and funded the replacement reserve to make the
Renovations.
The Partnership has directed the Hotel Manager, the St. Louis
Hotel's tenant, to make payments on behalf of the Partnership
solely from the St. Louis Hotel's FF&E Replacement Reserve
account in an amount equal to $61,986 per period commencing with
the second accounting period in fiscal 1997 until the maturity of
the Line of Credit. The Line of Credit bears interest at a rate
of 9% per annum on all outstanding amounts and can be prepaid by
the Partnership without premium or penalty. The Hotel Manager
will fund all interest payments into the FF&E Replacement Reserve
account from the Hotel Manager's own funds prior to making any
debt service payments to the Lender. Consequently, the payment
from the tenant will offset the interest as if this were an
interest-free loan to the Partnership. The Partnership made
principal payments on the Line of Credit from the replacement
reserve totaling $679,727 during 1997. Interest on the Line of
Credit was $64,105 during 1997.
6. Transactions with Related Parties
Administration-The General Partner or its affiliates
incurred out-of-pocket and other expenses in connection with
the administration of the Partnership. The following is a
summary of these expenses incurred for the periods ended
December 31, 1997, 1996 and 1995 and the unpaid portions at
December 31, 1997 and 1996.
Effective as of January 1, 1997 the Partnership began
reimbursing certain expenses incurred by the General Partner
and its affiliates in servicing the Partnership to the
extent permitted by the partnership agreement. In prior
years, affiliates of the General Partner had voluntarily
absorbed these expenses.
Unpaid at December 31,
1997 1996 1997 1996 1995
Out-of-pocket expenses $ _ $ 1,000 $ 11,220 $ 10,081 $ 13,801
Other expenses 40,000 _ 80,223 _ _
Fees and Compensation-The General Partner or its affiliates
earned fees and compensation, and were reimbursed for certain
out-of-pocket and expenses actually incurred in connection with
the organization, syndication, acquisition and financing for the
Partnership and the Properties in the amount of $6,094,751 in
1988. These amounts are comprised of $4,044,982 included in the
offering costs, $302,576 (prior to reimbursement) included in
deferred charges, $667,165 included in organization costs and
$1,080,028 included in the acquisition cost of the Properties.
Cash and Cash Equivalents-Cash and cash equivalents were on
deposit with an affiliate of the General Partner during a portion
of 1996. As of December 31, 1997, no cash and cash equivalents
were on deposit with an affiliate of the General Partner or the
Partnership.
7. Partnership Agreement
The partnership agreement provides for the following allocations:
Income-Income is first allocated to the General Partner and
Limited Partners (the "Partners") in amounts equal to the amounts
distributed to such Partners; then to any Partner with a deficit
capital account balance to the extent of such Partner's deficit
capital account balance; then 100% to the Limited Partners in an
amount equal to the unpaid balance of their preferred return, as
defined in the Partnership Agreement.
Losses-Losses are generally allocated to the General Partner and
Limited Partners in the amounts equal to the amount distributed
to such Partners.
Distributions of Net Cash Flow from Operations-Net cash flow from
operations, as defined, with respect to each fiscal year will
generally be distributed 99% to the Limited Partners and 1% to
the General Partner, until such time as each Limited Partner has
received an amount equal to his preferred return, as defined,
plus his unrecovered capital, as defined. Thereafter, net cash
flow from operations will be distributed 94.12% to the Limited
Partners and 5.88% to the General Partner.
Distributions of Net Proceeds from Interim Capital Transactions-
Net Proceeds from interim capital transactions will generally be
distributed 99% to the Limited Partners and 1% to the General
Partner until each Limited Partner has received an amount equal
to his unpaid preferred return and unrecovered capital, as
defined. Any remaining net proceeds will be distributed 94.12%
to the Limited Partners and 5.88% to the General Partner.
Distributions of Net Proceeds from Sale Upon Dissolution-It is
anticipated that net proceeds from any final liquidation of the
Partnership's assets will be distributed 99% to the Limited
Partners and 1% to the General Partner until each Limited Partner
has received from these and other payments an amount equal to any
unpaid preferred return and his capital contribution (less prior
distributions with respect thereof from a previous Interim
Capital Transaction). Any remaining net proceeds will generally
be distributed 94.12% to the Limited Partners and 5.88% to the
General Partner.
Allocation of Gain or Loss from Sales-Gains on sales of
properties will generally be allocated first to each Limited
Partner and the General Partner in the amount of the proceeds
received by such Limited Partner and the General Partner from the
transaction. Then, following certain capital account
adjustments, any remaining income or gain will be allocated
94.12% to the Limited Partners and 5.88% to the General Partner.
Losses from Interim Capital Transactions will be allocated in
accordance with positive capital accounts, then in accordance
with the profit sharing ratios then in effect, subject to certain
adjustments as described in the partnership agreement.
8. Asset Management Agreement
On June 3, 1988, the Partnership entered into an agreement with
EREIM, an affiliate of the Seller, for the management of the
Properties. The agreement provided for an annual fee of the
lesser of 6.5% of the rent received by the Partnership or 1% of
gross revenues of the Properties, subject to an agreement to
defer such fee to the extent that rents received by the
Partnership were less than certain amounts defined in the Asset
Management Agreement. Any amount of such fee that was deferred
accrued interest at 12.5%, compounded annually, and was due and
payable on the earlier of 15 years after the purchase of the
Properties or upon sale of the Properties; however, such amount
was subordinate to the Partners receiving a return of their
capital and a 6% simple return thereon.
On June 28, 1995, the Partnership terminated its June 3, 1988
Asset Management Agreement with EREIM. Pursuant to the
termination agreement, EREIM is entitled to a refinancing fee in
the amount of $412,500, which is payable upon the earlier of a
sale or refinancing of one or more of the Hotels or on June 2,
2000. The refinancing fee is included in "Refinancing fee
payable" and "Deferred charges - refinancing costs" on the
Partnership's balance sheet and is being amortized over the term
of the New Mortgage. Additionally, all deferred management fees
and deferred interest payable earned as of the Effective Date in
the amounts of $4,187,505 and $1,849,185, respectively, will
remain as liabilities to EREIM but subordinate to a return of
investor equity plus a 6% annual return thereon. No further
management fees or interest on these amounts accrue after the
Effective Date.
During 1997, 1996 and 1995, the Partnership recorded $0, $0 and
$288,528, respectively, of such asset management fees, of which
$4,187,505 have been cumulatively deferred as of December 31,
1997 and 1996.
If the Hotels are sold based upon the negotiated sale price (see
Note 3), the Partners would not receive a six percent simple
return on their capital. This will likely result in non-payment
of the accrued management fees and related deferred interest
payable which are subordinated to the Partners receiving a return
on their capital and a six percent simple return thereon (see
Note 12).
9. Commitments and Contingencies
The lease agreements provide that the Hotel Manager can request
additional funds for furniture, fixtures and equipment or
building additions or expansions, as required. In each case, the
Hotel Manager and the Partnership would be required to contribute
a portion of such funds, as defined in the operating leases. The
Partnership contributed $395,920 in 1997 to fund a portion of
garage repair costs at Tan-Tar-A. The hotel manager added
$237,552 as it's portion, as required by the lease.
Should the Partnership not elect to contribute such additional
funds, the Hotel Manager would have the right to acquire the
Properties at purchase prices, as outlined in the leases. The
Hotel Manager may also have certain purchase rights upon the
termination of the leases or lease defaults.
10. Distributions
Prior to 1994, cash distributions were paid on a quarterly basis
from net cash flow provided by operating activities to
Unitholders based on the seasonal performance of the Hotels. The
General Partner suspended the payment of cash distributions in
the fourth quarter of 1994. This action was taken in order to
increase Partnership cash reserves to provide for the various
costs of securing replacement financing related to the maturity
of the Partnership's outstanding indebtedness in June 1995.
Distributions remained suspended through 1996 in order for the
Partnership to meet certain requirements under the terms of the
New Mortgage. Due to the satisfaction of such requirements, and
improved operations during 1996 at both the Partnership and Hotel
levels, a cash distribution in the amount of $0.40 per Unit was
paid to Limited Partners on February 14, 1997 from the
Partnership's operations during the past year. The distribution
was paid to Limited Partners of record as of each month-end in
1996. This represented a one-time distribution of 1996 annual
cash flow and did not indicate the reinstatement of regular cash
distributions.
As noted above, the Partnership expects to sell the Hotels during
the second or third quarter of 1998. Accordingly, future
distributions will be in the form of one or more distributions
following the sale of the Hotels.
11. Reconciliation of Financial Statement Net Income and Partners' Capital
to Federal Income Tax Basis Net Income (Loss) and Partners' Capital
1997 1996 1995
Financial statement net income $ 5,875,244 $ 1,922,133 $ 274,859
Tax basis depreciation under
(over) financial statement
depreciation (3,920,811) 95,092 350,546
Financial statement deferred
management fee and interest
expense over tax basis deferred
management fee and interest expense _ _ 621,404
Other 29,874 84,628 43,952
Federal income tax basis net income $ 1,984,307 $ 2,101,853 $ 1,290,761
Financial statement partners' capital $ 27,053,026 $ 21,177,782 $20,655,528
Current year financial statement
net income (loss) under (over)
federal income tax basis net income (3,890,962) 179,720 1,015,902
Cumulative financial statement
net income over federal income tax
basis net income (1,232,998) (1,412,718) (2,428,620)
Federal income tax basis partners'
capital $21,029,066 $19,944,784 $19,242,810
Because many types of transactions are susceptible to varying
interpretations under Federal and State income tax laws and
regulations, the amounts reported above may be subject to change
at a later date upon final determination by the taxing
authorities.
12. Subsequent Event
The following unaudited pro forma financial information gives
effect to the Proposed Sale. The pro forma financial information
is presented for illustrative purposes only, and therefore, is
not necessarily indicative of the operating results and financial
position that might have been achieved had the Proposed Sale
occurred as of an earlier date, nor are they necessarily
indicative of operating results and financial position which may
occur in the future. A pro forma balance sheet is provided as of
December 31, 1997, giving effect to the Proposed Sale as though
it had been consummated on that date.
Pro Forma Balance Sheet (Unaudited)
Adjusted
December 31 Pro Forma December 31,
1997 Adjustments 1997
Assets
Real estate held for disposition $101,883,177 $(101,883,177)(a) $ _
Cash and cash equivalents 3,334,906 2,157,625 (e) 38,879,989
111,720,000 (a)
(78,332,542)(b)
Restricted cash 938,376 (938,376)(a) _
Restricted cash - loan reserve 2,535,447 (2,535,447)(e) _
Due from hotel managers, net 623,501 (623,501)(a) _
Replacement reserve receivable 1,783,963 (1,783,963)(e) _
Rent receivable 454,951 (454,951)(e) _
Deferred charges - refinancing costs,
net of accumulated amortization of
$813,626 in 1997 813,626 (813,626)(d) _
Total Assets $112,367,947 $(73,487,958) $38,879,989
Liabilities and Partner's Capital
Liabilities
Accounts payable and accrued
expenses 72,916 _ 72,916
Due to affiliates 40,000 _ 40,000
Mortgage loans payable 78,332,542 (78,332,542)(b) _
Mortgage loans interest payable _
Refinancing fee payable 412,500 (412,500)(e) _
Distributions payable
Deferred management fees 4,187,505 (4,187,505)(c) _
Deferred interest payable 1,849,185 (1,849,185)(c) _
Promissory notes payable 420,273 (420,273)(e) _
Total Liabilities $ 85,314,921 $(85,202,005) $ 112,916
Partners' Capital:
General Partner $ 58,752 $ 328,919 $ 387,671
Limited Partners (3,464,700
limited partnership units
authorized, issued and
outstanding) 26,994,274 11,385,128 38,379,402
Total Partners' Capital $ 27,053,026 $ 11,714,047 $38,767,073
Total Liabilities and
Partners' Capital $112,367,947 $(73,487,958) $38,879,989
The pro forma balance sheet as of December 31, 1997 reflects the
assumed sale of the four Hotels and the liquidation of the
Partnership on December 31, 1997. The sale price of the Hotels
is $114,000,000 in cash, subject to certain adjustments. The
cost to sell the Hotels as of June 30, 1998 are anticipated to be
approximately $2,280,000. The Partnership will use a portion of
the proceeds from the sale to repay the mortgage loan payable in
full, which is $78,332,542 as of December 31, 1997. The
remaining cash in the Partnership is assumed to be distributed in
accordance with the Partnership Agreement.
See accompanying Notes to the Pro Forma Adjustments.
Notes to the Pro Forma Adjustments
(a)To record the sale of the Hotels reflecting the removal of the property held
for disposition and related deferred charges, the receipt of net sale
proceeds, and the allocation of the gain to the General Partner and
Unitholders as follows:
Sales price $114,000,000
Closing costs 2,280,000
Net Cash Proceeds 111,720,000
Assets Sold:
Property held for disposition 101,883,177
Restricted Cash 938,376
Due from Hotel Managers 623,501
Replacement Reserve Receivable 1,783,963
105,229,017
Gain on Sale $ 6,490,983
Allocated as follows:
Unitholders $ 6,157,108
General Partner 333,875
$ 6,490,983
The allocation of gain to the General Partner is based upon their
estimated share of distributions from the sale.
(b) To reflect the payment of mortgage indebtedness, pursuant to the
agreements discussed herein, as follows:
Mortgage Loan Payable $ 78,332,542
$ 78,332,549
(c) To reflect the forgiveness of fees payable to EREIM and related
allocation to the General Partner and Unitholders as follows:
Deferred Management Fees $ 4,187,505
Deferred Interest Payable 1,849,185
$ 6,036,690
Allocated as Follows:
Unitholders $ 6,033,510
General Partner 3,180
$ 6,036,690
(d) To reflect the write-off of deferred charges associated with the
mortgages totalling $813,626 and the related allocation to the General
Partner and Unitholders.
Unitholders $ 805,490
General Partner 8,136
$ 813,626
(e) To reflect the collection of rent receivable and other receivables from
hotel managers, the receipt of the Partnership's portion of the
replacement reserve from Marriott, the satisfaction of obligations
payable from the replacement reserve, and the receipt of restricted cash.
(f) The remaining cash, net of accounts payable and accrued expenses and due
to affiliates, will be distributed to the General Partner and Unitholders
in accordance with the ending capital balances.
Report of Independent Accountants
To the Partners of
Hotel Properties L.P.:
We have audited the accompanying balance sheets of Hotel Properties
L.P. (formerly EQ/Shearson Hotel Properties, L.P.), a Delaware
limited partnership, as of December 31, 1997 and 1996, and the
related statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hotel
Properties L.P. as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Notes 3 and 12 to the financial statements, the
Partnership entered into a Letter of Intent on January 9, 1998 to
sell its Hotels. Upon execution of a Purchase and Sales Agreement
and subsequent Limited Partner approval, the Partnership will sell
the Hotels and commence liquidation shortly thereafter.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 18, 1998
Schedule III - Real Estate and Accumulated Depreciation
December 31, 1997
Hotel Properties: Los Angeles Nashville St. Louis Tan-tar-a Total
Location Los Angeles Nashville St. Louis Osage Beach na
CA TN MO MO
Construction date 1973 1981 1972 1980 na
Acquisition date 06-03-88 06-03-88 06-03-88 06-03-88 na
Life on which
depreciation in latest
income statements
is computed 40/7 40/7 40/7 40/7 na
Encumbrances $35,038,146 $18,321,981 $14,146,857 $10,825,557 $78,332,541
Initial cost to
Partnership:
Land 12,751,066 3,064,552 4,282,676 2,410,489 22,508,783
Buildings and
improvements 35,081,383 19,435,904 18,442,592 9,236,472 82,196,351
Costs capitalized
subsequent to
acquisition:
Land,
buildings and
improvements 17,909,977 6,067,691 10,034,387 13,897,449 47,909,504
Elimination of
accumulated
depreciation (19,444,456) (8,722,122)(11,610,587) (10,954,296)(50,731,461)
Gross amount at
which carried
at close of
period:
Land $12,751,066 $3,040,946 $4,282,676 $2,494,727 $22,569,415
Buildings and
improvements 52,991,360 25,527,201 28,476,979 23,049,683 130,045,223
46,297,970 19,846,025 21,149,068 14,590,114 101,883,177
Accumulated
depreciation (3) - - - - -
(1) Net of $1,058,976 reduction in purchase price allocated to land, buildings
and personal property.
(2) For Federal income tax purposes, the basis of land, building, and
personal property on a gross basis is $153,199,115.
(3) The amount of accumulated depreciation for Federal income tax purposes
is $62,160,400.
A reconciliation of the carrying amount of real estate and accumulated
depreciation for the years ended December 31, 1997, 1996, and 1995 follows:
1997 1996 1995
Real estate investments:
Beginning of year $144,106,502 $138,969,183 $134,077,764
Costs capitalized subsequent to
acquisition, net 8,508,136 5,137,319 4,891,419
Reclassification to held for
disposition $(50,731,461) $ - $ -
End of year $101,883,177 $144,106,502 $138,969,183
Accumulated depreciation:
Beginning of year $47,206,347 $ 40,612,178 $ 33,777,723
Depreciation expense 3,525,114 6,594,169 6,834,455
Elimination of accumulated
depreciation (50,731,461) - -
End of year $ - $ 47,206,347 $ 40,612,178
Report of Independent Accountants On Schedule
To Financial Statements
To the Partners of
Hotel Properties L.P.:
Our report on the financial statements of Hotel Properties L.P.
(formerly EQ/Shearson Hotel Properties, L.P.), a Delaware Limited
Partnership, has been incorporated by reference in this Form 10-K
from the Annual Report to Unitholders of Hotel Properties L.P.
for the year ended December 31, 1997. In connection with our
audit of such financial statements, we have also audited the
related financial statement schedule listed in the index of this
Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 18, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 6,808,729
<SECURITIES> 0
<RECEIVABLES> 2,862,415
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 152,614,638
<DEPRECIATION> (50,731,461)
<TOTAL-ASSETS> 112,367,947
<CURRENT-LIABILITIES> 112,916
<BONDS> 78,332,542
<COMMON> 0
0
0
<OTHER-SE> 27,053,026
<TOTAL-LIABILITY-AND-EQUITY> 112,367,947
<SALES> 0
<TOTAL-REVENUES> 17,261,090
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,248,608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,137,238
<INCOME-PRETAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,875,244
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
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