SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MARCH 18, 1998
STARWOOD FINANCIAL TRUST
(Exact name of registrant as specified in its charter)
Maryland 1-10150 95-6881527
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation Identification No.)
1114 Avenue of the Americas, 27th floor
New York, New York 10036
(Address of principal executive offices) (Zip Code)
Copy to:
James B. Carlson
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
Registrant's telephone number, including area code: (212) 930-9400
Angeles Participating Mortgage Trust
(Former name or former address, if changed since
last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
In response to comments received from the Securities and Exchange
Commission, the Trust hereby amends Item 2. Acquisition or Disposition of Assets
of the Trust's Current Report on Form 8-K dated March 18, 1998 (the "Current
Report") by deleting the text thereunder and inserting in lieu thereof the
following:
On March 18, 1998, Starwood Financial Trust, (the "Trust"), formerly
known as Angeles Participating Mortgage Trust (i) paid $25.5 million of cash, as
adjusted, and issued 55,148,000 Class A Shares $1.00 par value per share ("Class
A Shares") at a price of $2.50 per share to Starwood Mezzanine Investors, L.P.
("Mezzanine") in exchange for the contribution by Mezzanine to the Trust of its
entire interest in a portfolio of mortgage and partnership loans secured by
residential, hotel, office and mixed use real estate and other assets and (ii)
paid $324.3 million in cash, as adjusted, and issued 247,074,800 Class A Shares
at a price of $2.50 per share to Starwood Opportunity Fund IV, L.P. ("SOF IV")
in exchange for the contribution by SOF IV to the Trust of a portfolio of
mortgage loans and leases secured by residential, hotel, office and mixed use
real estate and other assets, a portfolio of first mortgage loans, cash of $17.9
million, and rights under certain letters of intent (collectively, the
"Recapitalization Transactions").
In connection with the Recapitalization Transactions: (i) the Trust
changed its name from Angeles Participating Mortgage Trust to Starwood Financial
Trust; (ii) the Trust entered into an advisory agreement (the "Advisory
Agreement") with Starwood Financial Advisors, L.L.C. (the "Advisor") pursuant to
which the Advisor manages the investment affairs of the Trust; (iii) the
Declaration of Trust of the Trust was amended and restated (as amended and
restated the "Declaration of Trust"); (iv) all of the limited partnership
interests in APMT Limited Partnership (the "Partnership") were exchanged for
Class A Shares which left the Trust as the sole partner of the Partnership; (v)
the Partnership was dissolved and all of its assets were distributed to the
Trust; (vi) the Trust's 1996 Trustees' Share Incentive Plan and the 1996 Share
Incentive Plan were combined, amended and restated into the Starwood Financial
Trust 1996 Share Incentive Plan; (vii) the Trust entered into several credit
facilities provided by Greenwich Capital Markets, Inc. and its affiliates, which
in the aggregate provide the Trust up to approximately $625.0 million in new
financing, with up to an additional $175.0 million available, subject to certain
conditions, to consummate the Recapitalization Transaction and provide funds for
working capital, new loan origination and acquisition and general corporate
purposes; and (viii) certain existing agreements were amended and restated.
As a result of the consummation of the Recapitalization Transactions,
Mezzanine owns a 13.7% voting interest and a 20.6% economic interest in the
Trust and SOF IV owns a 52.4% voting interest and a 78.6% economic interest in
the Trust.
The issuance of Class A Shares to Mezzanine and SOF IV were approved by
the shareholders of the Trust as were many of the other transactions taken in
connection with the Recapitalization Transactions. The Recapitalization
Transactions, the Advisory Agreement,
<PAGE>
certain other transaction related thereto were also approved by the members of
the Board of Trustees who are unaffiliated with Mezzanine, SOF IV and the
Advisor.
Mezzanine was a shareholder of the Trust prior to the consummation of
the Recapitalization Transactions with a 52.6% voting interest in the Trust.
Each of Messrs. Sternlicht, Sugarman, Dishner, Eilian, Kleeman and Silvey
(collectively the "Starwood Trustees and Officers"), each currently a Trustees
and/or executive officer of the Trust has a direct and/or indirect interest in
each of Mezzanine, SOF IV and the Advisor.
The Recapitalization Transactions were financed through new credit
facilities entered into by the Trust in connection with the Recapitalization
Transactions.
See "Description of the Contributed Interests" below for a description
of the portfolio of mortgage and partnership loans and leases to be contributed
to the Trust as part of the Recapitalization Transactions.
Description of the Contributed Interests
2
<PAGE>
STARWOOD FINANCIAL TRUST
The following is a summary description of the Assets contributed to the Trust in
the Recapitalization Transactions as of March 18, 1998:
The following is a summary description of the Assets contributed to the Trust in
the Recapitalization Transactions as of March 18, 1998 (in thousands):
<TABLE>
<CAPTION>
Current Original
Number of Balance of Original
Type of Underlying Borrowers Commitment Balances Ascribed Maturies
Loan/Borrower Property Type In Class Amount Outstanding Value Dates
- ------------- ------------- -------- ------ ----------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Senior Mortgages Office/Hotel/ 8 $ 502,114 $ 445,614 $ 449,796 1999-2004
Mixed Use/
Apartment
Subordinated Mortgages Office/Hotel 5 175,375 155,538 184,320 2002 to 2005
Resort/Planned
Communities
Opportunistic Mortgages Office/Hotel/ 2 166,644 132,427 81,057 1999 and 2007
Apartment
Unsecured Notes Office/Hotel 2 27,300 27,300 30,850 2002 and 2004
Construction Loans Assisted 2 92,390 85,471 91,985 1999 and 2004
Living/Resorts
Real Estate Under Hotels 1 N/A(3) N/A(3) 195,470 N/A(3)
Long-Term Master Lease
Loan Participations Various 3 22,656 22,534 13,660 1999 and 2000
Other Real Estate
Related Investments Public bonds 2 43,150 43,150 47,532 2002 and 2007
Total 25 $ 1,094,670
===================================[SPLIT TABLE]================================
Interest Interest
Type of Underlying Accrual Payment Principal Participation
Loan/Borrower Property Type Rates(4) Rates(4) Amortization Features
- ------------- ------------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Senior Mortgages Office/Hotel/ Fixed: 8.97 to 16% Fixed: 8.0-10.82% Yes (1) Yes (2)
Mixed Use/ Variable: LIBOR+ Variable: LIBOR+
Apartment 1.25 to 3.25% 1.25 to 3.25%
Subordinated Mortgages Office/Hotel Fixed 10.0 to Fixed 10.0 to Yes (1) Yes (2)
Resort/Planned 15.25% 15.25%
Communities
Opportunistic Mortgages Office/Hotel/ 6.0 to 7.0% 6.0 to 7.0% Yes (1) Yes (2)
Apartment
Unsecured Notes Office/Hotel 11.25% to 15.0% 11.25% to 15.0% No Yes (2)
Construction Loans Assisted 12.0 to 12.5% 10.0 to 12.5% No No
Living/Resorts
Real Estate Under Hotels N/A(3) N/A(3) N/A(3) N/A(3)
Long-Term Master Lease
Loan Participations Various Fixed: 7.13% Fixed: 5.45 to Yes(1) Yes
Variable: LIBOR+ 6.40%
.58 to 1.75% Variable: LIBOR+
.58 to 1.75%
Other Real Estate
Related Investments Public bonds 12.5 to 12.75% 12.5 to 12.75% No No
Total
</TABLE>
Explanatory Notes
(1) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the
remaining principal due at maturity. In addition, one of the loans
permits additional annual prepayments of principal of up to $1.3
million without penalty at the borrower's option.
(2) Under some of these loans, the lender receives additional payments
representing additional interest for participation in available cash
flow from operations of the property and the proceeds, in excess of a
base amount, arising from a sale or refinancing of the property.
(3) The lease is a triple net lease of 17 hotels under which the lessee
pays all costs associated with the operation of the hotels, including
real estate taxes, insurance, utilities, services and capital
expenditures. The initial term of the lease expires on December 31,
2010, and can be extended for up to five, five-year terms at lessee's
option. Rent payments under the lease consist of base rent and
additional rent based on the amount by which the aggregate operating
revenue for any given year exceeds the aggregate operating revenue of
the twelve months ended September 30, 1996.
(4) All variable rate loans are based on 30-day LIBOR and reprice monthly.
3
<PAGE>
The following summarizes information relating to concentration and significant
terms within the portfolio of assets contributed in the Recapitalization
Transactions based on ascribed values:
Concentration by size:
Ascribed
Value %
---------------------- ----------
(In thousands)
RLH (operating lease) $ 195,470 17.9%
Borrower A (senior and subordinate) 127,450 11.6%
Borrower B (senior and subordinate) 116,137 10.6%
All other loans/investments 655,613 59.9%
---------------------- ----------
$ 1,094,670 100.0%
---------------------- ----------
The RLH operating lease is discussed in detail under "Real Estate Under
Long-Term Operating Lease" as the sole asset group in that class.
The loans to Borrower A represent five first mortgage notes and a second
mortgage residual note which are cross-collateralized by over 1.1 million square
feet of office properties located in Seattle, WA and are personally guaranteed
by the borrower. The loans mature on December 31, 1999. In addition to the five
primary assets, additional collateral includes second or third mortgages on
three office buildings also located in Seattle. The subordinated loan was
acquired at a substantial discount to its face amount. Of the total principal
amount, $97 million was allocated to the first mortgage positions, while $54
million was allocated to a residual note. The $97 million first mortgage
amortizes on a 25-year schedule and bears interest at the rate of LIBOR plus 125
basis points. The second mortgage bears interest at the rate of 7%. The loans
are prepayable at any time without penalty.
The non-recourse loans to Borrower B mature on April 30, 2002 and are secured by
office properties containing 1.1 million square feet located in San Diego, CA.
The loans consist of a $74.3 million variable rate senior mortgage and a $34.8
million subordinate mortgage bearing interest at 12.0%. The loans are prepayable
subject to certain yield maintenance provisions on the subordinate mortgage.
Concentration by underlying asset/collateral type:
Ascribed
Value
(In thousands) %
-------------- ------
Office $ 516,099 47.1%
Hotel/Resorts 379,842 34.7%
Residential 118,029 10.8%
Other 80,700 7.4%
-------------- ------
$ 1,094,670 100.0%
============== ======
4
<PAGE>
For this purpose, the ascribed values for certain loans secured by mixed use
property were allocated by management based on estimated relative values of the
underlying collateral components.
Concentration by location:
Ascribed
Value %
-------------- --------
(In thousands)
California $ 237,316 21.7%
Washington 203,273 18.6%
New York 123,352 11.3%
Texas 108,679 9.9%
Florida 91,985 8.4%
Massachusetts 60,485 5.5%
Maryland 60,440 5.5%
Colorado 59,767 5.5%
All other states, combined 85,021 7.8%
Corporate obligations 64,352 5.9%
-------------- --------
$ 1,094,670 100.0%
============== ========
Summary of recourse provisions:
<TABLE>
<CAPTION>
Ascribed
Value %
------------------ -------
(In thousands)
<S> <C> <C>
Non-recourse - secured by real estate $ 676,940 61.8%
Recourse (including operating lease assets) 339,348 31.0%
Corporate obligations 64,352 5.9%
Non-recourse - secured by partnership interests 14,030 1.3%
------------------ --------
$ 1,094,670 100.0%
================== ========
</TABLE>
Summary of prepayment terms:
<TABLE>
<CAPTION>
Ascribed
Value %
------------------ -------
(In thousands)
<S> <C> <C>
Long-term operating lease - generally not prepayable $ 195,470 17.9%
Lock-out for greater than 70% of original term with yield 8%
maintenance or other prepayment premiums on a
substantial portion of remaining term 249,670 22.8%
Lock-out for greater than 70% of original term, prepayable
thereafter without premium 24,489 2.2%
Yield maintenance 142,565 13.0%
Other prepayment premiums 129,920 11.9%
No significant prepayment protection $ 352,556 32.2%
------------------ -------
$ 1,094,670 100.0%
================== =======
</TABLE>
As of December 31, 1997, the Trust's primary investments are primarily
government or government sponsored instruments such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and
Federal Home Loan Morgage (FHLMC). Certain of these investments were acquired at
premiums or discounts based on current market rates and expected prepayment
rates. To the extent that prepayments exceed those expected, actual yields will
decrease for premium investments and increase for discount investments. To the
extent that prepayments are less than those expected, actual yields will
increase for premium investments and decrease for discount investments.
With respect to the assets contributed to Trust in the Recapitalization
Transactions, the majority of these loans are subject to substantial prepayment
protection in the form of lock-outs, yield maintenance provisions or other
prepayment premiums which provide protection to the Trust. Those assets not
subject to prepayment penalties include: (i) variable rate mortgages based on
LIBOR, contributed at par, which would not result in any gain or loss upon
repayment; and (ii) opportunistic loans/loan participations acquired at
discounts to face values, which would result in gains upon repayment.
The loans without substantial prepayment protection primarily represent variable
rate senior mortgages or opportunistic loans/loan participations acquired at
discounts to face values, which would result in gains upon repayment. The
properties underlying the long-term operating lease may be purchased at fair
market value by the lessee in limited circumstances, including catastrophic loss
or condemnation of the property.
Summary of interest characteristics:
Ascribed
Value %
----------------- -------------
(In thousands)
Fixed rate investments $ 750,511 68.6%
Variable rate investments 344,159 31.4%
----------------- -------------
$ 1,094,670 100.0%
For this purpose, fixed rate investments include the real estate assets under
long-term operating lease under which the Trust receives a fixed annual base
rental revenue and 7.5% of annual operating revenue for the underlying leased
hotels in excess of a defined base amount. Variable rate loan investments are
generally based on 30-day LIBOR and reset monthly.
Summary of subordination and default characteristics:
The Company holds both the senior and the subordinated mortgages with respect to
the non-recourse loans to Borrower A and Borrower B. The Company has all rights
as a mortgage holder and under the uniform commercial code with respect to the
properties underlying these mortgages in the event of a default. The Company's
rights with respect to the property underlying these properties are not
subordinated to any other lender of borrowed money.
5
<PAGE>
Summary of delinquencies and possible losses
As of December 31, 1997, the Trust's primary investments are primarily
government or government sponsored instruments and, as a result, have no recent
delinquency or loss experience. Starwood Mezzanine and SOF IV have had lending
operations since February 15, 1994 and July 3, 1996, respectively and during
those periods through the date of the Recapitalization Transactions have not
experienced any significant delinquencies or losses on any loan investment,
including those contributed to the Trust. Although no such issues were
identified with respect to specific loan investments contributed, the
possibility of delinquencies and losses were considered in evaluating the terms
of the Recapitalization Transactions. There can be no assurances that
delinquencies or losses will not be experienced by the Trust in the future with
respect to the contributed investments or other investments originated or
acquired by the Trust.
Senior Mortgage Loans
Description of Senior Mortgage Loans and the Collateral. There are
eight (8) loans (the "Senior Mortgage Loans") in this category with an aggregate
original principal balance of $502,114,000 and approximately $445,614,000
outstanding as of March 18, 1998. The Senior Mortgage Loans bear interest at
either a fixed rate per annum or a variable rate based on LIBOR plus an
additional specified amount, requiring either monthly interest payments or
specified amortization payments. One of the Senior Mortgage Loans permits (i)
accrual of interest on a portion of the principal of such loan, payable at
maturity, and (ii) the deferral of certain additional interest payments under
certain circumstances. The Senior Mortgage Loans are generally secured by
mortgages encumbering real properties comprised of a resort conference center in
New York, office buildings in Seattle, Washington, a mixed use complex in New
York, office buildings in Houston, Texas and Dallas, Texas, an office portfolio
in San Diego, California, a residential complex in San Diego, California, a
commercial office building in San Francisco, California, a mixed used complex in
Boston, Massachusetts, a residential complex in New York, New York and certain
pledges of partnership interests.
Maturity Date and Prepayment Terms. The Senior Mortgage Loans have
maturity dates that range from December, 1999 to December, 2007, with certain
extension rights in some cases. Two (2) of the Senior Mortgage Loans are subject
to a prepayment lock-out period during which time such loans may not be prepaid.
Otherwise, the remaining Senior Mortgage Loans are generally prepayable at
certain specified dates and in certain specified amounts, subject to certain
conditions, including the payment of prepayment penalties based on specified
yield maintenance formulas and/or other required costs.
Participating Equity Interest. Some of the Senior Mortgage Loans
require payments of participating equity based on specified percentages of cash
flow, property appreciation and a share of funds maintained in certain reserve
accounts.
Limited Non-Recourse. The Senior Mortgage Loans are generally
nonrecourse loans as to which, in the event of a default under such loans,
recourse generally may be had only against the
6
<PAGE>
collateral, except for certain standard carve-outs. One of the Senior Mortgage
Loans is fully recoursed against the borrower.
Cross-Default Provisions. Two (2) of the Senior Mortgage Loans are
cross- defaulted with certain lines of credit or loans made to the borrower
under such lines of credit or loans from different lenders.
Prohibition on Sale, Encumbrance and Transfer. The Senior Mortgage
Loans generally prohibit the transfer, sale or encumbrance of the real
properties or interests in the borrowers related to such Senior Mortgage Loans,
with certain specified exceptions.
Guaranties. Some of the Senior Mortgage Loans are supported by certain
secured, limited recourse guaranties of payment and performance.
Environmental Indemnity. Certain of the Senior Mortgage Loans are
supported by environmental indemnities.
Subordinate Financing. Three (3) of the Senior Mortgage Loans are
subject to junior financing in the aggregate original principal amount of
$131,935,000 which are part of the Subordinate Mortgage Loans and the
Opportunistic Mortgage Loans that are a part of this portfolio and are referred
to below. One (1) of the other Senior Mortgage Loans may be bifurcated, at the
lender's request under certain circumstances, into a senior lien tranche and a
junior lien tranche, both of which are part of this portfolio. Currently, both
such tranches are secured by a senior mortgage lien.
Forward Additional Loan Commitment. One (1) of the Senior Mortgage
Loans includes an additional commitment for an additional loan of up to
$25,000,000 as construction financing, subject to the satisfaction of certain
specified conditions.
Subordinate Mortgage Loans
Description of Subordinate Mortgage Loans and the Collateral. There are
five (5) loans (the "Subordinate Mortgage Loans") in this category with an
aggregate principal balance of $175,375,000 and approximately $155,538,000
outstanding as of March 18, 1998. The Subordinate Mortgage Loans bear interest
at either fixed or variable rates per annum requiring either monthly interest
payments or specified amortization payments. Under some of the Subordinate
Mortgage Loans, if for any month the interest paid is less than a specified
amount, the difference shall accrue interest at a specified fixed rate per
annum, or cash flow from subsequent months must be deposited into specified
interest accounts to cover previous interest payments that are not paid. The
Subordinate Mortgage Loans are secured by mortgages encumbering real properties
comprised of fifteen (15) hotels located in seven (7) states, fee and ground
leasehold interests in a mixed use complex of office, retail and hotel space in
Washington, D.C., office buildings in Houston, Texas and Dallas, Texas, and an
office portfolio in San Diego, California.
7
<PAGE>
Maturity Date and Prepayment Terms. The Subordinate Mortgage Loans have
maturity dates that range from May, 2002, to December, 2007, subject to
extension in certain cases. Some of the Subordinate Mortgage Loans are subject
to prepayment lock-out periods during which time such loans may not be prepaid.
At specified periods during the term of the Subordinate Mortgage Loans,
prepayment is generally permitted, subject to certain conditions set forth in
the applicable loan documents, including, in some cases, the payment of
prepayment penalties based on specified yield maintenance formulas or required
internal rates of return.
Limited Non-Recourse Loans. The Subordinate Mortgage Loans are
generally nonrecourse loans as to which, in the event of a default under such
loans, recourse generally may be had only against the collateral, except for
certain standard carve-outs.
Prohibition on Sale, Encumbrances and Transfer. The Subordinate
Mortgage Loans generally prohibit the transfer, sale or encumbrance or release
of the real properties or interests in the borrowers related to such Subordinate
Mortgage Loans, with certain specified exceptions.
Environmental Indemnity. Certain of the Subordinate Mortgage Loans are
supported by environmental indemnities.
Existing Senior Financing. Two (2) of the Subordinate Mortgage Loans
are subject to senior financing in the aggregate original principal amount of
$217,700,060 which are part of the Senior Mortgage Loans that are a part of this
portfolio and are referred to herein. The other two (2) Subordinate Mortgage
Loans are subject to senior financing in the aggregate original principal amount
of $205,000,000 which are not a part of this portfolio. The rights between
senior and junior lenders are generally governed by specified intercreditor
agreements which may provide the junior lender with certain notice and cure
rights, but otherwise limit the rights and remedies of the junior lender.
Management of Hotels. Management of the hotel real properties securing
the Subordinated Mortgage Loans are generally governed by management agreements.
Cross-Default Provisions. One (1) of the Subordinate Mortgage Loans is
cross- defaulted with certain loans entered into by certain partners of the
borrower for such Subordinate Mortgage Loan.
Purchased Promissory Note. One (1) of the promissory notes evidencing a
Subordinate Mortgage Loan was purchased from a third party lending institution.
The original lender has been indemnified for claims relating to acts of the
purchasing lender in connection with the note sale agreement, the debt evidenced
by the subject promissory note, the use or ownership of the real property
securing such note, and any contingency fee contracts with attorneys or
collection agencies.
Guaranties. One (1) of the Subordinate Mortgage Loans is supported by
certain secured, limited recourse unconditional guaranties of payment and
performance, and other limited guaranties of payment and performance.
8
<PAGE>
Participating Equity Interest. One (1) of the Subordinate Mortgage
Loans requires payments of participating equity, payable with monthly interest
payments, based on specified percentages of cash flow and net proceeds generated
from the sale or refinancing of the real property securing such loan.
Opportunistic Mortgage Loans
Description of Opportunistic Mortgage Loans. The two (2) loans (the
"Opportunistic Loans") in this category consists of (i) debt (the "Middle
Tranche") with an original principal balance of $72,400,000, secured by, among
other non-real property collateral, a second lien mortgage encumbering a
combination hotel and apartment building in Denver, Colorado and a 50% interest
in an unconsolidated partnership holding debt (the "Junior Tranche") with an
original principal balance of $79,868,613, secured by a third lien mortgage
encumbering the same combined hotel and apartment building and (ii) subordinate
debt with an original principal balance of $54.3 million secured by five
buildings in Seattle, Washington. The Opportunistic Loans bear interest at fixed
or variable rates per annum. One of the loans has monthly compounding of
interest, with payments due on a monthly basis, requiring either monthly
interest payments or specified principal payments at certain times during the
term thereof when certain specified conditions are satisfied.
Maturity Date and Prepayment Terms. The Opportunistic Loans have
maturity dates ranging from December, 1999 to June, 2007, with certain rights
for extensions. The Opportunistic Loans may be prepaid, but where prepayment
occurs before a certain specified date, prepayment must be accompanied by
certain specified yield maintenance payments.
Recourse Loan. The Opportunistic Loans are fully recourse to the
borrower thereunder.
Prohibition on Sale, Encumbrance and Transfer. The Opportunistic Loans
generally prohibit the transfer, sale or encumbrance of the real property or
interests in the borrower related to such Opportunistic Loan, with certain
specified exceptions.
Repayment Guaranty. One of the Opportunistic Loans is supported by a
repayment guaranty, which guaranty terminates upon payment in full of the senior
debt or upon judicial foreclosure by or a deed in lieu to the holder of the
senior debt.
Buy/Sell Agreement. One of the Opportunistic Loans is subject to the
terms of a buy/sell agreement pursuant to which, upon the occurrence of certain
events, the borrower under the Opportunistic Loan would be required to either
agree to buy certain interests or to sell to certain interests in the underlying
collateral. Certain specified parties have the rights to elect to exercise the
buy/sell right, in which event the non-triggering party must either agree to buy
the other party's interest or to sell to the other party the triggering party's
interest in the underlying collateral. In the event that borrower under the
Opportunistic Loans initiates this latter two-way buy/sell option, it must
prepay the Middle Tranche in full.
9
<PAGE>
Senior Financing and Intercreditor Agreement. The underlying collateral
is subject to senior financing in the aggregate original amount of $65,000,000
which is not part of the portfolio and $94,700,000 of which is part of the
portfolio. The rights between senior and junior lenders are generally governed
by specified intercreditor agreements which provides for certain cure rights for
defaults under such senior financing.
Hotel Management. In lieu of a management agreement, the general
partner of the borrower under one of the Opportunistic Loans acts as a manager
of the underlying collateral, and is entitled to receive property management
fees, construction management fees, leasing commissions, and reimbursement of
certain approved items. All fees are subordinated to the Middle Tranche in the
event of a default thereunder.
Unsecured Loans
Description of Unsecured Loans and the Collateral. There are two (2)
loans (the "Unsecured Loans") in this category with an aggregate original and
current principal balance of $27,300,000. The Unsecured Loans bear interest at
fixed rates per annum, requiring monthly interest payments. The Unsecured Loans
are generally secured by pledges of partnership, membership or stock interests,
and certain other non-real property collateral. The real properties owned by the
borrowing entities under the Unsecured Loans consist of mixed office and retail
in New York, New York and twenty-one (21) hotel sites in Georgia, Maryland,
North Carolina, Pennsylvania, Tennessee, and Virginia.
Maturity and Prepayment Terms. The Unsecured Loans have maturity dates
that range from April, 2002 to January, 2004. Some of the Unsecured Loans are
subject to prepayment lock-out periods during which time such loans may not be
prepaid. At specified periods during the term of the Unsecured Loans, prepayment
is generally permitted, subject to certain conditions, including the payment of
prepayment penalties based on specified yield maintenance formulas.
Participating Equity Interest. Some of the Unsecured Loans require
payments of participating equity based on specified percentages of cash flow and
net proceeds from sale or refinancings generated from properties related to the
Unsecured Loans.
Prohibition on Sale, Encumbrance and Transfer. The Unsecured Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Unsecured Loan, with certain
specified exceptions.
Recourse Loan. The Unsecured Loans are either recourse or non-recourse
to the personal assets of the borrowing entities, but where a loan is
non-recourse, the borrower is personally liable for certain specified carveouts.
Guarantees. Some of the Unsecured Loans are supported by secured or
unsecured guarantees, subject to specified recourse limitations as to the
guarantor.
10
<PAGE>
Environmental Indemnity. Some of the Unsecured Loans are supported by
environmental indemnities.
Existing Senior Loans on the Real Property. The real properties owned
by the borrowers under the Unsecured Loans are subject to senior financing in
the aggregate original amount of $107,800,000 which is not being contributed to
the Trust. The rights between senior and junior lenders are generally governed
by specified intercreditor agreements.
Construction Loans
Description of Construction Loans and the Collateral. There are two (2)
loans (the "Constructions Loans") in this category with an aggregate original
available principal balance of $92,390,000, of which $6,459,000 had not yet been
funded as of March 18, 1997. The Construction Loans are to be disbursed in
accordance with certain approved construction disbursement schedules and
budgets. The Construction Loans bear interest at fixed rates per annum,
requiring monthly interest payments in specified amounts. The Construction Loans
are secured by mortgages encumbering real properties comprised of a to-be-built
condominium project and a to-be-built luxury resort hotel, conference center and
beach club, and golf course both located in Florida, along with certain other
partnership and stock collateral. One (1) of the Construction Loans is also
supported by letters of credit which are subject to return upon the occurrence
of certain repayment conditions and thresholds.
Maturity Date and Prepayment Terms. The Construction Loans have
maturity dates that range from November, 1999, to July, 2004. Periodically
during the term of the Construction Loans, under certain specified conditions,
the Construction Loans may be prepaid either in full or in part, or just in
full, as applicable, upon the satisfaction of certain specified conditions,
including, without limitation, the payment of a specified prepayment fee.
Reserves. The Construction Loans require that the borrowers thereunder
fund certain reserves from, among other specified funds, all of the cash flow
and net sales proceeds generated from the real properties securing the
Construction Loans, which reserves are to be used for the payment of interest,
certain construction costs, or other operating or capital expenses.
Guarantees. The Construction Loans are supported by repayment and/or
completion guarantees. The repayment guaranties range from full repayment to
repayment of only certain specified losses. One of the guarantors under one of
the Construction Loans has provided a promissory note which will be returned to
such guarantor when certain specified funds have been contributed to the reserve
established for such Construction Loan.
Environmental Indemnity. The Construction Loans are supported by
environmental indemnities. A maintenance building on one of the real properties
securing one of the Construction Loans on which a golf course will be developed
is subject to environmental contamination, and such portion of real property is
the subject of a monitoring and remediation plan.
11
<PAGE>
Prohibition on Sale, Encumbrance and Transfer. The Construction Loans
generally prohibit the transfer, sale or encumbrance of the real properties or
interests in the borrowers related to such Construction Loans, with certain
specified exceptions.
Senior Encumbrances. A portion of the real property securing one of the
Construction Loans is subject to certain senior mortgages thereon, including
portions of the property on which a condominium project will be developed.
Real Estate under Long-term Operating Lease
General. Pursuant to the terms of the RLH lease (the "RLH Lease") Red
Lion Hotels, Inc., a Delaware corporation, a wholly owned subsidiary of
Doubletree Corporation ("Tenant") master leases seventeen (17) parcels of real
property (the "RLH Properties") each of which is improved with Doubletree or Red
Lion hotels (the "Leased Hotels"). The RLH Lease is absolutely net so that
Tenant controls all aspects of the RLH Properties operations and management and
is required to pay all rents and other sums to or on behalf of Landlord (as
defined). Tenant is required, at its own cost, to replace fixtures, furnishing
and equipment ("FF&E") and other fixed assets and operating equipment and
inventory as required, which shall be the property of Tenant and to fund an FF&E
reserve account. The Tenant is required to indemnify the Landlord and certain
others for all costs and expenses imposed upon or incurred by an indemnified
party in connection with the use, alteration, operation, management, condition
(including environmental condition and compliance), design, construction,
maintenance, repair or restoration of any of the leased premises and employment
of any person(s) at the leased premises. Doubletree Corporation has executed a
full guarantee of the punctual payment and performance of any and all
liabilities and obligations of Tenant arising out of or related to the RLH
Lease.
Term. The RLH Lease is a long-term lease that extends through 2010,
including five (5) automatic 5-year extension terms unless a proper termination
notice is delivered by the Tenant. The final expiration of the RLH Lease,
assuming all extensions would be in 2035.
Organization. RLH Partnership, L.P., a Delaware limited partnership
(the "Landlord") is the fee owner or ground lessee of the RLH Properties. The
general partner of the Landlord is Red Lion G.P., Inc. and the limited partner
is RLH Net Lease Investment, LLC ("RLH Net"), each of which is wholly owned by a
subsidiary of the Trust. RLH Net is also the sole stockholder of Red Lion G.P.,
Inc. A subsidiary of the Trust has a 99% membership interest in RLH Net and is
the controlling entity of the interest.
Base and Percentage Rent. Landlord collects a specified annual base
rent payable quarterly in arrears, and 7.5% of annual operating revenues in
excess of a base amount for all of the Leased Hotels. Under certain conditions,
Tenant's rent is subject to certain increases if Tenant completes an expansion
at any Leased Hotel.
Operation and Maintenance. Tenant is obligated to keep and maintain the
Leased Hotels in at least as good condition as existed on the commencement date.
Tenant is responsible for the
12
<PAGE>
payment of all costs and expenses incurred in the use, operation or maintenance
of the leased premises, including rents and other amounts owed under any ground
lease management fees real estate taxes, insurance, supplies and materials, the
cost of all maintenance, janitorial, security and service agreements,
electricity, water and any other utilities supplied to the leased premises.
Limited Nonrecourse to Landlord. Any claim based on the Landlord's
liability under the RLH Lease shall be enforced against the leased premises and
not against any other tangible or intangible assets, properties or funds of the
Landlord; provided, however, if, as a result of a judicial foreclosure of any
mortgage, the Landlord's interest in any Leased Hotel is transferred to a
mortgagee or other entity, and at such foreclosure Tenant has a legal proceeding
against the Landlord, Tenant shall have the right to enforce any judgment from
any assets or other properties of the Landlord.
For the year ended December 31, 1997
------------------------------------
Average
Number Daily Average
of Rooms Rate Occupancy
-------- ---------- ---------
Seattle, Washington 850 $ 93.59 71.3%
Salt Lake City, Utah 497 101.96 78.5%
Sacramento, California 376 67.05 77.1%
San Diego, California 300 96.36 75.4%
Sonoma, California 245 88.54 68.1%
Medford, Oregon 186 63.80 64.8%
Boise, Idaho 182 58.16 74.4%
Pendleton, Oregon 168 65.09 52.7%
Kelso, Washington 162 65.25 60.5%
Vancouver, Washington 160 81.86 67.2%
Durango, Colorado 159 98.44 59.7%
Wenatchee, Washington 149 48.42 75.0%
Coos Bay, Oregon 143 61.51 62.7%
Eugene, Oregon 137 63.45 64.3%
Astoria, Oregon 124 68.02 45.2%
Missoula, Montana 76 50.15 67.5%
Bend, Oregon 75 59.34 63.8%
------
3,989
13
<PAGE>
Loan Participations
Description of Participation Loans and the Collateral. There are three
(3) loans (the "Participation Loans") in this category which are Participations
in loans that have an aggregate original principal balance of $22,656,000. The
interest in each of the Participation Loans is limited to a certain specified
participation percentage. The Participation Loans bear interest at either a
variable rate per annum based on LIBOR plus an additional specified amount, or
at fixed rates per annum subject to certain scheduled increases, and requiring
either no monthly payments, monthly interest payments or specified amortization
payments. The Participation Loans are secured by mortgages encumbering real
properties comprised of an office building in New York, New York, an office
building in Rockville, Maryland, and a leasehold interest in a hotel in
Uniondale, New York, and certain other non-real property collateral.
Maturity and Prepayment Terms. The Participation Loans have maturity
dates that range from May, 1999, to May, 2000. The Participation Loans may
either be prepaid in full or in part without the payment of a prepayment penalty
or are not prepayable.
Guaranties. Some of the Participation Loans are supported by either a
completion guaranty or a repayment guaranty.
Co-Lending Arrangement. Each of the Participation Loans is subject to
the interest of other participants in the loans and the relationship among
participating lenders is generally governed by the terms of certain
participation or co-lending agreements.
Participating Equity Interest. One (1) of the Participation Loans
requires payment of participating equity upon the sale or refinancing of the
real property securing such loan.
Other
This category generally includes publicly traded bonds with a market
value of approximately $47.5 million of two issuers, one of which matures in May
2002 with a coupon of 12.75% per annum that pays semi-annually and the other
which matures in March 2007 with a coupon of 12.5% per annum that pays
semi-annually.
Letters of Intent
In addition to the assets described above, SOF IV also contributed to
the Trust its rights under certain letters of intent. The letters of intent are
non-binding obligations to originate or acquire mortgages on office, residential
and hotel properties. There can be no assurance that definitive agreements with
respect to the transactions contemplated by the letters of intent will be
executed on the terms set forth in the letters of intent or at all, and if
executed that such transactions will be consummated.
14
<PAGE>
Item 7. Financial Statements and Exhibits.
In response to comments received from the Securities and Exchange
Commission, the Trust hereby amends Item 7. Financial Statements and Exhibits of
the Current Report by deleting the information thereunder and inserting in lieu
thereof the following:
INDEX TO FINANCIAL STATEMENTS
STARWOOD FINANCIAL TRUST
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Condensed Consolidating Financial Statements
- ----------------------------------------------------------------
Pro Forma Consolidating Balance Sheets as of December 31, 1997......................................10
Pro Forma Consolidating Statements of Operations for the year ended December 31, 1997...............11
Notes and Management's Assumptions to Unaudited Pro Forma Consolidating
Financial Statements.............................................................................12
Starwood Mezzanine Loan Investment Operations
- ---------------------------------------------
Report of Independent Accountants...................................................................17
Divisional Balance Sheets as of December 31, 1997 and 1996..........................................18
Statements of Divisional Operations for years ended December 31, 1997, 1996 and 1995................19
Statements of Divisional Equity for the years ended December 31, 1997, 1996 and 1995................20
Statements of Cash Flows for the years ended December 31, 1997, 1996, 1995..........................21
Notes to Divisional Financial Statements............................................................22
SOF IV Loan Investment Operations
- ---------------------------------
Report of Independent Accountants...................................................................27
Divisional Balance Sheets as of December 31, 1997 and 1996..........................................28
Statements of Divisional Operations for the year ended December 31, 1997 and for the
period from July 3, 1996 (Inception) through December 31, 1996...................................29
Statements of Divisional Equity for the year ended December 31, 1997 and for the
period from July 3, 1996 (Inception) through December 31, 1996...................................30
Statements of Divisional Cash Flows for the year ended December 31, 1997 and for
the period from July 3, 1996 (Inception) through December 31, 1996...............................31
Notes to Divisional Financial Statements............................................................32
RLH Portfolio
- -------------
Report of Independent Accountants...................................................................39
Statement of Revenue and Certain Expenses for the year ended December 31, 1996......................40
Statement of Revenue and Certain Expenses for the period from January 1, 1997
through May 1, 1997 (unaudited)..................................................................41
Notes to Statement of Revenue and Certain Expenses..................................................42
</TABLE>
15
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited Pro Forma Consolidating Balance Sheet as of
December 31, 1997 and Pro Forma Consolidating Statements of Operations for the
year ended December 31, 1997 have been prepared to reflect the transactions and
the adjustments described in the accompanying notes. The pro forma financial
information is based on the historical financial statements and should be read
in conjunction with the notes and management's assumptions thereto. The Pro
Forma Balance Sheet was prepared as if the Transactions (as defined and more
fully described in Note 1 to the Pro Forma Consolidating Financial Statements)
occurred as of December 31, 1997. The Pro Forma Consolidating Statements of
Operations for the year ended December 31, 1997 were prepared as if the
Transactions occurred on January 1, 1997. The pro forma operating results are
unaudited and not necessarily indicative of the consolidated operating results
which actually would have occurred if the Transactions had been consummated at
the beginning of 1997, nor does it purport to represent the future financial
position of the Trust, as defined, or the results of operations for future
periods. For purposes of this financial information, the term the "Trust"
includes the Starwood Financial Trust (formerly known as the Angeles
Participating Mortgage Trust) and its subsidiary, APMT Limited Partnership (the
"Partnership"), in their collective capacities as the recipients of certain
assets of Starwood Mezzanine Investors, L.P. ("Mezzanine") and Starwood
Opportunity Fund IV, L.P. ("SOF IV") in the Transactions.
16
<PAGE>
STARWOOD FINANCIAL TRUST
PRO FORMA CONSOLIDATING BALANCE SHEET
(Note 2)
As of December 31, 1997
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Historical
------------------------------------------- Pro Forma Trust
Trust Mezzanine SOF IV Adjustments Pro Forma
-------------- ------------ ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Assets:
Real estate investments.................. $11,175 $143,885 $829,906 $88,911 (A) $1,037,877
Cash and cash equivalents................ 296 3,376 - 5,526 (B) 9,198
Restricted cash.......................... - - 2,119 - 2,119
Accrued interest receivable.............. 58 1,695 15,178 (16,873) (C) 58
Other assets and deferred expenses....... 1,912 169 656 8,687 (D) 11,424
Total assets...................... -------------- ------------ ------------- ----------------- --------------
$13,441 $149,125 $847,859 $86,251 $1,096,676
Liabilities and Shareholders' Equity:
Debt obligations......................... $350,000 (E) $350,000
Other liabilities........................ $2,119 - 2,119
Accrued expenses and accounts payable.... $1,915 $250 186 - 2,351
Total liabilities -------------- ------------ ------------- ----------------- --------------
1,915 250 2,305 350,000 354,470
-------------- ------------ ------------- ----------------- --------------
Minority interest........................ 5,175 (5,175) (F) -
Division equity.......................... 148,875 845,554 (994,429) (G) -
Shareholders' equity:
Class A Shares $1.00 par value,
7,550,000 and 314,341,744 shares
issued and outstanding on a
historical and pro forma basis,
respectively...................... 7,550 306,792 (H) 314,342
Class B Shares $.01 par value,
3775,000 and 157,170,872 shares
issued and outstanding on a
historical and pro forma basis,
respectively...................... 38 1,533 (I) 1,571
Unrealized gain on "available for
sale" investments................. (162) (162)
Additional paid in capital.......... 42,228 427,530 (J) 469,758
Accumulated undistributed net
realized gain from sale of
mortgages......................... 2,545 2,545
Accumulated distributions in excess
of cumulative net income other
than gain from sale of mortgages.. (45,848) (45,848)
Total shareholders'/division equity -------------- ------------ ------------- ----------------- --------------
6,351 148,875 845,554 (258,547) 742,206
Total liabilities and -------------- ------------ ------------- ----------------- --------------
shareholders'/Division equity............ $13,441 $149,125 $847,859 $86,251 $1,096,676
============== ============ ============= ================= ==============
</TABLE>
The accompanying notes and management's assumptions are an integral
part of this statement.
17
<PAGE>
STARWOOD FINANCIAL TRUST
PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
(Note 3)
For the Year Ended December 31, 1997
(Unaudited)
(In thousands, except for net income per Class A Share)
<TABLE>
<CAPTION>
Historical
------------------------------------------- Pro Forma Trust
Trust Mezzanine SOF IV RLH Adjustments Pro Forma
-------------- ------------ ------------- ----- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Interest income.......................... $ 896 $20,893 $46,523 $ $(6,356)(a) $61,956
Prepayment and participation income...... 985 16,182 7,970 25,137
Rental income............................ - - 10,311 5,000 15,311
Other income............................. -------------- ------------ ------------- ----- ------------ -------------------
6 710 171 887
Total revenue..................... -------------- ------------ ------------- ----- ------------ -------------------
1,887 37,785 64,975 5,000 (6,356) 103,291
Expenses:
Interest expense......................... - 23,151 (b) 23,151
Depreciation and amortization............ 3,869 3,006 (c) 6,875
General and administrative............... 461 219 830 (d) 1,510
Management fee........................... 1,808 8,883 (10,691)(e) -
Advisory fee (Note 4).................... - 8,143 (f) 8,143
Other expenses........................... -------------- ------------ ------------- ----- ------------ -------------------
507 1,610 - 2,117
Total expenses................... -------------- ------------ ------------- ----- ------------ -------------------
461 2,315 14,581 - 24,439 41,796
Net income before minority interests..... 1,426 35,470 50,394 5,000 (30,795) 61,495
Minority interests of limited partnership -------------- ------------ ------------- ----- ------------ -------------------
interests in the Partnership........ (1,415) - - - 1,415 (g) -
Net income............................... -------------- ------------ ------------- ----- ------------- -------------------
$ 11 $35,470 $50,394 $5,000 $(29,380) $61,495
============== ============ ============= ===== ============ ===================
Net income per Class A Share............. $0.01 $0.20
============== ===================
Weighted average number of Class A
Shares outstanding.................. 7,244 314,342
============== ===================
</TABLE>
The accompanying notes and management's assumptions are an integral
part of this statement.
18
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
Note 1--Recapitalization Transactions
As more fully discussed in Note 5 to the annual report on Form 10-K for
the year ending December 31, 1997 of Starwood Financial Trust (the "Trust"),
formerly known as Angeles Participating Mortgage Trust, pursuant to a series of
transactions beginning in March 1994 and including the exercise of certain
warrants in January 1997, Starwood Mezzanine Investors, L.P. ("Mezzanine") and
certain entities affiliated with the general partners of Mezzanine
(collectively, Mezzanine, Starwood Opportunity Fund IV, L.P. ("SOF IV") and
other affiliates are referred to as "Starwood"), acquired joint ownership of 70%
and 100% of the outstanding Class A Shares and Class B Shares of the Trust
through which they control approximately 80% of the voting interests in the
Trust. As of December 31, 1997 Mezzanine also owned the remaining 91.95% of the
APMT Limited Partnership ("the Partnership") not held by the Trust, which was
convertible into either cash, an additional 4,568,944 Class A Shares of the
Trust, or a combination of the two, as determined by the Trust. Interests in the
Partnership are referred to as "Units".
Immediately prior to the Transactions, each outstanding Unit held by
Mezzanine was exchanged for one Class A Share of the Trust and, concurrently,
the Partnership was liquidated through a distribution of its net assets to the
Trust, its then sole Partner. Upon exchange of the Units for Class A Shares but
prior to the consummation of the Transactions described below, Starwood and its
affiliates jointly owned approximately 80.97% and 100% of the outstanding Class
A Shares and Class B Shares, respectively, of the Trust through which they
controlled 87.3% of the voting interests the Trust.
On March 18, 1998, The Trust, Mezzanine and SOF IV (an affiliate of the
general partners of Starwood Mezzanine) consummated the Transactions
contemplated by a contribution agreement ("Contribution Agreement") among
Mezzanine, SOF IV and the Trust to substantially recapitalize and increase the
size of the Trust's operations. Pursuant to the Contribution Agreement,
Mezzanine contributed various real estate investments to the Trust in exchange
for 55,148,000 Class A Shares and $25.5 million in cash, as adjusted. SOF IV
contributed various real estate loans and investments, $17.9 million in cash and
certain letters of intent in exchange for the issuance of 247,074,800 Class A
Shares of the Trust and a cash payment of $324.3 million, as adjusted.
Concurrently, the holders of the Class B Shares who are affiliates of the
general partners of Starwood Mezzanine and SOF IV acquired 153,395,872
additional Class B Shares sufficient to maintain existing voting preferences
pursuant to the Trust's Amended and Restated Declaration of Trust (the
"Declaration of Trust"). Immediately after these Transactions, Starwood and its
affiliates owned approximately 99.3% of the outstanding Class A Shares and 100%
of the Class B Shares. (Collectively, the transactions described in this note
are the "Transactions").
19
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
On March 18, 1998, the Trust entered into bank credit agreements under
which the Trust may currently borrow up to $625.0 million, with an additional
$175.0 million available under certain conditions to fund loan originations
(including the cash portion of the Transactions described above) and provide
working capital to fund new loan originations and for other general corporate
purposes. The credit agreement is comprised of a (i) $500.0 million revolving
credit facility which bears interest only payable monthly at LIBOR plus 1.5% and
with outstanding principal due at maturity on March 13, 2001 and (ii) a $125.0
million Term Loan secured by the properties under long term operating lease
which bears interest only payable monthly at LIBOR plus 1.5% and which matures
on March 15, 1999. Availability of amounts to borrow under the revolving credit
facility is subject to having sufficient assets includable as security under the
line under a percentage borrowing base calculation. An aggregate of $8.0 million
in loan fees relating to these arrangements were paid at closing of the
Transactions. These fees will be amortized over the related loan terms.
In anticipation of consummating the Transactions, effective on March
16, 1998, the Trust entered into LIBOR interest rate caps at 9% in the notional
amounts of $125.0 million and $300.0 million expiring on March 16, 1999 and
2001, respectively, for an aggregate cost of $158,750.
Note 2--Basis of Presentation
The accompanying unaudited pro forma consolidating balance sheet is
presented as if the Transactions were completed on December 31, 1997. The RLH
Portfolio is included in SOF IV's consolidated balance sheet as of December 31,
1997.
The accompanying unaudited pro forma consolidating statements of
operations are presented as if the Transactions and the acquisition of the RLH
portfolio from the predecessor owners, were completed on January 1, 1997 for the
year ended December 31, 1997.
The pro forma financial statements should be read in conjunction with
the related historical financial statements and notes thereto of which these
financial statements are a part. In management's opinion, all adjustments
necessary to reflect the effects of the Transactions have been made.
The unaudited pro forma consolidating financial statements are not
necessarily indicative of the actual financial position of the Trust at December
31, 1997 or what the actual results of operations of the Trust would have been
assuming that the Transactions had been completed as of January 1, 1997, nor are
they indicative of the results of operations for future periods.
20
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
Note 3--Other Transactions with Affiliates:
Advisory Agreement
On March 18, 1998, the Trust and Starwood Financial Advisors, L.L.C.
(the "Advisor") entered into an Advisory Agreement (the "Advisory Agreement")
pursuant to which the Advisor manages the investment affairs of the Trust,
subject to the Trust's purpose and investment policy, certain investment
restrictions and the directives of the Board of Trustees. The services provided
by the Advisor include the following: identifying investment opportunities for
the Trust; advising the Trust with respect to and effecting acquisitions and
dispositions of the Trust's investments; monitoring, managing and servicing the
Trust's loan portfolio; and arranging debt financing for the Trust. The Advisor
will not act in a manner that is inconsistent with the express direction of the
Board of Trustees and reports to the Board of Trustees and/or the officers of
the Trust with respect to its activities. The Advisor is not responsible for the
administration of the Trust.
Commencing on the 90th day after the consummation of the Transactions,
the Trust will pay to the Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the "Book Equity Value" of the Trust (as defined in the
Advisory Agreement) determined as of the last day of each quarter, but estimated
and paid in advance subject to recomputation. Fees to be paid in 1998 will be
recognized ratably during the period from March 18, 1998 to December 31, 1998.
As a result of the delayed commencement of the advisory fee, the operating
results of the Trust for fiscal 1998 will be higher than they would have been if
the advisory fee had not been deferred and therefore may not be reflective of
future operating results of the Trust.
In addition, commencing on the 90th day after the consummation of the
Transactions, the Trust will pay the Advisor a quarterly incentive fee of five
percent (5%) of the Trust's "Adjusted Net Income" (as defined in the Advisory
Agreement) during each quarter that the Adjusted Net Income for such quarter
restated and annualized as an annualized rate of return on the Trust's Book
Equity Value for such quarter equals or exceeds the "Benchmark BB Rate" (as
defined in the Advisory Agreement). The Advisor will be also be reimbursed for
certain expenses it incurs on behalf of the Trust.
The Advisory Agreement has an initial term of three years subject to
automatic renewal for one year periods unless the Trust has been liquidated or a
Termination Event (as defined in the Advisory Agreement and which generally
includes violations of the Advisory Agreement by the Advisor, a bankruptcy event
of the Advisor or the imposition of a material liability on the Trust as a
result of the Advisor's bad faith, willful misconduct, gross negligence or
reckless disregard of duties) has occurred and is continuing. In addition, the
Advisor may terminate the Advisory
21
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
Agreement on 60 days' notice to the Trust and the Trust may terminate the
Advisory Agreement upon 60 days' written notice if a Termination Event has
occurred or if the decision to terminate is based on affirmative vote of the
holders of two-thirds or more of the voting shares of the Trust at the time
outstanding.
The Trust's investment affairs will be managed by the Advisor, subject
to the supervision of the Board of Trustees. Thus, the Trust will depend on the
services of the Advisor and its officers and employees for the success of the
Trust. The Trust's success depends in part on the continuing ability of the
Advisor to hire and retain knowledgeable personnel. Finally, the Trust is
subject to the risk that the Advisor will terminate the Advisory Agreement and
that no suitable replacement can be found to manage the investment affairs of
the Trust. The Starwood Trustees and Officers directly or indirectly own a
substantial economic and voting interest in the Advisor.
1996 Share Incentive Plan
The Trust amended and restated its stock option plan to provide a means
of incentive compensation for officers, key employees, Trustees, consultants and
advisors. Stock options, restricted stock awards and other performance awards
may be granted under the Starwood Financial Trust 1996 Share Incentive Plan (the
"Plan"). Under the amended Plan, up to a maximum of 9.0% of the outstanding
Class A Shares on a fully-diluted basis, as adjusted for subsequent issuances of
Class A Shares, are reserved for issuance under the Plan. All grants of shares
under the Plan, other than automatic grants to non-employee Trustees, will be at
the sole discretion of the Board of Trustees or a specifically designated
sub-committee of such Trustees. Approximately 14,963,057 options to purchase
Class A Shares at $2.50 per share that are immediately exercisable were granted
to the Advisor under the Plan upon consummation of the Recapitalization
Transactions and future grants may be made to the Advisor or employees of the
Trust in the future.
An independent financial advisory firm estimated the value of these
options at date of grant to be approximately $0.40 per share using a
Black-Scholes valuation model. In the absence of comparable historical market
information for the Trust, the advisory firm utilized assumptions consistent
with activity of a comparable peer group of companies including an estimated
option life of five years, a 27.5% volatility rate and an estimated dividend
rate of 8.5%. Options issued to employees will be accounted for using the
intrinsic method and, accordingly, no earnings charge will be reflected for
options issued to direct employees since the exercise price approximates the
concurrent exchange transaction price at date of grant. Options issued to the
Advisor will be accounted for under the option value method and, accordingly,
result in a charge to earnings upon consummation of the Recapitalization
Transaction equal to the number of options allocated to the Advisor multiplied
by the estimated value at consummation. The charge of approximately $6.0
22
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
million will be reflected in the Trust's first quarter 1998 financial results,
however, such charge has been excluded from the pro forma financial information
presented in this note, as it represents a non-recurring charge. Future charges
may be taken to the extent of additional option grants, which are at the
discretion of the Board of Trustees.
Note 4--Adjustments to Pro Forma Consolidating Balance Sheet:
(A) In accordance with the terms of the Contribution Agreement, at
closing, cash adjustments were made to reflect cash activity from the January 1,
1998 valuation through closing.
The pro forma adjustment represents the following (in thousands):
Cash due from Mezzanine for cash activity...................... $ (2,998)
Cash due from SOF IV for cash activity......................... (7,315)
Cash due to SOF IV for additional fundings and loans........... 11,418
Basis adjustment on Mezzanine assets........................... 832
Basis adjustments on SOF IV assets.............................-----------------
Assets acquired from Starwood Mezzanine have been reflected using step
acquisition accounting at predecessor basis adjusted to fair value to the extent
of post-transaction third-party ownership. Assets acquired from SOF IV have been
reflected at their fair market value.
(B) Represents the following (in thousands):
Cash payment to Mezzanine....................................... $ (28,500)
Cash due from Mezzanine for cash activity....................... 2,998
Elimination of Mezzanine cash not acquired...................... (3,376)
Cash contribution from SOF IV................................... 17,947
Cash due from SOF IV for cash activity.......................... 7,315
Cash due from SOF IV for additional fundings and loans.......... (11,418)
Payment to SOF IV for certain senior mortgages and
related accrued interest........................................ (320,175)
Borrowings under credit facilities.............................. 350,000
Loan fees and related legal expenses paid at closing............ (8,687)
Legal and accounting costs of recapitalization transaction...... (2,111)
Proceeds from issuance of Class B Shares........................ 1,533
---------------
$ 5,526
23
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
(C) Represents the elimination of certain assets of Mezzanine and SOF
IV that were not acquired by the Trust.
(D) Loan fees and related legal expenses paid in connection with the
credit facilities.
(E) Represents the amounts borrowed at closing under bank credit
agreements to consummate the Transactions.
(F) Represents the conversion of the Units in exchange for Class A
Shares.
(G) Represents the elimination of divisional equity of Mezzanine and
SOF IV in connection with the Transactions.
(H) Represents the par value of the Class A Shares to be issued to
Mezzanine and SOF IV in connection with the Transactions and upon conversion of
the Units as follows:
Par Value
-------------
(In thousands)
Contribution transactions:
Starwood Mezzanine......................................... $ 55,148
SOF IV..................................................... 247,075
---------
302,223
Conversion of Units by Mezzanine............................. 4,569
---------
$ 306,792
(I) Proceeds from issuance of additional Class B Shares.
(J) Represents the additional paid-in-capital as a result of the
Transactions.
Note 5--Adjustments to Pro Forma Consolidating Statement of Operations:
(a) Represents the adjustment to recognize revenue on the contributed
real estate related loan investments as necessary to reflect the amortization of
the increased basis described in Note 4 (A). Such premium was computed on a
loan-by-loan basis and is to be amortized using the effective interest method
over the remaining contractual term to maturity adjusted for anticipated
prepayments, where appropriate.
(b) Represents an adjustment to reflect the estimated interest expense
which would have been incurred under the Trust's new bank credit agreements,
including amortization of loan fees and legal costs, under the post transaction
capital structure based on the weighted average assets outstanding assuming
approximately a 35% leverage ratio and actual LIBOR rates for the related
periods.
24
<PAGE>
STARWOOD FINANCIAL TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA CONSOLIDATING FINANCIAL STATEMENTS
(c) Represents additional depreciation on the RLH Portfolio, real
estate held under a long term operating lease as follows (in thousands):
For the year
Ended
December 31,
1997
-------------
Depreciation for period May 2, 1997 acquisition by SOF IV........... $ 2,185
Increased depreciation resulting from the Trust's acquisition
at a higher basis................................................. 821
----------
$ 3,006
(d) Represents estimated additional general and administrative expenses
(i.e. salaries, office rent, legal, insurance costs etc.) to be incurred by the
Trust in connection with the increase in overall operations as a result of
consummation of the Transactions.
(e) Represents the elimination of management fees previously charged to
Mezzanine and SOF IV.
(f) Represents the pro forma base and incentive advisor fees which
would have been earned under the terms of the Advisory Agreement for the related
periods based on the post transaction capital structure, at an assumed 35%
leverage rate on actual investments made. The incentive fee was calculated using
pro forma returns, published "BB" spread rates and historical 10 year treasury
rates.
(g) Represents the adjustment to eliminate the minority interests
allocated to the Units in the Partnership currently held by Mezzanine which were
converted to Class A Shares.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Starwood Mezzanine Investors, L.P.
We have audited the accompanying balance sheets of the Starwood
Mezzanine Loan Investment Operations (the "Division"), a division of Starwood
Mezzanine Investors, L.P. (the "Partnership") at December 31, 1997 and 1996 and
the related statements of operations and of cash flows of the Division 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 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.
The accompanying financial statements were prepared to comply with the
rules and regulations of the Securities and Exchange Commission and on the basis
of presentation as described in Note 1, to present the balance sheets of the
Division contributed to Starwood Financial Trust (the "Trust"), formerly known
as Angeles Participating Mortgage Trust, and the related statements of
operations and cash flows of the Division and are not intended to be a complete
presentation of the Partnership's financial position, results of operations or
cash flows.
In our opinion, the financial statements present fairly, in all
material respects, the balance sheets of the Division at December 31, 1997 and
1996 and the related statements of operations and of cash flows of the Division
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
Price Waterhouse LLP
New York, New York
March 20, 1998
26
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
DIVISIONAL BALANCE SHEETS
(Notes 1 and 2)
(In thousands)
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1997 1996
<S> <C> <C>
Assets:
Real estate and related investments (Note 4)................. $ 143,885 $ 180,485
Cash and cash equivalents.................................... 3,376 4,540
Accrued interest receivable.................................. 1,695 2,238
Other assets and deferred expenses........................... --------------------------------
169 356
Total assets........................................ --------------------------------
$ 149,125 $ 187,619
Liabilities and divisional equity:
Accrued expenses and accounts payable........................ $ 250 $ 45
Divisional equity............................................ --------------------------------
148,875 187,574
Total liabilities and divisional equity............. --------------------------------
$ 149,125 $ 187,619
</TABLE>
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
STATEMENTS OF DIVISIONAL OPERATIONS
(Notes 1 and 2)
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest income from investments.................................... $ 20,893 $ 33,100 $ 15,169
Prepayment and participation income................................. 16,182 705 --
Other income........................................................ ---------------------------------------------------
710 394 232
Total revenues............................................. ---------------------------------------------------
37,785 34,244 15,401
Expenses:
Management fee (Note 3)............................................. 1,808 2,157 2,201
Other expenses...................................................... ---------------------------------------------------
507 220 223
Total expenses............................................. ---------------------------------------------------
2,315 2,377 2,424
Net income (loss).......................................... ---------------------------------------------------
$ 35,470 $ 31,867 $ 12,977
</TABLE>
The accompanying notes are an integral part of these financial
statements.
28
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(Notes 1 and 2)
(In thousands)
Capital balances at January 1, 1995...................... 26,855
Cash contributions ...................................... 183,441
Cash distributions ...................................... (6,779)
Net income for the year.................................. ----------------------
12,977
Capital balances at December 31, 1995.................... 216,494
Cash contributions....................................... 17,825
Cash distributions....................................... (74,852)
Non-cash distributions.................................. (3,760)
Net income for the year.................................. ----------------------
31,867
Capital balances at December 31, 1996.................... 187,574
Cash contributions....................................... 4,953
Cash distributions....................................... (79,122)
Net income for the year.................................. ----------------------
35,470
Capital balances at December 31, 1997.................... ----------------------
$148,875
The accompanying notes are an integral part of these financial
statements.
29
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
STATEMENTS OF DIVISIONAL CASH FLOWS
(Notes 1 and 2)
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $35,470 $31,867 $12,977
Reconciliation of net income (loss) to net cash
provided (used) by operating activities..................
Amortization of organized costs.............................. 80 80 80
Amortization of discounts on real estate loans............... (278) (191) (4)
Changes in assets and liabilities:
(Increase) decrease in interest receivable............... 543 1,472 (3,620)
(Increase) decrease in other assets...................... 107 (75) 168
Increase (decrease) in accounts payable and -----------------------------------------------------
accrued expenses......................................... 205 (52) 20
Net cash provided (used) by operating -----------------------------------------------------
activities......................................... 36,127 33,101 9,621
Cash flows from investing activities:
Principal repayments from unsecured notes and
mortgage notes............................................... 76,878 62,105 173
Investments in unsecured notes and mortgage -----------------------------------------------------
notes........................................................ (40,000) (37,695) (183,611)
Net cash provided (used) by investing -----------------------------------------------------
activities............................................... 36,878 24,410 (183,438)
Cash flows from financing activities:
Contributions to divisional equity........................... 4,953 17,825 183,441
Distributions from divisional equity......................... -----------------------------------------------------
(79,122) (74,852) (6,779)
Net cash provided (used) by financing -----------------------------------------------------
activities............................................... (74,169) (57,027) 176,662
Net increase (decrease) in cash and cash equivalents.............. (1,164) 484 2,845
Cash and cash equivalents, beginning of period.................... -----------------------------------------------------
4,540 4,056 1,211
Cash and cash equivalents, end of period.......................... -----------------------------------------------------
$3,376 $4,540 $4,056
</TABLE>
The accompanying notes are an integral part of these financial
statements.
30
<PAGE>
STARWOOD MEZZANINE LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD MEZZANINE INVESTORS, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
The accompanying financial statements were prepared to reflect certain
assets and operations which were contributed on March 18, 1998 to Starwood
Financial Trust (the "Trust"), formerly Angeles Participating Mortgage Trust, a
real estate investment trust which is publicly traded on the American Stock
Exchange, in exchange for Class A Shares of the Trust as more fully described in
Note 2.
Starwood Mezzanine Investors, L.P. (the "Partnership" or "Mezzanine"),
a Delaware limited partnership, was formed on February 15, 1994. Starwood
Capital Group, L.P. as managing general partner, and Starwood Mezzanine
Holdings, L.P. as the general partner, in the Partnership (collectively, the
"General Partners"), and certain entities or persons, as limited partners in the
Partnership, entered into a Limited Partnership Agreement (the "Partnership
Agreement") dated August 29, 1994. The Partnership Agreement was amended as of
November 1, 1994 (date of inception) to admit additional limited partners to
Mezzanine resulting in an effective termination of the old partnership.
Investing activity including loan investments commenced upon this date. Under
the amended Partnership Agreement, the General Partners and limited partners
(collectively, the "Partners") have aggregate 1% and 99% interests in the
Partnership, respectively. The term of the Partnership is seven years after the
admission of additional limited partners on November 1, 1994 but may be extended
upon majority approval of the limited partners.
As stated in the Partnership's offering memorandum, the purpose of
Mezzanine is to seek current returns and capital appreciation through investment
in high yielding, senior and subordinated real estate related debt interests
including unrated credit support for the first loss tranches of commercial
mortgage-backed securities, junior or subordinated mortgage loans, and other
high-yielding securities collateralized by various types of real estate
properties.
The Partnership, at the sole discretion of the General Partners, was
originally permitted to reinvest the proceeds of any disposition or prepayment
from its real estate investments and real estate related investments through
November 1, 1996. After this period, proceeds from any dispositions or
prepayments from real estate and related investments were to be distributed, net
of any required reserves. Notwithstanding the foregoing, the Partnership was
permitted to make reinvestments subsequent to November 1, 1996 with the approval
of the limited partners.
Basis of accounting
The accompanying financial statements include Mezzanine's loan
investment operations (the "Division"), as included in the financial records of
the Partnership, as if it were a separate legal entity. All of the allocations
and estimates in the financial statements are based on assumptions that
31
<PAGE>
the Partnership's management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the Division had been operated as a separate
entity.
For purposes of these financial statements, the investments in the
Trust's stock/warrants and in the APMT (see Note 2) have been excluded since
they will not be contributed by Mezzanine in the proposed transaction.
Revenue recognition
Interest income, including amortization of discounts, commitment fees,
and amortization fees, is recognized using the effective interest method. Income
under participation features is recognized when earned and payable. Income from
prepayment penalties is recognized when received.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash in banks and short-term investments. Short-term investments are comprised
of highly liquid instruments with original maturities of three months or less.
Income taxes
No provision for income taxes has been made in the financial statements
because the Division and the Partnership are not subject to income tax. The tax
effects of its activities accrue to the partners of the Partnership.
Risks and uncertainties
In the normal course of business, the Division encounters economic
risk. There are three main components of economic risk: interest rate risk,
credit risk and market risk. The Division would be subject to interest rate risk
to the degree that its interest-bearing liabilities mature or reprice at
different speeds, or different bases, than its interest earning assets. However,
the Division has not historically entered into interest bearing relationships to
finance its investment activity or operations. Credit risk is the risk of
default on the Division's loan portfolio that results from a borrowers'
inability or unwillingness to make contractually required payments. Market risk
reflects changes in the value of loans held for sale, securities available for
sale and purchased mortgage servicing rights due to changes in interest rates or
other market factors including the rate of prepayments of principal and the
value of the collateral underlying loans and the valuation of real estate held
by the Division.
32
<PAGE>
Allowance for estimated loan losses on loan portfolio
The Division's accounting policies require that an allowance for
estimated loan losses be maintained at a level that management, based upon an
evaluation of known and inherent risks in the portfolio, considers adequate to
provide for potential losses. Specific valuation allowances are established for
impaired loans in the amount by which the carrying value, before allowance for
estimated losses, exceeds the fair value of collateral less costs to dispose on
an individual loan basis. Management considers a loan to be impaired when, based
upon current information and events, it believes that it is probable that
management will be unable to collect all amounts due according to the
contractual terms of the loan agreement on a timely basis. Management measures
these impaired loans at the fair value of the loans' underlying collateral less
estimated disposal costs. Impaired loans may be left on accrual status during
the period Starwood Mezzanine is pursuing repayment of the loan. These loans are
placed on non-accrual status at such time that the loans either: (i) become 90
days delinquent or (ii) management determines the borrower is incapable of, or
has ceased efforts toward, curing the cause of the impairment. Impairment losses
are recognized through an increase in the allowance for loan losses and a
corresponding charge to the provision for loan losses. Charge-offs occur when
loans, or a portion thereof, are considered uncollectible and of such little
value that further pursuit of collection is not warranted. Management's periodic
evaluation of the allowance for estimated loan losses is based upon an analysis
of the portfolio, historical loss experience, economic conditions and trends,
collateral values and other relevant factors. As of December 31, 1997 and 1996,
no allowances were considered necessary, however, such allowances may be
required in the future. Further, no charge-offs have been taken since inception.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of Mezzanine to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2. Transactions with the Trust and APMT
On March 15, 1994, the Trust entered into an agreement with SAHI
Partners, and SAHI, Inc. (affiliates of the general partners of Starwood
Mezzanine) for the sale of warrants (the "Warrants") for the right to purchase
five million shares of the Trust's Class A Shares at a price of $1 per share and
2,500,000 shares of the Class B Shares at a price of $0.01 per share. The Class
B Shares are convertible 49 for 1 into Class A Shares. SAHI Partners and SAHI,
Inc. purchased the Warrants for $101,000, which amount was applied against the
purchase price for the Class A and Class B Shares purchased upon the subsequent
exercise of the Warrants. On March 28, 1996, the Class A Warrants were assigned
to the Partnership at an amount equal to the cost to the affiliates.
33
<PAGE>
On September 26, 1996, the Trust became sole general partner (with an
8.05% interest) of the APMT Limited Partnership ("APMT"), a newly formed entity,
in exchange for a contribution of $400,000 in cash. Concurrently, Mezzanine
received a 91.95% limited partner interest in APMT in exchange for its entire
interest in the Warwick Hotel mortgage note then valued at approximately $4.6
million. The Partnership's interest in APMT was evidenced by 4,568,944
partnership units ("Units"), which were exchangeable for either Class A Shares
of the Trust, cash or a combination of each as determined by the Trust.
On January 22, 1997, Starwood Mezzanine exercised the Warrants and
acquired five million Class A Shares for an additional $4.9 million in cash.
Immediately prior to the Transactions described below, each outstanding
Unit held by Starwood Mezzanine was exchanged for one Class A Share of the Trust
and, concurrently, APMT was liquidated through a distribution of its net assets
to the Trust, its then sole partner. Upon exchange of the Units for Class A
Shares, but prior to the consummation of the Transactions described below
Starwood and its affiliates jointly owned approximately 80.97% and 100% of the
outstanding Class A Shares and Class B Shares, respectively, of the Trust
through which they controlled 87.3% of the voting interests the Trust.
On March 18, 1998, the Trust (i) paid $25.5 million of cash, as
adjusted, and issued 55,148,000 Class A Shares at a price of $2.50 per share to
Mezzanine in exchange for the contribution by Mezzanine to the Trust of its
entire interest in a portfolio of mortgage and partnership loans secured by
residential, hotel, office and mixed use real estate and other assets and (ii)
paid $324.3 million in cash, as adjusted, and issued 247,074,800 Class A Shares
at a price of $2.50 per share to Starwood Opportunity Fund IV, L.P. ("SOF IV")
in exchange for the contribution by SOF IV to the Trust of a portfolio of
mortgage loans and leases secured by residential, hotel, office and mixed use
real estate and other assets, a portfolio of first mortgage loans, cash of $17.9
million, and rights under certain letters of intent (collectively, the
"Transactions").
For purposes of these financial statements, the investments in the
warrants, Class A Shares of the Trust and Units of APMT have been excluded since
they will not be contributed by Mezzanine in the proposed transactions.
Note 3. Related Party Transactions
Mezzanine pays to the General Partners an annual asset management fee
calculated as follows: (i) 1% of the total amount of capital commitments for the
first and second years of the Partnership's term, beginning at the date of
inception, (ii) 1% of the weighted average amount of capital contributions
invested in real estate interests for the third year and (iii) .75% of the
weighted average amount of capital contributions invested in real estate
interests for the fourth year through the dissolution or termination of Starwood
Mezzanine. Such fees are to be limited to actual direct costs and allocated
overhead, as determined by the General Partners, in connection with managing
Starwood Mezzanine's affairs. These fees are payable quarterly in advance.
34
<PAGE>
Note 4. Investments in Real Estate and Related Investments
Summary information regarding the Division's investments is included in
the table on the following page:
35
<PAGE>
Note 4. Investments in Real Estate and Related Investments (Continued)
<TABLE>
<CAPTION>
Current Original
Number of Balance of
Underlying Borrowers Commitment Carrying Balance as of
Investment Class Property Types in Class(a) Amount(a) December 31
---------------- --------------- ----------- ------------- ----------------------
1997 1996
<S> <C> <C> <C> <C> <C>
Senior mortgages Hotel/Apartment -- -- ---- ----
Subordinate Hotel/Office/Resort 2 79,750 $ 75,709 $151,076
mortgages Planned communities
Unsecured Notes Apartment/Hotel/ 2 27,300 25,344 25,161
Office
Construction loans Assisted Living 1 40,000 40,000 --
Loan participation Office 1 5,954 2,832 4,248
interests
$ 143,885 $ 180,485
========= =========
=======================[SPLIT TABLE=============================================
Interest Interest
Underlying Accrual Payment Principal Participation
Investment Class Property Types Maturities(a) Rates(a) Rates(a) Amortization(a) Features(a)
---------------- --------------- ------------- --------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Senior mortgages Hotel/Apartment N/A N/A N/A N/A N/A
Subordinate Hotel/Office/Resort 2002 & 2005 10.00% to 10.00% to Yes(b) None(c)
mortgages Planned communities 15.25% 15.25%
Unsecured Notes Apartment/Hotel/ 2002 & 2004 11.25% to 11.25% to None Yes(e)
Office 15.00% 15.00%
Construction loans Assisted Living 1999 12.00% 12.00% None None
Loan participation Office various LIBOR + LIBOR + Yes(b) None
interests 1.50-175% 1.50-175%
</TABLE>
Footnotes to table
(a) Information relates only to assets outstanding as of December 31, 1997
(b) The remaining loans require fixed monthly payments of interest and
principal resulting in partial principal amortization over the loan term
with the balance due at maturity. Further, one of the loans allows for
additional annual prepayments of $1.3 million without penalty at the
borrowers option.
(c) On June 26, 1997, one of the loans was refinanced. As part of this
refinancing, Mezzanine received net proceeds which included a $16.1 million
yield maintenance payment which has been reflected in prepayment income in
the results of operations for the year ended December 31, 1997.
(d) Contributed to APMT in exchange for Units effective September 26, 1996--See
Note 2.
(e) Under the terms of one of the loans, the Division is to receive additional
interest equal to 12% of the cash flow from operation of the underlying
property and the proceeds, in excess of the base amount, from a sale or
refinancing of the property.
36
<PAGE>
Prepayment terms
The terms of the loan investments generally provide some protection
against re-investment risks associated with early repayments of the loans for a
substantial portion of the loan's term. This protection is achieved through
various specific loan terms including one or more of the following: prepayment
lock-outs, prepayment penalties or yield maintenance provisions based on the
loans accrual rates.
NOTE 5. Disclosures About Fair Value of Financial Instruments
The following estimated fair values of the Divisional financial
instruments are presented in accordance with generally accepted accounting
principles which define fair value as the amount at which a financial instrument
could be exchanged for cash in a current transaction with third parties, other
than in a forced or liquidation sale. These estimated fair values, however, do
not necessarily represent the liquidation value or the market value of the
Division as an operating entity.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Real Estate and related investments
For investments in unsecured notes, senior mortgages, subordinated
mortgages, construction loans, and loan participations, fair value was estimated
by an independent Investment Bank discounting the future contractual and
expected cash flows using the current market rates at which similar loans would
be made to borrowers with similar credit ratings for the same remaining
maturities and analysis regarding the values of the underlying collateral.
Estimated Fair Values of the Division's real estate and related investments were
$166.3 million and $200.5 million at December 31, 1997 and 1996, respectively.
Cash and cash equivalents
Accrued interest receivable
Accrued expenses and other liabilities
For these short-term instruments, the carrying value is a reasonable
approximation of the fair value.
37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Starwood Opportunity Fund IV, L.P.
We have audited the accompanying balance sheet of the SOF IV Loan
Investment Operations (the "Division"), a division of Starwood Opportunity Fund
IV, L.P. (the "Partnership") at December 31, 1997 and 1996 and the related
statement of operations and of cash flows of the Division for the year ended
December 31, 1997 and for the period from July 3, 1996 ("Inception") through
December 31, 1996. 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 audit.
We conducted our audit 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 accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying financial statements were prepared to comply with the
rules and regulations of the Securities and Exchange Commission and on the basis
of presentation as described in Note 1, to present the balance sheet of the
Division contributed to Starwood Financial Trust (the "Trust"), formerly Angeles
Participating Mortgage Trust, and the related statement of operations and cash
flows of the Division and are not intended to be a complete presentation of the
Division's financial position, results of operations or cash flows.
In our opinion, the financial statements present fairly, in all
material respects, the balance sheet of the Division at December 31, 1997 and
1996 and the related statement of operations and of cash flows of the Division
for the year ended December 31, 1997 and for the period from July 3, 1996
("Inception") through December 31, 1996, in conformity with generally accepted
accounting principles.
PRICE WATERHOUSE LLP
New York, New York
March 20, 1998
38
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
DIVISIONAL BALANCE SHEETS
(NOTES 1 AND 2)
(in thousands)
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------
1997 1996
<S> <C> <C>
Assets:
Real estate and related investments (Note 4)............... $ 829,906 $ 8420
Cash and cash equivalents.................................. 2,094
Restricted cash............................................ 2,119 --
Accrued interest and rents receivable...................... 15,178 --
Other assets............................................... 656 401
-------------- -------------
Total assets......................................... $ 847,859 $ 10,915
========== ==========
Liabilities and divisional equity:
Accounts payable and accrued expenses...................... $186 $1,606
Due to affiliates.......................................... 536
Other liabilities.......................................... 2,119 __
----- ----------
Total liabilities..................................... 2,305 2,142
Divisional equity.......................................... 845,554 8,773
---------- ----------
Total liabilities and divisional equity............... $ 847,859 $ 10,915
========= =========
</TABLE>
39
<PAGE>
SOFI IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
STATEMENTS OF DIVISIONAL OPERATIONS
(Notes 1 and 2)
(In thousands)
<TABLE>
<CAPTION>
For the Period
from July 3,
1996-(Inception)
For the Year Ended through
December 31, December 31,
------------------- --------------------
1997 1996
<S> <C> <C>
Revenues:
Interest income from investments................................. $ 46,523 $ 311
Prepayment and participation income.............................. 7,970
Rental revenue................................................... 10,311 --
Other interest income............................................ 171 60
------------------ -------------------
Total revenues............................................. 64,975 371
------------------ -------------------
Expenses:
Management fee................................................... 8,883 1,546
Depreciation and amortization.................................... 3,869 __
General and administrative....................................... 219 37
Other expenses................................................... 1,610 100
------------------ -------------------
Total expenses......................................... 14,581 1,683
------------------ -------------------
Net income (loss)................................................ $ 50,394 $ (1,312)
------------------ --------------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
40
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(Notes 1 and 2)
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Contributions to divisional equity................................................ $ 10,085
Net loss for the period from July 3, 1996 (Inception) through December 31,
1996.............................................................................. (1,312)
-------------
Divisional equity at December 31, 1996............................................ 8,773
Contributions to divisional equity................................................ 786,387
Net income for the year ended December 31, 1997................................... 50, 394
Divisional equity at December 31, 1997 (unaudited)................................ $ 845,554
=========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
41
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
STATEMENTS OF DIVISIONAL CASH FLOWS
(Notes 1 and 2)
(In thousands)
<TABLE>
<CAPTION>
For the
Period from
July 3, 1996
For the Year (Inception)
Ended through
December 31, December 31,
-------------------------- --------------------------
1997 1996
-------------------------- --------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................... $ 50,394 $ (1,312)
Reconciliation of net income (loss) to cash provided
(used) by operating activities:
Depreciation and amortization.................................. 3,869 --
Changes in assets and liabilities:
Loss on sale of Real Estate Investments.................... 13 --
Increase in accrued interest receivable.................... (15,178) --
Increase in restricted cash................................ (2,119) --
Increase in other assets................................... (147) (401)
Increase in real estate investments from
deferred interest or amortization........................ (10,221) --
(Decrease) Increase in accounts payable and
accrued expenses......................................... (1,420) 1,606
-------------------------- --------------------------
Increase in other liabilities ............................. 2,119 --
Net cash provided (used) by operating -------------------------- --------------------------
activities............................................ 27,310 (107)
Cash flows from investing activities:
Purchase of real estate investments.................................. (874,786) (8,420)
Sale of Real Estate Investments...................................... 1,862 --
-------------------------- --------------------------
Repayment of mortgage notes receivable............................... 57,669 --
-------------------------- --------------------------
Net cash used by investing activities.................... (815,255) (8,420)
42
<PAGE>
For the
Period from
July 3, 1996
For the Year (Inception)
Ended through
December 31, December 31,
-------------------------- --------------------------
1997 1996
-------------------------- --------------------------
<S> <C> <C>
Cash flows from financing activities:
Contributions to divisional equity................................... 786,387 10,085
Increase (decrease) in due to affiliates............................. (536) 536
Net cash provided by financing activities................ 785,851 10,621
Net increase (decrease) in cash and cash equivalents........................ (2,094) 2,094
Cash and cash equivalents, beginning of period.............................. 2,094 --
Cash and cash equivalents, end of period.................................... -------------------------- --------------------------
$ -- $ 2,094
</TABLE>
The accompanying notes are an integral part of these financial
statements.
43
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
The accompanying financial statements were prepared to reflect certain
assets and operations which were contributed on March 18, 1998 to Starwood
Financial Trust (the "Trust"), formerly known as Angeles Participating Mortgage
Trust ("APT"), a real estate investment trust which is publicly traded on the
American Stock Exchange, in an exchange for Class A Shares of the Trust and cash
as more fully described in Note 2.
Starwood Opportunity Fund IV, L.P. ("SOF IV" or the "Partnership"), a
Delaware limited partnership, was formed with SOFI IV Management L.L.C. ("the
General Partner") as general partner in the Partnership, and certain entities or
persons, as limited partners (collectively, the "Partners"), entered into a
Limited Partnership Agreement (the "Partnership Agreement") dated July 3, 1996
(the "Inception"). Under the Partnership Agreement, as amended, the General
Partners and limited partners to SOF IV have aggregate 1% and 99% interests in
SOF IV, respectively. The term of SOF IV is eight years after February 27, 1997,
the "Final Date", but may be extended by the General Partner with the consent of
the limited partners advisory committee for up to two consecutive one-year
periods.
As stated in SOF IV's offering memorandum, the objective of SOF IV is to
generate returns for its Partners by (i) originating or purchasing mortgage
loans, including, without limitation, mortgage loans with equity
characteristics, and by locating, analyzing, investing in and managing real
estate-related debt interests and pools of such interests, including, without
limitation, junior or subordinated mortgage loans, unsecured loans to companies
or entities involved in real estate-related activities, unrated credit support
or first loss tranches of commercial mortgage-backed securities, and other
high-yielding securities collateralized by various types of real estate
properties and, in furtherance thereof, where appropriate to participate in or
substantially influence the management of the obligors of such debt interests,
to hold such assets for investment purposes, and to sell, distribute, convert
into equity, or otherwise dispose of such investments, (ii) acquiring, holding,
maintaining, operating, leasing, managing, developing, improving, mortgaging,
encumbering, and selling for profit equity interests in real estate and in
securities and other interests related to real estate, including, without
limitation, rental apartment buildings, office properties and zoned residential
land, (iii) lending to and/or participating as a partner, owner or investor in
other general or limited partnerships, limited liability companies, corporations
or other vehicles or entities, the business of which is related to real estate,
and (iv) engaging in all other activities related or incidental thereto.
Basis of accounting
The accompanying financial statements include SOF IV's loan investment
operations (the "Division"), as included in the financial records of SOF IV, as
if they were a separate legal entity. All of the allocations and estimates in
the financial statements are based on assumptions that the
44
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
Partnership's management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the Division had been operated as a separate
entity.
The Partnership has outstanding debt obligations aggregating $887.6 and
$24.7 million at December 31, 1997 and 1996, respectively, which are secured by
the partners' capital commitments and certain of the Partnership's investments,
including those of the Division. As part of the proposed transaction, a portion
of the cash proceeds were utilized to reduce the outstanding obligations and the
Division's investments were released as collateral. None of the Partnership's
debt obligations were assumed by the Trust. Accordingly, for purposes of these
Divisional financial statements, the investments which will not be contributed
and loan obligations which were not assumed by the Trust, along with their
related effects on the Division's operating results and cash flows, have been
excluded.
Revenue recognition
Interest income, including amortization of discounts, commitment fees,
and amortization fees, is recognized using the effective interest method. Income
under participation features is recognized when earned and payable. Income from
prepayment penalties is recognized when received.
Rental revenue from tenants under operating leases is recognized on a
straight-line basis regardless of when payments are due.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash in banks and short-term investments. Short-term investments are comprised
of highly liquid instruments with original maturities of three months or less.
Allowance for estimated loan losses on loan portfolio
The Division's accounting policies require that an allowance for
estimated loan losses be maintained at a level that management, based upon an
evaluation of known and inherent risks in the portfolio, considers adequate to
provide for potential losses. Specific valuation allowances are established for
impaired loans in the amount by which the carrying value, before allowance for
estimated losses, exceeds the fair value of collateral less costs to dispose on
an individual loan basis. Management considers a loan to be impaired when, based
upon current information and events, it believes that it is probable that SOF IV
will be unable to collect all amounts due according to the contractual terms of
the loan agreement on a timely basis. Management measures these impaired loans
45
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
at the fair value of the loans' underlying collateral less estimated disposal
costs. Impaired loans may be left on accrual status during the period SOF IV is
pursuing repayment of the loan. These loans are placed on non-accrual status at
such time that the loans either: (i) become 90 days delinquent; or (ii)
management determines the borrower is incapable of, or has ceased efforts
toward, curing the cause of the impairment. Impairment losses are recognized
through an increase in the allowance for loan losses and a corresponding charge
to the provision for loan losses. Charge-offs occur when loans, or a portion
thereof, are considered uncollectible and of such little value that further
pursuit of collection is not warranted. Management's periodic evaluation of the
allowance for estimated loan losses is based upon an analysis of the portfolio,
historical loss experience, economic conditions and trends, collateral values
and other relevant factors. As of December 31, 1997 and 1996, no allowances were
considered necessary, however, such allowances may be required in the future.
Further, no charge-offs have been taken since inception.
Income taxes
No provision for income taxes has been made in the divisional financial
statements because its owner, SOF IV, is a partnership which is not directly
subject to income tax. The tax effects of its activities accrue to the Partners
of SOF IV.
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
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2. Transactions with the Trust and APMT
On March 15, 1994, the Trust entered into an agreement with SAHI
Partners, and SAHI, Inc. (affiliates of the general partners of Starwood
Mezzanine Investors, L.P. ("Mezzanine")) for the sale of warrants (the
"Warrants") for the right to purchase five million shares of the Trust's Class A
Shares at a price of $1 per share and 2,500,000 shares of the Class B Shares at
a price of $0.01 per share. The Class B Shares are convertible 49 for 1 into
Class A Shares. SAHI Partners, and SAHI, Inc. purchased the Warrants for
$101,000, which amount was applied against the purchase price for the Class A
and Class B Shares purchased upon the subsequent exercise of the Warrants. On
March 28, 1996, the Class A Warrants were assigned to Mezzanine at an amount
equal to the cost to the affiliates.
46
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
On September 26, 1996, the Trust became sole general partner (with an
8.05% interest) of the APMT Limited Partnership ("APMT"), a newly formed entity,
in exchange for a contribution of $400,000 in cash. Concurrently, Mezzanine
received a 91.95% limited partner interest in APMT in exchange for its entire
interest in the Warwick Hotel mortgage note then valued at approximately $4.6
million. The Partnership's interest in APMT was evidenced by 4,568,944
partnership units ("Units"), which were exchangeable for Class A Shares of the
Trust, cash or a combination of each as determined by the Trust.
On January 22, 1997, Starwood Mezzanine exercised the Warrants and
acquired five million Class A Shares of the Trust for an additional $4.9 million
in cash.
Immediately prior to the Transactions described below, each outstanding
Unit held by Mezzanine was exchanged for one Class A Share of the Trust and,
concurrently, APMT was liquidated through a distribution of its net assets to
the Trust, its then sole Partner. Upon exchange of the Units for Class A Shares,
but prior to the consummation of the Transactions described below, Starwood and
its affiliates jointly owned approximately 80.97% and 100% of the outstanding
Class A Shares and Class B Shares, respectively, of the Trust through which they
controlled 87.3% of the voting interests of the Trust.
On March 18, 1998, the Trust (i) paid $25.5 million of cash, as adjusted,
and issued 55,148,000 Class A Shares at a price of $2.50 per share to Mezzanine
in exchange for the contribution by Mezzanine to the Trust of its entire
interest in a portfolio of mortgage and partnership loans secured by
residential, hotel, office and mixed use real estate and other assets and (ii)
paid $324.3 million in cash, as adjusted, and issued 247,074,800 Class A Shares
at a price of $2.50 per share to SOF IV in exchange for the contribution by SOF
IV to the Trust of a portfolio of mortgage loans and leases secured by
residential, hotel, office and mixed use real estate and other assets, a
portfolio of first mortgage loans, cash of $17.9 million, and rights under
certain letters of intent (collectively, the "Transactions").
For purposes of these divisional financial statements, the investments
which will not be contributed and loan obligations which will not be assumed by
the Trust have been excluded.
Note 3. Related Party Transactions
The Partnership pays to the General Partners an annual management fee
calculated as follows: (i) 1.25% of the total amount of capital commitments for
three years from the Closing Date and thereafter, (ii) 1.25% of the SOF IV loan
investment operations' weighted average amount of capital contributions invested
in real estate interests for the earlier of (a) the Partnership's dissolution
date or (b) the actual
47
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
termination of the Partnership. These fees are payable quarterly in advance and
adjustments shall be made at the end of each calendar year to reflect the actual
management fee payable for the year.
Note 4. Investments in Real Estate and Related Investments
Real Estate under long-term operating leases
RLH Portfolio
On May 2, 1997, a 99% owned subsidiary of the Partnership ("RLH"),
acquired a portfolio of seventeen hotels for a price of approximately $170.7
million. The properties are leased under a triple net lease to and operated by
Red Lion Hotels, Inc. ("Red Lion") under a Master Lease Agreement (the "Lease")
between RLH, the lessor, and Red Lion, the lessee. The properties are seventeen
full service hotels located in seven states and contain a total of 3,989 rooms.
On November 8, 1996, Doubletree Corporation ("Doubletree") acquired Red Lion and
assumed the Lease with RLH.
The Lease is a triple net lease under which Doubletree controls all
aspects of the properties' operation and pays all costs associated with the
operation of the hotels, including real estate taxes, insurance, utilities,
services and capital expenditures. The initial term of the lease expires on
December 31, 2010, and can be extended for up to five, five-year terms at
Doubletree's option. Rent payments under the Lease consist of base rent equal to
$15 million annually and additional rent equal to 7.5% of the amount by which
the aggregate operating revenue for any given year exceeds the aggregate
operating revenue of the twelve months ended September 30, 1996. Payments under
the lease are guaranteed by Doubletree.
The components of the related investments are as follows (In thousands):
48
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
As of
December 31,
1997
------------
Land................................................... $ 22,916
Building............................................... 129,044
Land improvements...................................... 10,095
Office and other....................................... 995
Furniture, fixtures & equipment........................ 7,628
170,678
Less: Accumulated depreciation......................... (3,465)
$ 167,213
=========
Summary information regarding the Division's lending investments is included in
the table on the following page:
49
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
Note 4. Investments in Real Estate and Related Investments (Continued)
<TABLE>
<CAPTION>
Current Original
Number of Balance of Carrying Balance Interest
Underlying Borrowers Commitment as of Accrual
Investment Class Property Type In Class(a) Amount December 31, Maturities Rates(a)
- ---------------- ------------- ----------- ------ ------------ ---------- --------
1997 1996
------- -------
Senior mortgages Office/Hotel/Mixed use 8 459,014 431,546 -- 1999-2007 Fixed: 10.30-
10.82%
Variable: LIBOR +
1.25-2.00%
Subordinated
mortgages Office/Hotel 3 77,625 78,632 -- 2002-2007 Fixed: 12-15.00%
Opportunistic Loan
Investments Office/Hotel/Apartment 2 166,644 63,501 -- 1999 & 2007 Fixed: 5.00-7.00%
Construction loans Resort 1 52,390 38,635 -- 2004 12.50%
Real estate under long Hotels 1 N/A(e) 167,213 -- N/A(e) N/A(e)
term operating
leases
Loan participation
interests Various 2 15,422 10,145 8,420 1999 Fixed: 7.13%
Variable: LIBOR +
58%
Other Public bonds 3 40,250 40,234 -- 2002 & 2007 12.50% - 12.75%
------- -------
829,906 8,420
======= =======
==============================[SPLIT TABLE======================================
Interest
Underlying Payment Principal Participation
Investment Class Property Type Rates(a) Amortization(a) Features(a)
- ---------------- ------------- -------- --------------- -----------
<S> <C> <C> <C> <C>
Senior mortgages Office/Hotel/Mixed use Fixed 10.30- Yes(c) Yes(d)
10.82%
Variable: LIBOR
+ 1.25-2.00%
Subordinated
mortgages Office/Hotel Fixed: 11-12.00% None Yes(b)
Opportunistic Loan
Investments Office/Hotel/Apartment Fixed: 5.00-7.00% Yes(c) Yes(b)
Construction loans Resort 10.00-12.50% None None
Real estate under long Hotels N/A(e) N/A(e) N/A(e)
term operating
leases
Loan participation
interests Various Fixed: Yes(c) None
5.65 - 6.40%
Variable:
LIBOR+ 58%
Other Public bonds 12.50% - 12.75% None None
</TABLE>
Footnotes to table
(a) Information relates only to assets outstanding as of December 31, 1997
(b) Under the terms of one of the loans in this class, the Division is to
receive additional interest of up to 50% of the cash flow from operation of
the underlying property and the proceeds, in excess of the base amount,
from a sale or refinancing of the property.
(c) These loans require fixed monthly payments of interest and principal
resulting in partial principal amortization over the loan term with the
balance due at maturity.
(d) Under the terms of one of the loans, the Division is to receive additional
interest equal to 10% of the cash flow from operation of the underlying
property and the proceeds, in excess of the base amount, from a sale or
refinancing of the property. The cash flow participation is reduced to 5%
if certain collateral operating performance targets are met.
(e) See discussion of lease terms of RLH lease contained elsewhere in this
note.
(f) On December 31, 1997, SOF IV received partial payments of $38.6 million and
$15.3 million on a Senior and a subordinated mortgage, respectively,
representing the required portion of the proceeds from the sale of a
portion of the underlying collateral by a common borrower. A participation
payment on the loan of $8.0 million was also received in connection with
this partial sale by the borrower.
50
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
Prepayment terms
Except for the opportunistic loan investments, the terms of the loan
investments generally provide for some protection against re-investment risks
associated with early repayment of the loans for a substantial portion of the
loan's terms. This protection is achieved through various specific loan terms
including one or more of the following: prepayment lock-outs, prepayment
penalties or yield maintenance provisions based on the loans accrual rates.
Note 5. Risk Management and Use of Financial Instruments
Risk management
In the normal course of business, SOF IV encounters economic risk.
There are three main components of economic risk: interest rate risk, credit
risk and market risk. SOF IV is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different speeds, or
different bases, than its interest earning assets. Credit risk is the risk of
default on SOF IV's loan portfolio that results from a borrower's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans held for sale, securities available for sale and
purchased mortgage servicing rights due to changes in interest rates or other
market factors, including the rate of prepayments of principal and the value of
the collateral underlying loans and the valuation of real estate held by SOF IV.
Use of financial instruments
SOF IV's use of derivative financial instruments is primarily limited
to the utilization of interest rate agreements or other instruments to manage
interest rate exposures. The principal objective of such arrangements is to
minimize the risks and/or costs associated with SOF IV's operating and financial
structure as well as to hedge specific anticipated transactions. The
counterparties to these contractual arrangements are major financial
institutions with which SOF IV and its affiliates also have other financial
relationships. The Partnership is potentially exposed to credit loss in the
event of nonperformance by these counterparties. However, because of their high
credit ratings, the General Partner does not anticipate that any of the
counterparties will fail to meet their obligations.
In 1997, SOF IV utilized interest rate instruments such as interest
rate swaps, as well as treasury locks and collars agreements to reduce the
impact of changes in interest rates on its floating rate debt obligations or in
anticipation of securitization transactions or planned 1998 sales of portions of
fixed rate debt investments. None of the Partnership's debt obligations were
assumed
51
<PAGE>
SOF IV LOAN INVESTMENT OPERATIONS
(A DIVISION OF STARWOOD OPPORTUNITY FUND IV, L.P.)
NOTES TO DIVISIONAL FINANCIAL STATEMENTS--(Continued)
by the Trust nor were any of the existing interest rate protection agreements
contributed. Accordingly, for purposes of these Divisional financial statements,
such instruments, along with their related effects on the Divisional Operating
results and cash flows, have been excluded.
Note 6. Disclosures about Fair Value of Financial Instruments
The following estimated fair values of the divisional financial
instruments are presented in accordance with generally accepted accounting
principles which define fair value as the amount at which a financial instrument
could be exchanged for cash in a current transaction with third parties, other
than in a forced or liquidation sale. These estimated fair values, however, do
not necessarily represent the liquidation value or the market value of the
Division as an operating entity. The following methods and assumptions were used
to estimate the fair value of each class of financial instruments:
Real estate and related investments
For investments in unsecured notes, senior mortgages, subordinated
mortgages, construction loans, and loan participations, fair value was estimated
by an independent Investment Bank discounting the future contractual and
expected cash flows using the current market rates at which similar loans would
be made to borrowers with similar credit ratings for the same remaining
maturities and analysis regarding the values of the underlying collateral.
Investments in real estate under long term operating leases are not considered
financial instruments. Estimated fair values of the Division's real estate and
related investments, except for real estate under long term operating leases,
aggregated approximately $709.1 million and $8.3 million at December 31, 1997
and 1996, respectively.
Cash and cash equivalents
Accrued interest receivable
Accrued expenses and other liabilities
For these short-term instruments, the carrying value is a reasonable
approximation of the fair value.
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Angeles Participating Mortgage Trust
We have audited the accompanying Statement of Revenue and Certain
Expenses for the properties known as the RLH Portfolio for the year ended
December 31, 1996. This financial statement is the responsibility of management.
Our responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount 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 presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statement of revenue and certain expenses was prepared
as described in Note 2, for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission (for inclusion in the
Starwood Financial Trust, formerly known as the Angeles Participating Mortgage
Trust, filing on Form 8-K pursuant to SX Rule 3-14) and is not intended to be a
complete presentation of RLH Portfolio's revenues and expenses.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the revenue and certain expenses for RLH
Portfolio, on the basis described in Note 2, for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
New York, New York
November 14, 1997
53
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES
For the Year Ended December 31, 1996
(In thousands)
Revenue:
Base Rents (Note 3)...................................... $15,000
Additional rent (Note 3)................................. --
------------
15,000
Certain expenses (Note 3)......................................... --
------------
Revenue in excess of certain expenses.................... $15,000
============
The accompanying notes are an integral part of these financial
statements.
54
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES
For the Period Ended January 1, 1997 to May 1, 1997
(Unaudited)
(In thousands)
Revenue:
Base Rents (Note 3).................................... $5,000
Additional rent (Note 3)............................... --
--------
5,000
Certain expenses (Note 3)....................................... --
--------
Revenue in excess of certain expenses.................. $5,000
========
The accompanying notes are an integral part of these financial
statements.
55
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES
Note 1. Organization and Operation of Property
For the purpose of the accompanying statement of revenue and certain
expenses, RLH (the "Property") consists of seventeen full service hotels located
in seven states and containing a total of 3,989 rooms. The Property was
originally leased to and operated by Red Lion Hotels, Inc. ("Red Lion") under a
master lease agreement between RLH Partnership, L.P. as the lessor and Red Lion
as the lessee. On November 8, 1996, Doubletree Corporation ("Doubletree")
acquired Red Lion and assumed the lease with RLH Partnership, L.P.
On May 2, 1997, subsidiaries of Starwood Opportunity Fund IV, L.P. (the
"SOF IV") acquired all of the outstanding partnership interests of RLH
Partnership, L.P.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying statement of revenue and certain expenses has been
prepared on the accrual basis of accounting.
The accompanying financial statement is not representative of the
actual operations for the period presented, as certain revenue and expenses,
which may not be comparable to the revenues and expenses to be earned or
incurred by the SOF IV in the future operations of the Property, have been
excluded. Revenues excluded consist of interest and other revenues unrelated to
the continuing operations of the Property. Expenses excluded consist of
depreciation of the building and improvements, and amortization of organization
and other intangible costs and other expenses not directly related to the future
operations of the Property.
Revenue Recognition
Base rents are recognized on a straight-line basis over the terms of
the respective leases.
Interim Statements
The interim financial data for the period of January 1, 1997 to May 1,
1997 is unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normally recurring adjustments,
necessary for a fair statement of the results for the interim periods. The
results for the periods presented are not necessarily indicative of the results
to be expected for the entire fiscal year or any other period.
56
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES--(Continued)
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
Note 3. Leases
The lease is a triple net lease under which Doubletree pays all costs
associated with the operation of the Hotels, including real estate taxes,
insurance, utilities, services and capital expenditures. The initial term of the
lease expires on December 31, 2010, and can be extended for up to five,
five-year terms at Doubletree's option. Rent payments under the lease consist of
base rent equal to $15 million annually and additional rent equal to 7.5% of the
amount by which the aggregate operating revenue for any given year exceeds the
aggregate operating revenue of the twelve months ended September 30, 1996 (i.e.
the base year).
57
<PAGE>
RLH PORTFOLIO
STATEMENT OF REVENUE AND CERTAIN EXPENSES--(Continued)
Further minimum rents to be received over the next five years and
thereafter under the current term, as of December 31, 1996 is as follows:
1997.........................................................$ 15,000
1998......................................................... 15,000
1999......................................................... 15,000
2000......................................................... 15,000
2001......................................................... 15,000
Thereafter................................................... 135,000
--------
Total...............................................$210,000
========
58
<PAGE>
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 hereunto duly authorized.
STARWOOD FINANCIAL TRUST
(Registrant)
Date: February 18, 1999 By: /s/ Jay Sugarman
--------------------------
Name: Jay Sugarman
Title: President &
Chief Executive Officer
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