<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-12809
10,000,000 SHARES
[LOGO] INNKEEPERS USA
COMMON SHARES
Innkeepers USA Trust (the "Company") is a self-administered real estate
investment trust ("REIT") that owns 22 hotels (collectively, the "Current
Hotels") with an aggregate of 2,511 rooms and has contracted to acquire ten
hotels, seven from a single seller, representing an additional 1,401 rooms (the
"Acquisition Hotels" and together with the Current Hotels, the "Hotels"). Upon
the closing of the Acquisition Hotels, which is expected to occur concurrent
with or immediately after the closing of the Offering, the Company will own
interests in 32 Hotels with an aggregate of 3,912 rooms in 14 states. The Hotels
operate as Residence Inn by Marriott(R) hotels ("Residence Inn") (20), Hampton
Inn(R) hotels (8), Comfort Inn(R) hotels (2), a Holiday Inn Express(R) hotel and
a Sheraton Inn(R) hotel. Upon the closing of the Acquisition Hotels, the Company
will be one of the largest owners of Residence Inn hotels. The Current Hotels
are, and the Acquisition Hotels will be, leased to JF Hotel, Inc. or its
Affiliates (collectively, the "Lessee") under leases providing for the payment
of rent based primarily on a percentage of room revenues from the Hotels
("Percentage Leases").
The net proceeds to the Company from the Offering will be approximately
$101.7 million, $73.4 million of which will be used to fund a portion of the
costs of acquiring the Acquisition Hotels, $12.0 million of which will be used
to repay outstanding amounts under its line of credit (the "Line of Credit"),
and the balance of which will be primarily used for working capital purposes.
All of the Common Shares offered hereby are being sold by the Company. The
Common Shares are listed on the New York Stock Exchange (the "NYSE") under the
Symbol "KPA." On October 21, 1996, the last reported sale price per share of the
Company's Common Shares on the NYSE was $10.875 (the "Offering Price"). On
September 18, 1996, the Company's Board of Trustees declared a quarterly
distribution, paid on October 15, 1996 to shareholders of record on September
27, 1996, of $0.225 per share, representing an annual distribution of $0.90 per
share.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $10.875 $0.61 $10.265
Total (3).............................. $108,750,000 $6,100,000 $102,650,000
- ------------------------------------------------------------------------------------------------------
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $950,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 1,500,000 additional Common Shares solely to cover over-allotments, if
any, at the Price to Public less the Underwriting Discount. If the
Underwriters exercise this option in full, the Price to Public will total
$125,062,500, the Underwriting Discount will total $7,015,000, and the
Proceeds to Company will total $118,047,500. See "Underwriting."
The Common Shares are offered by the Underwriters named herein when, as and
if delivered to and accepted by the Underwriters and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the Common Shares will be made against payment
therefor at the office of Montgomery Securities on or about October 25, 1996.
------------------------
MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS
INCORPORATED
EVEREN SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
October 21, 1996
<PAGE> 2
[COLOR PHOTOS OF HOTELS AND HOTEL ROOMS]
<PAGE> 3
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE EXCHANGE ACT,
INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND WORDS OF SIMILAR IMPORT. SUCH FORWARD-LOOKING
STATEMENTS RELATE TO FUTURE EVENTS, THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY, AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY
OR INDUSTRY RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER, INCLUDING THOSE DISCUSSED IN THE SECTIONS ENTITLED "PROSPECTUS SUMMARY,"
"RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS AND PROPERTIES." THE COMPANY DISCLAIMS ANY
OBLIGATION TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE RESULT OF ANY
REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT
FUTURE EVENTS OR DEVELOPMENTS.
ADDITIONAL INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-3, including all
amendments thereto and any registration statements filed pursuant to Rule
462(b), (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered pursuant to this
Prospectus. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits. For further information concerning the Company and the Common
Shares offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed therewith, which may be examined without charge at,
or copies obtained upon payment of prescribed fees from, the Commission and its
regional offices at the locations listed below. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
regional offices of the Commission located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company, and the address is http://www.sec.gov. The Common Shares
are listed on the NYSE, and such reports, proxy and information statements and
other information concerning the Company can be inspected and copied at the
offices of the NYSE at 20 Broad Street, New York, New York.
iii
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
ADDITIONAL INFORMATION.......................... (iii)
PROSPECTUS SUMMARY.............................. 1
The Company................................... 1
Risk Factors.................................. 3
Recent Developments........................... 3
The Hotels.................................... 6
The Hotel Industry............................ 7
The Lessee.................................... 8
Distribution Policy........................... 8
Tax Status.................................... 9
The Offering.................................. 9
Summary Financial Data........................ 10
RISK FACTORS.................................... 12
Risk that Pending Acquisitions Will Not
Close....................................... 12
Growth Strategy............................... 12
Lack of Control over Operations of the
Hotels...................................... 13
Acquisition of Hotels with Limited Operating
History..................................... 13
Multi-Hotel Acquisition Risks................. 13
Hotel Industry Risks.......................... 14
Risks of Leverage............................. 17
Conflicts of Interest......................... 18
Real Estate Investment Risks.................. 19
Tax Risks..................................... 22
Ownership Limitation.......................... 23
Common Share Price Fluctuations and Trading
Volume...................................... 23
Ability of Board of Trustees to Change Certain
Policies.................................... 24
Limitation on Acquisition and Change in
Control..................................... 24
Adverse Effect of Shares Available for Future
Issuance and Sale on Market Price of Common
Shares...................................... 25
THE COMPANY..................................... 26
ACQUISITIONS.................................... 26
The DeBoer Hotels............................. 26
Residence Inn-Portland, Maine................. 27
The Atlanta Hotels............................ 27
USE OF PROCEEDS................................. 27
PRICE RANGE OF COMMON SHARES AND
DISTRIBUTIONS................................. 28
CAPITALIZATION.................................. 29
SELECTED FINANCIAL INFORMATION.................. 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 35
Background.................................... 35
Results of Operations......................... 36
Liquidity and Capital Resources............... 39
Inflation..................................... 42
Seasonality of Hotel Business................. 42
BUSINESS AND PROPERTIES......................... 44
The Hotel Industry............................ 44
Business Strategy............................. 45
Acquisition Strategy.......................... 45
Internal Growth Strategy...................... 47
The Hotels.................................... 48
Property Descriptions......................... 49
The Current Hotels............................ 49
The Acquisition Hotels........................ 51
The Percentage Leases......................... 56
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<S> <C>
Franchise Licenses and Marriott Management
Agreements.................................. 61
Operating Practices........................... 63
Employees..................................... 64
Environmental Matters......................... 64
Competition................................... 65
Legal Proceedings............................. 65
MANAGEMENT...................................... 66
Trustees and Executive Officers............... 66
Audit Committee............................... 67
Compensation Committee........................ 67
Executive Compensation........................ 67
Compensation of Trustees...................... 67
Fisher Employment Agreement; Exclusive Hotel
Development Agreement and Covenant Not to
Compete..................................... 68
Bulger Employment Agreement................... 68
1994 Share Incentive Plan..................... 68
The Trustees' Plan............................ 71
THE LESSEE...................................... 72
General....................................... 72
Management Team............................... 72
PRINCIPAL SHAREHOLDERS.......................... 73
SHARES AVAILABLE FOR FUTURE SALE................ 75
PARTNERSHIP AGREEMENT........................... 76
Management.................................... 76
Transferability of Interests.................. 77
Capital Contribution.......................... 77
Redemption Rights............................. 77
Registration Rights........................... 78
Operations.................................... 78
Distributions................................. 78
Allocations................................... 79
Term.......................................... 79
Tax Matters................................... 79
Preferred Units............................... 79
FEDERAL INCOME TAX CONSIDERATIONS............... 79
Taxation of the Company....................... 80
Requirements for Qualification................ 81
Failure to Qualify............................ 90
Taxation of Taxable U.S. Shareholders......... 90
Taxation of Shareholders on the Disposition of
the Common Shares........................... 91
Capital Gains and Losses...................... 91
Information Reporting Requirements and Backup
Withholding................................. 91
Taxation of Tax-Exempt Shareholders........... 91
Taxation of Non-U.S. Shareholders............. 92
Other Tax Consequences........................ 93
Tax Aspects of the Partnership and the
Subsidiary Partnerships..................... 93
Sale of the Partnership's or a Subsidiary
Partnership's Property...................... 96
UNDERWRITING.................................... 98
LEGAL MATTERS................................... 98
EXPERTS......................................... 99
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE..................................... 99
GLOSSARY........................................ 101
INDEX TO FINANCIAL STATEMENTS................... F-1
</TABLE>
iv
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Unless the context otherwise indicates, all references
herein to (i) the "Company" include Innkeepers USA Trust, its wholly-owned
subsidiaries, Innkeepers USA Limited Partnership and its subsidiary
partnerships, which are owned 99% by Innkeepers USA Limited Partnership and 1%
by Innkeepers USA Trust or its wholly-owned subsidiaries, (ii) the "Partnership"
include Innkeepers USA Limited Partnership and its subsidiary partnerships and
(iii) the "Lessee" include JF Hotel, Inc. and its sister corporations which have
identical ownership and are under common control with JF Hotel, Inc. Except as
otherwise noted, all of the information in this Prospectus assumes no exercise
of the Underwriters' overallotment option. See "Glossary" for the definitions of
certain capitalized terms used in this Prospectus. This Prospectus contains
forward-looking statements, which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the forward
looking statements. Factors that might cause such a difference include those
discussed in "Risk Factors."
THE COMPANY
Innkeepers USA Trust is a self-administered REIT that owns 22 hotels (the
"Current Hotels") with an aggregate of 2,511 rooms. Since its initial public
offering in September 1994 (the "IPO"), the Company has tripled the number of
Hotels it owns. In addition, the Company has entered into agreements to acquire
the ten Acquisition Hotels containing an additional 1,401 rooms. Upon the
closing of the acquisition of the Acquisition Hotels, which is expected to occur
concurrent with or shortly after the closing of the Offering, the Company will
(i) own 32 Hotels with an aggregate of 3,912 rooms in fourteen states, (ii) have
invested approximately $270 million in hotel acquisitions and renovations, at
cost, and increased the number of hotels it owns by more than four times since
the IPO, and (iii) own more extended-stay hotels than any other publicly-traded
lodging REIT and be one of the largest owners of Residence Inn hotels. The
Company's strategy is to continue its growth primarily through the acquisition
of existing and newly-developed upscale extended-stay hotels, such as Residence
Inn hotels, that are located in markets with relatively high barriers to entry.
In addition, the Company intends to pursue the acquisition of underperforming
mid-price hotels that can be renovated and converted to premium franchise
brands, such as Hampton Inn and Courtyard by Marriott(R). The Company also
intends to grow internally through participation in any increased revenue from
the Hotels. The following chart sets forth certain information with respect to
the Hotels:
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PERCENT OF
CURRENT ACQUISITION THE NUMBER HOTELS
FRANCHISE AFFILIATION HOTELS HOTELS HOTELS OF ROOMS BY FRANCHISE
---------------------------------------- ------- ----------- ------ --------- ------------
<S> <C> <C> <C> <C> <C>
Residence Inn........................... 11 9 20 2,323 62.5%
Hampton Inn............................. 7 1 8 1,059 25.0
Comfort Inn(1).......................... 2 -- 2 227 6.3
Holiday Inn Express(2).................. 1 -- 1 164 3.1
Sheraton Inn............................ 1 -- 1 139 3.1
-- -- -- ----- -----
Total......................... 22 10 32 3,912 100.0%
</TABLE>
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(1) The Company has received a commitment from Promus Hotels, Inc. ("Promus")
for a Hampton Inn Franchise License for the Comfort Inn-Woburn,
Massachusetts hotel, subject to the completion of certain renovations and
improvements, which are expected to cost approximately $2.0 million and are
expected to be completed in the first quarter of 1997. See "Business and
Properties -- Franchise Licenses and Marriott Management Agreements."
(2) The Company has received a commitment from Holiday Inn Franchising, Inc.
("Holiday Inn Franchising") for a Holiday Inn Express & Suites(R) Franchise
License for the Holiday Inn Express-Lexington, Massachusetts hotel, subject
to the completion of certain renovations and improvements, which are
expected to cost approximately $1.0 million and are expected to be
completed in the first quarter of 1997.
<PAGE> 6
The Company has focused its acquisition strategy on the upscale
extended-stay segment because of the favorable supply/demand imbalance and
relatively strong hotel revenue performance currently being experienced within
this segment. Of the 25 hotels purchased since the IPO, including the ten
Acquisition Hotels, 19 hotels, or 76%, have been Residence Inn hotels. Residence
Inn is the leading brand in the extended-stay segment of the U.S. lodging
industry, with more than 50% of all extended-stay rooms and more than 70% of all
upscale extended-stay rooms. According to Marriott International, Inc. (with its
subsidiaries, "Marriott"), for the year ended December 31, 1995, the average
occupancy at Residence Inn hotels was 84.2%, compared to 65.3% for the entire
U.S. lodging industry during the same period. As of August 9, 1996, there were
217 existing Residence Inn hotels.
Seven of the Acquisition Hotels (the "DeBoer Hotels") are being purchased
from partnerships affiliated with Jack P. DeBoer (the "DeBoer Group") for a
total purchase price of approximately $108.0 million. Mr. DeBoer is credited
with creating the franchised extended-stay lodging concept when he founded the
Residence Inn brand in 1975. The DeBoer Group has agreed to contribute all of
its equity in the DeBoer Hotels to Innkeepers USA Limited Partnership (the
"Partnership") in exchange for approximately 4,113,000 preferred units of
limited partnership interest in the Partnership (the "Preferred Units"), which
were assumed to have a value of $11.00 per Preferred Unit (or an aggregate of
$45.2 million) for purposes of calculating the purchase price of the DeBoer
Hotels, and which have a value of approximately $44.7 million based on the
Offering Price. Upon the closing of the Offering, the DeBoer Group will
beneficially own 15.9% of the Common Shares, assuming full redemption into
Common Shares of all units of partnership interest in the Partnership (the
"Units") and Preferred Units. In addition, Mr. DeBoer has agreed to join the
Company's Board of Trustees. The seven DeBoer Hotels and the two remaining
Residence Inn Acquisition Hotels will be managed by Marriott pursuant to
separate management agreements (the "Marriott Management Agreements") between
Marriott and the Lessee. Additionally, in connection with the acquisition of the
DeBoer Hotels by the Company, Marriott will receive Units having a value of
$500,000 (the "Release Units") in exchange for releasing the existing management
contracts relating to such Hotels.
The Company currently owns 11 Residence Inn hotels franchised by Marriott,
and Marriott will manage the DeBoer Hotels and the two remaining Residence Inn
Acquisition Hotels pursuant to the Marriott Management Agreements. The Company
expects that Marriott will manage certain additional Residence Inn hotels that
may be acquired from Marriott in the future, although no assurance can be given
in this regard. In addition, Marriott may provide the Company with Residence Inn
hotel acquisition opportunities that might not otherwise be available to the
Company, such as the Residence Inn-Portland, Maine hotel that Marriott has
agreed to sell to the Company in exchange for cash and Units. Additionally, the
Company believes that Marriott's management of Company-owned Hotels will enable
the Company to realize the benefits of Marriott's resources and broad-based
hotel operations experience in order to enhance the Company's ability to grow.
The Company has achieved significant internal growth through its
participation in the revenue growth at the Current Hotels. For the three months
ended June 30, 1996, on a pro forma basis, revenue per available room ("REVPAR")
at the Current Hotels (excluding the Comfort Inn-Woburn, Massachusetts hotel,
which was acquired by the Company in August 1996) increased by 10.6% compared to
the three months ended June 30, 1995, which represented the highest pro forma
REVPAR growth rate among publicly-traded lodging REITs for that period. In
addition, actual funds from operations ("FFO") per share during the three months
ended June 30, 1996, compared to the three months ended June 30, 1995 increased
from $0.24 to $0.33 per share, an increase of $0.09 or 37.5%, which represented
the second highest FFO growth rate among all publicly-traded lodging REITs and
the third highest FFO growth rate among all publicly-traded REITs. For the six
months ended June 30, 1996, on a pro forma basis, REVPAR at the Current Hotels
(excluding the Comfort Inn-Woburn, Massachusetts hotel, which was acquired by
the Company in August 1996) increased by 9.1% compared to the six months ended
June 30, 1995, which was the second highest growth rate among publicly-traded
lodging REITs for that period. As a result of the Company's revenue growth, the
Company has increased its annual distribution rate per share since the IPO from
$0.775 to $0.90.
Upon closing of the acquisition of the Acquisition Hotels, 62.5% of the
Company's Hotels will be upscale extended-stay hotels. Extended-stay generally
refers to an average length of stay of at least five consecutive room nights at
a particular hotel. The Company believes that the extended-stay segment of the
lodging
2
<PAGE> 7
industry is attractive because of the following primary factors: (i) demand for
extended-stay hotels is increasing due to economic and social changes resulting
from the increased number of corporate reorganizations and trends toward
downsizing and out-sourcing of various functions and the increased mobility of
the workforce and technological improvements which have allowed businesses to
relocate outside of large metropolitan areas; (ii) the demand for hotel rooms by
guests who stay longer than five consecutive room nights exceeds the number of
extended-stay hotel rooms by 7 to 1, according to industry sources (See "Hotel
Industry"); (iii) extended-stay hotels offer a more consistent revenue stream
due to higher average occupancy and longer stays by guests than in traditional
hotels; and (iv) the strong performance of the Company's existing upscale
extended-stay Hotels, which generated REVPAR growth of 10.3% for the six months
ended June 30, 1996, as compared to the six months ended June 30, 1995.
The Company will also consider the acquisition of selected mid-price hotels
that the Company believes will achieve substantial improvement in revenues
through refurbishment and repositioning, which may include the rebranding of the
hotels. As an example, after its acquisition of the Ramada Inn-Germantown,
Maryland hotel in May 1995, the Company commenced an approximately $2.0 million
renovation and repositioning of the hotel as a Hampton Inn. For the three months
ended June 30, 1995, REVPAR at the hotel was $30.73. For the three months ended
June 30, 1996, the first quarter following completion of such renovations,
REVPAR had improved to $39.79, which represented an increase of approximately
29.5%. The Company is currently undertaking an approximately $2.0 million
renovation of the Comfort Inn-Woburn, Massachusetts hotel, in connection with
the repositioning of the hotel as a Hampton Inn, and is also converting an
existing building into 32 suites at the Holiday Inn Express-Lexington,
Massachusetts hotel, in connection with the conversion of the hotel to a Holiday
Inn Express & Suites.
The Company intends to utilize the Line of Credit to acquire additional
hotels and for certain other business purposes. Following the closing of the
Offering and the application of the net proceeds as described in "Use of
Proceeds," the Company will have (i) outstanding indebtedness of approximately
$99.6 million, including (a) approximately $30 million under its existing term
loan with the Lender (the "Term Loan"), (b) approximately $42 million
outstanding under the Line of Credit, and (c) approximately $27.6 million of
existing indebtedness on certain of the Hotels, (ii) a borrowing capacity of
approximately $28 million under the Line of Credit, and (iii) approximately
$126.4 million in available borrowing capacity under the provision of the
Company's Declaration of Trust which limits the consolidated indebtedness of the
Company to 50% of its investment in hotels at cost after giving effect to the
use of such indebtedness (the "Debt Limitation"), subject to certain debt
coverage requirements contained in the Line of Credit agreements. Upon the
closing of the Offering, the Company will own seven Hotels that do not secure
any of its indebtedness. The Company intends to pursue additional borrowing
capacity to permit it to borrow amounts up to the Debt Limitation. See "Risk
Factors -- Risks of Leverage." "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RISK FACTORS
An investment in the Common Shares involves various risks, and investors
should carefully consider the matters discussed under "Risk Factors" beginning
on page 12.
RECENT DEVELOPMENTS
Pending Acquisitions. The Company has contracted to acquire the ten
Acquisition Hotels for $142 million. The purchase prices are payable in, or with
a combination of, cash, Units, Preferred Units and the assumption of
approximately $24 million of existing indebtedness encumbering three of the
DeBoer Hotels (the "Assumed Indebtedness"). The Company expects to close the
acquisition of all ten of the Acquisition Hotels concurrent with or shortly
after the closing of the Offering. The purchase agreements under which the
Company will acquire the Acquisition Hotels contain customary closing and other
conditions. There is no assurance that the Company will close any of the
Acquisition Hotels. See "Risk Factors -- Risk that Pending Acquisitions Will Not
Close."
3
<PAGE> 8
The DeBoer Hotels are being acquired from the DeBoer Group for a total
purchase price of approximately $108.0 million, consisting of (i) approximately
4,113,000 Preferred Units, which were assumed to have a value of $11.00 per
Preferred Unit (or an aggregate of $45.2 million) for purposes of calculating
the purchase price of the DeBoer Hotels, and which have a value of approximately
$44.7 million based on the Offering Price, (ii) the assumption and immediate
repayment of approximately $38.8 million of outstanding mortgage indebtedness
and (iii) the assumption of the approximately $24 million of Assumed
Indebtedness. Additionally, in connection with the acquisition of the DeBoer
Hotels by the Company, Marriott will receive the Release Units having a value of
$500,000 in exchange for releasing the existing management contracts relating to
such Hotels. Marriott will have the right, on or after the first anniversary of
the issuance of the Release Units, to redeem the Release Units for cash or, at
the option of the Company, Common Shares on a one-for-one basis. The DeBoer
Group will own approximately 15.9% of the outstanding Common Shares upon closing
of the acquisition of the DeBoer Hotels, assuming full redemption into Common
Shares of all Units and Preferred Units. Mr. DeBoer, individually, will
beneficially own approximately 10.1% of the outstanding Common Shares, assuming
full redemption into Common Shares of all Units and Preferred Units. Annual
preferred distributions of $1.10 are payable on each Preferred Unit, which may
increase to up to $1.155 for each Preferred Unit, based on increases in
dividends payable on the Common Shares. The Preferred Units are convertible at
any time into Units on a one-for-one basis (the "Preferred Conversion Right").
On or after the second anniversary of the issuance of the Preferred Units, the
DeBoer Group will have the right to redeem all outstanding Preferred Units (or
Units received upon exercise of the Preferred Conversion Right) for cash or, at
the option of the Company, Common Shares on a one-for-one basis. See "Risk
Factors -- Adverse Effect of Shares Available For Future Issuance and Sale on
Market Price of Common Shares" and "Partnership Agreement -- Preferred Units."
Due to the potential adverse tax consequences to members of the DeBoer Group
that may result from a sale of the DeBoer Hotels, the Company has agreed with
the DeBoer Group that for a period of up to ten years following the closing of
the acquisition of the DeBoer Hotels, any taxable sale of a DeBoer Hotel will
require the consent of the applicable members of the DeBoer Group. See "Risk
Factors -- Conflicts of Interest." In addition, due to potential adverse tax
consequences, the Company has agreed with the DeBoer Group, for a period of up
to ten years following the closing of the acquisition of the DeBoer Hotels, to
maintain at all times outstanding indebtedness of at least approximately $42
million, subject to reduction upon the occurrence of certain events, including
certain redemptions or taxable transfers of Preferred Units by the applicable
members of the DeBoer Group (the "Required Indebtedness"). In the event that the
Company fails to maintain the Required Indebtedness, the Company will be liable
for any resulting income tax liabilities incurred by the applicable members of
the DeBoer Group. See "Risk Factors -- Risks of Leverage." After the closing of
the acquisition of the DeBoer Hotels, Mr. DeBoer will become a Trustee of the
Company.
The Residence Inn-Portland, Maine hotel is being acquired from Marriott for
a purchase price of approximately $6.2 million. Marriott has agreed to accept
Units with a value of $859,000 (the "Marriott Units"), or approximately 14% of
the purchase price, as a portion of the purchase consideration for the hotel.
Marriott will have the right to redeem the Marriott Units, at any time on or
after the first anniversary of issuance at a per Unit price equal to the greater
of the Offering Price or the market price of the Common Shares on the redemption
date, payable in cash or, at the option of the Company, Common Shares with an
equivalent value. See "Risk Factors -- Adverse Effect of Shares Available For
Future Issuance and Sale on Market Price of Common Shares." Marriott will
continue to manage the Residence Inn-Portland, Maine hotel following the closing
of the acquisition of the hotel.
To facilitate the financing and acquisition of the Residence Inn-Atlanta
(Downtown), Georgia hotel and the Hampton Inn-Norcross, Georgia hotel
(collectively, the "Atlanta Hotels") without causing the Company to incur
indebtedness in excess of the Debt Limitation, JF Atlanta, LLC ("JF Atlanta")
was formed to acquire such hotels. JF Atlanta is owned by Mr. Fisher, Chairman
of the Company, and Mr. Shaw, President of the Lessee. JF Atlanta acquired the
Atlanta Hotels on September 6, 1996 for a purchase price of approximately $27.8
million (including closing and financing costs incurred to date). The Company
has entered into agreements with JF Atlanta to acquire the Atlanta Hotels
concurrent with or immediately after the closing of the Offering for a purchase
price equal to the actual cost incurred by JF Atlanta in acquiring and financing
the Atlanta Hotels plus any capital contributed by the owners of JF Atlanta to
fund any operating
4
<PAGE> 9
losses incurred by JF Atlanta prior to the sale of the Atlanta Hotels to the
Company. The Company has paid to JF Atlanta a deposit of $5.8 million, which is
refundable in the event that the Offering is not completed. JF Atlanta utilized
this deposit, together with a term loan from the Lender in the amount of
approximately $22 million to finance the acquisition of the Atlanta Hotels. See
"Risk Factors -- Risk that Pending Acquisitions Will Not Close," and
"-- Conflicts of Interest."
Marriott Management. The Company currently owns 11 Residence Inn hotels
franchised by Marriott, and Marriott will manage the DeBoer Hotels and the two
remaining Residence Inn Acquisition Hotels pursuant to the Marriott Management
Agreements. The Company expects that Marriott will manage certain additional
Residence Inn hotels that may be acquired from Marriott in the future, although
no assurances can be made in this regard. In addition, Marriott may provide the
Company with Residence Inn acquisition opportunities that might not otherwise be
available to the Company. The proposed acquisition of the Residence
Inn-Portland, Maine hotel illustrates the benefits the Company hopes to realize
from its relationship with Marriott. That hotel was developed by Marriott and
opened in May 1996, and Marriott has agreed to sell such hotel to the Company,
take approximately 14% of the purchase price for the hotel in the form of Units,
and enter into a Marriott Management Agreement with the Lessee to operate the
hotel.
Recently Completed Acquisitions. Since the completion of the Company's
follow-on public offering in October 1995 (the "Follow-on Offering"), the
Company has implemented its acquisition growth strategy by acquiring the
following four Hotels: the 164-room Holiday Inn Express-Lexington, Massachusetts
hotel, in February 1996; the 96-room Residence Inn-Cherry Hill, New Jersey hotel
and the 80-room Residence Inn-Harrisburg, Pennsylvania hotel, in May 1996; and
the 100-room Comfort Inn-Woburn, Massachusetts hotel, in August 1996. See
"Business and Properties -- The Current Hotels."
Investment by Lessee Shareholders. The shareholders of the Lessee, Mr.
Fisher, Chairman of the Company, and Mr. Shaw, President of the Lessee, have
agreed that from and after the closing of the Offering they or their Affiliates
will invest 75% of the Lessee's net income (after distributions to pay taxes and
establishment of necessary working capital reserves) in Common Shares (or Units,
if necessary to preserve the Company's REIT status). The Common Shares (or
Units) will be acquired either directly from the Company at the then-current
market price or in the open market, at the election of the Company's independent
trustees (the "Independent Trustees"). Messrs. Fisher and Shaw have agreed to
hold any such Common Shares (or Units) for at least one year after the date of
the applicable purchase. Since the date of the Follow-on Offering, the Lessee
and its Affiliates have purchased 53,050 Common Shares, and as of August 31,
1996, owned a total of 81,050 Common Shares in addition to the 413,595 Units and
85,608 Common Shares and Units beneficially owned by Mr. Fisher and Mr. Shaw,
respectively, as of August 31, 1996.
5
<PAGE> 10
THE HOTELS
The following table sets forth certain information with respect to the
Hotels:
<TABLE>
<CAPTION>
PRO FORMA TWELVE MONTHS ENDED JUNE 30, 1996
-------------------------------------------------------
YEAR NUMBER OF ROOM LEASE
CURRENT HOTELS OPENED ROOMS REVENUE PAYMENTS(1) OCCUPANCY ADR REVPAR
- ------------------------------------ ------ --------- ----------- ----------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Residence Inn hotels:
Fremont, CA....................... 1985 80 $ 2,406,681 $1,066,544 87.7% $93.72 $82.17
Mountain View (Palo Alto), CA..... 1985 112 4,405,498 2,539,739 94.5 114.09 107.84
San Jose, CA...................... 1986 80 2,589,153 1,190,624 94.2 93.94 88.53
Denver (South), CO................ 1981 128 3,503,380 1,698,299 90.2 82.81 74.74
Windsor, CT....................... 1986 96 2,499,048 1,015,352 83.6 85.30 71.31
Troy (Central), MI................ 1986 152 4,048,664 2,031,091 93.0 78.37 72.91
Troy (Southeast), MI.............. 1985 96 2,413,422 1,109,127 89.8 75.71 68.02
Cherry Hill, NJ................... 1989 96 2,862,786 1,300,694 90.4 90.26 81.63
Binghamton, NY.................... 1987 72 1,871,931 845,522 83.6 84.90 70.99
Harrisburg, PA.................... 1988 80 2,097,125 901,645 83.3 85.12 70.92
Richmond, VA...................... 1986 80 1,996,138 853,874 85.1 80.08 68.15
Hampton Inns:
Naples, FL........................ 1990 107 1,830,806 787,588 70.5 65.59 46.21
Tallahassee, FL................... 1993 93 1,671,593 835,927 84.6 58.08 49.16
West Palm Beach, FL............... 1986 136 1,889,651 678,293 69.5 55.08 38.25
Germantown, MD.................... 1987 176 1,800,512 681,716 45.9 60.59 27.83
Albany/Latham, NY................. 1990 126 2,041,527 1,000,937 69.7 64.06 44.63
Islandia (Long Island), NY........ 1988 121 2,509,543 1,169,334 73.9 76.01 56.18
Willow Grove
(Philadelphia), PA.............. 1991 150 3,152,170 1,670,752 80.7 71.02 57.34
Comfort Inns:
Woburn, MA(2)..................... 1981 100 1,500,257 507,175 71.8 56.81 40.81
Allentown, PA..................... 1990 127 1,954,812 1,012,154 77.9 55.54 43.30
Holiday Inn Express:
Lexington, MA(3).................. 1971 164 2,474,535 883,185 66.1 63.54 41.98
Sheraton Inn:
Fort Lauderdale, FL............... 1988 139 2,264,027 1,009,907 72.3 60.05 43.41
----- ----------- ----------- ---- ------ ------
Subtotal/Weighted average for
Current Hotels................ 2,511 $53,783,259 $24,789,479 78.2% $74.81 $58.49
----- ----------- ----------- ---- ------ ------
ACQUISITION HOTELS
- ------------------------------------
Residence Inn hotels:
San Mateo, CA..................... 1985 159 5,305,581 2,676,795 93.5 98.10 91.75
Silicon Valley I, CA.............. 1983 231 6,988,335 3,821,067 90.5 92.29 83.55
Silicon Valley II, CA............. 1985 247 7,587,457 4,133,471 92.1 91.96 84.66
Denver (Downtown), CO............. 1982 156 3,777,160 1,523,468 84.8 78.06 61.88
Atlanta (Downtown), GA(4)......... 1996 160 N/A 1,260,000 N/A N/A N/A
Wichita East, KS.................. 1981 64 1,504,716 576,706 82.3 78.29 64.45
Portland, ME(4)................... 1996 78 N/A 430,000 N/A N/A N/A
East Lansing, MI.................. 1984 60 1,370,493 570,935 85.9 72.58 62.35
Grand Rapids, MI.................. 1984 96 2,113,586 924,239 87.3 69.12 60.35
Hampton Inn:
Norcross, GA(4)................... 1996 150 N/A 665,000 N/A N/A N/A
----- ----------- ----------- ---- ------ ------
Subtotal/Weighted Average for
Acquisition Hotels............ 1,401 $28,647,328 $16,581,681 88.7% $86.78 $76.99
----- ----------- ----------- ---- ------ ------
Consolidated total/Weighted
average for all Hotels.......... 3,912 $82,430,587 $41,371,160 81.3% $78.63 $63.89
===== =========== =========== ==== ====== ======
</TABLE>
6
<PAGE> 11
- ---------------
(1) Represents payments of Rent from the Lessee to the Company calculated on a
pro forma basis by applying the rent provisions in the Percentage Leases
using historical room revenues of the Hotels as if July 1, 1995 was the
beginning of the lease year.
(2) The Company has received a commitment from Promus for a Hampton Inn
Franchise License for the Comfort Inn-Woburn, Massachusetts hotel, subject
to the completion of certain renovations and improvements which are
expected to cost approximately $2.0 million and are expected to be
completed during the first quarter of 1997. See "Business and
Properties -- Franchise Licenses and Marriott Management Agreements."
(3) The Company has received a commitment from Holiday Inn Franchising for a
Holiday Inn Express & Suites Franchise License for the Holiday Inn
Express-Lexington, Massachusetts hotel, subject to the completion of
certain renovations and improvements, which are expected to cost
approximately $1.0 million and are expected to be completed in the first
quarter of 1997.
(4) Because this recently developed Hotel had no substantive operations for the
period presented, the Percentage Lease payment is assumed to be equal only
to the Base Rent provided for in the Percentage Lease for this Hotel, and
does not include any Percentage Rent in excess of Base Rent, which the
Company expects will be payable in future periods.
THE HOTEL INDUSTRY
TRADITIONAL LODGING INDUSTRY
The fundamentals of the lodging industry have improved significantly in
each year since 1991. The industry as a whole generated record earnings in 1995,
with industry-wide pre-tax profits of $8.5 billion. This was up 55% from $5.5
billion in pre-tax profits in 1994, and represented the industry's third
consecutive year of profitability. Coopers & Lybrand Hospitality Directions,
January 1996 ("Hospitality Directions") projects that industry pre-tax profits
will reach $14.7 billion in 1998.
The industry's profitability has been fueled by four consecutive years in
which the growth in demand for hotel rooms has exceeded the growth in room
supply. Industry-wide growth in room demand exceeded the growth in total room
supply by 1.7%, 2.2%, 2.6% and 1.1% in 1992, 1993, 1994 and 1995, respectively.
This trend has continued in the first seven months of 1996, with demand growth
exceeding supply growth by 1.1% despite harsh winter weather conditions
affecting many markets.
This sustained, favorable relationship between demand growth and supply
growth has enabled the industry to increase REVPAR every year since 1991. REVPAR
for the industry as a whole grew 3.2%, 5.6% 6.5% and 6.0% in 1992, 1993, 1994
and 1995, respectively. This trend has continued in the first seven months of
1996, with REVPAR growing by 7.7%. Hospitality Directions forecast industry-wide
REVPAR gains averaging approximately 5% annually in the period 1996 through
1998.
EXTENDED-STAY SEGMENT
The Company believes that the extended-stay lodging segment offers a more
consistent revenue stream due to higher average occupancy rates and longer
average stays by guests than in traditional hotels. Demand for extended-stay
lodging has been stimulated by the economic and social changes resulting from
the increased number of corporate reorganizations and trends toward downsizing
and out-sourcing of various functions, the increased mobility of the workforce
and technological improvements which have allowed businesses to relocate outside
of large metropolitan areas. These changes have created new accommodation needs
for, among others, corporate executives and trainees, consultants, sales
representatives, construction workers and people in between jobs or homes. For
the year ended December 31, 1995, demand for hotel rooms by guests who stay
longer than five consecutive room nights exceeded the number of dedicated
extended-stay rooms by 7 to 1, according to an April 1996 study conducted by
D.K. Shiflett & Associates, an independent marketing research firm.
7
<PAGE> 12
MID-PRICE SEGMENT
The fundamentals are similarly favorable in the mid-price segment in which
the 12 non-extended-stay Hotels operate. According to Smith Travel Research,
demand for mid-price rooms grew at approximately 3.8% in 1995, while the supply
of new mid-price rooms increased only approximately 2.6%. Carrying this trend
forward, demand for mid-price rooms increased by approximately 3.4% during the
seven months ended July 31, 1996, compared to an approximately 2.8% increase in
new mid-price room supply in the same period. REVPAR at mid-price hotels grew
6.4% in 1995, and increased 7.3% in the seven months ended July 31, 1996,
compared to the seven months ended July 31, 1995. Hospitality Directions
forecasts that the mid-price segment will achieve REVPAR gains averaging
approximately 4.5% annually in the period 1996 through 1998.
THE LESSEE
The Company believes that the quality of the on-site hotel operators is
important to the future growth in Percentage Lease revenue from the Hotels. Upon
the closing of the Offering, the Lessee will lease all of the Hotels pursuant to
the Percentage Leases and will operate 18 of the Hotels. Marriott will operate
the nine Residence Inn Acquisition Hotels pursuant to the Marriott Management
Agreements. The Company also expects that certain additional Residence Inn
hotels that may be acquired from Marriott in the future will be managed by
Marriott, although no assurance can be made in that regard. Marriott is the
largest operator of extended-stay hotels in the U.S., with 108 extended-stay
hotels under management as of August 9, 1996. The Company believes that
Marriott's management of Company-owned Hotels will enable the Company to realize
the benefits of Marriott's resources and broad-based hotel operations experience
in order to enhance the Company's ability to grow. TMH Hotels, Inc. ("TMH")
operates five of the Current Hotels pursuant to separate management agreements
with the Lessee (the "TMH Management Agreements"). See "Business and
Properties -- The Percentage Leases." The Lessee is owned by Mr. Fisher and Mr.
Shaw. The Lessee employs approximately 900 people. Under the Percentage Leases,
the Lessee generally is required to perform or provide for all operational and
management functions necessary to operate the Hotels. Such functions include
accounting, periodic reporting, ordering supplies, advertising and marketing,
maid service, laundry, and repair and maintenance. In addition to operating 18
of the Hotels following the closing of the Offering, the Lessee employs three
regional managers who oversee the operation of all of the Hotels, including
those managed by third-party operators. The primary responsibility of these
regional managers is to assist general managers and sales directors in
developing, implementing and evaluating sales and marketing efforts. The Lessee
is entitled to all revenue from the Hotels after payment of Rent under the
Percentage Leases and other operating expenses, including any management fees
payable to third-party managers. See "The Lessee."
DISTRIBUTION POLICY
The following table sets forth the cash distributions declared per share
since inception of the Company:
<TABLE>
<S> <C>
1994
Fourth Quarter............................................................ $0.19375
1995
First Quarter............................................................. 0.19375
Second Quarter............................................................ 0.215
Third Quarter............................................................. 0.215
Fourth Quarter............................................................ 0.215
1996
First Quarter............................................................. 0.225
Second Quarter............................................................ 0.225
Third Quarter(1).......................................................... 0.225
</TABLE>
- ---------------
(1) On September 18, 1996, the Company's Board of Trustees declared a quarterly
distribution of $0.225 per share, paid on October 15, 1996 to all holders
of record of the Common Shares on September 27, 1996.
8
<PAGE> 13
Future distributions paid by the Company will be at the discretion of the
Board of Trustees and will depend on the Company's actual Cash Available for
Distribution, its financial condition, capital requirements, the distribution
requirements under federal income tax provisions for qualification as a REIT and
such other factors as the Board may deem relevant.
TAX STATUS
The Company elected to be taxed as a REIT under sections 856-860 of the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
short taxable year ended December 31, 1994. If the Company qualifies for
taxation as a REIT, with certain exceptions, the Company will not be subject to
federal income tax at the Company level on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute to its shareholders at least 95% of its annual taxable income.
Although the Company does not intend to request a ruling from the Internal
Revenue Service (the "Service") as to its REIT status, the Company will receive
at the closing of the Offering an opinion of its legal counsel that the Company
qualifies as a REIT, which opinion is based on certain assumptions and
representations and is not binding on the Service or any court. Even if the
Company qualifies for taxation as a REIT, the Company may be subject to certain
federal, state and local taxes on its income and property. The Company has
adopted the calendar year as its taxable year. In connection with the Company's
election to be taxed as a REIT, the Company's Declaration of Trust imposes
restrictions on the transfer of Common Shares. Failure to qualify as a REIT will
render the Company subject to federal income tax (including any applicable
minimum tax) on its taxable income at regular corporate rates and distributions
to the holders of Common Shares in any such year will not be deductible by the
Company. See "Risk Factors -- Tax Risks" and "-- Limitation on Acquisition and
Change of Control -- Ownership Limitation" and "Federal Income Tax
Considerations -- Taxation of the Company."
THE OFFERING
<TABLE>
<S> <C>
Common Shares offered by the Company......... 10,000,000
Common Shares to be outstanding after the
Offering................................... 20,829,153(1)
Use of Proceeds.............................. To fund a portion of the costs of acquiring
the Acquisition Hotels, to repay outstanding
indebtedness, to fund future acquisitions and
for working capital.
NYSE symbol.................................. KPA
</TABLE>
- ---------------
(1) Includes an aggregate of 30,896 restricted Common Shares issued to the
Trustees of the Company other than Mr. Fisher, 330 shares issued in
connection with the Company's dividend reinvestment plan and 526 Units
which were redeemed by the Company for Common Shares subsequent to June 30,
1996. Excludes approximately 4,984,590 Common Shares issuable upon
redemption of Units held by Limited Partners of the Partnership, including
4,112,727 Preferred Units and 124,966 Units (based on the Offering Price)
to be issued in connection with the acquisition of certain of the
Acquisition Hotels. Also excludes Common Shares issuable under the
Company's 1994 Share Incentive Plans and the Trustees Share Incentive Plan.
On a fully diluted basis, there will be 25,813,743 Common Shares and Units
outstanding upon the closing of the Offering. See "Management -- Executive
Compensation," "-- Compensation of Trustees" and "Partnership
Agreement -- Redemption Rights."
9
<PAGE> 14
SUMMARY FINANCIAL DATA
The following table sets forth summary historical and pro forma operating
and financial data for the Company. Such data should be read in conjunction with
the financial statements and notes thereto contained elsewhere or incorporated
by reference in this Prospectus. The pro forma operating and other data for the
Company and the Lessee is presented as if the acquisition of the Hotels, and the
closing of the Follow-on Offering and the Offering had occurred as of the
beginning of the periods presented and therefore incorporates certain
assumptions that are included in the Notes to the Pro Forma Consolidated
Statements of Income included elsewhere in this Prospectus. The pro forma
balance sheet data is presented as if the acquisition of the Acquisition Hotels,
the Offering and the application of the proceeds of the Offering had occurred on
June 30, 1996.
INNKEEPERS USA TRUST
SUMMARY HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
-------------------------------------------------------------
TWELVE
MONTHS
HISTORICAL ENDED
--------------------------------------- YEAR ENDED JUNE 30,
PERIOD FROM DECEMBER 31, 1995 1996
SEPTEMBER 30, --------------------------------------------------- --------
1994 CURRENT
(INCEPTION) YEAR SIX MONTHS CURRENT HOTELS ACQUISITION HOTELS HOTELS
THROUGH ENDED ENDED ------------------ -------------------- --------
DECEMBER 31, DECEMBER 31, JUNE 30, BEFORE AFTER OPERATING OTHER THE BEFORE
1994 1995 1996 OFFERING(2) OFFERING HOTELS(3) HOTELS(4) HOTELS OFFERING(2)
------------- ------------ ---------- -------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage Lease
revenue(5)......... $ 1,480 $ 11,268 $ 12,050 $23,137 $23,137 $13,022 $ 2,355 $ 38,514 $24,789
Income before
minority
interest........... 420 3,864 4,476 5,468 5,911 5,060 565 11,536 6,989
Net income per
Common Share
outstanding(6)..... $ 0.08 $ 0.57 $ 0.39 $ 0.32
Weighted average
number of Common
Shares and Common
Share equivalents
(Units)
outstanding........ 5,383 6,836 11,569 21,700
OTHER DATA:
Lessee room
revenue............ $ 3,404 $ 24,412 $ 25,333 $51,278 $51,278 $26,876 $ 0 $ 78,154 $53,783
Funds from
operations(7)...... 915 7,017 7,490 12,615 13,058 9,616 1,992 24,666 14,136
Cash Available for
Distribution(8).... 924 6,453 6,859 11,362 11,805 8,431 2,006 22,242 12,787
Cash provided by
operating
activities(9)...... 670 4,925 6,957 25,604
Cash used in
investing
activities(10)..... (172) (90,929) (29,516) (198,624)
Cash provided (used)
by financing
activities(11)..... (1,764) 86,642 26,977 190,976
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
----------------------------------------- ---------------------------------------------------
ACQUISITION HOTELS CURRENT HOTELS ACQUISITION HOTELS
-------------------- ------------------ --------------------
AFTER OPERATING OTHER THE BEFORE AFTER OPERATING OTHER THE
OFFERING HOTELS(3) HOTELS(4) HOTELS OFFERING(2) OFFERING HOTELS(3) HOTELS(4) HOTELS
-------- --------- --------- --------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage Lease
revenue(5)......... $24,789 $14,227 $ 2,355 $ 41,371 $13,013 $13,013 $ 6,869 $ 1,178 $ 21,060
Income before
minority
interest........... 7,432 6,265 565 14,262 4,110 4,332 2,887 283 7,502
Net income per
Common Share
outstanding(6)..... $ 0.45 $ 0.24
Weighted average
number of Common
Shares and Common
Share equivalents
(Units)
outstanding........ 21,700 21,700
OTHER DATA:
Lessee room
revenue............ $53,783 $28,648 $ 0 $ 82,431 $27,840 $27,840 $13,966 $ 0 $ 41,806
Funds from
operations(7)...... 14,579 10,821 1,992 27,392 7,683 7,905 5,166 996 14,067
Cash Available for
Distribution(8).... 13,230 9,565 2,006 24,801 6,972 7,194 4,552 1,003 12,749
Cash provided by
operating
activities(9)...... 28,334 14,540
Cash used in
investing
activities(10)..... (206,275) (133,007)
Cash provided (used)
by financing
activities(11)..... 201,768 142,703
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-------------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)(12)
-------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in Hotels, at cost................. $175,918 $325,684
Total assets.................................. 175,428 344,175
Total long-term debt.......................... 78,673 99,635
Minority interest in Partnership.............. 6,084 46,594
Total shareholders' equity.................... 87,550 194,825
</TABLE>
Notes located on following page.
10
<PAGE> 15
- ---------------
(1) The pro forma information does not purport to represent what the Company's
or the Lessee's financial position or results of operations actually would
have been if the Company had in fact owned and leased to the Lessee the
Current Hotels and the Acquisition Hotels at the beginning of the periods
indicated, or to project the Company's or the Lessee's results of
operations for any future period.
(2) This pro forma information represents the results of operations for the
Current Hotels as if the Current Hotels were owned by the Company at the
beginning of the periods presented and leased to the Lessee under the
Percentage Leases throughout the periods presented, but does not reflect
any effects of the Offering.
(3) Operating Hotels includes the following Acquisition Hotels, which had
substantive room revenues for the periods presented: the Residence Inn-San
Mateo, California; -Silicon Valley I, California; -Silicon Valley II,
California; -Denver (Downtown), Colorado; -Wichita East, Kansas; -East
Lansing, Michigan; and -Grand Rapids, Michigan hotels.
(4) Other Hotels includes the following three Acquisition Hotels that had no
substantive operations during the periods presented: the Residence
Inn-Atlanta (Downtown), Georgia and -Portland, Maine hotels; and the
Hampton Inn-Norcross, Georgia hotel.
(5) With respect to the pro forma information, represents Rent payments from
the Lessee to the Company calculated on a pro forma basis by applying the
Rent provisions of the Percentage Leases to the historical room revenue of
the Hotels as if the beginning of the periods presented were the beginning
of the lease year and assumes the Company owned and leased the Current
Hotels and the Acquisition Hotels throughout the periods presented. For the
three Hotels that had no substantive operations for the periods presented,
the Percentage Lease payment is assumed to be equal only to the Base Rent
provided in the applicable Percentage Leases, and does not include
Percentage Rent in excess of Base Rent which the Company expects will be
payable in future periods.
(6) Computed by dividing income before minority interest, less the
distributions on the Preferred Units, by the weighted average number of
Common Shares and Common Share equivalents (including Units) outstanding
for the periods presented. For the periods presented, redemption of the
Preferred Units into Common Shares would be antidilutive, and, therefore,
fully diluted earnings per share is not presented.
(7) Funds From Operations ("FFO") under the National Association of Real Estate
Investment Trusts ("NAREIT") guidelines consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains
or losses from debt restructuring and sales of property, plus depreciation
of real property (including furniture, fixtures and equipment) and after
adjustments for unconsolidated partnerships and joint ventures. Industry
analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. FFO should not be considered as an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance or to cash
flows from operating, investing or financing activities as a measure of
liquidity. FFO does not reflect cash expenditures for capital improvements
or principal repayment of debt. Under the Percentage Leases, the Company is
obligated to make available to the Lessee 4% of room revenues for the
periodic refurbishment and replacement of furniture, fixtures and equipment
at the Hotels. See "Business and Properties -- The Percentage Leases."
(8) Cash Available for Distribution is computed by subtracting from FFO the sum
of (a) 4% of room revenues, which the Company is obligated by the
Percentage Leases to make available to the Lessee for the periodic
refurbishment and replacement of furniture, fixtures and equipment at the
Hotels, and (b) principal amortization on long-term debt and adding the sum
of (i) the amortization of franchise costs, (ii) the amortization of loan
origination fees, and (iii) the amortization of unearned Trustees'
compensation.
(9) Pro forma cash provided by operating activities represents net income plus
minority interest, depreciation and amortization, amortization of loan
origination fees, and amortization of unearned Trustees' compensation.
There are no adjustments included for changes in working capital items.
(10) Pro forma cash used in investing activities includes the purchase of the
Hotels, the payment of certain franchise fees and 4% of room revenues,
which the Company is obligated by the Percentage Leases to make available
to the Lessee for the periodic refurbishment and replacement of furniture,
fixtures and equipment at the Hotels.
(11) Pro forma cash provided (used) by financing activities is computed as the
sum of (i) the product of actual distributions per share and per Unit for
the periods presented and the pro forma Common Shares and Units
outstanding; (ii) distributions on the Preferred Units; (iii) proceeds from
the issuance of long-term debt used to acquire the Hotels; (iv) principal
payments required on the long-term debt; (v) the proceeds from the
Follow-on Offering and the Offering; and (vi) the payment of loan
origination fees to the Lender.
(12) Adjusted to reflect the sale of 10,000,000 Common Shares and the
application of the net proceeds as set forth in "Use of Proceeds."
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following factors in
evaluating an investment in the Common Shares offered hereby. The Prospectus
contains forward looking statements, which involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below.
RISK THAT PENDING ACQUISITIONS WILL NOT CLOSE
While the Company has entered into purchase agreements for the purchase of
the Acquisition Hotels, has substantially completed its due diligence with
respect to the Acquisition Hotels, and contemplates closing the Acquisition
Hotels concurrent with or shortly after the closing of the Offering, there are
no assurances that the Company will acquire one or more of the Acquisition
Hotels. The purchase agreements pertaining to the Acquisition Hotels are subject
to customary closing conditions, including closing conditions imposed by the
lenders of the Assumed Indebtedness. In addition, the closing of the acquisition
of the DeBoer Hotels is contingent upon all of such hotels being acquired
simultaneously; provided that the Company may elect not to close the acquisition
of individual hotels for which structural, environmental or title reports reveal
material defects. If the Company does not complete the acquisition of any or all
of the Acquisition Hotels, for whatever reason, concurrent with or shortly after
the closing of the Offering, the net proceeds from the Offering designated for
the purchase of such Acquisition Hotel or Acquisition Hotels will have no
specific designated use. In such event, there is a risk that the Company would
be unable to identify and close additional hotel acquisitions that meet the
Company's acquisition criteria, and as a result the Company's Cash Available for
Distribution to shareholders would be materially adversely affected. The Company
has incurred approximately $250,000 in due diligence and related expenses in
connection with investigating and preparing for the closing of the Acquisition
Hotels; these expenses will not be recovered by the Company whether or not the
closing of the Acquisition Hotels occurs. In the event that JF Atlanta does not
convey the Atlanta Hotels to the Company as required under the applicable
acquisition agreements, the Company may need to initiate legal action in order
to obtain the prompt return of its $5.8 million deposit.
During the period prior to the Company's acquisition of the Atlanta Hotels,
such hotels may be damaged or destroyed without permitting full recovery through
insurance, thus increasing the risk of loss of the Company's $5.8 million
deposit. Additionally, in the event that JF Atlanta experiences financial
difficulty, bankruptcy or defaults on the term loan applicable to the Atlanta
Hotels, the Company's ability to acquire the Atlanta Hotels could be delayed or
hindered and the $5.8 million deposit forfeited.
GROWTH STRATEGY
Availability of Capital
The ability of the Company to implement its growth strategy depends on
access to capital necessary to invest in additional hotels through the use of
borrowings, subsequent issuances of Common Shares or other securities or
operating cash flow. The Company currently depends solely on the Lender to
provide debt financing, including the Line of Credit and the Term Loan.
Competition for Acquisitions
Competition exists for investment opportunities in upscale extended-stay
and mid-price hotels from entities organized for purposes substantially similar
to the Company's objectives as well as other purchasers of hotels. The Company
may be competing for such hotel investment opportunities with entities that have
substantially greater financial resources than the Company or better
relationships with franchisors, sellers or lenders. These entities may also
generally be able to accept more risk than the Company prudently can manage.
Competition may generally reduce the number of suitable hotel investment
opportunities offered to the Company and increase the bargaining power of
property owners seeking to sell, thereby increasing prices. See "Business and
Properties -- Competition."
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Risk of Rapid Growth; Dependence on Third-Party Managers
The Company's ability to grow is also dependent upon the ability of the
Lessee and any third-party manager retained by the Lessee, such as Marriott or
TMH, to manage effectively the Hotels, as well as any additional hotels in which
the Company invests. The Lessee's or third-party managers' ability to operate
additional hotels under Percentage Leases, the Marriott Management Agreements or
the TMH Management Agreements, as applicable, with current staffing levels and
office locations, may diminish as the Company acquires additional hotels. Such
growth may require the Lessee to hire additional personnel, engage additional
third-party managers, and to operate in new geographic locations. There can be
no assurance that the Lessee or its third-party managers will effectively
operate the Hotels. In the event that the Lessee and its third-party managers
fail to effectively operate the Hotels, the Company's internal growth strategy
and acquisition strategy would be more difficult to achieve and, therefore, Cash
Available for Distribution could be adversely affected.
LACK OF CONTROL OVER OPERATIONS OF THE HOTELS
The Company cannot operate the Hotels or participate in the decisions
affecting the daily operations of the Hotels. See "-- Hotel Industry
Risks -- Dependence on Payments under Percentage Leases." Either the Lessee or
third-party managers retained by the Lessee will control the daily operations of
the Hotels. Marriott will provide management services for nine of the
Acquisition Hotels pursuant to the Marriott Management Agreements with the
Lessee and TMH provides management services for five of the Current Hotels
pursuant to the TMH Management Agreements with the Lessee. Other than as set
forth in the applicable Percentage Lease, the Company does not have the
authority to require a Hotel to be operated in a particular manner, or to govern
any particular aspect of its operation (e.g., setting room rates). Thus, even if
the Company's management believes a hotel is being operated inefficiently or in
a manner that does not result in a maximization of Rent to the Company, the
Company cannot require a change in the method of operation. The Company is
limited to seeking redress only if the Lessee violates the terms of the
Percentage Leases, and then only to the extent of the remedies set forth
therein. Remedies include the Company's ability to terminate the Percentage
Leases upon certain limited events of default by the Lessee in the payment of
Rent or failure by the Lessee to maintain the Franchise Licenses. See "Business
and Properties -- The Percentage Leases." In addition, if the Company declares a
default under the Percentage Leases, a default could concurrently be triggered
under the Line of Credit and the Term Loan, which could result in a foreclosure
of the Hotels securing the Line of Credit and the Term Loan.
ACQUISITION OF HOTELS WITH LIMITED OPERATING HISTORY
Three of the Acquisition Hotels have little or no operating history. The
Company has calculated the Percentage Rent formulas for these hotels based on
its projections of occupancy and ADR for the twelve months following the opening
of such hotels in the areas in which each of these Hotels is located.
Consequently, the Company will be subject to risks that these Hotels will not
achieve anticipated occupancy or ADR levels or may not achieve such levels
within projected time frames. During the start-up period for such new hotels,
room revenues may be less than required to result in the payment of Percentage
Rent at levels at a particular hotel that provide the Company with an attractive
return on its investment.
MULTI-HOTEL ACQUISITION RISKS
Since the IPO, the Company has increasingly emphasized and intends to
continue to emphasize acquisitions of multiple hotels in a single transaction in
order to enable the Company to more rapidly expand its hotel portfolio.
Multiple-hotel acquisitions are, however, often more complex, require a larger
investment of management's time, and may require additional financial and other
resources than single-hotel acquisitions. The risk that a multiple-hotel
acquisition will not close may be greater than in a single-hotel acquisition. If
the Company fails to close hotel acquisitions, its ability to increase Cash
Available for Distribution will be limited. Another risk associated with
multiple-hotel acquisitions is that a seller may require that a group of hotels
be purchased as a package, even though one or more of the hotels in the package
does not meet the Company's investment criteria. In such cases, the Company may
purchase the group of hotels with the intent to re-sell
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those which do not meet its criteria. In such circumstances, there is no
assurance as to how quickly the Company could sell such hotels, the price at
which they could be sold or limitations on resale imposed by the seller. Such
hotels might reduce Cash Available for Distribution if they operate at a loss
during the time the Company holds them for sale or if the Company sells them at
a loss. In addition, under the Code, a REIT's gain from the sale of a hotel
acquired with the intent to re-sell within four years of the date of acquisition
potentially could be subject to a 100% tax. See "Federal Income Tax
Considerations -- Taxation of the Company."
HOTEL INDUSTRY RISKS
Dependence on Payments under Percentage Leases
Certain rules relating to the qualification of a REIT prohibit a REIT from
operating hotels. Therefore, the Company leases the Current Hotels and will
lease the Acquisition Hotels to the Lessee pursuant to the Percentage Leases.
The Company's primary source of revenue is Rent payments under the Percentage
Leases. The Company must rely on the Lessee and any third-party managers
retained by the Lessee, such as Marriott and TMH, to operate effectively the
Hotels in a manner that generates sufficient cash flow to enable the Lessee to
make the Rent payments under the Percentage Leases. Ineffective operation of the
Hotels may result in the Lessee being unable to pay Rent to the Company,
including the higher tier Percentage Rent necessary for the Company to fund its
current level of distributions to shareholders. The obligations of the Lessee
under the Percentage Leases are not secured. Other than working capital, the
Lessee will have nominal assets, which may be insufficient to satisfy any claims
the Company may have upon a default by the Lessee under the Percentage Leases. A
material default under a Percentage Lease could trigger cross-defaults under one
or more Percentage Leases which would have a material adverse effect on Cash
Available for Distribution.
Seasonality of Hotel Business and the Hotels
The hotel industry is seasonal in nature. The Current Hotels' operations
historically reflect higher occupancy rates and ADR during the second and third
quarters for the 18 Current Hotels located outside of Florida and one of the
Current Hotels located in Florida and higher occupancy rates and ADR during the
first and fourth quarters for three of the four Current Hotels located in
Florida. This seasonality generally, and the significant impact of the first
quarter with respect to revenues of three of the Current Hotels located in
Florida, makes the annual revenue of those three Current Hotels located in
Florida highly dependent on the first quarter room revenue. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality of Hotel Business." To the extent that the Company's
cash flow for a quarter is insufficient to fund all of the distribution for the
quarter, the Company may maintain the annual distribution rate by funding
seasonal-related shortfalls with available cash or borrowings under the Line of
Credit.
Operating Costs and Capital Expenditures; Hotel Renovation
Hotels in general, including the Hotels, have an ongoing need for
renovations and other capital improvements, particularly in older structures,
including periodic replacement of furniture, fixtures and equipment at the
hotels. In addition, (i) franchisors of the Hotels or Marriott may require
capital improvements as a condition to the continuation of a Franchise License
or a Marriott Management Agreement, and (ii) the Lender under the Line of Credit
and the Term Loan and the lenders under the Assumed Indebtedness and the
Mortgage Note, respectively, also may require capital improvements. Under the
terms of the Percentage Leases, the Company is obligated to pay the cost of
certain capital expenditures at the Hotels and pay for furniture, fixtures and
equipment. If these expenses exceed the Company's estimate, the additional cost
could have an adverse effect on Cash Available for Distribution. In addition,
the Company has and may continue to acquire hotels in the future that require
significant renovation. Renovation of hotels involves certain risks, including
the possibility of environmental problems, construction cost overruns and
delays, uncertainties as to market demand or deterioration in market demand
after commencement of renovation and the emergence of unanticipated competition
in the local geographic market.
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Concentration of Investments in California, Florida and Michigan
Six of the 32 Hotels are located in California, and four are located in
each of Florida and Michigan. See "Business and Properties -- The Hotels." The
concentration of the Company's investments in California, Florida and Michigan
could result in adverse events, or conditions which affect those areas in
particular, such as economic recessions and natural disasters, having a more
significant negative effect on the operations of the combined Hotels, and
ultimately cash distributions to shareholders of the Company, than if the
Company's investments were more geographically diverse.
Concentration of Percentage Lease Payments
On a pro forma basis, for the 12 months ended June 30, 1996, five of the
Hotels (the Residence Inn-Mountain View, California, -San Mateo, California,
- -Silicon Valley I, California, -Silicon Valley II, California and -Troy
(Central), Michigan hotels) generated approximately 37% of the Rent payments to
the Company under the Percentage Leases. Therefore, the Company's Cash Available
for Distribution will be affected, to a large degree, by the operating
performance of these five Hotels.
Operating Risks
The Hotels are subject to all operating risks common to the hotel industry.
The hotel industry has experienced volatility in the past, as have the Hotels,
and there can be no assurance that such volatility will not occur in the future.
These risks include, among other things, economic recessions, competition from
other hotels; over-building in the hotel industry which has adversely affected
occupancy, ADR and REVPAR; increases in operating costs due to inflation and
other factors, which increases have not in recent years been, and may not
necessarily in the future be, offset by increased room rates; dependence on
business and commercial travelers and tourism; strikes and other labor
disturbances of hotel employees for hotels acquired by the Company in the
future; increases in energy costs and other expenses of travel; and adverse
effects of general and local economic conditions. These factors could decrease
room revenues of the Hotels and adversely affect the Lessee's ability to make
payments of Rent under the Percentage Leases to the Company, including payments
at the higher tier Percentage Rent levels, and therefore, Cash Available for
Distribution to shareholders.
Investment Concentration in Single Industry; Emphasis on Upscale Extended-Stay
Market Segment
The Company's current growth strategy is to acquire operating hotels,
primarily upscale extended-stay hotels. The Company will not seek to invest in
assets selected to reduce the risks associated with an investment in the hotel
industry, and is subject to risks inherent in concentrating investments in a
single industry and in a single market segment within that industry. Therefore,
the adverse effect on Rent under the Percentage Leases and distributions to
shareholders of the Company resulting from a downturn in the hotel industry or
the upscale extended-stay market segment would be more pronounced than if the
Company had diversified its investments outside of the hotel industry or in
additional hotel market segments. See "Business and Properties -- The Hotel
Industry."
Emphasis on Residence Inn and Hampton Inn Hotels
After the acquisition of the Acquisition Hotels, the Company will own 32
Hotels. The Current Hotels operate as Residence Inn hotels (11), Hampton Inn
hotels (7), Comfort Inn hotels (2), a Holiday Inn Express hotel and a Sheraton
Inn hotel. The Acquisition Hotels include nine Residence Inn hotels and one
Hampton Inn hotel. The Company intends to emphasize the acquisition of Residence
Inn hotels in its acquisition strategy. The Company will be subject to risks
inherent in concentrating investments in any franchise brand, in particular the
Residence Inn and the Hampton Inn brands, such as a reduction in business
following any adverse publicity related to a brand, which could have an adverse
effect on the Company's Rent under the Percentage Leases and distributions to
shareholders. In addition, dependence upon a major franchisor or manager, such
as Promus or Marriott, may adversely affect the Company's ability to negotiate
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<PAGE> 20
favorable contractual provisions with such franchisor or manager. See "Business
and Properties -- Franchise Licenses and Marriott Management Agreements,"
"-- The Hotels -- Residence Inn Hotels," and "-- Hampton Inn Hotels."
Risks of Operating Hotels under Franchise Licenses and the Marriott Management
Agreements
The continuation of the Franchise Licenses is subject to specified
operating standards and other terms and conditions. The franchisors that have
issued or will issue the Franchise Licenses periodically inspect their licensed
hotels to confirm adherence to their operating standards. The failure of the
Partnership or the Lessee to maintain such standards respecting a Hotel or to
adhere to such other terms and conditions could result in the loss or
cancellation of a Franchise License. The Marriott Management Agreements will
allow the Hotels subject thereto to be operated as Residence Inn hotels so long
as the Company does not breach its obligations under the Percentage Leases
relating to such Hotels. Continued operation of such Hotels as Residence Inn
hotels also requires the Company to make capital improvements as required by
Marriott to maintain the hotel in accordance with system standards. It is
possible that a franchisor or Marriott, as applicable, could condition the
continuation of a Franchise License or a Marriott Management Agreements, as
applicable, on the completion of capital improvements which the Board of
Trustees determines are too expensive or otherwise not economically feasible in
light of general economic conditions or the operating results or prospects of
the affected Hotel. In that event, the Board of Trustees may elect to allow the
Franchise License or Marriott Management Agreement to lapse or be terminated. In
addition, when the term of a Franchise License or a Marriott Management
Agreement expires, the franchisor or Marriott has no obligation to issue a new
franchise license or management agreement, as applicable, for the Hotel. In any
case, if a Franchise License or a Marriott Management Agreement is terminated or
not renewed, the Company and the Lessee may seek to obtain a suitable
replacement franchise, or to operate the Hotel independent of a franchise
relationship. The loss of a Franchise License or a Marriott Management Agreement
could have a material adverse effect upon the operations or the underlying value
of the Hotel covered by the Franchise License or a Marriott Management Agreement
because of the loss of associated name recognition, marketing support and
centralized reservation systems provided by the franchisor or Marriott. The loss
of a Franchise License or Marriott Management Agreement for one or more of the
Hotels could have a material adverse effect on Rent under the Percentage Leases
and Cash Available for Distribution. In addition, when a Franchise License or a
Marriott Management Agreement expires, the franchisor or Marriott could issue a
new franchise license or management agreement with fees that are higher than
those required under the expired Franchise License or Marriott Management
Agreement, which could have an adverse effect on the Lessee's ability to pay
Rent and, accordingly, the Company's ability to make distributions to its
shareholders. See "Business and Properties -- Franchise Licenses." In addition,
in the case of certain of the Hotels, the terms of the applicable Franchise
Licenses or Marriott Management Agreements will be shorter than the terms of the
applicable Percentage Leases. In the event that such Franchise Licenses or
Marriott Management Agreements are not extended, the affected Hotels could lose
the benefits of franchise or management affiliations, which could adversely
affect Hotel revenues, Rent and Cash Available for Distribution.
Competition for Guests
The hotel industry, and the upscale extended-stay and mid-price segments of
the lodging market, in which the Company operates, is highly competitive.
Competitive factors within the industry include room rates, quality of
accommodations, name recognition, service levels, reputation, reservation
systems, convenience of location and the supply and availability of alternative
lodging. The Hotels compete with other existing and new hotels in their
geographic markets. The extended-stay and mid-price segments of the hotel
industry have become more competitive recently, as several new competitors have
entered the market. Many of the Company's competitors have substantially greater
marketing and financial resources than the Company and the Lessee. Each of the
Hotels is located in a developed area that includes other hotels, many of which
are competitive with the Hotels in their locality. The number of competitive
hotels in a particular area could have a material adverse effect on occupancy,
ADR and REVPAR of the Hotels or at hotels acquired in the future. Further, there
can be no assurance that new or existing competitors will not significantly
reduce their rates or offer greater convenience, services or amenities or
significantly expand or improve hotels in the market in
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which the Company competes or markets in which it will compete, thereby
materially adversely affecting the Company's business and results of operations.
See "Business and Properties -- Competition."
RISKS OF LEVERAGE
The Board of Trustees has the discretion to permit the Company to incur
debt in an amount not to exceed the Debt Limitation. The Company obtained the
Line of Credit with the Lender to fund future hotel acquisitions and provide
working capital. The Line of Credit is currently limited to a maximum principal
amount of $70 million. The Line of Credit also permits borrowing only if the
Company's debt service coverage ratio is at least 2.0, which, in addition to the
Debt Limitation, limits the Company's borrowing capacity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."At June 30, 1996, approximately
$45.0 million in borrowings were outstanding under the Line of Credit. After the
closing of the Offering and the application of the net proceeds as described in
"Use of Proceeds," the Company will have outstanding indebtedness of
approximately $99.6 million, including (a) approximately $30 million outstanding
under the Term Loan, (b) approximately $42 million outstanding under the Line of
Credit and (c) approximately $27.6 million of existing indebtedness on certain
of the Hotels and may borrow up to approximately $126.4 million under the Debt
Limitation, subject to certain debt coverage requirements under the Line of
Credit agreements. See "Use of Proceeds." The Line of Credit is currently
secured by 13 of the Current Hotels will be secured by any hotels acquired by
the Company in the future with proceeds from the Line of Credit. The Term Loan
is secured by eight of the Current Hotels, the remaining Current Hotel secures a
mortgage note in the remaining principal amount of $3.6 million (the "Mortgage
Note") and the Assumed Indebtedness is secured by three of the DeBoer Hotels.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In connection with the purchase
of the DeBoer Hotels, the Company has agreed to assume the approximately $24
million of Assumed Indebtedness encumbering three of the DeBoer Hotels and to
maintain, for a period of up to ten years following the closing of the
acquisition of the DeBoer Hotels, the Required Indebtedness to accommodate the
DeBoer Group's efforts to minimize certain adverse tax consequences. The
Required Indebtedness will be reduced upon the deaths of members of the DeBoer
Group and certain redemptions or taxable transfers of Preferred Units by members
of the DeBoer Group. In the event that the Company fails to maintain the
Required Indebtedness, the Company will be liable for any resulting income tax
liabilities incurred by members of the DeBoer Group. See "Acquisitions -- The
DeBoer Hotels."
To the extent the Company continues to incur debt, its debt service
requirements will reduce Cash Available for Distribution. Variable rate debt,
such as the Line of Credit, creates higher debt service requirements if interest
rates increase, which may decrease Cash Available for Distribution. There can be
no assurances that the Company, upon the incurrence of debt, will be able to
meet its debt service obligations (including, without limitation, its
obligations under the Line of Credit and the Term Loan) and, to the extent that
it cannot, the Company risks the loss of some or all of its assets, including
the Hotels securing such debt, to foreclosure. Changes in economic conditions
could result in higher interest rates on variable rate debt, including
borrowings under the Line of Credit, reduce the availability of debt financing
generally or at rates deemed favorable to the Company, reduce Cash Available for
Distribution and increase the risk of loss upon a sale or foreclosure. While it
has not done so to date, the Company also may obtain one or more forms of
interest rate protection on variable rate debt (e.g., swap agreements or
interest rate cap contracts) and will consider additional long-term fixed-rate
financing to further hedge against the possible adverse effects of interest rate
fluctuations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." Adverse economic
conditions could cause the terms on which borrowings become available to be less
favorable than at present. In such circumstances, if the Company is in need of
capital to repay indebtedness in accordance with its terms or otherwise, it
could be required to liquidate one or more investments in Hotels or lose one or
more Hotels to foreclosure, either of which could result in a material financial
loss to the Company.
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CONFLICTS OF INTEREST
Because of Mr. Fisher's ownership in and positions with the Company and the
Lessee, and Mr. DeBoer's interests in the hotel industry, including his
interests in another proposed public hotel company focusing on the extended-stay
segment of the lodging industry, there are inherent conflicts of interest in the
ongoing lease, acquisition, disposition and operation of the Hotels, and the
interests of shareholders may not have been, and in the future may not be,
reflected solely in all decisions made or actions taken by officers and Trustees
of the Company.
No Arm's-Length Bargaining on Percentage Leases
The terms of the Percentage Leases were not negotiated on an arm's-length
basis. The Company believes, however, that the terms of the Percentage Leases
are fair to the Company at the time such agreements were executed by the
Company. The Company does not own any interest in the Lessee, however, Mr.
Fisher is the majority shareholder in the Lessee and a director thereof. See
"The Lessee." Because Mr. Fisher is the majority shareholder and a director of
the Lessee as well as an officer and Trustee of the Company, there is a conflict
of interest with respect to the enforcement, termination or extension of the
Percentage Leases and the negotiation of the terms of future percentage leases
between the Lessee and the Company. Mr. Fisher's economic interest in the Lessee
may result in decisions relating to the Company's enforcement of its rights
under the Percentage Leases that do not solely reflect the interests of the
Company's shareholders.
Continuing Hotel Development by Mr. Fisher, Conflicting Demands for Management
Time and Possible Competition From Hotels Developed by Mr. Fisher
The success of the Company is dependent in part upon Mr. Fisher, the loss
of whose services could have a material adverse effect on the Company's business
and operations. In addition, Mr. Fisher and his Affiliates may develop new
hotels, subject to certain limitations, which may materially affect the amount
of time Mr. Fisher has available to devote to the affairs of the Company.
Further, hotels developed by Mr. Fisher and his Affiliates could compete with
the Hotels. In connection with the IPO, Mr. Fisher entered into an employment
agreement with the Company (the "Fisher Employment Agreement") pursuant to which
Mr. Fisher agreed to devote substantially all of his time to the affairs of the
Company. See "Management -- Fisher Employment Agreement; Exclusive Hotel
Development Agreement and Covenant Not to Compete."
Continuing Hotel Development by Mr. DeBoer, and Possible Competition From
Hotels Developed by Mr. DeBoer
Mr. DeBoer, who will be the largest shareholder of the Company, on a fully
diluted basis, and who has agreed to become a Trustee of the Company after the
closing of the acquisition of the DeBoer Hotels, and certain of his Affiliates
have in the past, and continue to be, involved in the development of hotels,
including extended-stay hotels. Mr. DeBoer is the President, Chairman of the
Board and a major shareholder of Candlewood Hotel Company, Inc. ("Candlewood"),
a proposed public hotel company that is the owner, operator and franchisor of
Candlewood hotels, a mid-price extended-stay hotel chain recently founded by Mr.
DeBoer. Candlewood filed a registration statement with the Commission on Form
S-1 relating to its initial public offering of common stock on September 13,
1996. Hotels developed by Mr. DeBoer and his Affiliates, including Candlewood
hotels, may compete with the Company's hotels for guests, and other hotel
companies with which Mr. DeBoer is affiliated, including Candlewood, and may
compete with the Company for acquisition opportunities. Accordingly, the
interests of the Company and Mr. DeBoer could be different in connection with
matters relating to the Company's Hotels or proposed acquisitions that are
competitive with hotels owned or being considered for acquisition or development
by Mr. DeBoer and his Affiliates.
Conflicts Relating to Sales, Refinancing or Prepayment of Indebtedness of
Fisher Initial Hotels
As holders of Units, certain Affiliates of Mr. Fisher may have unrealized
taxable gain associated with their interests in the four Current Hotels that
were contributed by such Affiliates of Mr. Fisher to the Company in connection
with the IPO (the "Fisher Initial Hotels"). Because those Affiliates of Mr.
Fisher may suffer different and more adverse tax consequences than the Company
upon the sale of or the refinancing or prepayment of indebtedness secured by the
Fisher Initial Hotels, the Affiliates of Mr. Fisher and the
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Company may have different objectives regarding the appropriate pricing and
timing of any sale of or refinancing or prepayment of indebtedness with respect
to such Hotels. However, decisions with respect to the disposition or
refinancing or prepayment of indebtedness associated with all hotels in which
the Company invests will be made by a majority of the members of the Board of
Trustees, which majority must include a majority of the Independent Trustees,
when the disposition of or refinancing or prepayment of indebtedness involves
any Fisher Initial Hotel.
Conflicts Relating to Sales, Refinancing or Prepayment of Indebtedness of
DeBoer Hotels
Due to the potential adverse tax consequences to the DeBoer Group that may
result from the sale of or refinancing or prepayment of indebtedness associated
with the DeBoer Hotels, the Company has agreed with the DeBoer Group that, for a
period of up to ten years following the closing of the acquisition of the DeBoer
Hotels, (i) any taxable sale of a DeBoer Hotel will require the consent of the
applicable members of the DeBoer Group, which may cause the Company to be unable
to sell some or all of the DeBoer Hotels in circumstances in which it would be
advantageous to do so, and (ii) the Company will maintain the Required
Indebtedness. See "Acquisitions -- The DeBoer Hotels," "Partnership
Agreement -- Preferred Units."
Acquisition of Atlanta Hotels
To facilitate the financing and acquisition of the Atlanta Hotels without
causing the Company to incur indebtedness in excess of the Debt Limitation, JF
Atlanta was formed to acquire the Atlanta Hotels. JF Atlanta is owned and
controlled by Messrs. Fisher and Shaw. JF Atlanta acquired the Atlanta Hotels on
September 6, 1996 for a purchase price of approximately $27.8 million (including
closing and financing costs incurred to date). The Company has entered into
agreements with JF Atlanta to acquire the Atlanta Hotels concurrent with or
immediately after the closing of the Offering for a purchase price equal to the
aggregate cost incurred by JF Atlanta in acquiring and financing the Atlanta
Hotels, plus any capital contributed by the members of JF Atlanta to fund any
operating losses incurred by JF Atlanta prior to the sale of the Atlanta Hotels
to the Company. The Company has paid to JF Atlanta a deposit of $5.8 million
with respect to the acquisition of the Atlanta Hotels which is refundable in the
event that the Offering is not completed. JF Atlanta utilized this deposit,
together with a term loan from the Lender in the principal amount of
approximately $22 million, to finance the acquisition of the Atlanta Hotels. The
Board of Trustees, including a majority of the Independent Trustees, has
approved the involvement of Mr. Fisher in JF Atlanta as described above, since
such involvement would otherwise be prohibited by the Exclusive Hotel
Development Agreement and Covenant Not to Compete between the Company and Mr.
Fisher (the "Development Agreement").
REAL ESTATE INVESTMENT RISKS
General Risks of Investing in Real Estate
The Hotels are subject to varying degrees of risk generally incident to the
ownership of real property. Income from the Hotels may be adversely affected by
adverse changes in national economic conditions, adverse changes in local market
conditions due to changes in general or local economic conditions and
neighborhood characteristics, competition from other hotels, changes in interest
rates and in the availability, cost and terms of mortgage funds, the impact of
present or future environmental legislation and compliance with environmental
laws, the ongoing need for capital improvements, particularly in older
structures, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured losses), acts of war, adverse changes in zoning laws, and
other factors which are beyond the control of the Company.
Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions is
limited. In particular, the Company may not sell any of the DeBoer Hotels in a
taxable transaction for a period of up to ten years following the closing of the
Offering, without the consent of the applicable members of the DeBoer Group. See
"The Acquisitions -- The DeBoer
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<PAGE> 24
Hotels." Pursuant to the Marriott Management Agreements, Marriott will have a
right of first negotiation with respect to the Residence Inn hotels managed by
it. In addition, the sale of a Marriott-managed Residence Inn hotel to an entity
that does not enter into a franchise license with Marriott or its affiliates or
to an entity that is a hotel operator that competes with Marriott will require
the Company to pay to Marriott a termination fee equal to up to five times the
average fees paid to Marriott over the two years prior to the sale. No
assurances can be given that the market value of any of the Hotels will not
decrease in the future. There can be no assurance that the Company will be able
to dispose of a Hotel investment when it finds disposition advantageous or
necessary or that the sale price of any Hotel will recoup or exceed the amount
of the Company's investment.
Consents of Ground Lessors Required for Certain Actions with Respect to Three
Hotels
The Hampton Inn-West Palm Beach hotel, the Sheraton Inn-Fort Lauderdale
hotel and the Comfort Inn-Woburn, Massachusetts hotel are subject to ground
leases with third-party ground lessors. Any proposed sale or refinancing of any
of those Hotels by the Company or any proposed assignment of the Company's
leasehold interest in the ground leases would require the consent of the
third-party ground lessors. In addition, the proposed renovation of the Comfort
Inn-Woburn, Massachusetts hotel requires the consent of the ground lessor under
the ground lease for such Hotel. As a result of the terms of such ground leases,
the Company may not be able to sell, assign, transfer or convey its interest in
those Hotels or make capital improvements at the Comfort Inn-Woburn,
Massachusetts hotel absent the consent of such third-party ground lessors, even
if such transaction may be in the best interests of the shareholders of the
Company.
Uninsured and Underinsured Losses
Each Percentage Lease specifies comprehensive insurance to be maintained on
each of the Hotels, including liability, fire and extended coverage. Management
of the Company believes that such specified coverage is of the type and amount
customarily obtained by owners of hotels similar to the Hotels. Percentage
Leases for subsequently acquired hotels will contain similar provisions.
However, there are certain types of losses, generally of a catastrophic nature,
such as earthquakes, floods and hurricanes, that may be uninsurable or not
economically insurable and which may impact certain of the Hotels.
All six of the Hotels in California are located in areas that are subject
to earthquake activity. These Hotels are located in areas of high seismic risk
and were constructed under pre-1985 building codes. These six Hotels were
subjected to either Probable Maximum Loss ("PML") assessments or insurance
underwriting review (the three Current Hotels in September 1995 and the three
Acquisition Hotels in October 1996), which are intended to quantify the possible
damage to a property from an earthquake. The other Hotels were not subject to
PML assessments or insurance underwriting review because either (i) the Hotels
were recently constructed and therefore conform to more recent and stringent
building codes, or (ii) the Hotels are located in areas of relatively low
seismic risk. A third-party engineering firm or insurance underwriter has
estimated, based on these assessments, the losses that would likely result from
earthquakes at levels which have historically affected the areas in which the
six Hotels in California are located. No assurance can be given that an
earthquake would not render significant damage to the Acquisition Hotels that
have been constructed in compliance with more recent building codes, or are in
areas of lower seismic risk. Additionally, areas in Florida where certain of the
Current Hotels are located may experience hurricane or high-wind activity. The
Company has earthquake insurance policies on the Current Hotels located in
California (and, concurrent with the closing of the acquisition of the
applicable Acquisition Hotels, intends to obtain such insurance for the three
Acquisition Hotels located in California) and hurricane insurance policies on
the Current Hotels located in Florida. The Company's Board of Trustees has used
and will use its discretion in determining amounts, coverage limits and
deductibility provisions of insurance, with a view to maintaining appropriate
insurance coverage on the Company's investments at a reasonable cost and on
suitable terms, and may from time to time elect not to carry earthquake or
hurricane insurance. This may result in insurance coverage that, in the event of
a substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the Company's lost investment. Inflation, changes
in building codes and ordinances, environmental considerations, and other
factors also might make it infeasible to use insurance proceeds to replace a
Hotel after it has
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been damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company might not be adequate to restore its economic position
with respect to the Hotel.
Fluctuations in Property Taxes
Each Hotel is subject to real and personal property taxes. The real and
personal property taxes on the Hotels or any hotels in which the Company may
invest in the future may increase or decrease as property tax rates change and
as the Hotels are assessed or reassessed by taxing authorities. The Company is
obligated under the Percentage Leases to pay for real and personal property
taxes. Management believes that the assessed value of substantially all of the
Hotels is less than the price paid for the Hotels by the Company, and,
therefore, the Company believes that if such Hotels were to be reassessed by the
applicable governmental authority, the assessed value could be raised to or
above the purchase price of the Acquisition Hotels. If property taxes increase,
the Company's ability to make distributions to its shareholders would be
adversely affected. See "Business and Properties -- The Percentage Leases."
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to borrow using such real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of such
substances at the disposal or treatment facility, whether or not such facility
is or ever was owned or operated by such person. Certain environmental laws and
common law principles could be used to impose liability for release of and
exposure to hazardous substances, including asbestos-containing materials
("ACMs"), into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances, including ACMs. In connection
with the ownership of the Hotels, the Company, the Partnership or the Lessee, as
the case may be, may be potentially liable for any such costs. Phase I
environmental site assessments ("ESAs") were prepared in September 1996 for all
of the Acquisition Hotels. The purpose of ESAs and any additional testing
conducted in connection therewith is to identify potential sources of
contamination for which the Hotels may be responsible and to assess the status
of environmental regulatory compliance. The ESA reports and any additional
testing conducted in connection therewith have not revealed any environmental
liability or compliance concerns that the Company believes would have a material
adverse effect on the Company's business, assets or results of operations, nor
is the Company aware of any such liability or concerns. Furthermore, it is
possible that these reports and any additional testing conducted in connection
therewith do not reveal all environmental liabilities or environmental
compliance concerns or that there are material environmental liabilities which
arose at a Hotel after the applicable ESA report was completed of which the
Company is otherwise unaware.
Compliance with Americans with Disabilities Act and other Changes in
Governmental Rules and Regulations
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While the Company believes that the Hotels
are substantially in compliance with these requirements, a determination that
the Company is not in compliance with the ADA could result in imposition of
fines or an award of damages to private litigants. In addition, changes in
governmental rules and regulations or enforcement policies affecting the use and
operation of the Hotels, including changes to building codes and fire and life-
safety codes, may occur. If the Company were required to make substantial
modifications at the Hotels to comply with the ADA or other changes in
governmental rules and regulations, the Company's ability to make distributions
to its shareholders could be adversely affected.
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TAX RISKS
Failure to Qualify as a REIT
The Company operates and intends to continue to operate so as to qualify as
a REIT for federal income tax purposes. Although the Company has not requested,
and does not expect to request, a ruling from the Service that it qualifies as a
REIT, it will receive at the closing of the Offering an opinion of its counsel
that, based on certain assumptions and representations, it so qualifies.
Investors should be aware, however, that opinions of counsel are not binding on
the Service or any court. The REIT qualification opinion only represents the
view of counsel to the Company based on counsel's review and analysis of
existing law, which includes no controlling precedent. Furthermore, both the
validity of the opinion and the continued qualification of the Company as a REIT
will depend on the Company's continuing ability to meet various requirements
concerning, among other things, the ownership of its outstanding shares of
beneficial interest, the nature of its assets, the sources of its income, and
the amount of its distributions to its shareholders. See "Federal Income Tax
Considerations -- Taxation of the Company."
If the Company were to fail to qualify as a REIT for any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. As a result, Cash
Available for Distribution would be reduced for each of the years involved.
Although the Company currently operates in a manner designed to qualify as a
REIT, it is possible that future economic, market, legal, tax or other
considerations may cause the Board of Trustees, with the consent of two-thirds
of the number of Common Shares entitled to vote on such matter at a meeting of
the shareholders of the Company, to revoke the REIT election. See "Federal
Income Tax Considerations."
REIT Minimum Distribution Requirements
In order to qualify as a REIT, the Company generally is required each year
to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). In addition, the Company is subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (i) 85% of
its ordinary income for that year, (ii) 95% of its capital gain net income for
that year, and (iii) 100% of its undistributed taxable income from prior years.
The Company has made, and intends to continue to make, distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of its share
of the income of the Partnership, and the Company's Cash Available for
Distribution consists primarily of its share of cash distributions from the
Partnership. Differences in timing between the recognition of taxable income and
the receipt of Cash Available for Distribution due to the seasonality of the
hospitality industry could require the Company, through the Partnership, to
borrow funds on a short-term basis to meet the 95% distribution requirement and
to avoid the nondeductible excise tax. The requirement to distribute a
substantial portion of the Company's net taxable income could cause the Company
to distribute amounts that would otherwise be spent on future acquisitions,
capital expenditures or repayment of debt, which would require the Company to
borrow or sell assets to fund the costs of such items.
Distributions by the Partnership are determined by the Company and are
dependent on a number of factors, including the amount of the Partnership's
distributable cash, the Partnership's financial condition, any decision by the
Company to reinvest funds rather than to distribute such funds, the
Partnership's capital expenditures, the annual distribution requirements under
the REIT provisions of the Code and such other factors as the Company deems
relevant. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Distribution Requirements."
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Failure of the Partnership to be Classified as a Partnership for Federal Income
Tax Purposes; Impact on REIT Status
The Company has not requested, and does not expect to request, a ruling
from the Service that the Partnership (and each of the Subsidiary Partnerships
(as defined herein)) will be classified as a partnership for federal income tax
purposes. If the Service were to challenge successfully the tax status of the
Partnership (or a Subsidiary Partnership) as a partnership for federal income
tax purposes, the Partnership (or the Subsidiary Partnership) would be taxable
as a corporation. In such event, the Company likely would cease to qualify as a
REIT for a variety of reasons. Furthermore, the imposition of corporate income
tax on the Partnership would reduce substantially the amount of Cash Available
for Distribution. See "Federal Income Tax Considerations -- Tax Aspects of the
Partnership."
OWNERSHIP LIMITATION
In order for the Company to maintain its qualification as a REIT, not more
than 50% in value of its outstanding shares of beneficial interest may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities). Furthermore, if any shareholder or group of
shareholders of the Lessee owns, actually or constructively, 10% or more of the
shares of beneficial interest of the Company, the Lessee could become a
related-party tenant of the Company and the Partnership, which likely would
result in loss of REIT status for the Company. For the purpose of preserving the
Company's REIT qualification, the Company's Declaration of Trust prohibits
direct or indirect ownership (taking into account applicable ownership
provisions of the Code) of more than 9.8% of the outstanding Common Shares or
any other class of outstanding shares of beneficial interest by any shareholder
or group (including Affiliates of Mr. Fisher) subject to adjustment under
certain circumstances (the "Ownership Limitation"). Generally, the shares of
beneficial interest owned by related or affiliated owners will be aggregated for
purposes of the Ownership Limitation. The Board of Trustees has waived the
Ownership Limitation in the case of a specific mutual fund investment family.
Any transfer of shares of beneficial interest that would prevent the
Company from continuing to qualify as a REIT under the Code will be void ab
initio, the intended transferee of such shares will be deemed never to have had
an interest in such shares, and such shares will be designated
"Shares-in-Trust." Further, the Company shall be deemed to have been offered
Shares-in-Trust for purchase at the lesser of the market price (as defined in
the Declaration of Trust) on the date the Company accepts the offer and the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift, devise or non-transfer event (as defined in the Declaration of
Trust), the market price on the date of such gift, devise or non-transfer
event). Therefore, the recordholder of shares of beneficial interest in excess
of the Ownership Limitation will experience a financial loss when such shares
are redeemed, if the market price falls between the date of purchase and the
date of redemption. See "Federal Income Tax Considerations -- Requirements for
Qualification."
COMMON SHARE PRICE FLUCTUATIONS AND TRADING VOLUME
A number of factors may adversely influence the price of the Common Shares
in public trading markets, many of which are beyond the control of the Company.
In particular, an increase in market interest rates will result in higher yields
on other financial instruments and may lead purchasers of Common Shares to
demand a higher annual distribution rate on the price paid for the Common
Shares, which could adversely affect the market price of the Common Shares.
Although the Common Shares are listed on the NYSE, the daily trading volume of
shares of stock or beneficial interest in REITs in general and the Common Shares
in particular may be lower than the trading volume of securities of other
industries. As a result, investors in the Company who desire to liquidate
substantial holdings at a single point in time may find that they are unable to
dispose of such Common Shares in the market without causing a substantial
decline in the market value of such Common Shares.
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ABILITY OF BOARD OF TRUSTEES TO CHANGE CERTAIN POLICIES
The major policies of the Company, including its policies with respect to
acquisitions, financing, executive compensation, growth, operations, debt
capitalization and distributions, are and will continue to be determined by its
Board of Trustees. The Board of Trustees may amend or revise these and other
policies from time to time without a vote of the holders of the Common Shares.
The Company cannot change the provision of its Declaration of Trust limiting
indebtedness to the Debt Limitation or its policy of seeking to maintain its
qualification as a REIT without the approval of the holders of two-thirds of all
of the votes entitled to be cast on the matter.
LIMITATION ON ACQUISITION AND CHANGE IN CONTROL
Staggered Board
The Board of Trustees of the Company has three classes. The terms of the
Company's Trustees expire in 1996, 1997 and 1998, respectively. Trustees for
each class are elected for a three-year term upon the expiration of the term of
that class. The staggered terms of Trustees may delay, deter or prevent a change
in control of the Company or other transaction which could involve holders of
Common Shares receiving a premium over the prevailing market price for their
Common Shares or which might otherwise be in such holders' interests. See
"Management -- Trustees and Executive Officers."
Authority to Issue Common and Preferred Shares
The Declaration of Trust authorizes the Board of Trustees to reclassify and
issue any unissued Common Shares and to classify or reclassify and issue up to
20,000,000 Preferred Shares and to establish the preferences and other terms of
any shares issued. The issuance of Common Shares or Preferred Shares could have
the effect of delaying, deferring or preventing a change in control of the
Company even if a change in control were in the interests of the holders of
Common Shares and could dilute the interests of the holders of the Common Shares
issued in the Offering. No Preferred Shares will be issued or outstanding as of
the closing of the Offering.
Maryland Anti-Takeover Statutes
As a Maryland real estate investment trust, the Company is subject to
various provisions of the Maryland General Corporation Law ("MGCL"), which
impose certain restrictions and require certain procedures with respect to
certain takeover offers and business combinations. Certain business
combinations, including mergers, share exchanges and, in certain circumstances,
asset transfers, between a Maryland real estate investment trust and any person
who beneficially owns ten percent or more of the voting power of the trust's
shares (an "Interested Shareholder") or an affiliate thereof are prohibited for
five years after the most recent date on which the Interested Shareholder
becomes an Interested Shareholder. Thereafter, any such business combination
must be recommended to the trust's shareholders by the board of trustees and
approved by the shareholders, by votes of at least (i) 80% of all of the votes
entitled to be cast by outstanding voting shares, voting together as a single
voting group, and (ii) two-thirds of the votes entitled to be cast by holders of
voting shares other than voting shares held by the Interested Shareholder or by
an affiliate thereof, voting together as a single group, unless the trust's
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholders for its common shares. Pursuant
to the statute, the board of trustees may exempt or approve a business
combination with an existing or future Interested Shareholder or its affiliates
at any time prior to the time that an Interested Shareholder becomes an
Interested Shareholder.
The MGCL, as applicable for real estate investment trusts, also restricts
the voting rights of certain shares beneficially acquired by a person if that
person would then be entitled to exercise voting power in the election of
trustees within any one of three specified ranges of voting power, except to the
extent voting rights for such acquired shares are or have been approved by at
least two-thirds of the votes entitled to be cast, excluding shares owned by
such person or by officers or trustees who are employees of the trust. A person
who has made or proposes to make an acquisition of shares entitling such person
to exercise such specified voting
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<PAGE> 29
power may, upon satisfying certain conditions, compel the board of trustees to
call a shareholders meeting to consider voting rights for such shares. If the
shareholders do not grant voting rights or the person does not deliver a
statutorily required notice, then, under certain circumstances, the trust may
redeem any or all shares for fair value (as defined in the MGCL). If voting
rights are approved for such shares and the person becomes entitled to vote a
majority of all of the outstanding shares entitled to vote, then all other
shareholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by such person in acquiring such shares.
The Bylaws of the Company exempt from the provisions restricting voting
rights any acquisitions of the Company's Common Shares or Preferred Shares,
although there are no assurances that such provision will not be amended or
eliminated in the future.
Ownership Limitation
The Ownership Limitation, which provides that no shareholder may own,
directly or indirectly, more than 9.8% of any class of the outstanding shares of
beneficial interest of the Company, may have the effect of precluding
acquisition of control of the Company by a third party without the approval of
the Board of Trustees. See "Federal Income Tax Considerations -- Requirements
for Qualification."
ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE ISSUANCE AND SALE ON MARKET PRICE
OF COMMON SHARES
The Company's Declaration of Trust authorizes the Board of Trustees to
issue up to 120,000,000 shares of capital stock, consisting of 100,000,000
Common Shares and 20,000,000 Preferred Shares. Upon the closing of the Offering,
the Board of Trustees will be able to reclassify and issue an aggregate of
approximately 73,386,257 unissued or unreserved Common Shares and to classify
and issue all 20,000,000 unissued Preferred Shares. The Company's acquisition
strategy depends in part on access to additional capital through sales and
issuances of equity securities. The market price of the Common Shares may be
adversely affected by the availability for future sale and issuance of such
unissued and unreserved Common Shares and Preferred Shares.
In addition, the market price of Common Shares may also be adversely
affected by the availability for future sale and issuance of 4,984,590 Common
Shares that could be issued upon the redemption of Units of the Partnership. The
Company is required under the Partnership Agreement and, in the case of the
Preferred Units, the Release Units and the Marriott Units, the Redemption and
Registration Rights Agreements between the Company and the DeBoer Group and
Marriott, respectively, which will be entered into upon closing of the
acquisition of the Acquisition Hotels (the "Redemption Agreements"), to register
the resale of the Common Shares issuable to Limited Partners upon exercise of
their Redemption Rights. See "Shares Available for Future Sale."
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THE COMPANY
The Company is a self-administered Maryland REIT which owns equity
interests in the 22 Current Hotels with an aggregate of 2,511 rooms. Innkeepers
Financial Corporation, a wholly-owned subsidiary of the Company, owns an
approximately 93.5% interest in the Partnership and is the sole General Partner
of the Partnership. The Company, including through its wholly-owned
subsidiaries, will contribute all of the net proceeds from the Offering to the
Partnership, and following such contribution, will own an approximately 80.7%
interest in the Partnership.
In order for the Company to qualify as a REIT, the Company cannot operate
hotels. Therefore, the Company leases the Current Hotels and will lease the
Acquisition Hotels to the Lessee pursuant to Percentage Leases. The Percentage
Leases are designed to allow the Company to participate in growth in room
revenues by providing that a portion (ranging from approximately 68% to 70%) of
each Hotel's room revenues in excess of specified amounts will be paid by the
Lessee as Percentage Rent. See "Business and Properties -- The Percentage
Leases."
The Company's executive offices are located at 306 Royal Poinciana Way,
Palm Beach, Florida 33480, and its telephone number is (561) 835-1800.
ACQUISITIONS
The Company has contracted to acquire the ten Acquisition Hotels, for
purchase prices aggregating approximately $142 million. The purchase prices are
payable in, or with a combination of, cash, Units, Preferred Units and the
assumption of the approximately $24 million of Assumed Indebtedness. The Company
expects to close the acquisition of all ten of the Acquisition Hotels concurrent
with or shortly after the closing of the Offering. The purchase agreements under
which the Company will acquire the Acquisition Hotels contain customary closing
and other conditions. There is no assurance that the Company will close any of
the Acquisition Hotels. See "Risk Factors -- Risk that Pending Acquisitions Will
Not Close."
THE DEBOER HOTELS
The DeBoer Hotels are being acquired from the DeBoer Group for a purchase
price of approximately $108.0 million, consisting of (i) approximately 4,113,000
Preferred Units, which were assumed to have a value of $11.00 per Preferred Unit
(or an aggregate of $45.2 million) for purposes of calculating the purchase
price of the DeBoer Hotels, and which have a value of approximately $44.7
million based on the Offering Price, (ii) the repayment of approximately $38.8
million of outstanding mortgage indebtedness on the hotels, and (iii) the
assumption of the approximately $24 million of Assumed Indebtedness.
Additionally, in connection with the acquisition of the DeBoer Hotels, Marriott
will receive the Release Units with a value of $500,000 in exchange for
releasing the existing management contracts relating to the DeBoer Hotels.
Marriott will have the right, on or after the first anniversary of the issuance
of the Release Units, to redeem the Release Units for cash or, at the option of
the Company, Common Shares on a one-for-one basis. The DeBoer Group will own
approximately 15.9% of the outstanding Common Shares upon closing of the
acquisition of the DeBoer Hotels, assuming full redemption into Common Shares of
all Units and Preferred Units. Mr. DeBoer, individually, will beneficially own
approximately 10.1% of the outstanding Common Shares, assuming full redemption
into Common Shares of all Units and Preferred Units. The Preferred Units are
convertible at any time into Units on a one-for-one basis. Annual preferred
distributions of $1.10 are payable on each Preferred Unit, which may increase up
to $1.155 for each Preferred Unit, based on increases in dividends payable on
the Common Shares. On or after the second anniversary of the issuance of the
Preferred Units, the DeBoer Group will have the right to redeem all outstanding
Preferred Units (or Units received upon exercise of the Preferred Conversion
Right) for cash or, at the option of the Company, Common Shares on a one-for-one
basis. See "Risk Factors -- Adverse Effect of Shares Available for Future
Issuance and Sale on Market Price of Common Shares" and "Partnership
Agreement -- Preferred Units." Due to the potential adverse tax consequences to
members of the DeBoer Group that may result from a sale of the DeBoer Hotels,
the Company has agreed with the DeBoer Group, that for a period of up to ten
years following the closing of the acquisition of the DeBoer Hotels, any taxable
sale of a DeBoer Hotel requires the consent of the applicable members of the
DeBoer Group. See "Risk Factors -- Conflicts of Interest." In addition, due to
potential adverse tax consequences, the Company has agreed with the DeBoer
Group, for a period of up to ten years
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<PAGE> 31
following the closing of the acquisition of the DeBoer Hotels, to maintain at
all times the Required Indebtedness. In the event that the Company fails to
maintain the Required Indebtedness, the Company will be liable for any resulting
income tax liabilities incurred by the applicable members of the DeBoer Group.
See "Risk Factors -- Risks of Leverage." After the closing of the acquisition of
the DeBoer Hotels, Mr. DeBoer will become a Trustee of the Company.
RESIDENCE INN-PORTLAND, MAINE
The Residence Inn-Portland, Maine hotel is being acquired from Marriott for
a purchase price of approximately $6.2 million. Marriott has agreed to accept
the Marriott Units with a value of $859,000, or approximately 14% of the
purchase price, as a portion of the purchase consideration for the hotel.
Marriott will have the right, on or after the first anniversary of issuance of
the Marriott Units, to redeem the Marriott Units for a per Unit price equal to
the greater of the Offering Price or the market price of the Common Shares on
the Redemption Date, payable in cash or, at the option of the Company, Common
Shares with an equivalent value. See "Risk Factors -- Adverse Effect of Shares
Available for Future Issuance and Sale on Market Price of Common Shares."
Subject to the satisfaction of customary closing conditions, the Company will
acquire this hotel even if the Offering is not completed. Marriott will continue
to manage the Residence Inn-Portland, Maine hotel following the closing of the
acquisition of the hotel.
THE ATLANTA HOTELS
To facilitate the financing and acquisition of the Atlanta Hotels without
causing the Company to incur indebtedness in excess of the Debt Limitation, JF
Atlanta was formed to acquire such hotels. JF Atlanta is owned by Messrs. Fisher
and Shaw. JF Atlanta acquired the Atlanta Hotels on September 6, 1996 for a
purchase price of approximately $27.8 million (including closing and financing
costs incurred to date). The Company has entered into agreements with JF Atlanta
to acquire the Atlanta Hotels concurrent with or immediately after the closing
of the Offering for a purchase price equal to the aggregate cost incurred by JF
Atlanta in acquiring and financing the Atlanta Hotels, plus any capital
contributed by the owners of JF Atlanta to fund any operating losses incurred by
JF Atlanta prior to the sale of the Atlanta Hotels to the Company. The Company
has paid to JF Atlanta a deposit of $5.8 million in connection with the
acquisition of the Atlanta Hotels, which is refundable in the event that the
Offering is not completed. JF Atlanta utilized this deposit, together with a
term loan from the Lender in the principal amount of approximately $22 million,
to finance the acquisition of the Atlanta Hotels. See "Risk Factors -- Risk that
Pending Acquisitions Will Not Close," and "-- Conflicts of Interest."
USE OF PROCEEDS
The net proceeds to the Company from the Offering will be approximately
$101.7 million ($117.1 million if the over-allotment option is fully exercised).
The Company will contribute all of the net proceeds of the Offering to the
Partnership and after such contribution and the acquisition of the Acquisition
Hotels, will own, through its wholly-owned subsidiaries, an approximately 80.7%
interest in the Partnership (81.7% if the over-allotment option is fully
exercised). The Partnership will use the net proceeds of the Offering as set
forth in the table below:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Purchase of the Acquisition Hotels(1).................................... $ 73.4
Reduction of outstanding indebtedness under the Line of Credit........... 12.0
Franchise fees........................................................... 0.5
Working capital and future acquisitions.................................. 15.8
--------
Total use of proceeds.......................................... $ 101.7
========
</TABLE>
- ---------------
(1) Includes net closing costs of approximately $2.4 million and approximately
$38.8 million of mortgage indebtedness to be assumed and immediately repaid
with respect to four of the DeBoer Hotels.
The balance of the purchase price for the Acquisition Hotels will be paid
with (i) approximately 4,113,000 Preferred Units (which were assumed to have a
value of $11.00 per Preferred Unit (or an aggregate of $45.2 million) for
purposes of calculating the purchase price of the DeBoer Hotels and which have a
value
27
<PAGE> 32
of $44.7 million based on the Offering Price), (ii) Units with a value of
$1,359,000, and (iii) approximately $24 million of Assumed Indebtedness. See
"Acquisitions". If the Underwriters' over-allotment option is exercised in full,
the Company intends to use the additional net proceeds of approximately $15.4
million for additional hotel acquisitions and for working capital purposes.
Pending the use of proceeds referenced above, the net proceeds will be
invested in interest-bearing, short-term, investment grade securities or money
market accounts, which are consistent with the Company's intention to qualify
for taxation as a REIT. Such investments may include, for example, government
and government agency securities, certificates of deposit and interest-bearing
bank deposits.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares were listed for quotation on The Nasdaq Stock Market
("Nasdaq") until September 24, 1996 under the symbol "NKPR." The Company's
Common Shares were listed on the NYSE under the symbol "KPA" commencing
September 25, 1996. The following table sets forth for the indicated periods the
high and low bid prices for the Common Shares, as traded through the facilities
of Nasdaq and the NYSE and the cash distributions declared per share:
<TABLE>
<CAPTION>
PRICE RANGE
------------------ CASH DISTRIBUTION
HIGH LOW DECLARED PER SHARE
------- ------ ------------------
<S> <C> <C> <C>
1994
Third Quarter (beginning September 23)............ $10.125 $9.625 --
Fourth Quarter.................................... 9.750 7.125 $0.19375
1995
First Quarter..................................... 8.625 7.125 0.19375
Second Quarter.................................... 9.125 8.000 0.215
Third Quarter..................................... 9.500 8.375 0.215
Fourth Quarter.................................... 9.625 8.625 0.215
1996
First Quarter..................................... 10.375 8.500 0.225
Second Quarter.................................... 10.250 8.750 0.225
Third Quarter (through October 21, 1996).......... 11.875 9.375 0.225
</TABLE>
On October 21, 1996, the last reported sale price of the Common Shares on
the NYSE was $10.875 per share. As of September 30, 1996, the Company had 188
shareholders of record and approximately 4,800 beneficial owners.
Although the declaration of distributions is within the discretion of the
Board of Trustees and depends on the Company's results of operations, Cash
Available for Distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Trustees, the Company's policy is to make regular
quarterly distributions to its shareholders. The Company's ability to make
distributions will depend on the receipt of distributions from the Partnership.
The Company has caused and intends to cause the Partnership to distribute to its
partners substantially all of its Cash Available for Distribution. The
Partnership's primary source of revenue is Rent payments from the Lessee under
the Percentage Leases for the Hotels. The Company must rely on the operation of
the Hotels to generate sufficient cash flow from the operation of the Hotels to
permit the Lessee to meet its Rent obligations under the Percentage Leases. The
Lessee has nominal assets and its obligations under the Percentage Leases are
unsecured. See "The Lessee."
Under the federal income tax provisions affecting REITs, the Company must
distribute at least 95% of its annual taxable income in order to avoid taxation
as a regular corporation. Moreover, the Company must distribute at least 85% of
its ordinary income and 95% of its capital gain net income (plus any
undistributed income from the prior year) to avoid certain excise taxes
applicable to REITs. Under certain circumstances, the Company may be required to
make distributions in excess of Cash Available for Distribution in order to meet
such distribution requirements. In such event, the Company would seek to borrow
the amount of the deficiency or sell assets to obtain the cash necessary to make
distributions to retain its qualification as a REIT for federal income tax
purposes. The Company expects that a portion of its distributions will
constitute a return of capital. A return of capital generally is not subject to
federal income tax under current law. Based on
28
<PAGE> 33
the Company's pro forma income before minority interest of approximately $14.3
million for the twelve months ended June 30, 1996, 25,813,743 Common Shares,
Units and Preferred Units to be outstanding after the closing of the Offering, a
$0.90 per share annual distribution, and the Company's pro forma taxable income
for such period, approximately 19.0% of such per share annual distribution is
estimated to represent a return of capital for federal income tax purposes.
There can be no assurance that the portion of the distributions estimated to be
a return of capital based on pro forma results is indicative of the actual
return of capital for any future period.
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of June 30, 1996 and as adjusted to reflect the sale by the Company of
10,000,000 Common Shares offered hereby and the application of the net proceeds
as set forth in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt........................................................ $ 78,673 $ 99,635
Minority interest..................................................... 6,084 46,594
Shareholders' Equity:
Preferred Shares, $0.01 par value per share, 20,000,000 shares
authorized, no shares issued and outstanding..................... -- --
Common Shares, $0.01 par value per share, 100,000,000 shares
authorized, 10,821,401 shares issued and outstanding, and
20,829,153 shares issued and outstanding, as adjusted(1)......... 108 208
Additional paid-in capital.......................................... 90,630 197,880
Unearned Trustees' compensation..................................... (161) (236)
Distributions in excess of net earnings............................. (3,027) (3,027)
-------- --------
Total shareholders' equity.................................. 87,550 194,825
-------- --------
Total capitalization........................................ $172,307 $ 341,054
======== ========
</TABLE>
- ---------------
(1) Includes an aggregate of 30,896 restricted Common Shares issued to the
Trustees of the Company other than Mr. Fisher, 330 shares issued in
connection with the Company's dividend reinvestment plan and 526 Units
which were redeemed by the Company for Common Shares subsequent to June 30,
1996. Excludes approximately 4,984,590 Common Shares issuable upon
redemption of Units held by limited partners of the Partnership, including
4,112,727 Preferred Units and 124,966 Units to be issued in connection with
the acquisition of the Acquisition Hotels. Also excludes Common Shares
issuable under the Company's 1994 Share Incentive Plans and the Trustees
Share Incentive Plan. On a fully-diluted basis, there will be 25,813,743
Common Shares and Units outstanding upon the closing of the Offering. See
"Management -- Executive Compensation," "-- Compensation of Trustees" and
"Partnership Agreement -- Redemption Rights."
29
<PAGE> 34
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma operating
and financial data for the Company, the Lessee, the Fisher Initial Hotels and
the DeBoer Hotels.
With respect to the Company, the following tables set forth (i) selected
historical operating and other financial data for the period September 30, 1994
(inception) through December 31, 1994, the year ended December 31, 1995, and the
six months ended June 30, 1996, (ii) selected (unaudited) historical balance
sheet data as of June 30, 1996, (iii) selected (unaudited) pro forma operating
and other financial data for the year ended December 31, 1995, the twelve months
ended June 30, 1996 and the six months ended June 30, 1996, and (iv) selected
(unaudited) pro forma balance sheet data as of June 30, 1996.
With respect to the Lessee, the following tables set forth (i) selected
historical financial data for the period September 30, 1994 (inception) through
December 31, 1994, the year ended December 31, 1995, and the six months ended
June 30, 1996, and (ii) selected unaudited pro forma financial information for
the year ended December 31, 1995, the 12 months ended June 30, 1996 and the six
months ended June 30, 1996.
With respect to the DeBoer Hotels, the following tables set forth the
selected historical financial data for the fiscal years ended December 31, 1993,
December 30, 1994 and December 31, 1995 and the six months ended June 14, 1996.
The selected historical financial data for the Company and the Lessee for
the period September 30, 1994 (inception) through December 31, 1994 and the year
ended December 31, 1995 has been derived from the historical financial
statements of the Company and the Lessee, respectively, and audited by Coopers &
Lybrand L.L.P., independent accountants, whose reports with respect thereto are
incorporated by reference in this Prospectus.
The selected historical financial data for the DeBoer Hotels for the fiscal
years ended December 31, 1993, December 30, 1994 and December 31, 1995 have been
derived from the historical financial statements of the DeBoer Hotels audited by
Coopers & Lybrand L.L.P., independent accountants, whose reports with respect
thereto are included elsewhere in this Prospectus.
Under rules of the Securities and Exchange Commission, the Fisher Initial
Hotels is the predecessor of the Company. The selected financial data for the
Fisher Initial Hotels for each of the years in the three-year period ended
December 31, 1993 and the nine months ended September 30, 1994 was derived from
the historical financial statements of the Fisher Initial Hotels audited by
Coopers & Lybrand L.L.P., independent accountants, whose reports with respect
thereto are incorporated by reference in this Prospectus.
The pro forma operating and other financial data is presented as if the
acquisition of the Hotels and the closing of the IPO, the Follow-on Offering and
the Offering had occurred as of the beginning of the periods presented and,
therefore, incorporates certain assumptions that are included in the notes to
the pro forma financial statements included elsewhere in this Prospectus. The
pro forma balance sheet data of the Company is presented as if the acquisition
of the Acquisition Hotels and the closing of the Offering had occurred on June
30, 1996. The pro forma information does not purport to represent what the
Company's financial position or results of operations or the Lessee's results of
operation actually would have been had such transactions, in fact, occurred on
such date or at the beginning of the periods indicated, or to project the
Company or the Lessee's financial position or results of operations at any
future date or for any future period.
The following selected financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and all of the financial statements and notes thereto contained or
incorporated by reference in this Prospectus.
30
<PAGE> 35
INNKEEPERS USA TRUST
SELECTED HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
HISTORICAL ---------------------------------------------------------
---------------------------------------
PERIOD FROM YEAR ENDED DECEMBER 31, 1995
SEPTEMBER 30, ---------------------------------------------------------
1994 SIX
(INCEPTION) YEAR MONTHS CURRENT HOTELS ACQUISITION HOTELS
THROUGH ENDED ENDED ---------------------- ---------------------
DECEMBER 31, DECEMBER 31, JUNE 30, BEFORE AFTER OPERATING OTHER THE
1994 1995 1996 OFFERING(2) OFFERING HOTELS(3) HOTELS(4) HOTELS
------------- ------------ -------- ----------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage Lease
revenue(5).......... $ 1,480 $ 11,268 $12,050 $23,137 $23,137 $13,022 $ 2,355 $ 38,514
Other revenue........ 39 197 247 257 257 0 0 257
------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 1,519 11,465 12,297 23,394 23,394 13,022 2,355 38,771
------- ------- ------- ------- ------- ------- ------- -------
Depreciation and
amortization........ 500 3,182 3,044 7,212 7,212 4,586 1,441 13,239
Ground rent.......... 83 336 171 419 419 0 0 419
Interest expense..... 61 1,989 2,442 6,226 5,783 2,079 0 7,862
Amortization of
origination fees.... 148 439 376 774 774 0 0 774
Real estate and
personal property
taxes and property
insurance........... 159 1,105 1,153 2,440 2,440 1,217 329 3,986
General and
administrative...... 133 510 611 800 800 80 20 900
Amortization of
unearned Trustees'
compensation........ 15 40 24 55 55 0 0 55
------- ------- ------- ------- ------- ------- ------- -------
Total expenses....... 1,099 7,601 7,821 17,926 17,483 7,962 1,790 27,235
------- ------- ------- ------- ------- ------- ------- -------
Income before
minority interest... 420 3,864 4,476 $ 5,468 $ 5,911 $ 5,060 $ 565 11,536
======= ======= ======= =======
Minority interest.... (52) (397) (291) (2,226)
------- ------- ------- -------
Net income........... $ 368 $ 3,467 $ 4,185 $ 9,310
======= ======= ======= =======
Net income per Common
Share
outstanding(6)...... $ 0.08 $ 0.57 $ 0.39 $ 0.32
Weighted average
number of Common
Shares and Common
Shares equivalents
outstanding......... 5,383 6,836 11,569 21,700
OTHER DATA:
Lessee room
revenue............. $ 3,404 $ 24,412 $25,333 $51,278 $51,278 $26,876 $ 0 $ 78,154
Funds from
operations(7)....... 915 7,017 7,490 12,615 13,058 9,616 1,992 24,666
Cash available for
distribution(8)..... 924 6,453 6,859 11,362 11,805 8,431 2,006 22,242
Cash provided by
operating
activities(9)....... 670 4,925 6,957 25,604
Cash used in
investing
activities(10)...... (172) (90,929) (29,516) (198,624)
Cash provided by
(used) financing
activities(11)...... (1,764) 86,642 26,977 190,976
<CAPTION>
TWELVE MONTHS ENDED JUNE 30, 1996 SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------- ----------------------------------------------
CURRENT HOTELS ACQUISITION HOTELS CURRENT HOTELS ACQUISITIONS HOTELS
---------------------- --------------------- ---------------------- ---------------------
BEFORE AFTER OPERATING OTHER THE BEFORE AFTER OPERATING OTHER
OFFERING(2) OFFERING HOTELS(3) HOTELS(4) HOTELS OFFERING(2) OFFERING HOTELS(3) HOTELS(4)
----------- -------- --------- --------- -------- ----------- -------- --------- ---------
<S> <C>
OPERATING DATA:
Percentage Lease
revenue(5).......... $24,789 $24,789 $14,227 $ 2,355 $ 41,371 $13,013 $13,013 $ 6,869 $ 1,178
Other revenue........ 421 421 0 0 421 277 277 0 0
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenue........ 25,210 25,210 14,227 2,355 41,792 13,290 13,290 6,869 1,178
------- ------- ------- ------- ------- ------- ------- ------- -------
Depreciation and
amortization........ 7,212 7,212 4,586 1,441 13,239 3,606 3,606 2,294 720
Ground rent.......... 424 424 0 0 424 212 212 0 0
Interest expense..... 6,226 5,783 2,079 0 7,862 3,113 2,891 1,040 0
Amortization of
origination fees.... 774 774 0 0 774 387 387 0 0
Real estate and
personal property
taxes and property
insurance........... 2,440 2,440 1,217 329 3,986 1,220 1,220 608 165
General and
administrative...... 1,086 1,086 80 20 1,186 611 611 40 10
Amortization of
unearned Trustees'
compensation........ 59 59 0 0 59 31 31 0 0
------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses....... 18,221 17,778 7,962 1,790 27,530 9,180 8,958 3,982 895
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
minority interest... $ 6,989 $ 7,432 $ 6,265 $ 565 14,262 $ 4,110 $ 4,332 $ 2,887 $ 283
======= ======= ======= ======= ======= ======= ======= =======
Minority interest.... (2,753)
-------
Net income........... $ 11,509
=======
Net income per Common
Share
outstanding(6)...... $ 0.45
Weighted average
number of Common
Shares and Common
Shares equivalents
outstanding......... 21,700
OTHER DATA:
Lessee room
revenue............. $53,783 $53,783 $28,648 $ 0 $ 82,431 $27,840 $27,840 $13,966 $ 0
Funds from
operations(7)....... 14,136 14,579 10,821 1,992 27,392 7,683 7,905 5,166 996
Cash available for
distribution(8)..... 12,787 13,230 9,565 2,006 24,801 6,972 7,194 4,552 1,003
Cash provided by
operating
activities(9)....... 28,334
Cash used in
investing
activities(10)...... (206,275)
Cash provided by
(used) financing
activities(11)...... 201,768
<CAPTION>
THE
HOTELS
--------
OPERATING DATA:
Percentage Lease
revenue(5).......... $ 21,060
Other revenue........ 277
-------
Total revenue........ 21,337
-------
Depreciation and
amortization........ 6,620
Ground rent.......... 212
Interest expense..... 3,931
Amortization of
origination fees.... 387
Real estate and
personal property
taxes and property
insurance........... 1,993
General and
administrative...... 661
Amortization of
unearned Trustees'
compensation........ 31
-------
Total expenses....... 13,835
-------
Income before
minority interest... 7,502
Minority interest.... (1,448)
-------
Net income........... $ 6,054
=======
Net income per Common
Share
outstanding(6)...... $ 0.24
Weighted average
number of Common
Shares and Common
Shares equivalents
outstanding......... 21,700
OTHER DATA:
Lessee room
revenue............. $ 41,806
Funds from
operations(7)....... 14,067
Cash available for
distribution(8)..... 12,749
Cash provided by
operating
activities(9)....... 14,540
Cash used in
investing
activities(10)...... (133,007)
Cash provided by
(used) financing
activities(11)...... 142,703
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(1)(12)
-------- ----------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in Hotels, at cost................................................... $175,918 $325,684
Total assets.................................................................... 175,428 344,175
Total long-term debt............................................................ 78,673 99,635
Minority interest in Partnership................................................ 6,084 46,594
Total shareholders' equity...................................................... 87,550 194,825
</TABLE>
Notes located on subsequent page.
31
<PAGE> 36
LESSEE
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA(1)
HISTORICAL --------------------------------------------------------
------------------------------------------- TWELVE
PERIOD FROM MONTHS
SEPTEMBER 30, ENDED
1994 YEAR ENDED JUNE 30,
(INCEPTION) DECEMBER 31, 1995 1996
THROUGH YEAR ENDED SIX MONTHS -------------------------------------------- --------
DECEMBER 31, DECEMBER 31, ENDED JUNE CURRENT OPERATING OTHER THE CURRENT
1994 1995 30, 1996 HOTELS HOTELS HOTELS HOTELS HOTELS
------------- ------------ ---------- -------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total gross
operating
revenue............ $ 3,776 $ 26,307 $ 27,226 $ 54,861 $ 28,597 $ 83,458 $ 57,618
Total departmental
expenses........... 963 6,275 6,004 12,482 6,012 18,494 13,159
Total unallocated
operating
expenses........... 1,026 7,182 7,231 15,978 9,094 25,072 16,386
Total other
expenses........... 52 239 206 682 189 871 450
------- -------- -------- -------- -------- ------- -------- --------
Net operating
profit............. 1,735 12,611 13,785 25,719 13,302 39,021 27,623
Lessee overhead..... (132) (952) (904) (1,252) (1,252) (1,745)
Percentage Lease
payments........... (1,480) (11,268) (12,050) (23,137) (13,022 ) $(2,355) (38,514) (24,789)
------- -------- -------- -------- -------- ------- -------- --------
Net income(13)...... $ 123 $ 391 $ 831 $ 1,330 $ 280 $(2,355) $ (745) $ 1,089
======= ======== ======== ======== ======== ======= ======== ========
<CAPTION>
SIX MONTHS ENDED
TWELVE MONTHS ENDED JUNE 30, 1996 JUNE 30, 1996
--------------------------------- --------------------------------------------
OPERATING OTHER THE CURRENT OPERATING OTHER THE
HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS HOTELS
--------- ------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total gross
operating
revenue............ $ 30,479 $ 88,097 $ 29,841 $14,855 $ 44,696
Total departmental
expenses........... 6,198 19,357 6,630 2,950 9,580
Total unallocated
operating
expenses........... 9,712 26,098 8,040 4,873 12,913
Total other
expenses........... 189 639 217 106 323
-------- -------- ------- -------- -------- -------- --------
Net operating
profit............. 14,380 42,003 14,954 6,926 21,880
Lessee overhead..... (1,745) (904) (904)
Percentage Lease
payments........... (14,227 ) $(2,355) (41,371) (13,013) (6,869) $(1,178) (21,060)
-------- -------- ------- -------- -------- -------- --------
Net income(13)...... $ 153 $(2,355) $ (1,113) $ 1,037 $ 57 $(1,178) $ (84)
======== ======== ======= ======== ======== ======== ========
</TABLE>
Notes located on subsequent page.
32
<PAGE> 37
FISHER INITIAL HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA(14)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1991 1992 1993 1994
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Room revenue.......................................... $ 5,499 $ 7,637 $ 9,985 $ 8,182
Other revenue......................................... 622 758 668 559
------- ------- ------- ------
Total revenue............................... 6,121 8,395 10,653 8,741
Hotel operating expenses.............................. 4,251 5,152 6,458 5,048
Depreciation and amortization......................... 1,273 1,382 1,337 814
Interest expense...................................... 2,012 2,198 2,204 1,435
Other expenses........................................ 642 865 1,177 948
------- ------- ------- ------
Net income (loss)........................... $(2,057) $(1,202) $ (523) $ 496
======= ======= ======= ======
</TABLE>
THE DEBOER HOTELS
SELECTED COMBINED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- JUNE 14,
1993 1994 1995 1996
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Room revenue.............................................. $22,930 $24,456 $26,876 $ 13,966
Other revenue............................................. 1,570 1,613 1,774 897
------- ------- ------- -------
Total revenue................................... 24,500 26,069 28,650 14,863
Hotel operating expenses.................................. 15,804 15,916 16,861 8,691
Depreciation and amortization............................. 1,661 2,045 2,255 786
Interest expense.......................................... 5,500 5,125 5,312 2,431
Partnership expenses...................................... 103 509 251 177
------- ------- ------- -------
Net income before extraordinary item...................... 1,432 2,474 3,971 2,778
Extraordinary item........................................ -- -- 10,356 --
------- ------- ------- -------
Net income...................................... $ 1,432 $ 2,474 $14,327 $ 2,778
======= ======= ======= =======
</TABLE>
- ---------------
(1) The pro forma information does not purport to represent what the Company's
or the Lessee's financial position or results of operations actually would
have been if the Company had in fact owned and leased to the Lessee the
Current Hotels and the Acquisition Hotels at the beginning of the periods
indicated, or to project the Company's or the Lessee's results of
operations for any future period.
(2) This pro forma information represents the results of operations for the
Current Hotels as if the Current Hotels were owned by the Company at the
beginning of the periods presented and leased to the Lessee under the
Percentage Leases throughout the periods presented, but does not reflect
any effects of the Offering.
(3) Operating Hotels include the following Acquisition Hotels, which had
substantive room revenues for the Residence Inn-San Mateo, California;
-Silicon Valley I, California; -Silicon Valley II, California; - Denver
(Downtown), Colorado; -Wichita East, Kansas; -East Lansing, Michigan; and
-Grand Rapids, Michigan hotels.
(4) Other Hotels includes the following three Acquisition Hotels, which had no
substantive operations during the periods presented: the Residence
Inn-Atlanta (Downtown), Georgia and -Portland, Maine hotels; and the
Hampton Inn-Norcross, Georgia hotel.
33
<PAGE> 38
(5) With respect to the pro forma information, represents Rent payments from
the Lessee to the Company calculated on a pro forma basis by applying the
Rent provisions of the Percentage Leases to the historical room revenue of
the Hotels as if the beginning of the periods presented were the beginning
of the lease year and assumes the Company owned and leased the Current
Hotels and the Acquisition Hotels throughout the periods presented. For the
three Hotels that had no substantive operations for the periods presented,
the Percentage Lease payment is assumed to be equal only to the Base Rent
provided in the applicable Percentage Leases, and does not include
Percentage Rent in excess of Base Rent which the Company believes will be
payable in future periods.
(6) Computed by dividing income before minority interest, less the
distributions on the Preferred Units, by the weighted average number of
Common Shares and Common Share equivalents (including Units) outstanding
for the periods presented. For the periods presented, redemption of the
Preferred Units into Common Shares would be antidilutive, and, therefore,
fully diluted earnings per share is not presented.
(7) FFO under the NAREIT guidelines consists of net income, computed in
accordance with generally accepted accounting principles, excluding gains
or losses from debt restructuring and sales of property, plus depreciation
of real property (including furniture, fixtures and equipment) and after
adjustments for unconsolidated partnerships and joint ventures. Industry
analysts generally consider FFO to be an appropriate measure of the
performance of an equity REIT. FFO should not be considered as an
alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance or to cash
flows from operating, investing or financing activities as a measure of
liquidity. FFO does not reflect cash expenditures for capital improvements
or principal repayment of debt. Under the Percentage Leases, the Company is
obligated to make available to the Lessee 4% of room revenues for the
periodic refurbishment and replacement of furniture, fixtures and equipment
at the Hotels. See "Business and Properties -- The Percentage Leases."
(8) Cash Available for Distribution is computed by subtracting from FFO the sum
of (a) 4% of room revenues, which the Company is obligated by the
Percentage Leases to make available to the Lessee for the periodic
refurbishment and replacement of furniture, fixtures and equipment at the
Hotels, and (b) principal amortization on long-term debt and adding the sum
of (i) amortization of franchise costs, (ii) amortization of loan
origination fees, and (iii) amortization of unearned Trustees'
compensation.
(9) Pro forma cash provided by operating activities represents net income plus
minority interest, depreciation and amortization, amortization of loan
origination fees, and amortization of unearned Trustees' compensation.
There are no adjustments included for changes in working capital items.
(10) Pro forma cash used in investing activities includes the purchase of the
Hotels, the payment of certain franchise fees and 4% of room revenues,
which the Company is obligated by the Percentage Leases to make available
to the Lessee for the periodic refurbishment and replacement of furniture,
fixtures and equipment at the Hotels.
(11) Pro forma cash provided (used) by financing activities is computed as the
sum of (i) the product of actual distributions per share and per Unit for
the periods presented and the pro forma Common Shares and Units
outstanding; (ii) distributions on the Preferred Units; (iii) the proceeds
from the issuance of long-term debt used to acquire the Hotels; (iv) the
principal payments required on the long-term debt; (v) the proceeds from
the Follow-on Offering and the Offering, and (vi) the payment of loan
origination fees to the Lender.
(12) Adjusted to reflect the sale of 10,000,000 Common Shares and the
application of the net proceeds as set forth in "Use of Proceeds."
(13) The Lessee has elected status as a Subchapter S corporation for federal
income tax purposes and pays no corporate level tax on its net income.
(14) The Fisher Initial Hotels are deemed to be the predecessor of the Company
and do not include any of the other Hotels.
34
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BACKGROUND
The Company completed its IPO on September 30, 1994 and contributed all of
the net proceeds thereof to the Partnership in exchange for an approximately
87.7% aggregate equity interest in the Partnership. The Partnership used the
proceeds of the IPO to repay indebtedness incurred in connection with the
acquisition of one Initial Hotel prior to the IPO and to acquire the other six
Initial Hotels.
In January 1995, the Company acquired the 93-room Hampton Inn-Tallahassee,
Florida hotel; in March 1995, the Company acquired the 127-room Comfort
Inn-Allentown, Pennsylvania hotel; and in May 1995, the Company acquired the
176-room Ramada Inn-Germantown, Maryland hotel, which was subsequently converted
to a Hampton Inn. The Company completed the Follow-on Offering on October 6,
1995, and shortly thereafter, acquired eight Residence Inn hotels, with an
aggregate of 824 rooms. Since the closing of the Follow-on Offering, the Company
has acquired the 164-room Holiday Inn Express-Lexington, Massachusetts hotel in
February 1996, the 96-room Residence Inn-Cherry Hill, New Jersey hotel, and the
80-room Residence Inn-Harrisburg, Pennsylvania hotel, both acquired in May 1996
and, in August 1996, the 100-room Comfort Inn-Woburn, Massachusetts hotel.
Immediately following the closing of the Offering, the Company will
contribute all of the net proceeds of the Offering to the Partnership and,
following such contribution, will own, through the Company's wholly-owned
subsidiaries, an approximately 80.7% interest in the Partnership. The
Partnership will use a portion of the net proceeds to pay a portion of the costs
of acquiring the Acquisition Hotels. The Company also will assume the
approximately $24 million of Assumed Indebtedness in connection with the
acquisition of the Acquisition Hotels.
In order for the Company to qualify as a REIT, the Company cannot operate
hotels. Therefore, the Company leases the Hotels to the Lessee. The Company's
principal source of revenue is Rent payments by the Lessee pursuant to the
Percentage Leases. Percentage Lease revenue is based primarily upon room
revenue. The Lessee leases all of the Current Hotels, and will lease all of the
Acquisition Hotels, from the Company under Percentage Leases. The Lessee's
ability to make Rent payments to the Company under the Percentage Leases is
dependent on the ability of the Lessee or any third-party manager, such as
Marriott or TMH, to generate sufficient cash flow from the operation of the
Hotels.
REVPAR for the Current Hotels experienced increases in each of 1994, 1995,
and during the first six months of 1996, as compared to the same periods of the
prior years. Management believes the growth in REVPAR at the Current Hotels
reflects the implementation of professional management techniques and improving
industry conditions. The following table sets forth information with respect to
occupancy, ADR and REVPAR for the Current Hotels for each of the years ended
December 31, 1994 and 1995, and for the six months ended June 30, 1996. No
assurance can be given that the trends reflected in the following table will
continue or that occupancy, ADR and REVPAR will not decrease due to changes in
national or local economic or hospitality industry conditions. Increases in
REVPAR attributable to increases in occupancy are accompanied by increases in
most categories of variable operating costs. Increases in REVPAR attributable to
increases in ADR are accompanied by increases in certain categories of operating
costs, such as management fees, license fees and Percentage Rent.
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------- SIX MONTHS ENDED JUNE
DECEMBER 31, 1994 DECEMBER 31, 1995 30, 1996
--------------------- --------------------- ---------------------
PERCENTAGE PERCENTAGE PERCENTAGE
CHANGE CHANGE CHANGE
ABSOLUTE FROM PRIOR ABSOLUTE FROM PRIOR ABSOLUTE FROM PRIOR
CHANGE YEAR CHANGE YEAR CHANGE YEAR
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Occupancy............................. 1.7% 2.3% (0.5)% (0.0)% 4.3% 5.7%
ADR................................... $ 2.51 3.8% $ 4.59 6.7% $ 3.05 4.2%
REVPAR................................ $ 3.05 6.2% $ 3.14 6.0% $ 5.59 10.1%
</TABLE>
35
<PAGE> 40
RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the Company
and the Lessee. The Company's fiscal year ends on December 31. Therefore, the 12
months ended June 30, 1996, and December 31, 1995 are referred to hereafter as
"1996" and "1995" respectively. The six months ended June 30, 1996 and June 30,
1995 are referred to hereafter as the "1996 Six Months" and the "1995 Six
Months," respectively.
The Company -- Actual
COMPARISON OF 1996 SIX MONTHS TO 1995 SIX MONTHS
The Company had revenues of $12,297,000 for the 1996 Six Months, consisting
of $12,050,000 of Percentage Lease revenues from the Lessee and $247,000 of
other revenue. Percentage Lease revenues increased by $7,532,000, or 166.7% from
$4,518,000 for the 1995 Six Months. This increase was primarily due to the
number of Hotels owned by the Company increasing from seven at January 1, 1995,
to 18 at January 1, 1996, and to 21 at June 30, 1996.
Depreciation and amortization, amortization of loan origination fees, and
amortization of unearned Trustees' compensation ("Depreciation and
Amortization") were $3,444,000 in the aggregate for the 1996 Six Months.
Depreciation and Amortization increased by $2,129,000, or 161.9%, from
$1,315,000 for the 1995 Six Months. This increase was primarily due to increased
depreciation and amortization as a result of the number of Hotels owned by the
Company increasing from seven at January 1, 1995, to 18 at January 1, 1996, and
to 21 at June 30, 1996. Amortization of loan origination fees increased by
$221,000 due primarily to the payment by the Company of a $350,000 loan
commitment fee to the Lender to increase the Line of Credit from $50 million to
$70 million in March 1996.
Real estate and personal property taxes and property insurance ("Taxes and
Insurance") were $1,153,000 for the 1996 Six Months. Taxes and Insurance
increased by $763,000, or 195.6%, from $390,000 for the 1995 Six Months. This
increase was due primarily to the number of Hotels owned by the Company
increasing from seven at January 1, 1995, to 18 at January 1, 1996 and to 21 at
June 30, 1996.
Interest expense of $2,442,000 primarily consisted of interest incurred on
borrowings outstanding under the Line of Credit and the Term Loan for the 1996
Six Months. Interest Expense increased by $1,866,000, or 324.0%, from $576,000
for the 1995 Six Months. This increase was primarily due to interest incurred on
borrowings outstanding under the Term Loan, which was outstanding only for the
1996 Six Months. Additionally, the outstanding balance on the Line of Credit
increased for the 1996 Six Months due to borrowings for the acquisition of the
Holiday Inn Express -- Lexington, Massachusetts hotel in February 1996, the
acquisition of the Residence Inn -- Cherry Hill, New Jersey hotel in May 1996
and the acquisition of the Residence Inn -- Harrisburg, Pennsylvania hotel in
May 1996.
Net income before minority interest and FFO was $4,476,000, or $0.39 per
share and $7,490,000, or $0.65 per share, respectively, for the 1996 Six Months.
Net income before minority interest increased by $2,617,000, or 140.8%, and
$0.04 per share, or 11.4% from $1,859,000 and $0.35 per share, respectively, for
the 1995 Six Months. FFO increased by $4,502,000, or 150.7%, and $0.09 per
share, or 16.1%, from $2,988,000 and $0.56 per share, respectively for the 1995
Six Months.
1995
The Company had revenues of $11,465,000, consisting of $11,268,000 of
Percentage Lease revenues from the Lessee and $197,000 of other revenue.
Depreciation and Amortization was $3,661,000 in the aggregate. Taxes and
Insurance was $1,105,000. Interest expense of $1,989,000 primarily consisted of
interest incurred on borrowings outstanding under the Line of Credit and the
Term Loan. Net income before minority interest was $3,864,000, or $0.57 per
share, and FFO was $7,017,000, or $1.03 per share.
SEPTEMBER 30, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
The Company had revenues of $1,519,000, consisting of $1,480,000 of
Percentage Lease revenues from the Lessee and $39,000 in other revenue.
Depreciation and Amortization was $663,000 in the aggregate. Taxes
36
<PAGE> 41
and Insurance was $159,000. Interest expense was $61,000, which consisted solely
of interest on the Mortgage Note on the Hampton Inn-West Palm Beach, Florida
hotel. Net income before minority interest was $420,000, or $0.08 per share, and
FFO was $915,000, or $0.17 per share.
The Company -- Pro Forma
The following pro forma information is presented as if the acquisition of
the Hotels and the closing of the Follow-on Offering and the Offering had
occurred at the beginning of the periods presented.
COMPARISON OF 1996 SIX MONTHS TO 1995 SIX MONTHS
The Company had revenues of $21,337,000 for the 1996 Six Months, consisting
of $21,060,000 of Percentage Lease revenue from the Lessee and $277,000 of other
revenue. Percentage Lease revenue increased by $2,857,000, or 15.7%, from
$18,203,000 for the 1995 Six Months. This increase was primarily due to a REVPAR
increase of 11.0% for the Hotels for the 1996 Six Months over the 1995 Six
Months.
Depreciation and Amortization was $7,038,000 in the aggregate for the 1996
Six Months and $7,034,000 for the 1995 Six Months. Taxes and Insurance was
$1,993,000 for the 1996 Six Months and $1,993,000 for the 1995 Six Months.
Interest Expense, which primarily consisted of interest incurred on borrowings
under the Line of Credit and the Term Loan which was $3,931,000 for the 1996 Six
Months and $3,931,000 for the 1995 Six Months.
Net income before minority interest and FFO was $7,502,000, or $0.24 per
share and $14,067,000, or $0.54 per share, respectively, for the 1996 Six
Months. Net income before minority interest increased by $2,726,000, or 57.1%,
and $0.12 per share, or 100.0%, from $4,776,000 and $0.12 per share,
respectively for the 1995 Six Months. FFO increased by $2,726,000, or 24.0%, and
$0.12 per share, or 28.6%, from $11,341,000 and $0.42 per share, respectively
for the 1995 Six Months. These increases were primarily due to a REVPAR increase
of 11.0% for the Hotels for the 1996 Six Months over the 1995 Six Months.
COMPARISON OF 1996 TO 1995
The Company had revenues of $41,792,000 for 1996, consisting of $41,371,000
of Percentage Lease revenue from the Lessee and $421,000 of other revenue.
Percentage Lease revenue increased by $2,857,000, or 7.4%, from $38,514,000 in
1995. This increase was primarily due to a REVPAR increase of 5.5% for the
Hotels for 1996 over 1995.
Depreciation and Amortization was $14,072,000 in the aggregate for 1996 and
$14,068,000 in 1995. Taxes and Insurance was $3,986,000 for 1996 and 1995.
Interest Expense, primarily consisting of interest incurred on borrowings under
the Line of Credit and the Term Loan was $7,862,000 for 1996 and 1995.
Net income before minority interest and FFO was $14,262,000, or $0.45 per
share and $27,392,000, or $1.05 per share, respectively, for 1996. Net income
before minority interest increased by $2,726,000, or 23.6%, and $0.13 per share,
or 40.6%, from $11,536,000, or $0.32 per share, respectively, for 1995. FFO
increased by $2,726,000, or 11.1%, and $0.12 per share, or 12.9%, from
$24,666,000 and $0.93 per share, respectively, for 1995. These increases were
primarily due to a REVPAR increase of 5.5% for the Hotels for 1996 over 1995.
The Lessee -- Actual
COMPARISON OF 1996 SIX MONTHS TO 1995 SIX MONTHS
The Lessee had total revenue for the 1996 Six Months of $27,226,000,
consisting of $25,333,000 of room revenue and $1,893,000 of other revenue. Room
revenue increased by $15,819,000, or 166.3%, from $9,514,000 for the 1995 Six
Months. This increase was primarily due to the number of Hotels leased
increasing from seven at January, 1995 to 18 at January 1, 1996 and to 21 at
June 30, 1996.
Percentage Lease payments, hotel operating expenses and overhead expenses
for the 1996 Six Months were $12,050,000, $13,441,000, and $904,000,
respectively. Percentage Lease payments, hotel operating expense and overhead
expenses increased by $7,532,000 or 166.7%, $8,506,000, or 172.4%, and $493,000
or
37
<PAGE> 42
120.0%, respectively from $4,518,000, $4,935,000 and $411,000 for the 1995 Six
Months, respectively. These increases were primarily due to the number of Hotels
leased increasing from seven at January 1, 1995 to 18 at January 1, 1996 and to
21 at June 30, 1996. Net income for the 1996 Six Months was $831,000. Net income
increased $421,000, or 103.0%, from $410,000 for the 1995 Six Months.
The gross margin percentage remained relatively constant at 78% for the
1996 Six Months and 1995 Six Months. Net income as a percentage of gross
operating revenue was 3.0% and 4.0% for the 1996 Six Months and 1995 Six Months,
respectively.
1995
The Lessee had total revenue of $26,307,000, consisting of $24,412,000 of
room revenue and $1,895,000 of other revenue. Percentage Lease payments, hotel
operating expenses and overhead expenses were $11,268,000, $13,696,000 and
$952,000, respectively, resulting in net income of $391,000.
SEPTEMBER 30, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
The Lessee had total revenue of $3,776,000, consisting of $3,404,000 of
room revenue and $372,000 of other revenue. Percentage Lease payments, hotel
operating expenses and overhead expenses were $1,480,000, $2,041,000 and
$132,000, respectively, resulting in net income of $123,000.
The Lessee -- Pro Forma
The following pro forma information is presented as if the acquisition of
the Hotels and the closing of the IPO, the Follow-on Offering and the Offering
had occurred at the beginning of the periods presented.
COMPARISON OF 1996 SIX MONTHS TO 1995 SIX MONTHS
The Lessee had total revenue for the 1996 Six Months of $44,696,000,
consisting of $41,806,000 of room revenue and $2,890,000 of other revenue. Room
revenue increased by $4,277,000, or 11.4%, from $37,529,000 for the 1995 Six
Months. This increase was primarily due to an ADR increase of 5.7% and an
occupancy increase of 5.1%.
Percentage Lease payments, hotel operating expenses and overhead expenses
for the 1996 Six Months were $21,060,000, $22,816,000, $904,000, respectively.
Percentage Lease payments, hotel operating expenses and overhead expenses
increased by $2,857,000 or 15.7%, $1,657,000 or 7.8%, and $493,000 or 119.9%,
respectively, from $18,203,000, $21,159,000 and $411,000 for the 1995 Six
Months. These increases were primarily due to increased REVPAR of 11.0% at the
Hotels, which resulted in increased Percentage Lease payments and variable
expenses. Net loss for the 1996 Six Months was $84,000. Net income decreased
$368,000 or 129.6%, from $284,000 the 1995 Six Months.
The gross margin percentage remained relatively constant at 78.6% and 78.2%
for the 1996 Six Months and 1995 Six Months, respectively. Net loss (net income
for 1995) as a percentage of gross operating revenue was 0.2% and 0.7% for 1996
Six Months and 1995 Six Months, respectively.
COMPARISON OF 1996 TO 1995
The Lessee had total revenue for 1996 of $88,097,000 consisting of
$82,431,000 of room revenue and $5,666,000 of other revenue. Room revenue
increased by $4,277,000, or 5.5%, from $78,154,000 for 1995. This increase was
primarily due to an ADR increase of 2.9% and an occupancy increase of 2.5%.
Percentage Lease payments, hotel operating expenses and overhead expenses
for 1996 were $41,371,000, $46,094,000, $1,745,000, respectively. Percentage
Lease payments, hotel operating expenses and overhead expenses increased by
$2,857,000, or 7.4%, $1,657,000, or 3.7%, and $493,000, or 39.4%, respectively,
from $38,514,000, $44,437,000 and $1,252,000, for 1995. These increases were
primarily due to increased REVPAR of 5.5% at the Hotels, which resulted in
increased Percentage Lease payments and increased
38
<PAGE> 43
variable expenses. Net loss for 1996 was $1,113,000. Net loss increased $368,000
or 49.4% from $745,000, for 1995.
The gross margin percentage remained relatively constant at 78.0% and 77.8%
for 1996 and 1995, respectively. Net loss as a percentage of gross operating
revenue was 1.3% and 0.9% for 1996 and 1995, respectively.
The Fisher Initial Hotels
The following table sets forth certain historical information for the
Fisher Initial Hotels as a percentage of combined Fisher Initial Hotel total
revenue for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- SEPTEMBER 30,
1991 1992 1993 1994
----- ----- ----- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Room revenue.......................................... 89.8% 91.0% 93.7% 93.6%
Other revenue......................................... 10.2 9.0 6.3 6.4
----- ----- ----- -----
Total revenue...................................... 100.0 100.0 100.0 100.0
Hotel operating expenses.............................. 69.4 61.4 60.6 57.8
Other Expenses........................................ 64.2 52.9 44.3 36.5
----- ----- ----- -----
Net income (loss).................................. (33.6)% (14.3)% (4.9)% 5.7%
===== ===== ===== =====
</TABLE>
Comparison of year ended December 31, 1993 to year ended December 31, 1992
Room revenue increased $2,400,000, or 31.6%, from $7,600,000 in 1992 to
$10,000,000 in 1993. The primary reason for the increase was the acquisition of
the Hampton Inn-Islandia (Long Island), New York hotel in December 1992. In
addition, ADR increased 9.8% from $51.46 in 1992 to $56.50 in 1993 reflecting
management's focus on increasing room rates, particularly at the Hampton
Inn-Willow Grove (Philadelphia), Pennsylvania hotel. Partially offsetting the
increase in ADR was a decline in occupancy of 2.1% from 76.2% to 74.1%. The
primary reason for the decrease in occupancy in 1993 was the higher than normal
occupancy at the Hotels located in Florida during the fourth quarter of 1992 as
a result of Hurricane Andrew. REVPAR increased 6.8% from $39.22 to $41.89.
Hotel operating expenses increased $1,300,000, or 25.3%, from $5,200,000 in
1992 to $6,500,000 in 1993 principally as a result of the acquisition of the
Hampton Inn-Islandia (Long Island), New York hotel, but decreased as a percent
of total revenue from 61.4% to 60.6%. Net loss declined from ($1,200,000) to
($523,000).
Comparison of year ended December 31, 1992 to year ended December 31, 1991
Room revenue increased $2,100,000, or 38.2% from $5,500,000 in 1991 to
$7,600,000 in 1992, approximately $1,500,000 of which resulted from the
commencement of operations of the Hampton Inn-Willow Grove (Philadelphia),
Pennsylvania hotel in August 1991, and approximately $600,000 of which resulted
from increased revenues at the Hotels located in Florida during the last four
months of 1992 due to increased demand in South Florida hotels as a result of
Hurricane Andrew.
Hotel operating expenses increased $900,000, or 20.9%, from $4,300,000 in
1991 to $5,200,000 in 1992, principally as a result of expenses attributable to
the commencement of operations at the Hampton Inn-Willow Grove (Philadelphia),
Pennsylvania hotel, but decreased as a percentage of total revenue in 1992 from
69.4% to 61.4%. Net loss decreased from ($2,100,000) to ($1,200,000).
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's growth strategy is to enhance
shareholder value by increasing Cash Available for Distribution through the
acquisition of additional operating hotels. The Company will
39
<PAGE> 44
invest in additional hotels as suitable opportunities arise, and the Company
will not contract for investments unless adequate sources of financing are
available. It is expected that future investments in additional hotels will be
financed, in whole or in part, with (i) proceeds from additional issuances of
Common Shares or other securities, (ii) incurrence of additional indebtedness
and (iii) internally generated cash flow. Additionally, the Company may be
required to incur additional indebtedness to meet distribution requirements
imposed on a REIT under the Code to the extent cash flow from operations is
insufficient to make such distributions. The Debt Limitation limits aggregate
indebtedness to 50% of the Company's investment in hotel properties, at cost.
After the closing of the Offering and the application of the net proceeds of the
Offering as set forth in "Use of Proceeds," the Company will have outstanding
debt of approximately $99.6 million, borrowing capacity of approximately $126.4
million under the Debt Limitation and $28 million of borrowing capacity under
the Line of Credit, all subject to certain debt coverage requirements contained
in the Line of Credit agreements.
The purchase of the Current Hotels has been funded by the issuance of
Common Shares and Units, borrowings on the Line of Credit and the Term Loan and
internally generated cash flow. The Company completed its IPO in September 1994,
which raised gross proceeds of approximately $46.9 million primarily to fund the
purchase of seven hotels. Subsequent to the IPO, the Company funded the purchase
of three of the Current Hotels through borrowings under the Line of Credit. The
Company raised gross proceeds of approximately $55.7 million in the Follow-on
Offering primarily for the acquisition of eight of the Current Hotels. Since the
Follow-on Offering, the Company has funded the purchase of four additional
Hotels through borrowings under the Line of Credit and internally generated cash
flow.
The Company obtained the Line of Credit from the Lender in March 1995 to
fund hotel acquisitions. The maximum amount available under the Line of Credit
currently is $70 million. The Line of Credit is secured by 13 of the Current
Hotels and will be secured by any hotels acquired by the Company in the future
with proceeds from the Line of Credit. Borrowings under the Line of Credit
currently bear interest at 175 basis points over the 30-day LIBOR rate as
published by Telerate. The Company pays a financing fee equal to 0.5% of any
funds borrowed under the Line of Credit. The Line of Credit has a term expiring
in March 1997, and may be extended for an additional year upon the payment of a
fee equal to 1.0% of the maximum amount available under the Line of Credit. The
average interest rate on borrowing under the Line of Credit for the 1996 Six
Months was 7.45% per annum.
The Line of Credit permits borrowings under the Line of Credit only if the
Company's debt service coverage ratio is at least 2.0. The Company may remove a
lien on a hotel securing the Line of Credit if the Company's debt service
coverage ratio is 2.0 or greater and the Company pays the Lender 1.25 times the
amount of the outstanding indebtedness under the Line of Credit that is
allocated to such Hotel. In addition to the first priority mortgage liens
currently on 13 of the Hotels owned by the Company, the Line of Credit is
secured by (i) guarantees by each of the Company and its wholly owned subsidiary
Innkeepers Financial Corporation, the general partner of the Partnership, (ii) a
pledge of the Company's interest in the Partnership, (iii) liens on the
Company's personal property related to the Hotels securing the Line of Credit,
and (iv) an assignment of the Percentage Leases, and the rents, agreements and
licenses arising thereunder.
In addition to standard events of default, the Company will be in default
under the Line of Credit if (i) the Lessee defaults under any Percentage Lease
relating to a Hotel owned by the Company, (ii) either guarantor's minimum net
worth falls below a specified level or the Company's debt service coverage ratio
falls below 1.4, (iii) the Company fails to qualify as a REIT, or (iv) the
Partnership ceases to be majority-owned by either guarantor.
The Term Loan is secured by eight of the Current Hotels. The Company used a
portion of the Term Loan to fund approximately $18.6 million of the acquisition
costs on the Hotels that were purchased in connection with the Follow-on
Offering, and the balance of the Term Loan was used to repay amounts outstanding
under the Line of Credit. The Term Loan bears interest at a fixed rate equal to
8.17% per annum. The principal amount of the Term Loan will amortize on a
20-year schedule commencing on October 6, 1997, which is the second anniversary
of the closing of the Term Loan. The Term Loan will mature and be payable
40
<PAGE> 45
in full in October 2015, but may be prepaid at any time after October 2007
without penalty. If the Term Loan is not prepaid at such time, interest on the
then outstanding principal balance will accrue at 13.17% per annum. The
outstanding principal balance on the Term Loan was $30 million at June 30, 1996.
In connection with the acquisition of three of the DeBoer Hotels, the
Company will assume the approximately $24 million of Assumed Indebtedness, which
is secured by such Hotels. Following the closing of the Offering, the Residence
Inn-East Lansing, Michigan hotel and the Residence Inn-Grand Rapids, Michigan
hotel (the "New Michigan Hotels"), will continue to be subject to recourse
mortgage indebtedness in the outstanding aggregate principal amount of $10
million (the "Michigan Loans"). Each Michigan Loan bears interest at a variable
interest rate, reset monthly, based upon 30-day yield evaluations at par of not
less than 20 tax-exempt securities selected by an independent party. The average
interest rate on the Michigan Loans as of September 9, 1996 was 3.8% per annum,
and the average interest rate for the twelve months ended June 30, 1996 was
3.75% per annum. Accrued interest on the Michigan Loans is payable monthly, with
the entire principal amount of each Michigan Loan being payable on December 1,
2014. Each Michigan Loan may be prepaid in whole at any time. The Michigan Loans
are secured by irrevocable letters of credit (the "Michigan LOCs") that expire
on October 15, 1999. The Michigan LOCs are secured by mortgages on the New
Michigan Hotels, and were issued pursuant to Reimbursement Agreements providing
that all funds drawn on the Michigan LOCs will be recourse to the Subsidiary
Partnership that will own the New Michigan Hotels.
Following the closing of the Offering, the Residence Inn-Silicon Valley II,
California hotel will continue to be subject to mortgage indebtedness in the
outstanding principal amount of approximately $14.9 million as of September 1,
1996 (the "Silicon Valley II Loan"). Approximately $900,000 of such principal
amount will be repaid upon the assumption of the loan by the Company. The
Silicon Valley II Loan was entered into on May 31, 1995, bears interest at the
rate of 10.35% per annum and is payable in equal monthly installments of
principal and interest of approximately $141,331 each. The Silicon Valley II
Loan matures on June 1, 2010, at which time a balloon payment in the amount of
approximately $6.6 million will be due and payable. The Silicon Valley II Loan
may not be prepaid in whole or in part until after June 1, 2002, and after such
date may only be prepaid with a prepayment premium generally equal to the
discounted present value of the product of (A) the outstanding principal amount
to be prepaid and (B) the greater of (1) 1%, or (2) the product of (a) 10.35%
less the market rate of U.S. Treasury issues closest to maturity on the
prepayment date and (b) a fraction, the numerator of which is the number of days
from the prepayment date until June 1, 2010, and the denominator of which is
365.
In connection with the acquisition of one of the Current Hotels, the
Company assumed the Mortgage Note in the original principal amount of
approximately $3.8 million. The Mortgage Note is secured by a mortgage on the
Hampton Inn-West Palm Beach hotel. The Mortgage Note accrues interest at a rate
equal to 5.0% per annum payable monthly in arrears and principal amortization is
payable monthly based upon a 289 month amortization schedule, with all unpaid
principal due and payable in full on August 31, 2001. In addition, if any cash
flow from the Hampton Inn-West Palm Beach hotel remains after the payment of all
operating expenses and the funding of a reserve, such cash flow shall be paid as
an additional payment on the Mortgage Note and will be applied to reduce its
outstanding principal balance, subject to a maximum annual cap. The maximum
amount of the additional payment cannot exceed approximately $78,000. The
outstanding principal balance on the Mortgage Note was approximately $3.6
million at June 30, 1996.
The Company in the future may seek to increase the amount of its credit
facilities, negotiate additional credit facilities, or issue corporate debt
instruments, all in compliance with the Debt Limitation. Any debt incurred or
issued by the Company may be secured or unsecured, long-term or short-term,
fixed or variable interest rate and may be subject to such other terms as the
Board of Trustees of the Company deems prudent.
Net cash provided by operating activities for the 1996 Six Months was
$6,957,000. Cash and cash equivalents as of June 30, 1996 were $6,511,000,
including approximately $806,000 which the Company is required, under the
Percentage Leases, to make available to the Lessee for the replacement and
refurbishment of furniture, fixtures and equipment. Additionally, cash and cash
equivalents includes approximately
41
<PAGE> 46
$4,667,000 that is held in escrow to pay for insurance, taxes, and capital
expenditures pertaining to the 12 Hotels that collateralized the Line of Credit
at June 30, 1996 and the eight Hotels that collateralize the Term Loan.
Net cash used in investing activities was $29,516,000 for the 1996 Six
Months. This was comprised primarily of the Company acquiring the Holiday Inn
Express-Lexington, Massachusetts hotel for $7,000,000, the Residence Inn hotels
in Cherry Hill, New Jersey and Harrisburg, Pennsylvania for an aggregate of
$16,800,000 in cash, and deposits of $2,850,000 applied toward the purchase of
the Atlanta Hotels and the Comfort Inn-Woburn, Massachusetts hotel. At June 30,
1996, the Company's consolidated indebtedness was 45% of its investment in
hotels, at cost.
Net cash provided by financing activities was $26,977,000 for the 1996 Six
Months, reflecting primarily proceeds from long term debt of $35,086,000,
including $26,650,000 in borrowings under the Line of Credit to purchase three
of the Current Hotels and make deposits toward the purchase of the Holiday Inn
Express-Lexington, Massachusetts hotel, the Residence Inn-Cherry Hill, New
Jersey hotel and the Residence Inn-Harrisburg, Pennsylvania hotel. The Company
(and the Partnership) paid an aggregate of $5,091,000 in distributions to
holders of Common Shares and Units during the 1996 Six Months.
Under federal income tax law provisions applicable to a REIT, the Company
is required to distribute at least 95% of its taxable income to maintain its
status as a REIT. The Company believes that its net cash provided by operations
will be adequate to fund both operating requirements and the payment of
distributions by the Company in accordance with the requirements to maintain its
status as a REIT.
Pursuant to the Percentage Leases, the Company is required to make
available to the Lessee an amount equal to 4% of room revenues, per quarter, on
a cumulative basis, for periodic replacement or refurbishment of furniture,
fixtures and equipment at the Hotels. Management believes that the amounts
required to be made available to the Lessee will be sufficient to meet required
expenditures for furniture, fixtures and equipment during the terms of the
Percentage Leases. The Company intends to cause the expenditure of amounts in
excess of such obligated amounts if necessary to comply with the reasonable
requirements of any Franchise License or Marriott Management Agreement and
otherwise to the extent that the Company deems such expenditures to be in the
best interests of the Company. The Company is also obligated under the
Percentage Leases to fund the cost of capital improvements to the Hotels. In the
12 months following the closing of the Offering, the Company intends to spend
approximately $5.0 million in renovations for the DeBoer Hotels, approximately
$2.0 million in connection with the conversion of the Comfort Inn-Woburn,
Massachusetts hotel to a Hampton Inn and approximately $1.0 million to be spent
in connection with the completion of the conversion of the Holiday Inn
Express-Lexington, Massachusetts hotel to a Holiday Inn Express & Suites. The
Company currently intends to pay for the cost of capital improvements and
additional furniture, fixtures and equipment requirements from undistributed
cash. Provisions comparable to those described above, are expected to be
included in the Percentage Leases for any other hotels in which the Company
invests, including the Acquisition Hotels.
INFLATION
Operators of hotels, including the Lessee and any third-party manager
retained by the Lessee, such as Marriott or TMH, in general possess the ability
to adjust room rates quickly. However, competitive pressures have limited and
may in the future limit the ability of the Lessee and any third-party manager
retained by the Lessee to raise room rates in response to inflation.
SEASONALITY OF HOTEL BUSINESS
The hotel industry is seasonal in nature. The Current Hotels' operations
historically reflect higher occupancy rates and ADR during the second and third
quarters for the 18 Current Hotels located outside of Florida and one of the
Current Hotels located in Florida and higher occupancy rates and ADR during the
first
42
<PAGE> 47
and fourth quarters for three of the four Hotels located in Florida. The
seasonality generally, and the significant impact of the first quarter with
respect to revenues of three of the Current Hotels located in Florida, makes the
annual revenue of those three Current Hotels located in Florida highly dependent
on first quarter room revenue. To the extent that the Company's cash flow for a
quarter is insufficient to fund all of the distribution for the quarter, the
Company may maintain the annual distribution rate by funding seasonal-related
shortfalls with available cash or borrowings under the Line of Credit.
43
<PAGE> 48
BUSINESS AND PROPERTIES
THE HOTEL INDUSTRY
Traditional Lodging Industry
The fundamentals of the lodging industry have improved significantly in
each year since 1991. The industry as a whole generated record earnings on 1995,
with industry-wide pre-tax profits of $8.5 billion. This was up 55% from $5.5
billion in pre-tax profits in 1994, and represented the industry's third
consecutive year of profitability. Coopers & Lybrand Hospitality Directions,
January 1996 ("Hospitality Directions") projects that industry pre-tax profits
will reach $14.7 billion in 1998.
The industry's profitability has been fueled by four consecutive years in
which the growth in demand for hotel rooms has exceeded the growth in room
supply. Industry-wide growth in room demand exceeded the growth in total room
supply by 1.7%, 2.2%, 2.6% and 1.1% in 1992, 1993, 1994 and 1995, respectively.
This trend has continued in the first seven months of 1996, with demand growth
exceeding supply growth by 1.1% despite harsh winter weather conditions
affecting many markets.
This sustained, favorable relationship between demand growth and supply
growth has enabled the industry to increase REVPAR every year since 1991. REVPAR
for the industry as a whole grew 3.2%, 5.6% 6.5% and 6.0% in 1992, 1993, 1994
and 1995, respectively. This trend has continued in the first seven months of
1996, with REVPAR growing by 7.7%. Hospitality Directions forecast industry-wide
REVPAR gains averaging approximately 5% annually in the period 1996 through
1998.
Extended-Stay Segment
The Company believes that the extended-stay lodging segment offers a more
consistent revenue stream due to higher average occupancy rates and longer
average stays by guests than in traditional hotels. Demand for extended-stay
lodging has been stimulated by the economic and social changes resulting from
the increased number of corporate reorganizations and trends toward downsizing
and out-sourcing of various functions, the increased mobility of the workforce
and technological improvements, which have allowed businesses to relocate
outside of large metropolitan areas. These changes have created new
accommodation needs for, among others, corporate executives and trainees,
consultants, sales representatives, construction workers and people in between
jobs or homes. For the year ended December 31, 1995, demand for hotel rooms by
guests who stay longer than five consecutive room nights exceeded the number of
existing extended-stay rooms by 7 to 1, according to an April 1996 study
conducted by D.K. Shifflett & Associates, an independent marketing research
firm.
Mid-Price Segment
The fundamentals are similarly favorable in the mid-price segment in which
the 12 non-extended-stay Hotels operate. According to Smith Travel Research,
demand for mid-price rooms grew at approximately 3.8% in 1995, while the supply
of new mid-price rooms increased only approximately 2.6%. Carrying this trend
forward, demand for mid-price rooms increased by approximately 3.4% during the
seven months ended July 31, 1996, compared to an approximately 2.8% increase in
mid-price room supply in the same period. REVPAR at mid-price hotels grew
approximately 6.4% in 1995, and increased approximately 7.3% in the seven months
ended July 31, 1996, compared to the seven months ended July 31, 1995.
Hospitality Directions forecasts that the mid-price segment will achieve REVPAR
gains averaging approximately 4.5% annually in the period 1996 through 1998.
44
<PAGE> 49
The following table contains occupancy, ADR and REVPAR information for the
periods indicated for (i) U.S. Hotels, (ii) Upscale Extended-Stay Hotels, and
(iii) Mid-Price U.S. Hotels for the periods indicated.
<TABLE>
<CAPTION>
SEVEN MONTHS
YEAR ENDED DECEMBER 31, ENDED JULY 31,
------------------------------------------ ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OCCUPANCY:
U.S. Hotels...................................... 60.7% 61.7% 63.0% 64.6% 65.3% 65.8% 66.6%
Upscale Extended-Stay Hotels(1).................. 74.8 77.5 80.7 82.5 82.1 83.1 82.8
Mid-Price U.S. Hotels(2)......................... 61.4 62.6 63.8 65.6 66.3 67.0 67.4
ADR
U.S. Hotels...................................... $59.02 $59.90 $61.97 $64.35 $67.45 $67.16 $71.44
Upscale Extended-Stay Hotels(2).................. 73.98 74.53 76.54 78.84 83.57 83.57 88.40
Mid-Price U.S. Hotels............................ 55.04 55.19 56.20 58.43 61.50 61.03 65.07
REVPAR
U.S. Hotels...................................... $35.83 $36.96 $39.04 $41.57 $44.04 $44.19 $47.58
Upscale Extended-Stay Hotels(1).................. 55.34 57.76 61.77 65.04 68.61 69.21 73.20
Mid-Price U.S. Hotels(2)......................... 33.79 34.55 35.86 38.33 40.77 40.89 43.86
</TABLE>
- ---------------
Source -- Smith Travel Research through July 31, 1996.
(1) For each Metropolitan Statistical Area ("MSA") in the U.S., the "Mid-Price
U.S. Hotels" category represents hotels with ADRs within the 40th to 70th
percentile of the ADR range for all hotels in that MSA. Smith Travel
Research has not provided advice regarding any aspect of the Offering and
is not associated with the Offering in any way.
(2) Includes Residence Inn hotels, Hawthorn Inns, Homewood Suites, Summerfield
Suites and Woodfin Suites.
BUSINESS STRATEGY
The Company intends to grow internally and externally through a
three-pronged strategy as follows: (i) growth primarily through the acquisition
of existing and newly-developed upscale extended-stay hotels, such as Residence
Inn hotels, that are located in markets with relatively high barriers to entry,
(ii) growth through the acquisition of underperforming hotels, primarily
mid-price hotels, that can be renovated and converted to premium franchise
brands, such as Hampton Inn and Courtyard by Marriott, and (iii) internal growth
through participation in any increased revenue from the Hotels pursuant to the
Percentage Leases.
ACQUISITION STRATEGY
The Company intends to acquire additional hotels, primarily in the upscale
extended-stay segment and underperforming hotels that can be renovated and
converted to premium franchise brands. In particular, the Company has
increasingly emphasized and intends to continue to emphasize the acquisition of
hotel portfolios in order to capitalize on the Company's efficiency and
experience in acquisition analysis and transaction structuring and to enable the
Company to more rapidly expand its hotel portfolio. The Company's successful
acquisition of seven Residence Inn hotels from a single seller in October 1995
and the proposed acquisition of the DeBoer Hotels are examples of this strategy.
In addition, the Company has been able to avoid competitive bid situations in
these two portfolio acquisitions by creatively structuring transactions that
address the needs of the particular sellers.
Target Markets. In general, the Company will focus on acquisitions in
markets with the following characteristics:
- high barriers to entry, such as the scarcity of land for additional
development or restrictive zoning;
- historically stable demand generators, such as major office or retail
complexes, airports, major universities and medical centers with
convenient access to major thoroughfares and airports; and
- proximity to the Company's existing Hotels, where the Company may draw
upon its knowledge of local market conditions and develop certain
economics of scale.
45
<PAGE> 50
Upscale Extended-Stay Hotels. The Company has focused and will continue to
focus its acquisition strategy on upscale extended-stay hotels primarily as a
result of the following factors:
- current social and economic changes resulting from the increased number
of corporate reorganizations and trends toward downsizing and out-sourcing
of various functions, the increased mobility of the workforce and
technological improvements, which have allowed businesses to relocate
outside of large metropolitan areas, have increased the demand for
extended-stay hotels;
- the demand for hotel rooms by guests who stay longer than five
consecutive room nights exceeds the number of existing extended-stay hotel
rooms by 7 to 1, according to industry sources;
- extended-stay hotels offer a more consistent revenue stream due to
generally higher average occupancy and longer average stays by guests than
in traditional hotels; and
- the strong performance of the Company's existing portfolio of upscale
extended-stay hotels, which generated REVPAR growth of 10.3% for the six
months ended June 30, 1996.
Underperforming Hotels. The Company will consider investments in hotels
with the potential for refurbishment and repositioning which meet the following
criteria:
- poorly managed hotels which have the potential for increased performance
after the implementation of quality management and association with a
national franchisor;
- hotels in deteriorated physical condition which could benefit
significantly from renovations; and
- hotels in attractive locations that the Company believes could benefit
significantly by changing franchises to a brand the Company believes is
superior, such as Hampton Inn and Courtyard by Marriott.
Hotels that the Company may acquire in the future will include hotels and
portfolios of hotels which management believes have potential for growth in
occupancy and ADR. To capitalize on potential hotel acquisition opportunities,
the Company intends to utilize the availability under the Line of Credit to fund
investments in additional hotels and for certain other business purposes.
Following the closing of the Offering and the application of the net proceeds as
described in "Use of Proceeds," the Company will have (i) outstanding
indebtedness of approximately $99.6 million, including (a) approximately $30
million outstanding under the Term Loan, (b) approximately $42.0 million
outstanding under the Line of Credit, and (c) approximately $27.6 million of
existing indebtedness on certain of the Hotels, (ii) a borrowing capacity of
approximately $126.4 million under the Debt Limitation, and (iii) approximately
$28 million of borrowing availability under the Line of Credit, subject to
certain debt coverage requirements under the Line of Credit agreements. Upon the
closing of the Offering, the Company will own seven hotels that do not secure
any of the Company's indebtedness. The Company intends to pursue additional
borrowing capacity to permit it to borrow amounts up to the Debt Limitation. See
"Risk Factors -- Risks of Leverage", "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company presently expects that additional hotel investments will be
made through the Partnership or a partnership substantially owned by the
Partnership (i.e., the Subsidiary Partnerships). The approval of a majority of
the Independent Trustees will be required in any instances where hotel
acquisitions are not made through the Partnership. The proceeds of any
borrowings by the Company must be re-lent to the Partnership on identical terms
and conditions, except for borrowed funds required to satisfy REIT qualification
requirements which are approved by a majority of the Independent Trustees.
Future hotel investments may be financed, in whole or in part, with
undistributed cash, borrowings, or subsequent issuances of Common Shares or
other securities. Because of the Debt Limitation, and the debt service coverage
requirements under the Line of Credit agreements the success of the Company's
acquisition strategy depends on access to capital through issuances of equity
securities. See "Risk Factors -- Growth Strategy."
46
<PAGE> 51
INTERNAL GROWTH STRATEGY
The Company believes that the quality of on-site hotel operators will be a
major factor in any future growth in Percentage Lease revenue from the Hotels
and in the ability of the Company to successfully acquire, convert and rebrand
hotels to national franchise affiliations in the upscale extended-stay and
mid-price market segments. The Company intends to enhance shareholder value
through internal growth primarily by seeking to increase Cash Available for
Distribution resulting from increased revenue generated by (i) the Lessee's
marketing programs and sales management policies and procedures pursuant to the
Percentage Leases, including its oversight of sales and marketing efforts at
Hotels by third-party operators, (ii) the management skill and broad-based hotel
operating experience of Marriott, which will operate the nine Residence Inn
Acquisition Hotels, (iii) increased ADR and occupancy, resulting from selective
renovation of the Hotels, and (iv) the possible strategic development of new
hotels on a selected basis in the future.
Percentage Leases
The Percentage Leases are designed to allow the Company to participate in
growth in revenue at the Hotels. Under the Percentage Leases, once applicable
room revenues at the applicable Hotel reach certain specified levels ("Revenue
Break Points") (subject to annual inflation adjustments), the Company will
receive between approximately 68% to 70% of incremental room revenues at the
Hotels. For the twelve-month period ended June 30, 1996, room revenues from each
Current Hotel exceeded the Revenue Break Points for the payment of the higher
tier Percentage Rent under the applicable Percentage Lease. On a pro forma
basis, Percentage Lease revenue for the Current Hotels increased $1,652,046, or
14.5%, from $11,361,363 for the six months ended June 30, 1995 to $13,013,409
for the six months ended June 30, 1996. The Percentage Leases provide that
annual Base Rent and the Revenue Break Points for the payment of Percentage Rent
will be adjusted annually based on changes in the CPI. See "Business and
Properties -- The Percentage Leases."
Sales Management
The Lessee uses market-oriented sales management programs to coordinate,
direct and manage the sales activities of personnel located at each Current
Hotel, and, through Marriott, plans to continue similar programs at the DeBoer
Hotels, the Residence Inn-Atlanta (Downtown), Georgia hotel and the Residence
Inn-Portland, Maine hotel. The Company employs three regional managers to
oversee sales and marketing efforts at the Hotels, including Hotels managed by
third-party operators. Weekly sales reports are generated by each salesperson
through the daily input of data that identifies all sales related activities
which have taken place during the day (e.g., appointments, sales calls, direct
mailings, incoming calls) and the results of such actions (e.g., appointments
made, literature sent, rooms reserved). Each salesperson also inputs any
comments made by prospective or existing customers, the potential for new or
continued business and the timing of the follow-up action required.
Additionally, sales reports permit management to promptly evaluate a
salesperson's productivity as measured by the quantity of sales calls, sales
call results and number of group bookings. These sales reports also allow
comparisons of the ongoing sales efforts at the applicable Hotel to the
marketing and business plan established for each Hotel and allow management to
adapt the marketing and business plan accordingly.
Capital Improvements, Renovation and Refurbishment
The Percentage Leases require the Lessee to maintain the Hotels in a
condition that complies with the Franchise Licenses and the Marriott Management
Agreements, among other requirements. In addition, the Company may upgrade the
Hotels as needed to meet competitive conditions and will renovate Hotels when
the Company believes the investment in renovations will provide an attractive
return to the Company through increased revenue under the Percentage Leases or
is otherwise in the best interests of the Company. This strategy is designed to
enhance the revenue growth and increase the value of each Hotel and to maintain
or increase each Hotel's market share. The Company will schedule renovations to
the Hotels in order to implement this strategy and as otherwise may be required
by a particular franchisor in accordance with the applicable Franchise License
or by Marriott pursuant to the Marriott Management Agreements. The Company
intends to spend approximately $5.0 million over the next twelve months to
complete certain
47
<PAGE> 52
renovations at the DeBoer Hotels. The Company also intends to spend
approximately $2.0 million in connection with the conversion of the Comfort
Inn-Woburn, Massachusetts hotel to a Hampton Inn and approximately $1.0 million
in connection with the completion of the conversion of the Holiday Inn Express-
Lexington, Massachusetts hotel to a Holiday Inn Express & Suites hotel.
Development Strategy
The Company may in the future develop and construct hotels that will
operate under franchise brands that are not then fully represented in the
markets where such development would occur. To implement such development
strategy, the Company will rely on the hotel property development and
construction experience and franchisor relationships of Mr. Fisher.
THE HOTELS
Upon the closing of the acquisition of the Acquisition Hotels, the Company
will own 20 Residence Inn hotels, eight Hampton Inns, two Comfort Inns, a
Holiday Inn Express hotel and a Sheraton Inn. Nine of the Acquisition Hotels
are, and after their acquisition by the Company, the Company intends that they
will continue to be, operated as Residence Inn hotels under the Marriott
Management Agreements. Upon the closing of the acquisition of the Acquisition
Hotels, the Company will be one of the largest owners of Residence Inn hotels.
Residence Inn hotels are upscale, all-suite, extended-stay hotels designed to
appeal to business travelers who stay at a hotel for five or more consecutive
room nights. Hampton Inn, Sheraton Inn and Comfort Inn are mid-price hotels,
which are designed for business and leisure travelers. Mid-price hotels
generally do not include restaurants or lounges and minimize other public
meeting areas. All of the Hotels are constructed, maintained and operated in
accordance with a comprehensive set of franchisor or manager building,
maintenance, operational, recordkeeping and reservation system guidelines
designed to ensure uniform service, appearance and quality.
Residence Inn Hotels
Eleven of the Hotels are subject to Franchise Licenses permitting operation
by the Lessee as Residence Inn hotels. Nine of the Acquisition Hotels will be
operated by Marriott as Residence Inn hotels pursuant to the Marriott Management
Agreements. Residence Inn is the leading brand in the extended-stay segment of
the lodging industry, with more than 50% of all extended stay rooms and more
than 70% of all upscale extended-stay rooms, according to Smith Travel Research.
Residence Inn hotels are designed to appeal to extended-stay travelers (who stay
at a hotel longer than five consecutive room nights), primarily business
travelers such as consultants, engineers, attorneys and accountants on extended
stays for project-oriented work. According to Marriott, for the year ended
December 31, 1995, the average occupancy at Residence Inn hotels was 84.2%.
Residence Inn hotels feature a series of residential style buildings, which
typically include eight suites, on a landscaped site with courtyards and
recreational areas. Amenities designed to attract extended-stay guests include
full kitchen facilities, wood-burning fireplaces, a private entrance to each
suite and such services as laundry and grocery shopping services. Residence Inn
hotels do not have restaurants, but offer complimentary continental breakfast
and often provide a complimentary evening hospitality hour. According to
Marriott, as of August 9, 1996, 217 Residence Inn hotels were open and operating
in 43 states, Canada and Mexico. The Company believes that the Residence Inn
brand is the leading brand for upscale, extended-stay hotels.
Hampton Inn Hotels
Eight of the Hotels operate as Hampton Inn hotels pursuant to Franchise
Licenses. Hampton Inn hotels seek to offer guests consistent quality and value
at all locations. Hampton Inn was the first hotel company to offer guests an
unconditional 100% satisfaction guarantee. Hampton Inn hotels feature
complimentary continental breakfasts, free local telephone and in-room movie
channel, a toll-free reservation number, and a special discount program for
guests over 50 years of age. According to Promus, the first Hampton Inn hotel
was opened on August 1, 1984, and, as of September 9, 1996, there were 591
Hampton Inn hotels operating in the United States, Mexico and Canada. The
Company believes that the Hampton Inn brand is one of the leading brands for
mid-price hotels.
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<PAGE> 53
PROPERTY DESCRIPTIONS
The following chart provides certain information regarding the Hotels.
The Current Hotels
<TABLE>
<CAPTION>
NUMBER
OF
GUEST YEAR
HOTEL LOCATION ROOMS OPENED(2) COMPETITION DEMAND GENERATORS
- --------------------------- -------------------- ------ --------- ------------------------- -------------------------
<C> <S> <C> <C> <C> <C> <C>
UPSCALE EXTENDED-STAY(1):
1. Residence Inn......... Fremont, CA 80 1985 Woodfin Suites-Fremont, LAM Research, Sun-Micro
Crown Sterling Suites- Systems, General Motors
Fremont, Marriott and Nummi
Courtyard-Fremont and
Hilton-Fremont/Newark
2. Residence Inn......... Mountain View 112 1985 Woodfin Suites-Sunnyvale, Sun MicroSystems, Silicon
(Palo Alto), CA Summerfield Suites- Graphics, Hewlett Packard
Sunnyvale and Hyatt and Stanford University
Rickey's-Palo Alto
3. Residence Inn......... San Jose, CA 80 1986 Marriott Courtyard-San IBM, AT&T, Strata
Jose, Pruneyard, Communications, General
Summerfield Suites and Electric and Allstate
Campbell Inn
4. Residence Inn......... Denver (South), CO 128 1981 Woodfin Suites-Denver US West, Lockheed Martin,
South, Holtz Suites, Georgia Pacific, AT&T,
Residence-Denver South, Echo Bay Mines and Ford
Marriott Courtyard-Denver Motor Co.
Tech Center and Hyatt-
Denver Tech Center
5. Residence Inn......... Windsor, CT 96 1986 Homewood Suites-Bradley Hanover Capital, Oracle,
Airport, Marriott AETNA, Kaman Corp. and
Courtyard-Windsor, leisure travelers
Clarion
Suites-Manchester/
Hartford,
Sheraton-Bradley Airport,
Centennial Inn
Suites-Farmington and
Holiday Inn-Bradley
Airport
6. Residence Inn......... Troy (Central), MI 152 1986 Hilton Suites-Auburn General Motors, Chrysler,
Hills, Hilton-Northfield, EDS and Price Waterhouse
Guest Quarters-Troy,
Marriott-Troy and
Homewood Suites-Warren
7. Residence Inn......... Troy (Southeast), MI 96 1985 Homewood Suites-Warren, General Motors, Chrysler,
Hilton Suites-Auburn Textron, DuPont, Beijing
Hills, Residence Jeep, EDS, Lockheed
Inn-Warren and Guest Martin and Knoll
Quarters-Troy
8. Residence Inn......... Cherry Hill, NJ 96 1989 Summerfield Suites-Mt. General Electric Capital
Laurel, Clarion-Mt. Mortgage, U.S.
Laurel, Travelodge-Mt. government, Campbell
Laurel and Hilton-Cherry Soup, Mobil Oil, Computer
Hill Sciences Corporation,
Lockheed Martin and
Checkpoint Systems
9. Residence Inn......... Binghamton, NY 72 1987 Holiday Inn-Vestal, Universal Instruments,
Holiday Inn-Hawley and IBM, Small Business
Best Western-Regency Administration, Lockheed
Martin and FEMA
</TABLE>
49
<PAGE> 54
<TABLE>
<CAPTION>
NUMBER
OF
GUEST YEAR
HOTEL LOCATION ROOMS OPENED(2) COMPETITION DEMAND GENERATORS
- --------------------------- -------------------- ------ --------- ------------------------- -------------------------
<C> <S> <C> <C> <C> <C> <C>
10. Residence Inn......... Harrisburg, PA 80 1988 Marriott-Harrisburg, AMP Inc., Hershey Food,
Homewood Suites- Federal Government, USF&G
Mechanicsburg, Best Insurance, EDS, FEMA,
Western Crown-Harrisburg Caterpillar and IBM
and Doubletree-Harrisburg
11. Residence Inn......... Richmond, VA 80 1986 Marriott Courtyard- Philip Morris, Reynolds
Richmond West, Embassy Metals Co., Circuit City
Suites-Richmond West and Stores, Whitehall Robins
Hyatt-Richmond West and Social Security
Administration
MID-PRICE:
12. Hampton Inn........... Naples, FL 107 1990 Inn of Naples-Naples, Sears & Roebuck, Walden
Best Western Naples Inn- University and tourism
Naples, Quality Inn- generated by area
Gulfcoast, Comfort Inn- beaches, golf courses and
Naples Bay and Wellesley other attractions
Inn-Naples
13. Hampton Inn........... Tallahassee, FL 93 1993 Shoney's Inn-Tallahassee, Florida State University,
La Quinta Florida Department of
Inn-Tallahassee, Cabot Transportation, U.S.
Lodge-Tallahassee and Department of Justice and
Comfort Inn-Tallahassee Southeastern Kidney
Cooperative
14. Hampton Inn........... West Palm Beach, FL 136 1986 Holiday Inn-Palm Beach South Florida tourism,
International Airport, local area companies
Radisson Suites-Palm including Sign-A-Rama,
Beach International AMCI and International
Airport, Wellesley Hi-Tec and Palm Beach
Inn-West Palm Beach, International Airport
Comfort Inn-West Palm
Beach Turnpike and Best
Western-West Palm Beach
15. Hampton Inn(2)........ Germantown, MD 176 1986 Courtyard by Marriott- Local area companies,
Gaithersburg, Holiday Allstate, Marriott,
Inn-Gaithersburg, Hilton- Hughes Corporation and
Gaithersburg, Courtyard nearby Department of
by Marriott-Rockville and Energy facility
Woodfin Suites-Rockville
16. Hampton Inn........... Albany/Latham, NY 126 1990 Holiday Inn Express- Local area companies,
Albany Airport, Hampton area retail facilities,
Inn-Albany/Wolf Rd., Red Continental Airlines and
Roof Inn-Albany Airport, Air Transport
Comfort Inn-Albany
Airport, Best Western-
Clifton Park and
Courtyard by
Marriott-Albany
17. Hampton Inn........... Islandia 121 1988 Hampton Inn-Commack, Greyhound Bus Lines,
(Long Island), NY Holiday Inn-Ronkonkoma, Grumman Aerospace and
Sheraton-Smithtown, Best Coca-Cola Distributors
Western-Patchogue and
Radisson-Islandia
18. Hampton Inn........... Willow Grove 150 1991 Courtyard by Marriott- Prudential, Honeywell,
(Philadelphia), PA Willow Grove, Days Inn- GMAC National Operations
Horsham, Residence Inn by and EDS
Marriott-Willow Grove and
Holiday Inn-Fort
Washington
</TABLE>
50
<PAGE> 55
<TABLE>
<CAPTION>
NUMBER
OF
GUEST YEAR
HOTEL LOCATION ROOMS OPENED(2) COMPETITION DEMAND GENERATORS
- --------------------------- -------------------- ------ --------- ------------------------- -------------------------
<C> <S> <C> <C> <C> <C> <C>
19. Comfort Inn(2)........ Woburn, MA 100 1981 Red Roof Inn-Woburn, Tour packages and Hewlett
Courtyard by Marriott- Packard
Woburn and Suisse Chalet-
Woburn
20. Comfort Inn........... Allentown, PA 127 1989 Hampton Inn-Allentown, Mack, Nestle and Air
Holiday Inn-Allentown, Products
Comfort Suites-
Allentown/Bethlehem and
Holiday Express-Allentown
21. Holiday Inn
Express(2)............ Lexington, MA 164 1971 Ramada Inn-Bedford, Hanscom Air Force Base,
Howard Johnson-Burlington Work Group Technologies,
and Travelodge-Bedford Raytheon, Lincoln
Laboratories and Digital
22. Sheraton Inn.......... Fort Lauderdale, FL 139 1988 Guest Quarters-Cypress Comair Airlines, Delta,
Creek, Marriott-Cypress Cleveland Clinic,
Creek, Best Western- Vacation Break, Inc. and
Cypress Creek, Hampton Federal Express
Inn-Fort Lauderdale/
Cypress Creek and Westin-
Cypress Creek
</TABLE>
THE ACQUISITION HOTELS
<TABLE>
<CAPTION>
NUMBER
OF
GUEST YEAR
HOTEL LOCATION ROOMS OPENED COMPETITION DEMAND GENERATORS
- ------------------------------ ------------------ ------ ------ ------------------------- -------------------------
<C> <S> <C> <C> <C> <C> <C>
UPSCALE EXTENDED-STAY:
1. Residence Inn............ San Mateo, CA 159 1985 Summerfield Suites, High technology and
Holiday Inn and Hotel pharmaceutical firms
Sofitel including Oracle, Nikon,
Perkin-Elmer, Ericsson
and Raynet
2. Residence Inn-
Silicon Valley I......... Sunnyvale, CA 231 1983 Woodfin Suites-Sunnyvale, Applied Materials,
Summerfield Suites- Advanced Micro Devices,
Sunnyvale, Summerfield Amdahl, Intel and Hewlett
Suites-San Jose and Packard
Homewood Suites
3. Residence Inn-
Silicon Valley II........ Sunnyvale, CA 247 1985 Woodfin Suites-Sunnyvale, Applied Materials,
Summerfield Suites- Advanced Micro Devices,
Sunnyvale, Summerfield Amdahl, Intel and Hewlett
Suites-San Jose and Packard
Homewood Suites
4. Residence Inn............ Denver 156 1982 Holtz Suites, Embassy Conoco, AT&T and
(Downtown), CO Suites and Apartments, Merchandise Mart
Holiday Inn, Oxford Hotel
and Burnsley
5. Residence Inn............ Atlanta 160 1996 Ritz Carlton, Marriott Equitable, SunBank,
(Downtown), GA Marquis, Quality Suites Federal Reserve Bank of
and Westin Atlanta, Deloitte &
Touche and Georgia State
University
6. Residence Inn............ Wichita East, KS 64 1981 Candlewood Suites, the Boeing, Raytheon, Flight
Inn at Tallgrass (country Safety International,
club), Club House Inn, Anderson Consulting and
Marriott and North Rock Pizza Hut corporate
Inn headquarters
</TABLE>
51
<PAGE> 56
<TABLE>
<CAPTION>
NUMBER
OF
GUEST YEAR
HOTEL LOCATION ROOMS OPENED COMPETITION DEMAND GENERATORS
- ------------------------------ ------------------ ------ ------ ------------------------- -------------------------
<C> <S> <C> <C> <C> <C> <C>
7. Residence Inn............ Portland, ME 78 1996 Embassy Suites, Marriott, Tourism, National Semi-
Radisson, Regency, Conductors, Unum
corporate apartments and Insurance Co. and FEMA
beach house rentals
8. Residence Inn............ East Lansing, MI 60 1984 Clubhouse Inn, Comfort General Motors, Bull
Inn, Fairfield Inn, Information Systems,
Quality Suites, Marriott Michigan State University
and Club Meridian and the state government
Apartments of Michigan
9. Residence Inn............ Grand Rapids, MI 96 1984 Holiday Inn-Crowne Plaza, General Motors, Steelcase
Hilton Inn, New England and Herman Miller
Suites and Lexington
Hotel
MID-PRICE:
10. Hampton Inn.............. Norcross, GA 150 1996 Courtyard by Marriott- State Farm, GE Plastics
Norcross, Holiday Inn and Hayes Microcomputer
Select-Norcross and Corp.
Marriott Hotel-Norcross
</TABLE>
- ---------------
(1) Residence Inn hotels offer a standard amenities package that generally
includes a gatehouse with fireplace lounge, laundry facility, one or more
meeting rooms and kitchen facilities, a swimming pool, a whirlpool, a
picnic area with gas grill and an all-purpose sports court. Hampton Inn
hotels, Comfort Inn hotels and Holiday Inn Express hotels offer standard
amenities packages that generally include a complimentary continental
breakfast, a swimming pool and a meeting room. The Sheraton Inn-Fort
Lauderdale, Florida hotel's amenities include an outdoor heated swimming
pool, Tiki Bar, full service restaurant, exercise center and guest laundry
facilities.
(2) The following Current Hotels were or are in the process of being renovated
during the period noted: the Hampton Inn-Germantown, Maryland hotel (1995),
the Holiday Inn Express-Lexington, Massachusetts hotel (beginning November
1, 1996) and the Comfort Inn- Woburn, Massachusetts hotel (beginning
November 1, 1996). For the purposes of this footnote, a renovation is
defined as a substantial upgrade of guest rooms and/or public areas.
The following table sets forth certain information with respect to each
Current Hotel and the Current Hotels on a consolidated basis:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Residence Inn --
Fremont, CA
Occupancy............. 84.2% 86.9% 87.7% 87.5% 87.5%
ADR................... $74.30 $ 75.28 $ 84.05 $ 82.54 $102.07
REVPAR................ $62.56 $ 65.38 $ 73.70 $ 72.26 $ 89.35
Residence Inn --
Mountain View
(Palo Alto), CA
Occupancy............. 86.3% 89.0% 91.7% 89.5% 95.2%
ADR................... $99.68 $104.47 $109.87 $110.10 $118.53
REVPAR................ $85.97 $ 92.99 $100.70 $ 98.51 $112.90
Residence Inn --
San Jose, CA
Occupancy............. 84.4% 88.6% 93.4% 92.8% 94.6%
ADR................... $88.40 $ 84.68 $ 89.22 $ 89.32 $ 98.80
REVPAR................ $74.64 $ 74.99 $ 83.32 $ 82.91 $ 93.42
</TABLE>
52
<PAGE> 57
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------ ENDED JUNE 30,
1993 1994 1995 1995 1996
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Residence Inn --
Denver (South), CO
Occupancy............. 87.9% 89.1% 88.2% 88.0% 92.1%
ADR................... $71.26 $ 74.38 $ 80.08 $ 77.64 $ 83.16
REVPAR................ $62.61 $ 66.27 $ 70.60 $ 68.29 $ 76.63
Residence Inn --
Windsor, CT
Occupancy............. 75.8% 79.5% 86.3% 87.9% 82.6%
ADR................... $72.65 $ 74.75 $ 81.21 $ 78.75 $ 86.96
REVPAR................ $55.05 $ 59.45 $ 70.04 $ 69.24 $ 71.80
Residence Inn --
Troy(Central), MI
Occupancy............. 88.4% 89.1% 90.2% 86.8% 92.6%
ADR................... $69.74 $ 72.22 $ 77.13 $ 77.28 $ 79.79
REVPAR................ $61.65 $ 64.36 $ 69.57 $ 67.10 $ 73.85
Residence Inn --
Troy(Southeast), MI
Occupancy............. 84.6% 85.8% 91.6% 88.7% 85.0%
ADR................... $66.74 $ 69.39 $ 72.48 $ 73.57 $ 80.49
REVPAR................ $56.46 $ 59.54 $ 66.42 $ 65.24 $ 68.46
Residence Inn --
Cherry Hill, NJ
Occupancy............. 91.7% 92.1% 88.8% 87.0% 90.2%
ADR................... $81.11 $ 83.96 $ 87.94 $ 86.18 $ 90.93
REVPAR................ $74.41 $ 77.37 $ 78.10 $ 74.94 $ 82.06
Residence Inn --
Binghamton, NY
Occupancy............. 81.9% 81.0% 82.2% 79.4% 82.2%
ADR................... $82.29 $ 83.87 $ 84.68 $ 82.74 $ 83.26
REVPAR................ $67.37 $ 67.97 $ 69.64 $ 65.72 $ 68.45
Residence Inn --
Harrisburg, PA
Occupancy............. 88.9% 88.7% 80.8% 80.2% 85.4%
ADR................... $77.55 $ 82.59 $ 83.92 $ 81.47 $ 83.97
REVPAR................ $68.95 $ 73.25 $ 67.77 $ 65.36 $ 71.71
Residence Inn --
Richmond, VA
Occupancy............. 82.0% 84.9% 83.9% 84.3% 86.8%
ADR................... $73.19 $ 76.94 $ 78.49 $ 77.64 $ 80.80
REVPAR................ $60.05 $ 65.30 $ 65.83 $ 65.48 $ 70.16
Hampton Inn --
Naples, FL
Occupancy............. 78.4% 74.1% 69.1% 76.9% 79.6%
ADR................... $55.92 $ 59.78 $ 65.79 $ 79.23 $ 78.43
REVPAR................ $43.86 $ 44.29 $ 45.48 $ 60.97 $ 62.44
Hampton Inn --
Tallahassee, FL
Occupancy............. 79.7% 84.5% 86.1% 88.6% 85.5%
ADR................... $47.04 $ 49.99 $ 56.19 $ 54.28 $ 57.98
REVPAR................ $37.49 $ 42.27 $ 48.41 $ 48.08 $ 49.59
</TABLE>
53
<PAGE> 58
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Hampton Inn --
West Palm Beach, FL
Occupancy............. 71.6% 71.3% 70.6% 79.5% 77.2%
ADR................... $49.07 $ 52.24 $ 54.41 $ 59.98 $ 61.36
REVPAR................ $35.14 $ 37.25 $ 38.39 $ 47.66 $ 47.37
Hampton Inn --
Germantown, MD
Occupancy............. 32.4% 43.6% 38.9% 41.5% 55.7%
ADR................... $55.03 $ 59.78 $ 63.23 $ 63.88 $ 59.32
REVPAR................ $17.81 $ 26.08 $ 24.59 $ 26.52 $ 33.06
Hampton Inn --
Albany/Latham, NY
Occupancy............. 72.2% 73.3% 67.7% 66.1% 70.2%
ADR................... $59.44 $ 61.96 $ 65.15 $ 62.80 $ 60.74
REVPAR................ $42.93 $ 45.40 $ 44.08 $ 41.52 $ 42.63
Hampton Inn --
Islandia (Long Island), NY
Occupancy............. 69.9% 74.3% 75.0% 73.4% 71.3%
ADR................... $65.71 $ 69.74 $ 74.60 $ 72.96 $ 75.87
REVPAR................ $45.92 $ 51.84 $ 55.92 $ 53.58 $ 54.11
Hampton Inn --
Willow Grove
(Philadelphia), PA
Occupancy............. 74.4% 77.4% 77.6% 78.3% 84.5%
ADR................... $61.46 $ 65.51 $ 70.31 $ 68.94 $ 70.41
REVPAR................ $45.72 $ 50.68 $ 54.59 $ 53.96 $ 59.50
Comfort Inn --
Woburn, MA
Occupancy............. 48.8% 67.0% 69.6% 62.8% 67.3%
ADR................... $51.84 $ 52.02 $ 55.82 $ 54.27 $ 56.49
REVPAR................ $28.28 $ 34.88 $ 38.84 $ 34.05 $ 38.03
Comfort Inn --
Allentown, PA
Occupancy............. 67.1% 77.7% 72.9% 64.9% 75.1%
ADR................... $49.91 $ 53.17 $ 55.84 $ 55.09 $ 54.55
REVPAR................ $33.48 $ 41.32 $ 40.72 $ 35.76 $ 40.96
Holiday Inn Express --
Lexington, MA
Occupancy............. 46.6% 55.2% 62.5% 51.9% 59.1%
ADR................... $48.13 $ 53.65 $ 60.03 $ 57.63 $ 65.82
REVPAR................ $22.43 $ 29.62 $ 37.53 $ 29.92 $ 38.90
Sheraton Inn --
Fort Lauderdale, FL
Occupancy............. 77.3% 72.1% 64.8% 73.6% 88.8%
ADR................... $51.25 $ 54.74 $ 62.65 $ 67.26 $ 62.19
REVPAR................ $39.63 $ 39.44 $ 40.60 $ 49.53 $ 55.21
Consolidated Current Hotels --
Occupancy............. 74.9% 76.6% 76.1% 75.7% 80.0%
ADR................... $66.16 $ 68.67 $ 73.26 $ 73.41 $ 76.46
REVPAR................ $49.53 $ 52.58 $ 55.72 $ 55.59 $ 61.18
</TABLE>
54
<PAGE> 59
The following table sets forth certain information with respect to each
Acquisition Hotel and the Acquisition Hotels on a consolidated basis:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Residence Inn -- San Mateo, CA
Occupancy.................................. 89.0% 90.5% 91.90% 90.5% 93.8%
ADR........................................ $86.49 $90.46 $94.47 $94.32 $101.64
REVPAR..................................... $77.02 $81.90 $86.79 $85.38 $ 95.37
Residence Inn -- Silicon Valley I, CA
Occupancy.................................. 77.8% 79.8% 86.1% 84.1% 93.1%
ADR........................................ $79.25 $83.36 $88.17 $88.84 $ 96.86
REVPAR..................................... $61.66 $66.48 $75.89 $74.74 $ 90.19
Residence Inn -- Silicon Valley II, CA
Occupancy.................................. 76.1% 81.8% 89.5% 87.8% 93.0%
ADR........................................ $77.39 $80.44 $86.09 $86.38 $ 98.08
REVPAR..................................... $58.92 $65.83 $77.02 $75.84 $ 91.23
Residence Inn -- Denver, CO
Occupancy.................................. 86.9% 90.3% 85.3% 87.2% 86.1%
ADR........................................ $67.85 $67.97 $74.50 $72.98 $ 80.05
REVPAR..................................... $58.96 $61.40 $63.57 $63.66 $ 68.91
Residence Inn -- Atlanta (Downtown), GA
Occupancy.................................. N/A N/A N/A N/A N/A
ADR........................................ N/A N/A N/A N/A N/A
REVPAR..................................... N/A N/A N/A N/A N/A
Residence Inn -- Wichita East, KS
Occupancy.................................. 82.2% 82.7% 82.0% 80.4% 81.0%
ADR........................................ $73.56 $75.07 $76.13 $76.27 $ 80.70
REVPAR..................................... $60.45 $62.11 $62.45 $61.35 $ 65.38
Residence Inn -- Portland, ME(1)
Occupancy.................................. N/A N/A N/A N/A 40.2%
ADR........................................ N/A N/A N/A N/A $ 66.59
REVPAR..................................... N/A N/A N/A N/A $ 26.76
Residence Inn -- East Lansing, MI
Occupancy.................................. 83.4% 84.0% 85.7% 81.4% 81.8%
ADR........................................ $69.29 $68.21 $70.30 $71.16 $ 75.99
REVPAR..................................... $57.79 $57.31 $60.27 $57.95 $ 62.14
Residence Inn -- Grand Rapids, MI
Occupancy.................................. 80.7% 85.3% 83.9% 78.3% 85.2%
ADR........................................ $65.77 $66.93 $70.19 $72.66 $ 70.24
REVPAR..................................... $53.09 $57.06 $50.88 $56.87 $ 59.84
Hampton Inn -- Norcross, GA
Occupancy.................................. N/A N/A N/A N/A N/A
ADR........................................ N/A N/A N/A N/A N/A
REVPAR..................................... N/A N/A N/A N/A N/A
Consolidated Acquisition Hotels --
Occupancy.................................. 81.5% 84.5% 87.2% 85.5% 88.6%
ADR........................................ $75.96 $78.36 $83.23 $83.50 $ 90.46
REVPAR..................................... $61.87 $66.25 $72.58 $71.41 $ 80.14
Consolidated Hotels
Occupancy.................................. 76.8% 78.9% 79.3% 78.5% 82.5%
ADR........................................ $69.21 $71.67 $76.42 $76.57 $ 80.90
REVPAR..................................... $53.14 $56.52 $60.58 $60.15 $ 66.77
</TABLE>
55
<PAGE> 60
- ---------------
(1) This hotel opened in April 1996.
THE PERCENTAGE LEASES
In order for the Company to qualify as a REIT, the Company cannot operate
hotels. See "Risk Factors -- Lack of Control over Operations of the Hotels." The
Company, therefore, leases the Current Hotels and will lease the Acquisition
Hotels to the Lessee pursuant to Percentage Leases. The Lessee operates 17 of
the Current Hotels and will operate the Hampton Inn-Norcross, Georgia hotel
after the closing of such hotel. After the closing of the Acquisition Hotels,
Marriott will provide management services for the nine Residence Inn Acquisition
Hotels pursuant to the Marriott Management Agreements. TMH operates five of the
Current Hotels pursuant to the TMH Management Agreements.
Mr. Fisher is the majority shareholder of the Lessee. Other than working
capital, the Lessee has only nominal assets. Each Percentage Lease contains the
provisions described below, and the Company intends that future percentage
leases with respect to additional hotels it may acquire will contain
substantially similar provisions, although the Independent Trustees may, in
their discretion, alter any of these provisions with respect to any proposed
percentage lease, depending on the purchase price paid, economic conditions and
other factors deemed relevant at the time. The Lessee will not lease or manage
any hotel other than those owned by the Company.
Percentage Lease Terms. Each Percentage Lease has a non-cancelable initial
term of at least ten years, subject to earlier termination upon the occurrence
of defaults thereunder and certain other events described therein (including,
particularly, the provisions described herein under "Damage to Hotels,"
"Condemnation of Hotels" and "Termination of Percentage Leases on Disposition of
the Hotels").
Amounts Payable Under the Percentage Leases. During the term of each
Percentage Lease, the Lessee is obligated to pay to the Company (i) the greater
of Base Rent or Percentage Rent, and (ii) certain other amounts, including
interest accrued on any late payments or charges (the "Additional Charges").
Percentage Rent is based on percentages of room revenues for each of the Hotels.
Under the Percentage Leases, the Lessee pays Base Rent and Percentage Rent
monthly. The Percentage Rent due for any calendar month in a year is calculated
as the Percentage Rent owed for the entire year to date, net of Percentage Rent
and Base Rent already paid for such year. For the first two months of each
calendar quarter, the Lessee pays 70% of the Percentage Rent applicable to such
months, and for the final month of each calendar quarter the Lessee pays the
remaining Percentage Rent due for the entire quarter. Under these Percentage
Leases, Base Rent and Percentage Rent is due on the 10th and 25th day of the
following month, respectively. The Percentage Leases for the Acquisition Hotels
are expected to have rent payment provisions substantially similar to those
described above.
For all Percentage Leases, both the Base Rent and the Revenue Break Points
amount in each Percentage Rent formula will be adjusted annually for inflation.
The adjustment will be calculated at the beginning of each calendar year based
upon the change in the CPI during the prior calendar year.
56
<PAGE> 61
The following table sets forth certain unaudited information with respect
to the Hotels and the applicable Percentage Leases.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
ANNUAL PERCENTAGE JUNE 30, 1996
RENT FORMULA(1) --------------------------
----------------------------------- PRO FORMA
REVENUE --------------------------
NUMBER BASE BREAK FIRST SECOND ROOM LEASE
CURRENT HOTELS OF ROOMS RENT POINT TIER TIER REVENUE PAYMENTS(2)
- ------------------------------- -------- ----------- ---------- ----- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
UPSCALE EXTENDED-STAY:
Residence Inn-Fremont, CA.... 80 $ 410,000 $1,500,000 30.0% 68.0% $ 2,406,681 $ 1,066,544
Residence Inn-Mountain View
(Palo Alto), CA............ 112 1,207,000 1,200,000 30.0 68.0 4,405,498 2,539,739
Residence Inn-San Jose, CA... 80 520,000 1,500,000 30.0 68.0 2,589,153 1,190,624
Residence Inn-Denver (South),
CO......................... 128 734,000 1,800,000 30.0 68.0 3,503,380 1,698,299
Residence Inn-Windsor, CT.... 96 459,000 1,800,000 30.0 68.0 2,499,048 1,015,352
Residence Inn-Troy (Central),
MI......................... 152 931,000 1,900,000 30.0 68.0 4,048,664 2,031,091
Residence Inn-Troy
(Southeast), MI............ 96 494,000 1,400,000 30.0 68.0 2,413,422 1,109,127
Residence Inn-Cherry Hill,
NJ......................... 96 774,000 1,700,000 30.0 68.0 2,862,786 1,300,694
Residence Inn-Binghamton,
NY......................... 72 455,000 1,207,900 32.0 70.0 1,871,931 845,522
Residence Inn-Harrisburg,
PA......................... 80 554,000 1,380,000 30.0 68.0 2,097,125 901,645
Residence Inn-Richmond, VA... 80 447,000 1,325,000 30.0 68.0 1,996,138 853,874
MID-PRICE:
Hampton Inn-Naples, FL....... 107 $ 410,000 $1,336,400 33.5% 70.0% 1,830,806 787,588
Hampton Inn-Tallahassee,
FL......................... 93 350,000 825,000 30.0 70.0 1,671,593 835,927
Hampton Inn-West Palm Beach,
FL......................... 136 304,000 1,619,100 31.0 68.0 1,889,651 678,293
Hampton Inn-Germantown, MD... 176 490,000 1,500,000 32.0 69.5 1,800,512 681,716
Hampton Inn-Albany/Latham,
NY......................... 126 662,000 1,207,900 35.0 70.0 2,041,527 1,000,937
Hampton Inn-Islandia (Long
Island), NY................ 121 473,000 1,516,300 31.75 70.0 2,509,543 1,169,334
Hampton Inn-Willow Grove
(Philadelphia), PA......... 150 735,000 1,372,380 31.45 70.0 3,152,170 1,670,752
Comfort Inn-Woburn, MA(3).... 100 210,000 1,350,000 30.0 68.0 1,500,257 507,175
Comfort Inn-Allentown, PA.... 127 497,000 1,050,000 36.5 70.0 1,954,812 1,012,154
Holiday Inn
Express-Lexington, MA...... 164 500,000 1,950,000 27.0 68.0 2,474,535 883,185
Sheraton Inn-Fort Lauderdale,
FL......................... 139 359,000 1,413,500 31.0 68.0 2,264,027 1,009,907
----- ---------- --------- ---------
Subtotal for Current Hotels.... 2,511 11,975,000 53,783,259 24,789,479
----- ---------- --------- ---------
</TABLE>
57
<PAGE> 62
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
ANNUAL PERCENTAGE JUNE 30, 1996
RENT FORMULA(1) ------------------------
----------------------------------- PRO FORMA
REVENUE ------------------------
NUMBER BASE BREAK FIRST SECOND ROOM LEASE
CURRENT HOTELS OF ROOMS RENT POINT TIER TIER REVENUE PAYMENTS(2)
- ------------------------------- ----- ---------- ---------- ----- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ACQUISITION HOTELS
UPSCALE EXTENDED STAY:
Residence Inn-San Mateo, CA.. 159 $ 1,427,000 $2,450,000 30.0% 68.0% $ 5,305,581 $ 2,676,795
Residence Inn-Silicon Valley
I, CA...................... 231 2,154,000 2,450,000 30.0 68.0 6,988,335 3,821,067
Residence Inn-Silicon Valley
II, CA..................... 247 2,244,000 2,700,000 30.0 68.0 7,587,457 4,133,471
Residence Inn-Denver
(Downtown), CO............. 156 684,000 2,750,000 30.0 68.0 3,777,160 1,523,468
Residence Inn-
Atlanta (Downtown), GA(4).. 160 1,260,000 3,100,000 30.0 68.0 -- 1,260,000
Residence Inn-Wichita East,
KS......................... 64 287,000 1,175,000 30.0 68.0 1,504,716 576,706
Residence Inn-Portland,
ME(4)...................... 78 430,000 1,200,000 30.0 68.0 -- 430,000
Residence Inn-East Lansing,
MI......................... 60 290,000 950,000 30.0 68.0 1,370,493 570,935
Residence Inn-Grand Rapids,
MI......................... 96 509,000 1,350,000 30.0 68.0 2,113,586 924,239
MID-PRICE:
Hampton Inn-Norcross, GA(4).. 150 665,000 1,500,000 30.0 68.0 -- 665,000
----- ---------- --------- ---------
Subtotal for Acquisition
Hotels....................... 1,401 9,950,000 28,647,328 16,581,681
----- ---------- --------- ---------
Consolidated Total for
Hotels....................... 3,912 $21,925,000 $82,430,587 $ 41,371,160
===== ========== ========= =========
</TABLE>
- ---------------
(1) All Percentage Rent formulas included in the Percentage Leases are based on
room revenue from the applicable Hotels. See "Business and
Properties -- The Percentage Leases" and "Risk Factors -- Risk that Pending
Acquisitions Will Not Close." Beginning in the calendar year following the
year in which a Percentage Lease commences, and for each year thereafter
(i) the annual Base Rent, and (ii) the Percentage Rent formulas will be
adjusted for inflation, based on changes in the CPI.
(2) Represents Percentage Lease payments from the Lessee to the Company,
calculated on a pro forma basis by applying the rent provisions in the
Percentage Leases, and, for the Acquisition Hotels, the rent provisions in
the proposed Percentage Leases, to the historical room revenue of the
Hotels for the 12 months ended June 30, 1996. Under the terms of the
related Percentage Leases, the Company receives Percentage Rent in an
amount equal to the first tier percentage of all room revenues up to the
Revenue Break Point and an amount equal to the second tier percentage of
all room revenues in excess of the Revenue Break Point.
(3) A renovation of the Comfort Inn-Woburn, Massachusetts hotel is scheduled to
begin in late 1996. Until the renovation project has substantially
commenced, the Percentage Rent will be fixed at $45,000 per month. From the
date on which the renovation project substantially commences until the
earlier of (i) April 1, 1997 or (ii) the first day of the month following
the date of the completion of the renovation project (each a "Target
Completion Date") no Base Rent is payable. On the Target Completion Date,
the Percentage Rent formula reverts to the terms set forth in the above
table.
(4) This Hotel had no substantive operations for the periods presented, the
Percentage Lease payment is assumed to be equal only to the Base Rent
provided for in the applicable Percentage Leases and does not include any
Percentage Rent in excess of Base Rent, which the Company expects will be
payable in future periods.
Other than real estate and personal property taxes, ground lease rent
(where applicable), the cost of certain furniture, fixtures and equipment and
certain capital expenditures, and property and casualty insurance, which are
obligations of the Company, the Percentage Leases require the Lessee to pay Base
Rent, Percentage Rent, Additional Charges and all operating expenses of the
Hotels (including liability insurance,
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utility and other charges incurred in the operation of the Hotels) during the
terms of the Percentage Leases. The Percentage Leases also provide for Rent
reductions and abatements in the event of damage or destruction or a partial
taking of any Hotel as described under "Damage to Hotels" and "Condemnation of
Hotels."
Maintenance and Modifications. Under the Percentage Leases, the Company is
required to pay for capital improvements at each Hotel. In addition, the
Percentage Leases obligate the Company to make available to the Lessee for the
repair, replacement and refurbishment of furniture, fixtures and equipment in
the Hotels, when and as deemed necessary by the Lessee, an amount equal to, with
respect to the Current Hotels, 4% of room revenues per quarter on a cumulative
basis. The Percentage Leases for the Acquisition Hotels will require that the
Partnership make available to the Lessee for such purposes an amount equal to 4%
of room revenues per quarter on a cumulative basis. The Company's obligation is
carried forward to the extent that the Lessee has not expended such amount, and
any unexpended amounts will remain the property of the Company upon termination
of the Percentage Leases. In addition, the Company intends to spend amounts in
excess of the obligated amounts if necessary to comply with the reasonable
requirements of any Franchise License or Marriott Management Agreement and
otherwise to the extent that the Company deems such expenditures to be in the
best interests of the Company. Otherwise, the Lessee is required, at its
expense, to maintain the Hotels in good order and repair and to pay for all
operating expenses of the Hotels.
The Lessee, at its expense, may make non-capital and capital additions,
modifications or improvements to the Hotels, provided that any such action does
not significantly alter the character or purposes of the Hotels or significantly
detract from the value or operating efficiencies of the Hotels. All such
alterations, replacements and improvements shall be subject to all the terms and
provisions of the Percentage Leases and become the property of the Partnership
upon termination of the Percentage Leases. The Company owns, with respect to the
Current Hotels, and will own, with respect to the Acquisition Hotels,
substantially all personal property (other than inventory, linens and other
nondepreciable personal property) not affixed to, or deemed a part of, the real
estate or improvements thereon, except to the extent that ownership of such
personal property would cause the Rent under a Percentage Lease not to qualify
as "rents from real property" for REIT income test purposes. See "Federal Income
Tax Considerations -- Requirements for Qualification -- Income Tests."
Insurance and Property Taxes. The Company is responsible for paying real
estate and personal property taxes on the Hotels (except to the extent that
personal property associated with a hotel is owned by the Lessee), and all
property and casualty insurance. The Lessee is required to pay or reimburse the
Company for all other insurance on the Hotels, including comprehensive general
public liability, workers' compensation and other insurance appropriate and
customary for properties similar to the Hotels and naming the Company as an
additional named insured.
Assignment and Subleasing. The Lessee is not permitted to sublet all or
any part of the Hotels or assign its interest under any of the Percentage
Leases, other than to an Affiliate of the Lessee, without the prior written
consent of the Company. No assignment or subletting will release the Lessee from
any of its obligations under the Percentage Leases.
Damage to Hotels. In the event of damage to or destruction of any Hotel
covered by insurance which renders the Hotel unsuitable for the Lessee's use and
occupancy, the Lessee is obligated to repair, rebuild, or restore the Hotel or
offer to acquire the Hotel on the terms set forth in the applicable Percentage
Lease. If the Lessee rebuilds the Hotel, the Company is obligated to disburse to
the Lessee, from time to time and upon satisfaction of certain conditions, any
insurance proceeds actually received by the Company as a result of such damage
or destruction, and any excess costs of repair or restoration will be paid by
the Lessee. If the Lessee decides not to rebuild and the Company exercises its
right to reject the Lessee's mandatory offer to purchase the Hotel on the terms
set forth in the Percentage Lease, the Percentage Lease will terminate and the
insurance proceeds will be retained by the Company. If the Company accepts the
Lessee's offer to purchase the Hotel, the Percentage Lease will terminate and
the Lessee will be entitled to the insurance proceeds. In the event that damage
to or destruction of a Hotel that is covered by insurance does not render the
Hotel wholly unsuitable for the Lessee's use and occupancy, the Lessee generally
is obligated to repair or restore the Hotel. The Percentage Lease shall remain
in full force and effect during the first 12 months of any period
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required for repair or restoration of any damaged or destroyed Hotel, after
which time Rent will be equitably abated.
Condemnation of Hotels. In the event of a total condemnation of any Hotel,
the relevant Percentage Lease will terminate with respect to such Hotel as of
the date of taking, and the Company and the Lessee will be entitled to their
shares of the condemnation award in accordance with the provisions of the
Percentage Lease. In the event of a partial taking that does not render the
Hotel unsuitable for the Lessee's use, the Lessee shall restore the untaken
portion of the Hotel to a complete architectural unit and the Company shall
contribute to the cost of such restoration that part of the condemnation award
specified for restoration.
Events of Default. Events of Default under the Percentage Leases include,
among others, the following:
(i) the occurrence of an Event of Default under any other Percentage
Lease between the Company and the Lessee or any Affiliate of the Lessee;
(ii) the failure by the Lessee to pay Base Rent or Additional Charges
when due and the continuation of such failure for a period of 15 days
thereafter;
(iii) the failure by the Lessee to pay Percentage Rent when due and
the continuation of such failure for a period of 20 days thereafter;
(iv) the failure by the Lessee to observe or perform any other term of
a Percentage Lease and the continuation of such failure for a period of 30
days after receipt by the Lessee of notice from the Partnership thereof,
unless such failure cannot be cured within such period and the Lessee
commences appropriate action to cure such failure within such 30 day period
and thereafter acts, with diligence, to correct such failure within such
time as is necessary, provided in no event shall such period exceed 90
days;
(v) if the Lessee shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law, or shall be adjudicated a bankrupt or shall
make an assignment for the benefit of creditors or shall admit in writing
its inability to pay its debts generally as they become due, or if a
petition or answer proposing the adjudication of the Lessee as a bankrupt
or its reorganization pursuant to any federal or state bankruptcy law or
any similar federal or state law shall be filed in any court and the Lessee
shall be adjudicated a bankrupt and such adjudication shall not be vacated
or set aside or stayed within 60 days after the entry of an order in
respect thereof, or if a receiver of the Lessee or of the whole or
substantially all of the assets of the Lessee shall be appointed in any
proceeding brought by the Lessee or if any such receiver, trustee or
liquidator shall be appointed in any proceeding brought against the Lessee
and shall not be vacated or set aside or stayed within 60 days after such
appointment;
(vi) if the Lessee voluntarily discontinues operations of any Hotel
except as a result of damage, destruction, or condemnation; or
(vii) if the Franchise License or Marriott Management Agreement with
respect to a Hotel is terminated by the franchisor or Marriott as a result
of any action or failure to act by the Lessee or its agents, other than the
failure to complete improvements required by a franchisor or Marriott
because the Company fails to pay the costs of such improvements.
Termination of Percentage Leases on Disposition of the Hotels. In the
event the Company enters into an agreement to sell or otherwise transfer a
Hotel, the Company will have the right to terminate the Percentage Lease with
respect to such Hotel if, within six months of the termination, the Company
either (i) pays the Lessee the fair market value of the Lessee's leasehold
interest in the remaining term of the Percentage Lease to be terminated, or (ii)
offers to lease to the Lessee one or more substitute Hotels on terms that would
create a leasehold interest in such Hotel with a fair market value equal to or
exceeding the fair market value of the Lessee's remaining leasehold interest
under the Percentage Lease to be terminated.
Franchise Licenses; Marriott Management Agreements. The Lessee is the
licensee under the Franchise Licenses on the Current Hotels and will be the
licensee under the Franchise License on the Hampton Inn-
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Norcross, Georgia hotel. Upon the occurrence of certain events of default by the
Lessee under a Franchise License, the respective franchisors have agreed,
subject to certain terms and conditions, to transfer the Franchise License for
the Hotel to a designee of the Company. The nine Residence Inn Acquisition
Hotels will be operated by Marriott pursuant to the Marriott Management
Agreements. See "Business and Properties -- Franchise Licenses and Marriott
Management Agreements."
Other Lease Covenants. The Lessee has agreed that during the term of the
Percentage Leases it will maintain a ratio of total debt to consolidated net
worth (as defined in the Percentage Leases) of less than or equal to 50%,
exclusive of capitalized leases. In addition, the Lessee has agreed that it will
not pay fees for operating services or for marketing, accounting, construction,
renovation or other similar services to Mr. Fisher, any Affiliate of Mr. Fisher
or any Affiliate of the Lessee.
Breach by Company. Upon notice from the Lessee that the Company has
breached a Percentage Lease, the Company has 30 days to cure the breach or
proceed to cure the breach, which period may be extended in the event of certain
specified, unavoidable delays.
Inventory. All inventory required in the operation of the Hotels is and
will be purchased at the Lessee's expense and owned by the Lessee. The Company
has the option to purchase all inventory related to a particular Hotel at fair
market value upon termination of the Percentage Lease for that Hotel.
FRANCHISE LICENSES AND MARRIOTT MANAGEMENT AGREEMENTS
Eleven of the Current Hotels are licensed as Residence Inn hotels.
Residence Inn is the registered trademark of Marriott. Marriott approved the
transfer of the Franchise Licenses or the grant of a new Franchise Licenses to
the Lessee when the Company acquired the Current Hotels that are operated as
Residence Inn hotels. The nine Residence Inn hotels included in the Acquisition
Hotels will be operated as Residence Inn hotels pursuant to the terms of the
Marriott Management Agreements.
Seven of the Current Hotels and one of the Acquisition Hotels are licensed
as Hampton Inns. Hampton Inn is a registered trademark of Promus. Promus
approved the grant of new Franchise Licenses to the Lessee when the Company
acquired each such Current Hotel. Promus has agreed to approve the transfer of
the Franchise License to the Lessee upon the Company's acquisition of the
Hampton Inn-Norcross, Georgia hotel.
Two of the Current Hotels are licensed as Comfort Inns. Comfort Inn is the
registered trademark of Choice Hotels International, Inc. ("Choice"). Choice
approved the grant of new Franchise Licenses to the Lessee when the Company
acquired each such Current Hotel. The Company has received a commitment from
Promus for a Hampton Inn Franchise License for the Comfort Inn-Woburn,
Massachusetts hotel, subject to the Company's completion of certain renovations
and improvements. The Company's ability to complete such renovations and
improvements is subject to the Company's obtaining the consent of the ground
lessor under the ground lease for such hotel.
One of the Current Hotels is licensed as a Sheraton Inn hotel. Sheraton Inn
is a registered trademark of ITT Sheraton Corporation ("Sheraton"). Sheraton
approved the transfer of the Franchise License to the Lessee when the Company
acquired that Current Hotel.
One of the Current Hotels is licensed as a Holiday Inn Express hotel.
Holiday Inn Express is a registered trademark of Holiday Inn Franchising.
Holiday Inn Franchising approved the grant of a new Franchise License to the
Lessee when the Company acquired that Current Hotel. The Company has received a
commitment from Holiday Inn Franchising for a Holiday Inn Express & Suites
Franchise License for the Holiday Inn Express-Lexington, Massachusetts hotel,
subject to the Company's completion of the conversion of an existing building to
32 suites and certain other renovations and improvements.
The Company intends to spend (or cause to be spent) approximately $5.0
million on improvements to the DeBoer Hotels during the 12 months following the
closing of the Offering.
The Company anticipates that most of the additional hotels in which it
invests will be operated pursuant to management agreements with Marriott or
under franchise licenses. Management believes that any future
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management agreements with Marriott will contain substantially the same terms
and conditions as the Marriott Management Agreements. The Company believes that
the public's perception of quality associated with a franchisor is an important
feature in the operation of a hotel. Franchisors and managers such as Marriott
provide a variety of benefits for franchisees which include national
advertising, publicity and other marketing programs designed to increase brand
awareness, training of personnel, periodic review of quality standards and
centralized reservation systems.
Franchise Licenses generally specify certain management, operational,
recordkeeping, accounting, reporting and marketing standards and procedures with
which the franchisee must comply. The Franchise Licenses obligate the Lessee to
comply with the franchisors' standards and requirements with respect to training
of operational personnel, safety, maintaining specified insurance, the types of
services and products ancillary to guest room services that may be provided by
the Lessee, display of signage, and the type, quality and age of furniture,
fixtures and equipment included in guest rooms, lobbies and other common areas.
Each Franchise License relating to the Hotels gives the Lessee the right to
operate the particular Hotel for specified periods ranging from two to 13 years.
The Franchise Licenses provide and will provide for termination at the
franchisor's option upon the occurrence of certain events, including the
Lessee's failure to pay royalties and fees or perform other covenants under the
Franchise Licenses, bankruptcy, abandonment of the franchise, commission of a
felony, assignment of a Franchise License without the consent of the franchisor,
or failure to comply with applicable law in the operation of the applicable
Hotel. A Franchise License does not renew automatically upon expiration. The
Lessee is responsible for making all payments under the Franchise Licenses to
the franchisors. In certain instances, the terms of the Franchise Licenses are
shorter than the terms of the applicable Percentage Leases; the Company has no
intention to modify the terms of such Franchise Licenses to conform to the
Percentage Leases. See "Risk Factors -- Risks of Operating Hotels under
Franchise Licenses and Marriott Management Agreements."
The Marriott Management Agreements will allow the Hotels subject thereto to
be operated as Residence Inn hotels for an initial term of 13 years after the
closing of the Offering, provided that the Hotels maintain the standards of the
Residence Inn system. The Marriott Management Agreements may be extended by
Marriott for an additional term of seven years if the Company has achieved a
specified return on its initial investment. Marriott may terminate one or more
of the Marriott Management Agreements upon the occurrence of certain events,
including the Lessee's failure to make any payment or perform other covenants
under the Marriott Management Agreements or bankruptcy of the Lessee or the
Company. If a Marriott Management Agreement is terminated for any reason other
than a default by Marriott, the hotel to which the agreement relates will not be
entitled to operate thereafter as a Residence Inn. Marriott may be terminated as
manager if certain performance criteria set forth in the Marriott Management
Agreements are not met in any two consecutive years beginning with the third
anniversary of the closing of the acquisition of the Residence Inn Acquisition
Hotels, subject to certain exceptions and cure rights. In that event, the Lessee
may enter into a then-current form of Residence Inn Franchise License and,
subject to Residence Inn system requirements and subject to the Lessee being a
then-approved franchisee, continue to operate the hotel as a Residence Inn
hotel. The Lessee will be responsible for making all payments to Marriott under
the Marriott Management Agreements.
Under the Franchise License applicable to the Residence Inn-Windsor,
Connecticut hotel, the Lessee currently pays to Marriott a royalty fee of 3% of
suite revenue and a marketing fee of 2.5% of suite revenue. Under the Franchise
Licenses applicable to the other ten Current Hotels that are Residence Inn
hotels, the Lessee pays to Marriott a royalty fee of 4% to 5% of suite revenue
and a marketing fee of 2.5% of suite revenue.
Pursuant to each Marriott Management Agreement with respect to the nine
Residence Inn Acquisition Hotels, the Lessee will pay to Marriott a base
management fee of 2% of total revenue, a system fee of 5% of total revenue and
an incentive fee initially equal to 65% of the Lessee's annual net operating
income with respect to such Hotels, after payment of Rent under the Percentage
Leases for such Hotels. The Lessee will not pay a separate franchise fee for the
Residence Inn hotels that are operated by Marriott.
Under the Franchise Licenses applicable to the Hotels that are Hampton Inn
hotels, the Lessee currently pays to Promus a franchise fee of 4% of room
revenue from the Current Hotels. Currently, an assessment of
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4% of room revenue is designated for a marketing and reservation fund for the
benefit of all Hampton Inn hotels systemwide. The Company will pay the same fees
on the Hampton Inn-Norcross, Georgia hotel.
Under the Franchise License applicable to the Comfort Inn-Allentown hotel
and the Comfort Inn-Woburn hotel, the Lessee pays a franchise fee to Choice of
5% of room revenue from the Comfort Inn-Allentown hotel and a marketing fee of
1.3% of all room revenue, plus a supplemental marketing fee equal to $0.28 per
day per rentable room ($35.56 per day). The Lessee will also pay to Choice a
reservations fee equal to 1.75% of all room revenues.
Under the Franchise License applicable to the Holiday Inn
Express-Lexington, Massachusetts, the Lessee pays to Holiday Inn Franchising a
royalty equal to 5% of room revenue. In addition, the Lessee pays a reservation
and marketing fee of 3% of room revenue.
Under the Franchise License applicable to the Sheraton Inn-Fort Lauderdale
hotel, the Lessee pays to Sheraton a franchise fee of 5% of room revenue (plus
additional fees) from the Sheraton Inn-Fort Lauderdale hotel. An additional 2.5%
of room revenue is payable to the Sheraton marketing and reservation fund for
the benefit of all Sheraton hotels systemwide.
Promus, Sheraton, Holiday Inn Franchising, Choice and Marriott have agreed
that, in the event of certain events of default by the Lessee under a Franchise
License with respect to a franchised Hotel or the Company's termination of a
Percentage Lease, upon request by the Company and the curing of any event of
default, such franchisor will allow that Hotel to be operated by an operator
acceptable to such franchisor for a specified period of time. The Company will
be obligated to pay the franchisor's actual costs of investigating the
operator-designee. Normal change of ownership commitment fees will be due when a
operator-designee applies for a new franchise license. Pursuant to the Marriott
Management Agreements, Marriott will allow the Company to replace the Lessee at
a Marriott-managed Residence Inn, provided that the new lease terms do not
adversely affect the structure of the incentive fee payable to Marriott.
HAMPTON INN(R), IS A REGISTERED TRADEMARK OF PROMUS, COMFORT INN(R) IS A
REGISTERED TRADEMARK OF CHOICE, RESIDENCE INN BY MARRIOTT(R) IS A REGISTERED
TRADEMARK OF MARRIOTT, HOLIDAY INN EXPRESS(R) AND HOLIDAY INN EXPRESS &
SUITES(R) IS A REGISTERED TRADEMARK OF HOLIDAY INN FRANCHISING, AND SHERATON
INN(R) IS A REGISTERED TRADEMARK OF SHERATON. NONE OF PROMUS, CHOICE, MARRIOTT,
HOLIDAY INN FRANCHISING OR SHERATON HAS ENDORSED OR APPROVED THE OFFERING. A
GRANT OF A HAMPTON INN, COMFORT INN, RESIDENCE INN BY MARRIOTT, HOLIDAY INN
EXPRESS, HOLIDAY INN EXPRESS & SUITES OR SHERATON INN FRANCHISE LICENSE FOR ANY
HOTEL IS NOT INTENDED AS, AND SHOULD NOT BE INTERPRETED AS, AN EXPRESS OR
IMPLIED APPROVAL OR ENDORSEMENT BY PROMUS, CHOICE, MARRIOTT, HOLIDAY INN
FRANCHISING OR SHERATON (OR ANY OF THEIR AFFILIATES, SUBSIDIARIES OR DIVISIONS),
OF THE COMPANY, THE PARTNERSHIP OR APPROVAL OF THE COMMON SHARES OFFERED HEREBY.
OPERATING PRACTICES
The Company's management recognizes the need for aggressive, market-driven,
creative management given the competition in the hospitality industry. Although
the Lessee was formed in 1994, Affiliates of the Lessee have owned and managed
hotel properties since 1986. Certain former employees of such Affiliates are now
employed by the Lessee.
The Lessee
The Lessee utilizes sophisticated systems for marketing, ADR enhancement,
expense management, physical facility maintenance, human resources, accounting
and internal auditing. The general manager of each Hotel reports to his
respective regional manager, who is an experienced hotel manager. Responsibility
and authority are placed in the hands of the on-site general manager and
operations manager with general supervision from the Lessee.
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In addition, the Lessee uses market-oriented sales management programs to
coordinate, direct and manage the sales activities of personnel located at each
Hotel, including Hotels managed by third-party operators. Weekly sales reports
are generated by each salesperson through the daily input of data that
identifies all sales related activities which have taken place during the day
(e.g., appointments, sales calls, direct mailings and incoming calls) and the
results of such actions (e.g., appointments made, literature sent and rooms
reserved). Each salesperson also inputs any comments made by prospective or
existing guests, the potential for new or continued business and the timing of
the follow-up action required. Additionally, sales reports permit management of
the Lessee to promptly evaluate a salesperson's productivity insofar as the
quantity of sales calls, sales call results, and number of group bookings are
concerned. These sales reports also allow management to compare the ongoing
sales efforts at the applicable Hotel to the marketing and business plan
established for each Hotel and to adapt the marketing and business plan
accordingly.
The Lessee operates 17 of the Current Hotels and will operate one of the
Acquisition Hotels. Upon the closing of the Acquisition Hotels by the
Partnership, Marriott will provide management services to the Lessee pursuant to
the Marriott Management Agreements for all nine Acquisition Hotels that are
Residence Inn hotels. TMH operates five of the Current Hotels. In addition to
operating 18 of the Hotels following the closing of the Offering, the Lessee
employs three regional managers who oversee sales and marketing efforts at the
Hotels, including those managed by third-party operators.
EMPLOYEES
The Company is self-advised and thus the Company has retained Mr. Fisher as
an officer and employee in accordance with the terms of the Fisher Employment
Agreement rather than retain an advisor. See "Management -- Fisher Employment
Agreement; Exclusive Hotel Development and Agreement and Covenant Not to
Compete." In April of 1995, the Company employed David Bulger as its Chief
Financial Officer, Treasurer and Secretary. The Lessee employs approximately 900
people. The Lessee has advised the Company that its relationship with its
employees is good.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. Such laws often impose
such liability without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment a hazardous
substance at a property owned by another may be liable for the costs of removal
or remediation of hazardous substances released into the environment at that
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. In connection
with the ownership and operation of the Hotels, the Company or the Lessee, as
the case may be, may be potentially liable for any such costs.
Phase I environmental site assessments ("ESAs") were recently prepared for
all of the Acquisition Hotels. The ESAs and any additional testing conducted in
connection therewith are and were intended to identify potential environmental
contamination for which the Hotels may be responsible. The ESAs included
historical reviews of the Hotels, reviews of certain public records, preliminary
investigations of the sites and surrounding properties, screening for the
presence of hazardous substances, toxic substances and underground storage
tanks, and the preparation and issuance of a written report. The ESAs generally
did not include invasive procedures, such as soil sampling or ground water
analysis.
The ESAs and any additional testing conducted in connection therewith have
not revealed any environmental liability or compliance concerns that the Company
believes would have a material adverse effect on the Company's business, assets,
results of operations or liquidity, nor is the Company aware of any such
liability. Nevertheless, it is possible that these ESAs and any additional
testing conducted in connection therewith do not reveal all environmental
liabilities or that there are material environmental liabilities or compliance
concerns of which the Company is unaware. Moreover, no assurances can be given
that (i) future laws, ordinances or regulations will not impose any material
environmental liability, or (ii) the current environmental condition of the
Hotels will not be affected by the condition of the properties in the vicinity
of
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the Hotels (such as the presence of leaking underground storage tanks) or by
third parties unrelated to the Lessee or the Company.
The Company believes that the Hotels are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances and other environmental matters. Neither
the Company nor, to the knowledge of the Company, the current owners of the
Acquisition Hotels have been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substances or other environmental matter in connection with any of its present
or former properties.
COMPETITION
The hotel industry, and the upscale extended-stay and mid-price segments of
the lodging market, in which the Company operates, is highly competitive.
Competitive factors within the industry include room rates, quality of
accommodations, name recognition, service levels, reputation, reservation
systems, convenience of location and the supply and availability of alternative
lodging. The Hotels compete with other existing and new hotels in their
geographic markets. The extended-stay and mid-price segments of the hotel
industry have become more competitive recently, as several new competitors have
entered the market. Many of the Company's competitors have substantially greater
marketing and financial resources than the Company and the Lessee. Each of the
Hotels is located in a developed area that includes other hotels, many of which
are competitive with the Hotels in their locality. The number of competitive
hotels in a particular area could have a material adverse effect on occupancy,
ADR and REVPAR of the Hotels or at hotels acquired in the future. Further, there
can be no assurance that new or existing competitors will not significantly
reduce their rates or offer greater convenience, services or amenities or
significantly expand or improve hotels in the market in which the Company
competes or markets in which it will compete, thereby materially adversely
affecting the Company's business and results of operations.
LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation nor, to
the Company's knowledge, is any material litigation currently threatened against
the Company or any of the Hotels. The Lessee has advised the Company that it is
currently not involved in any material litigation. The current owners of the
Acquisition Hotels have represented to the Company that there is no material
litigation threatened against or affecting the Acquisition Hotels.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The Board of Trustees consists of five members, three of whom are
Independent Trustees. The Board of Trustees is divided into three classes. Mr.
Fisher serves as the Company's President. David Bulger serves as the Company's
Chief Financial Officer, Treasurer and Secretary.
Certain information regarding those individuals who will serve as trustees
and executive officers of the Company is set forth below.
<TABLE>
<CAPTION>
TERM
NAME AGE POSITION CLASS EXPIRES
- ------------------------------ --- -------------------------------------------- ------------ -------
<S> <C> <C> <C> <C>
Jeffrey H. Fisher............. 41 Chairman of the Board, Chief Executive Class III 1997
Officer and President
David Bulger.................. 43 Chief Financial Officer, Treasurer and
Secretary
Miles Berger.................. 66 Independent Trustee Class II 1996
Jack P. DeBoer................ 65 Proposed Trustee Class I 1998
C. Gerald Goldsmith........... 68 Independent Trustee Class II 1996
Bruce Zenkel.................. 65 Independent Trustee Class I 1998
</TABLE>
Jeffrey H. Fisher has served as Chairman of the Board, Chief Executive
Officer and President of the Company since its inception in 1994. Between 1986
and 1994 he served as President and Chief Operating Officer of JF Hotel
Management, Inc., an Affiliate of the Lessee, which managed five of the Current
Hotels prior to their acquisition by the Partnership. Mr. Fisher holds a B.S. in
Business Administration from Syracuse University, a J.D. from Nova University,
and an L.L.M. in Taxation from the University of Miami.
David Bulger has served as Chief Financial Officer, Treasurer and Secretary
of the Company since April 1995. He has approximately eight years of public
accounting experience with Coopers & Lybrand L.L.P., approximately two years as
a vice president of an NYSE-listed real estate and mortgage banking company, and
approximately two years as a chief financial officer of a privately-held
mortgage banking company. Mr. Bulger holds a B.A. in history from the State
University of New York at Albany, a Masters of Education from Springfield
College and a Masters in Accounting from the University of Texas at Austin.
Miles Berger has been engaged in a wide range of real estate and banking
activities since 1950. He currently serves as Vice Chairman of the Board of
Heitman Financial Ltd., a real estate investment management firm with
approximately $12.0 billion under management, with which Mr. Berger has been
employed for more than five years. He is Chairman of the Board of Mid-Town Bank
and Trust Company of Chicago and Vice Chairman of Columbia National Bank of
Chicago. He has served on the boards of numerous real estate and banking
organizations and philanthropic organizations.
Jack P. DeBoer has served as Chairman of the Board, President and Chief
Executive Officer of Candlewood since its inception. From October 1993 to
September 1995, Mr. DeBoer was self-employed and was engaged in the development
of the Candlewood extended-stay hotel concept. From 1988 to 1993, Mr. DeBoer
co-founded and developed Summerfield Hotel Corporation, an upscale extended-stay
hotel chain.
C. Gerald Goldsmith has been an independent investor and financial advisor
since 1976. He is currently a director of Palm Beach National Bank and Trust,
U.S. Banknote, Nine West Group, Inc. and is Chairman of Property Corp.
International, a private real estate investment company. He has served as a
director of several banks and NYSE-listed companies. He holds an A.B. from the
University of Michigan and an M.B.A. from Harvard Business School.
Bruce Zenkel is a partner of Zenkel Schoenfeld, an investment banking firm
he co-founded in 1990. From 1986 to 1990, he was director of merchant banking
for McKinley Allsopp. He served as a director of Jonathan Logan, Inc. and Mr.
Coffee, Inc. and currently serves on the boards of several philanthropic
organizations. He holds a B.B.A. from the University of Michigan.
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<PAGE> 71
AUDIT COMMITTEE
The Audit Committee consists of two Independent Trustees, Messrs. Berger
and Zenkel. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees and reviews the adequacy of the Company's internal accounting
controls. The Audit Committee, with advice from the Company's attorneys and
independent public accountants, establishes procedures to monitor compliance
with the REIT provisions of the Code and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and such other laws and regulations applicable to
the Company.
COMPENSATION COMMITTEE
The Compensation Committee consists of two Independent Trustees, Messrs.
Goldsmith and Zenkel. The Compensation Committee determines compensation for the
Company's executive officers and administers the Company's 1994 Share Incentive
Plan (the "1994 Plan").
EXECUTIVE COMPENSATION
The table below sets forth the base compensation to be paid to the
Company's executive officers during 1996. Each of the executive officers are
also eligible to receive bonuses based on increases in the Company's Funds from
Operations. See "-- Fisher Employment Agreement; Exclusive Hotel Development
Agreement; and Covenant Not to Compete;" and "-- Bulger Employment Agreement."
<TABLE>
<CAPTION>
BASE CASH
NAME OF INDIVIDUAL COMPENSATION
- -------------------------------------------------------------------------------- ------------
<S> <C>
Jeffrey H. Fisher
Chairman of the Board, Chief Executive Officer and President.................. $150,000
David Bulger
Chief Financial Officer, Treasurer and Secretary.............................. $ 80,000
</TABLE>
In addition, the Company's executive officers are eligible to participate
in the 1994 plan. In 1996, Mr. Fisher was awarded options to purchase 156,000
Common Shares of which 32,000 are currently exercisable at an exercise price of
$9.75 per Common Share.
In February 1996, Mr. Fisher's annual salary was increased to $150,000
pursuant to an amendment to the Fisher Employment Agreement (as defined below),
and the Compensation Committee approved a bonus plan that ties Mr. Fisher's
annual cash bonus to increases in the Company's FFO. See "-- Fisher Employment
Agreement; Exclusive Hotel Development Agreement and Covenant Not to Compete."
It is anticipated that future compensation of Mr. Fisher and Mr. Bulger and
other employees of the Company will contain an incentive or bonus component
designed to reward improved operating performance of the Company. The
compensation paid to the officers and employees is and shall be commensurate
with their position and determined with reference to compensation paid to
similarly situated employees and officers of other REITs which the Compensation
Committee deems comparable to the Company and such other factors as the
Compensation Committee deems relevant.
COMPENSATION OF TRUSTEES
Each non-employee Trustee is paid a fee of $5,000 per year, plus $1,000 for
each Board meeting attended and $500 for each committee meeting attended. In
addition, each Independent Trustee is awarded Common Shares and is granted
options to purchase Common Shares pursuant to the Trustees' Share Incentive
Plan, described below. See "The Trustees' Plan." In addition, the Company
reimburses all Trustees for their out-of-pocket expenses incurred in connection
with their service on the Board of Trustees. Mr. Fisher receives no compensation
as a Trustee, other than reimbursement for his out-of-pocket expenses incurred
in connection with his attendance at meetings of the Board of Trustees.
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<PAGE> 72
FISHER EMPLOYMENT AGREEMENT; EXCLUSIVE HOTEL DEVELOPMENT AGREEMENT AND COVENANT
NOT TO COMPETE
Mr. Fisher serves as President of the Company pursuant to a five-year
employment agreement (the "Fisher Employment Agreement"). The Fisher Employment
Agreement, which was entered into at the closing of the IPO and amended in
February 1996, is for a term expiring September 30, 1999, and provides for
annual base compensation of $150,000, subject to any increases in base
compensation approved by the Compensation Committee. In addition, the
Compensation Committee has approved a bonus plan under which Mr. Fisher will
receive an annual cash bonus for years commencing with 1996 equal to 7.5% of the
increase, if any, in the Company's FFO, which is defined as the net income
(loss) (computed in accordance with generally accepted accounting principles)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustment for unconsolidated
partnerships and joint ventures, over the previous year, up to a maximum annual
cash bonus equal to his annual salary. The Fisher Employment Agreement provides
for certain severance payments in the event of death or disability or upon
termination by the Company without cause. The Company maintains a comprehensive
medical plan for the benefit of Mr. Fisher, provides life insurance for Mr.
Fisher and will provide other fringe benefits as established by the Compensation
Committee from time to time.
Pursuant to the Development Agreement, Mr. Fisher has agreed not to compete
with the Company and to devote substantially all of his time to the business of
the Company. In addition, the Development Agreement limits Mr. Fisher's ability
to develop hotels in which the Partnership or the Company has not invested.
BULGER EMPLOYMENT AGREEMENT
Effective April 10, 1995, Mr. Bulger entered an employment agreement with
the Company (the "Bulger Employment Agreement") for a term of four years. Under
the terms of the Bulger Employment Agreement, Mr. Bulger serves as Chief
Financial Officer, Treasurer and Secretary of the Company. The Bulger Employment
Agreement provides for annual base compensation of $80,000, subject to any
increases approved by the President or the Company's Board of Trustees, and for
annual bonuses based upon increases in the Company's FFO for the preceding year.
The Bulger Employment Agreement provides for certain severance payments in the
event of death or disability or upon termination by the Company without cause.
The Company maintains a comprehensive medical plan for the benefit of Mr. Bulger
and, pursuant to the terms of the Bulger Employment Agreement, Mr. Bulger is
entitled to all rights, benefits and privileges to which other management level
employees of the Company are entitled. Under the Bulger Employment Agreement,
Mr. Bulger has agreed not to engage in a business activity, directly or
indirectly, competitive with the business of the Company or Partnership and
located within twenty five miles of any hotel owned directly or indirectly by
the Company during his employment with the Company and for a period of two years
from the effective date of the termination of his employment.
1994 SHARE INCENTIVE PLAN
Administration. The Board of Trustees adopted the 1994 Plan to provide
incentives to attract and retain executive officers and key employees. The 1994
Plan is administered by the Compensation Committee. The Compensation Committee
may not, however, delegate its authority with respect to grants and awards to
individuals subject to Section 16 of the Exchange Act. As used in this summary,
the term "Administrator" means the Compensation Committee or its delegate, as
appropriate. The Administrator generally has the authority, within limitations
described in the 1994 Plan, (i) to establish rules and policies concerning the
1994 Plan, (ii) to determine the persons to whom share options, stock
appreciation rights ("SARs") and awards of restricted Common Shares and
performance shares may be granted, (iii) to fix the number of Common Shares to
be covered by each award, and (iv) to set the terms and provisions of each
award.
Eligibility. Each employee of the Company, or an affiliate, including an
employee who is a member of the Board, is eligible to participate in the 1994
Plan. The Administrator selects the individuals who will participate in the 1994
Plan ("1994 Participants") but no person may participate in the 1994 Plan while
he is a member of the Compensation Committee. The Administrator may, from time
to time, grant options, SARs,
68
<PAGE> 73
restricted share awards, or performance shares to 1994 Participants. No 1994
Participant may be granted, in any calendar year, options that cover more than
250,000 Common Shares or SARs that cover more than 250,000 Common Shares.
Options granted with related SARs shall be treated as a single award for
purposes of applying the limitation in the preceding sentence. No 1994
Participant may be issued, in any calendar year, more than 50,000 Common Shares
pursuant to an award of restricted shares or performance shares with respect to
more than 50,000 Common Shares.
Options. Options granted under the 1994 Plan may be incentive stock
options ("ISOs") or nonqualified stock options. An option entitles a 1994
Participant to purchase Common Shares from the Company at the option price. The
option price may be paid in cash, with Common Shares, or with a combination of
cash and Common Shares. The option price is fixed by the Administrator at the
time the option is granted, but the price cannot be less than the shares' fair
market value on the date of grant. The exercise price of an ISO granted to any
1994 Participant who is a Ten Percent Shareholder (as defined below) may not be
less than 110% of the fair market value of the Common Shares on the date of
grant. A 1994 Participant is a Ten Percent Shareholder if he owns, or is deemed
to own, more than ten percent of the total combined voting power of all classes
of shares of beneficial interest of the Company or a related entity. A 1994
Participant is deemed to own any voting shares of beneficial ownership owned
(directly or indirectly) by the 1994 Participant's spouse, brothers, sisters,
ancestors and lineal descendants. A 1994 Participant and such persons are also
considered to own proportionately any voting shares of beneficial interest owned
(directly or indirectly) by or for a corporation, partnership, estate or trust
of which the 1994 Participant or any such person is a shareholder, partner or
beneficiary. An ISO must expire within ten years from the date of grant except
that the term of ISO that is granted to a Ten Percent Shareholder may not be
longer than five years. Moreover, no 1994 Participant may be granted ISO's or
related SARs (under all incentive stock option plans of the Company and its
Affiliates) which are first exercisable in any calendar year for shares having
an aggregate fair market value (determined as of the date of the ISO was
granted) that exceeds $100,000.
SARs. SARs entitle the 1994 Participant to receive a payment based on a
formula determined by the Administrator and set forth in an agreement with the
1994 Participant. In the absence of such a determination, the 1994 Participant
is entitled to receive the excess of the fair market value of a Common Share on
the date of exercise over the initial value of the SAR. The initial value of a
SAR that is granted independently of an option is the fair market value of a
Common Share on the date of grant. The amount payable upon the exercise of an
SAR may be paid in cash, Common Shares, or a combination of the two.
Restricted Share Awards. 1994 Participants also may be awarded Common
Shares pursuant to a restricted share award. A 1994 Participant's rights in a
restricted share award are nontransferable or forfeitable or both unless certain
conditions prescribed by the Administrator, in its discretion, are satisfied.
These conditions may include, for example, a requirement that the 1994
Participant continue employment with the Company for a specified period or that
the Company or the 1994 Participant achieve stated, performance-related
objectives such as earnings per share, fair market value and return on assets.
In cases where these conditions are performance-related, Common Shares subject
to a restricted share award do not vest sooner than one year after the date of
such award. In all other cases, vesting does not occur sooner than three years
after the award date.
Performance Share Awards. The 1994 Plan also provides for the award of
performance shares. A performance share award entitles the 1994 Participant to
receive a payment equal to the fair market value of a specified number of Common
Shares if certain standards are met. The Administrator prescribes the
requirements that must be satisfied before a performance share award is earned.
Those standards may be based on the fair market value of the Common Shares,
return on assets or earnings per share objectives. To the extent that
performance shares are earned, the obligation may be settled in cash, in Common
Shares, or by a combination of the two. No performance shares shall be earned
sooner than one year after the date the performance shares are awarded.
Share Authorization. A maximum of 800,000 Common Shares may be issued
under the 1994 Plan. The maximum aggregate number of Common Shares that may be
issued under the 1994 Plan pursuant to an award of restricted shares and in full
or partial settlement of an award of performance shares is 100,000 Common
69
<PAGE> 74
Shares. These share limitations and the terms of outstanding awards shall be
adjusted, as the Compensation Committee deems appropriate, in the event of a
share dividend, share split, combination, reclassification, recapitalization or
other similar event.
Termination and Amendment. No option or SAR may be granted and no
restricted shares or performance shares may be awarded under the 1994 Plan more
than ten years after the date that the 1994 Plan was adopted by the Board. The
Board may amend or terminate the 1994 Plan at any time, but an amendment will
not become effective without shareholder approval if the amendment changes the
eligibility requirements or increased the benefits that may be provided under
the 1994 Plan.
Awards. All awards made under the 1994 Plan are evidenced by written
agreements between the Company and the 1994 Plan Participant. In connection with
the IPO, the Compensation Committee approved the grant of an ISO covering
110,000 Common Shares and a nonqualified option covering 140,000 Common Shares
to Jeffrey H. Fisher. The ISO became exercisable for 10,000 shares on the date
of the IPO and the first anniversary of the IPO, and it will become exercisable
for 10,000 shares on the anniversary of the IPO in each of 1996 -- 2003 and on
January 1, 2004. The nonqualified option became exercisable for 28,000 shares on
the date of the IPO and the first anniversary of the IPO, and it will become
exercisable for 28,000 shares on the anniversary of the IPO in each of 1996
through 1998. Both the ISO and the nonqualified option are exercisable for ten
years from the date of grant at a price of $10.00 per share. In February 1996
the Compensation Committee approved the grant of a nonqualified option covering
156,000 shares to Mr. Fisher. The option is exercisable for 32,000 Common Shares
on the anniversary of the IPO in each of 1996 through 1998, and for 60,000
shares on the anniversary of the IPO in 1999. The nonqualified option is
exercisable for ten years from the date of grant at a price of $9.75 per share.
The Compensation Committee awarded a grant of an ISO covering 20,000 Common
Shares to Mr. Bulger in 1995. The ISO became exercisable annually with respect
to 5,000 Common Shares beginning on April 28, 1995 at an exercise price of
$8.875 per share, the fair market value on the date of the grant.
Federal Income Taxes. No income is recognized by a 1994 Participant at the
time an option is granted. If the option is an ISO, no income will be recognized
upon the 1994 Participant's exercise of the option. Income is recognized by a
1994 Participant when he disposes of shares acquired under an ISO. The exercise
of a nonqualified share option generally is a taxable event that requires the
1994 Participant to recognize, as ordinary income, the difference between the
shares' fair market value and the option price.
No income is recognized upon the grant of an SAR. The exercise of an SAR
generally is a taxable event. A 1994 Participant generally must recognize income
equal to any cash that is paid and the fair market value of Common Shares that
are received in settlement of an SAR.
A 1994 Participant will recognize income on account of a restricted share
award on the first day that the shares are either transferable or not subject to
a substantial risk of forfeiture. The amount of income recognized by the 1994
Participant is equal to the fair market value of the Common Shares received on
that date.
A 1994 Participant will recognize income on account of the settlement of a
performance share award. A 1994 Participant will recognize income equal to any
cash that is paid and the fair market value of Common Shares (on the date that
the shares are first transferable or not subject to a substantial risk of
forfeiture) that is received in settlement of the award.
The employer (either the Company or its affiliate) will be entitled to
claim a federal income tax deduction on account of the exercise of a
nonqualified option of an SAR, the vesting of a restricted share award and the
settlement of a performance share award. The amount of the deduction is equal to
the ordinary income recognized by the 1994 Participant. The employer will not be
entitled to a federal income tax deduction on account of the grant or the
exercise of an ISO. The employer may claim a federal income tax deduction on
account of certain dispositions of Common Shares acquired upon the exercise of
an ISO.
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<PAGE> 75
Shareholder Approval. The number of Common Shares which may be issued
under the 1994 Plan was increased from 500,000 Common Shares to 800,000 Common
Shares by vote of the shareholders at the 1996 annual meeting of shareholders.
THE TRUSTEES' PLAN
The Board of Trustees has also adopted the Trustees' Share Incentive Plan
(the "Trustees' Plan") to provide incentives to attract and retain Independent
Trustees.
Eligibility. The Trustees' Plan provides for the award of Common Shares
and the grant of options to purchase Common Shares to each eligible Trustee of
the Company. No Trustee who is an employee of the Company or an Affiliate is
eligible to participate in the Trustees' Plan.
Options. The Trustees' Plan provides that each eligible Trustee who was a
member of the Board on September 30, 1994 (the "First Award Date") was granted
an option covering 5,000 Common Shares (each such Trustee, a "Founding Trustee")
at an exercise price of $10.00. Options have been and will be granted to other
Trustees at the first Board meeting following the annual meeting of the
Company's shareholders at which they are first elected (the date of each such
Board meeting, an "Award Date") and will cover a number of Common Shares
determined in accordance with the following sentence. If an option is granted
(a) on the Award Date in 1995, such option covered 4,000 Common Shares; (b) on
the Award Date in 1996, such option covered 3,000 Common Shares; (c) on the
Award Date in 1997, such option shall cover 2,000 Common Shares; and (d) on the
Award Date in 1998, such option shall cover 1,000 Common Shares. The price per
Common Share purchased on the exercise of an option is the fair market value of
a Common Share on the date the option is granted. The exercise price may be paid
in cash, a cash equivalent acceptable to the Committee, Common Shares or a
combination thereof. Options issued under the Trustees' Plan are exercisable for
10 years from the date of grant. The share authorization, the terms of
outstanding options and the number of shares for which options will thereafter
be awarded shall be subject to adjustment in the event of a share dividend,
share split, combination, reclassification, recapitalization or other similar
event.
Exercise of Options. An option granted under the Trustees' Plan becomes
exercisable for 1,000 Common Shares on the first Award Date after the date on
which the option is granted, provided that the Trustee is then a member of the
Board, and for an additional 1,000 Common Shares subject to the option on each
successive Award Date on which the Trustee is a member of the Board. To the
extent that an option has become exercisable in accordance with the preceding
sentence, it may be exercised whether or not the Trustee is a member of the
Board on the date or dates of exercise. An option may be exercised with respect
to any number of whole shares less than the full number for which the option
could be exercised.
Shareholder Rights. A Trustee will have no rights as a shareholder with
respect to Common Shares subject to his or her option until the option is
exercised. A Trustee will have the right to vote all Common Shares awarded to
him under the Trustees' Plan and will receive all dividends paid with respect to
the shares, notwithstanding that a portion of the shares has not vested. Upon a
Trustee's ceasing to be a member of the Board, these rights will immediately
terminate with respect to any Common Shares not then vested.
Share Awards. Under the Trustees' Plan, each eligible Founding Trustee who
was a member of the Board on the First Award Date was awarded 7,500 Common
Shares on that date. Each eligible Trustee who is not a Founding Trustee or a
Reelected Trustee, as defined below, (a "Non-Founding Trustee") will receive, on
the first Award Date on which he is a member of the Board, a number of whole
Common Shares having a fair market value that as nearly as possible equals, but
does not exceed, $75,000. Any eligible Trustee who, during the term of the
Trustees' Plan, ceases to be a member of the Board but is subsequently reelected
to the Board (a "Reelected Trustee") will receive, on the first Award Date after
he is reelected to the Board, a number of Common Shares having a fair market
value on that date that as nearly as possible equals, but does not exceed, the
difference of (i) $75,000, minus (ii) the fair market value of any Common Shares
previously awarded to him under the Trustees' Plan that had vested prior to his
reelection. For purposes of the preceding sentence, the fair market value of the
previously awarded stock is determined as of the date such stock was awarded.
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<PAGE> 76
Vesting of Awards. A Trustee will be immediately and fully vested in 20%
of the Common Shares awarded to him under the Trustees' Plan. On the first Award
Date following the date on which a Trustee is awarded Common Shares, and on each
subsequent Award Date, an additional 20% of the shares issued to that Trustee
will become vested; provided, however, that if such subsequent Award Date falls
in 1994, no additional shares that were awarded as of the First Award Date shall
become vested on that date. Notwithstanding the foregoing, a Trustee is not a
member of the Board on any Award Date on which a portion of his shares otherwise
would become vested, no shares will vest on that date, and the Trustee will have
no further right in any Common Shares issued to him under the Trustees' Plan
that are not then vested.
Amendment and Termination. The Trustees' Plan provides that the Board may
amend or terminate the Plan, but the Plan may not be amended more than once
every six months other than to comport with changes in the Internal Revenue
Code, the Employee Retirement Income Security Act of 1974, or the rules
thereunder. An amendment will not become effective without shareholder approval
if the amendment changes the eligibility requirements or increases the benefits
that may be provided under the Trustees' Plan. No options for Common Shares may
be granted and no Common Shares will be awarded under the Trustees' Plan after
the Award Date in 1998.
THE LESSEE
GENERAL
The Lessee leases the Current Hotels and will lease the Acquisition Hotels
pursuant to the Percentage Leases. It is anticipated that the Lessee will lease
additional hotels acquired by the Company pursuant to similar percentage leases.
The Lessee employs approximately 900 people. The Company believes that the
quality of the on-site hotel operators is important to the future growth in
Percentage Lease revenue from the Hotels. Upon the closing of the Offering, the
Lessee will lease all of the Hotels pursuant to the Percentage Leases and will
operate 18 of the Hotels. Marriott will operate the nine Residence Inn
Acquisition Hotels pursuant to the Marriott Management Agreements. The Company
also expects that certain additional Residence Inn hotels that may be acquired
from Marriott in the future will be managed by Marriott, although no assurances
can be given in this regard. Marriott is the largest operator of extended-stay
hotels in the U.S., with 108 Residence Inn extended-stay hotels under management
as of August 9, 1996. The Company believes that Marriott's management of the
Company-owned Hotels will enable the Company to realize the benefits of
Marriott's resources and broad-based hotel operations experience in order to
enhance its ability to grow. TMH Hotels, Inc. ("TMH") operates five of the
Current Hotels. See "Business and Properties -- The Percentage Leases." The
Lessee is owned by Mr. Fisher, and Mr. Shaw, a Director and President of the
Lessee. Under the Percentage Leases, the Lessee generally is required to perform
all operational and management functions necessary to operate the Hotels. Such
functions include accounting, periodic reporting, ordering supplies, advertising
and marketing, maid service, laundry and maintenance. In addition to operating
18 of the Hotels following the closing of the Offering, the Lessee employs three
regional managers who will oversee the operation of all the Hotels, including
those managed by third-party operators. The regional managers will assist hotel
general managers and sales directors in developing and implementing sales and
marketing efforts. The Lessee is entitled to all gross revenue from the Hotels
after payment of Rent under the Percentage Leases and other operating expenses,
including any management fees payable to any third-party managers. The Lessee is
not required to devote all of its time and efforts to the Hotels. Mr. Fisher is
the majority shareholder and a director of the Lessee.
The Company must rely on the Lessee to generate sufficient cash flow from
the operation of the Hotels to enable the Lessee to pay the higher tier
Percentage Rent necessary for the Company to fund the distributions to holders
of the Common Shares. The obligations of the Lessee under the Percentage Leases
are unsecured. Other than working capital sufficient to operate the Hotels, the
Lessee has only nominal assets in addition to its rights and benefits under the
Percentage Leases.
MANAGEMENT TEAM
Certain information with respect to key personnel of the Lessee is set
forth below.
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Frederic M. Shaw (age 45) has been the President of the Lessee since its
formation in 1994. Since 1993 he has served as Vice President and Chief
Financial Officer of JF Hotel Management, Inc., an Affiliate of the Lessee. He
served as Controller of JF Hotel Management, Inc. from 1988 to 1993. Mr. Shaw is
also an owner of JF Atlanta. He holds a B.B.A. in public accounting from Pace
University and is a certified public accountant licensed in New York and
Florida.
John Langley (age 34) is the Director of Operations of the Lessee. Mr.
Langley has been employed since 1992 by JF Hotel Management, Inc., first as a
general manager, then as a regional manager of the northeast region and most
recently as Director of Operations. Mr. Langley has over 10 years of experience
in the hospitality industry. Prior to his association with JF Hotel Management,
Inc., Mr. Langley served as a general manager of several hotels for Prime Motor
Inns. He holds a B.A. from Villanova University.
Philip M. Cohen (age 40) is the Director of Human Resources of the Lessee.
Mr. Cohen has been employed by the Lessee since March of 1995. During the past
eight years he was the Director of Personnel for a publicly owned,
retail/service chain. Mr. Cohen was also an Human Resource Manager for a
franchised restaurant group. He has more than 15 years of human resource
management experience. Mr. Cohen has a B.A. in Business Administration from
Virginia Tech and an M.B.A. from Nova University with a specialty in Human
Resource Management.
Roger Pollak (age 35) is the Controller of the Lessee. He has been employed
by the Lessee since March of 1995. Mr. Pollak has over 11 years of accounting
experience. Prior to joining the Lessee he was the Controller at GES
International Inc., a wholesale distributor of consumer electronics in Ft.
Lauderdale, Florida. Mr. Pollak holds a B.S. in Accounting from the University
of Florida.
Angelo L. Celmo (age 42) is the regional manager for eight of the Hotels
and has worked for the Lessee since October 1995. Prior to joining the Lessee,
Mr. Celmo was a general manager of Residence Inn hotels for eight years. During
that time he received three Silver Hotel Awards, one Gold Hotel Award and was
named the Residence Inn hotels general manager of the year in 1993. In 1994, he
was one of eight general managers selected by Marriott to create a Quality
Service Delivery Program.
Tim Walker (age 36) is the regional manager for eight of the Hotels and has
worked for the Lessee since October 1995. Prior to joining the Lessee, Mr.
Walker was a general manager for two hotels operated by IMPAC Hotel Group. Mr.
Walker has more than 10 years experience in the hospitality industry and has a
degree in hotel management from Normandale Community College.
Walter Lowenburg (age 30) is the regional manager for seven of the Hotels
and has worked for the Lessee since November 1993. Prior to joining the Lessee,
Mr. Lowenburg was employed by Promus for 10 years where he held numerous
positions including quality assurance manager, operations manager and hotel
management system manager.
Randy Webb (age 37) is the Director of Marketing of the Lessee. He has been
employed by the Lessee since January 1996. Mr. Webb has been employed in various
capacities with Marriott, including General Manager and Manager of Field Sales.
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of September 30, 1996,
regarding (i) each person known to the Company to be the beneficial owner of
more than 5% of its Common Shares, (ii) each Trustee, (iii) each
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executive officer and (iv) all Trustees and executive officers as a group.
Unless otherwise indicated, such shares are owned directly and the indicated
person has sole voting and investment power.
<TABLE>
<CAPTION>
PERCENT OF CLASS(1)
AMOUNT AND NATURE ---------------------
OF BENEFICIAL BEFORE AFTER
BENEFICIAL OWNER OWNERSHIP OFFERING OFFERING
- ----------------------------------------------------- ----------------- -------- --------
<S> <C> <C> <C>
FMR Corp.(2)......................................... 1,403,200 13.0% 6.7%
82 Devonshire Street
Boston, Massachusetts 02109-3614
T. Rowe Price Associates, Inc.(3).................... 622,000 5.7% 3.0%
100 East Pratt Street
Baltimore, Maryland 21202
Jack P. DeBoer....................................... 2,604,896(4) -- 11.1%
9342 East Central
Wichita, Kansas 67206
Jeffrey H. Fisher.................................... 623,635(5) 4.62% 2.9%
David Bulger......................................... 10,000(6) * *
Miles Berger......................................... 9,500(7) * *
C. Gerald Goldsmith.................................. 9,500(7) * *
Bruce Zenkel......................................... 19,500(7) * *
All Trustees and executive officers as a group (8 3,277,031(4)(5)(6)(7) 5.9% 13.7%
persons)...........................................
</TABLE>
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* Represents less than 1% of the outstanding Common Shares.
(1) For each named person, assumes that all Units held by the named beneficial
owner are redeemed for Common Shares and that the named beneficial owner
exercised all options held by it which are currently exercisable or which
become exercisable on or before December 1, 1996. The total number of
Common Shares used in calculating the percent of class owned by each named
person assumes that none of the Units held by other persons are redeemed
for Common Shares and that none of the options held by other persons are
exercised. Outstanding Units generally are redeemable by the limited
partners (in some cases after a specified holding period which has not yet
expired) on a one-for-one basis for Common Shares or, if the redeeming
limited partner would then be deemed to own in excess of 9.8% of the
outstanding Common Shares or otherwise at the election of the Company, cash
in an equivalent value (the "Redemption Rights").
(2) Based on information contained in a Schedule 13G dated November 8, 1995, and
jointly filed by FMR Corp., Edward C. Johnson 3d, Fidelity Management &
Research Company and Fidelity Real Estate Investment Portfolio with the SEC
with respect to shares owned by various mutual funds and accounts advised
by the filers or their affiliates.
(3) Based on information contained in a Schedule 13G dated February 14, 1996,
and jointly filed by T. Rowe Price Associates, Inc. and T. Rowe Price Small
Cap Value Fund, Inc. with the SEC.
(4) Includes approximately 2,598,000 Common Shares issuable to Mr. DeBoer upon
the exercise of Redemption Rights pursuant to Preferred Units to be issued
to Mr. DeBoer as a portion of the purchase price of the DeBoer Hotels. Mr.
DeBoer is a Proposed Trustee and prior to the Offering he did not own any
Common Shares. Also includes 6,896 restricted Common Shares issued to Mr.
DeBoer under the Trustees' Plan, 1,348 of which vested immediately upon
grant.
(5) Includes 80,050 Common Shares owned by JF Hotel, Inc., in which Mr. Fisher
owns 80% of the capital stock. Mr. Fisher disclaims beneficial ownership of
16,010 of the Common Shares owned by JF Hotel, Inc. Also includes Common
Shares issuable to Mr. Fisher and his affiliates upon exercise of
Redemption Rights. Mr. Fisher owns 348,289 Units directly. Affiliates of
Mr. Fisher own 65,306 Units. Also includes 146,000 Common Shares issuable
to Mr. Fisher upon the exercise of options granted to Mr. Fisher under the
1994 Plan. Does not include 260,000 Common Shares issuable to Mr. Fisher
upon the exercise of additional options granted to Mr. Fisher under the
1994 Plan, 210,000 of which vest at the rate of 70,000
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shares in September of each of 1997, 1998 and 1999, and 50,000 of which
vest at the rate of 10,000 shares per year in September of each the years
between 2000 through 2003 and on January 1, 2004.
(6) Includes 10,000 Common Shares issuable to Mr. Bulger upon the exercise of
options granted to Mr. Bulger under the 1994 Plan. Does not include 10,000
Common Shares issuable to Mr. Bulger upon the exercise of additional
options granted to Mr. Bulger under the 1994 Plan, which vest at the rate
of 5,000 shares per year in each of 1997 and 1998.
(7) Includes 7,500 restricted Common Shares issued to each non-employee Trustee
under the Trustees' Plan. 1,500 Common Shares vested with each non-employee
trustee in each of 1994 and 1995 and the remainder will vest at the rate of
1,500 shares in each of 1996-1998. Each non-employee Trustee will be
entitled to vote and receive dividends paid on such Common Shares prior to
vesting. Also includes 2,000 Common Shares issuable to each non-employee
Trustee upon the exercise of options granted under the Trustees' Plan,
1,000 of which vested in April 1995 and 1,000 of which vested in May 1996.
Does not include 3,000 Common Shares issuable to each non-employee Trustee
upon the exercise of options granted to each non-employee Trustee under the
Trustees' Plan, which vest at the rate of 1,000 Common Shares on the date
of the date of the first board meeting following the shareholders' meetings
in each the years between 1997 through 1999. Any Common Shares or options
described above which have not vested when a Trustee ceases to be a Trustee
will be forfeited.
SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have outstanding (or
reserved for issuance upon redemption of Units and Preferred Units) 25,813,743
Common Shares. The Common Shares issued in the Offering will be freely tradeable
by persons other than "Affiliates" of the Company without restriction under the
Securities Act of 1933, as amended (the "Securities Act"), subject to certain
limitations on ownership set forth in the Declaration of Trust.
Pursuant to the Partnership Agreement and the Redemption Agreements, the
Limited Partners (other than the Company) have Redemption Rights, which enable
them to cause the Company to redeem their Units and Preferred Units in exchange
for cash (or, at the election of the Company, Common Shares on a one-for-one
basis). The Redemption Rights may be exercised with respect to the Units issued
to TMH in connection with the Partnership's acquisition of the Residence
Inn-Windsor hotel from TMH Windsor Limited Partnership (such Units, the "Windsor
Units") at any time after October 6, 1997. Pursuant to the Redemption Agreement
with the DeBoer Group, the Preferred Units issuable in connection with the
Company's acquisition of the DeBoer Hotels are redeemable at any time after the
second anniversary of the closing of the acquisition of the DeBoer Hotels;
provided, that the number of Preferred Units (or Units issuable upon exercise of
the Preferred Conversion Right) redeemed by the DeBoer Group in any fiscal
quarter may not exceed 2.5% of the then outstanding Units. Pursuant to the
Redemption Agreement with Marriott, the Marriott Units issuable in connection
with the Company's acquisition of the Residence Inn-Portland, Maine hotel and
the Release Units issuable in connection with the Company's acquisition of the
DeBoer Hotels are redeemable at any time after the first anniversary of the
issuance of such Units.
Common Shares issued to holders of Units upon exercise of the Redemption
Rights will be "restricted" securities under the meaning of Rule 144 promulgated
under the Securities Act ("Rule 144") and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including exemptions contained in Rule 144. As described below, the
Company has granted certain holders registration rights with respect to their
Common Shares.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
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information about the Company. If three years have elapsed since the date of
acquisition of restricted shares from the Company or from any Affiliate of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an Affiliate of the Company at any time during the three months preceding a
sale, such person would be entitled to sell such shares in the public market
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
The Company has filed a registration statement with the Commission for the
purpose of registering the sale of shares of 658,717 Common Shares issuable upon
redemption of Units issued in connection with the IPO (the "Original Units").
The Company has agreed to file, as soon as practicable after October 6, 1997, a
registration statement with the Commission for the purpose of registering the
sale of approximately 91,991 Common Shares issuable upon redemption of the
Windsor Units. The Company has agreed to file, as soon as practicable after the
second anniversary of the closing of the acquisition of the DeBoer Hotels, a
registration statement with the Commission for the purpose of registering the
sale of approximately 4,112,727 Common Shares issuable upon redemption of the
Preferred Units. The Company has agreed to file, as soon as practicable after
the first anniversary of the closing of the Residence Inn-Portland, Maine hotel
a registration statement with the Commission for the purpose of registering the
sale of approximately 124,966 Common Shares (based upon the redemption of the
Marriott Units and the Release Units at the Offering Price) issuable upon
redemption of the Marriott Units and the Release Units. The Company will use its
best efforts to have the registration statements declared effective and to keep
them effective for a period of two years. Upon effectiveness of such
registration statements, those persons who receive Common Shares upon redemption
of the applicable Units may sell such shares in the secondary market without
being subject to the volume limitations or other requirements of Rule 144. The
Company will bear expenses incident to its registration requirements, except
that such expenses shall not include any underwriting discounts or commissions,
Securities and Exchange Commission or state securities registration fees,
transfer taxes or certain other fees or taxes relating to such shares.
Registration rights may be granted to future sellers of hotels to the Company
who elect to receive, in lieu of cash, Common Shares, Units, or securities
convertible into Common Shares.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Shares, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Shares. See "Risk Factors -- Adverse
Effect of Shares Available for Future Issuance and Sale on Market Price of
Common Shares" and "Partnership Agreement -- Transferability of Interests."
For a description of certain restrictions on transfers of Common Shares
held by certain shareholders of the Company, see "Underwriting."
PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus, is qualified
in its entirety by reference to the Partnership Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
MANAGEMENT
The Partnership has been organized as a Virginia limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the Partnership
Agreement, Innkeepers Financial Corporation, as the sole general partner of the
Partnership (in such capacity, the "General Partner"), has full, exclusive and
complete responsibility and discretion in the management and control of the
Partnership, and the Limited Partners have no authority in their capacity as
Limited Partners to transact business for, or participate in the management
activities or decisions of, the Partnership except as required by applicable
law. However, any amendment to the Partnership Agreement that would affect the
Redemption Rights would require the consent of Limited Partners (other than the
General Partner) holding more than two-thirds of the Units held by such
partners. Any amendment to the Partnership Agreement that would (i) affect the
liquidation preference or preferred distributions with respect to the Preferred
Units or (ii) affect the Preferred Conversion Right would
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<PAGE> 81
require the consent of the Limited Partners holding more than two-thirds of the
Preferred Units held by such partners. Any amendment that would (i) adversely
affect the Limited Partners' rights to receive cash distributions, (ii) alter
the Partnership's allocations of income or loss, or (iii) impose on the Limited
Partners any obligations to make additional contributions to the capital of the
Partnership, would require the consent of Limited Partners (other than the
General Partner) holding more than two-thirds of the Units held by each such
class of Limited Partners adversely affected by such amendment.
TRANSFERABILITY OF INTERESTS
The General Partner may not voluntarily withdraw from the Partnership or
transfer or assign its interest in the Partnership unless the transaction in
which such withdrawal or transfer occurs results in the Limited Partners
receiving property in an amount equal to the amount they would have received had
they exercised their Redemption Rights immediately prior to such transaction, or
unless the successor to the General Partner contributes substantially all of its
assets to the Partnership in return for an interest in the Partnership. With
certain limited exceptions, the Limited Partners may not transfer their
interests in the Partnership, in whole or in part, without the written consent
of the General Partner, which consent the General Partner may withhold in its
sole discretion. The General Partner may not consent to any transfer that would
cause the Partnership to be treated as a corporation for federal income tax
purposes.
CAPITAL CONTRIBUTION
The Company will contribute to the General Partner, and the General Partner
will contribute to the Partnership, substantially all of the net proceeds of the
Offering in exchange for the issuance to the General Partner of 10,000,000 Units
to be held by the General Partner. Although the Partnership will receive the net
proceeds of the Offering, the General Partner will be deemed to have made a
capital contribution to the Partnership in the amount of the gross proceeds of
the Offering and the Partnership will be deemed simultaneously to have paid the
underwriter's discount and other expenses paid or incurred in connection with
the Offering. The Partnership Agreement provides that if the Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Partnership from borrowing or capital contributions, the
General Partner or the Company may borrow such funds from a financial
institution or other lender and lend such funds to the Partnership on the same
terms and conditions as are applicable to the General Partner's or the
Company's, as applicable, borrowing of such funds. Moreover, the General Partner
is authorized to cause the Partnership to issue partnership interests for less
than fair market value if the Company (i) has concluded in good faith that such
issuance is in the best interests of the Company and the Partnership and (ii)
the General Partner makes a capital contribution in an amount equal to the
proceeds of such issuance. Under the Partnership Agreement, the General Partner
generally is obligated to contribute the proceeds of a share offering by the
Company as additional capital to the Partnership. Upon such contribution, the
General Partner will receive additional Units and the General Partner's
percentage interest in the Partnership will be increased on a proportionate
basis based upon the amount of such additional capital contributions.
Conversely, the percentage interests of the Limited Partners will be decreased
on a proportionate basis in the event of additional capital contributions by the
General Partner. In addition, if the General Partner contributes additional
capital to the Partnership, the General Partner will revalue the property of the
Partnership to its fair market value (as determined by the General Partner) and
the capital accounts of the partners will be adjusted to reflect the manner in
which the unrealized gain or loss inherent in such property (that has not been
reflected in the capital accounts previously) would be allocated among the
partners under the terms of the Partnership Agreement if there were a taxable
disposition of such property for such fair market value on the date of the
revaluation.
REDEMPTION RIGHTS
Pursuant to the Partnership Agreement and the Redemption Agreements, the
Limited Partners have Redemption Rights, which will enable them to cause the
Partnership to redeem their interests in the Partnership in exchange for cash
or, at the election of the General Partner, Common Shares on a one-for-one
basis, provided, that the Marriott Units are redeemable for a per Unit price
equal to the greater of the Offering Price or the market price of the Common
Shares on the redemption date, payable in cash or, at the option of
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<PAGE> 82
the Company, Common Shares with an equivalent value. The redemption price will
be paid in cash in the event that the issuance of Common Shares to the redeeming
Limited Partner would (i) result in any person owning, directly or indirectly,
Common Shares in excess of the Ownership Limitation, (ii) result in shares of
beneficial interest of the Company being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of Section 856(h) of the Code,
(iv) cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, or (v) cause
the acquisition of Common Shares by such redeeming Limited Partner to be
"integrated" with any other distribution of shares of Common Stock for purposes
of complying with the Securities Act. The Redemption Rights may be exercised by
the Limited Partners (i) with respect to the Original Units at any time after
September 30, 1995, (ii) with respect to the Windsor Units, after October 6,
1997, (iii) with respect to the Preferred Units, after the second anniversary of
the closing of the DeBoer Hotels, and (iv) with respect to the Marriott Units
and the Release Units after the first anniversary of the closing of the
Residence Inn-Portland, Maine hotel provided that not more than two redemptions
may occur during each calendar year and each Limited Partner may not exercise
the Redemption Right for less than 1,000 Units or, if such Limited Partner holds
less than 1,000 Units, all of the Units held by such Limited Partner; and
provided further, that the number of Preferred Units (or Units issuable upon
exercise of the Preferred Conversion Right) redeemed by the DeBoer Group in any
fiscal quarter may not exceed 2.5% of the then outstanding Units. After the
closing of the Acquisition Hotels, the aggregate number of shares issuable upon
exercise of the Redemption Rights will be approximately 4,984,590. The number of
Common Shares issuable upon exercise of the Redemption Rights will be adjusted
upon the occurrence of share splits, mergers, consolidations or similar pro rata
share transactions, which otherwise would have the effect of diluting the
ownership interests of the Limited Partners or the shareholders of the Company.
REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Available for Future Sale."
OPERATIONS
The Partnership Agreement requires that the Partnership be operated in a
manner that will enable the Company to satisfy the requirements for being
classified as a REIT, to avoid any federal income or excise tax liability
imposed by the Code, and to ensure that the Partnership will not be classified
as a "publicly traded partnership" for purposes of section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Partnership, the Partnership will pay all administrative costs and
expenses of the Company and the General Partner (collectively, the "Company
Expenses") and the Company Expenses will be treated as expenses of the
Partnership. The Company Expenses generally will include (i) all expenses
relating to the continuity of existence of the Company and the General Partner,
(ii) all expenses relating to the public offering and registration of securities
by the Company, (iii) all expenses associated with the preparation and filing of
any periodic reports by the Company under federal, state or local laws or
regulations, (iv) all expenses associated with compliance by the Company and the
General Partner with laws, rules and regulations promulgated by any regulatory
body, and (v) all other operating or administrative costs of the General Partner
incurred in the ordinary course of its business on behalf of the Partnership.
The Company Expenses, however, will not include any administrative and operating
costs and expenses incurred by the Company that are attributable to hotel
properties or partnership interests in the Subsidiary Partnerships owned by the
Company directly. The Company currently does not have any such properties.
DISTRIBUTIONS
The Partnership Agreement provides that the Partnership shall distribute
cash from operations (including net sale or refinancing proceeds, but excluding
net proceeds from the sale of the Partnership's property in
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connection with the liquidation of the Partnership) on a quarterly (or, at the
election of the General Partner, more frequent) basis, in amounts determined by
the General Partner in its sole discretion, to the partners in accordance with
the provisions of the Partnership Agreement. Upon liquidation of the
Partnership, after payment of, or adequate provision for, debts and obligations
of the Partnership, including any partner loans, any remaining assets of the
Partnership will be distributed to all partners with positive capital accounts
in accordance with the provisions of the Partnership Agreement. If the Company
has a negative balance in its capital account following a liquidation of the
Partnership, it will be obligated to contribute cash to the Partnership equal to
the negative balance in its capital account.
ALLOCATIONS
Income, gain and loss of the Partnership for each fiscal year is allocated
among the partners in accordance with the provisions of the Partnership
Agreement, subject to compliance with the provisions of Code sections 704(b) and
704(c) and Treasury Regulations promulgated thereunder.
TERM
The Partnership shall continue until December 31, 2050, or until sooner
dissolved upon (i) the bankruptcy, dissolution or withdrawal of the General
Partner (unless the Limited Partners elect to continue the Partnership), (ii)
the sale or other disposition of all or substantially all the assets of the
Partnership, (iii) the redemption of all limited partnership interests in the
Partnership (other than those held by the Company, if any), or (iv) the election
by the General Partner.
TAX MATTERS
Pursuant to the Partnership Agreement, the General Partner is the tax
matters partner of the Partnership and, as such, has authority to handle tax
audits and to make tax elections under the Code on behalf of the Partnership.
PREFERRED UNITS
In connection with the acquisition of the DeBoer Hotels, the Partnership
has agreed to issue 4,112,727 Preferred Units to the DeBoer Group. The Preferred
Units have a liquidation preference of $11.00 per Preferred Unit and are
convertible at any time into Units on a one-for-one basis. Annual distributions
of $1.10 are payable on each Preferred Unit, subject to increase to $1.155 for
each Preferred Unit based on increases in the annual dividends payable on the
Common Shares. On or after the second anniversary of issuance, the Preferred
Units are redeemable for cash, or, at the option of the Company, Common Shares
on a one-for-one basis. So long as any Preferred Units remain outstanding, the
Partnership is prohibited from issuing Units with income, distribution or
liquidation rights that are superior to or equal to the income, distribution or
liquidation rights of the Preferred Units unless immediately after such issuance
(i) the value of all of the outstanding superior Units would not exceed 18.7% of
the value of all Units outstanding and (ii) the value of all outstanding
superior and equal Units would not exceed (A) 22% of the value of all
outstanding Units plus (B) the aggregate value of the Preferred Units at
issuance and minus (C) the value of the remaining outstanding Preferred Units.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Shares in the Company.
Hunton & Williams has acted as counsel to the Company and has reviewed this
summary and is of the opinion that it fairly summarizes the federal income tax
considerations that are material to a holder of the Common Shares. The
discussion contained herein does not address all aspects of taxation that may be
relevant to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) subject to special treatment under the federal income tax laws.
The statements in this discussion and the opinion of Hunton & Williams are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code,
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the legislative history of the Code, existing administrative rulings and
practices of the Service, and judicial decisions. No assurance can be given that
future legislative, judicial, or administrative actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company revoked its election to be taxed as a pass-through entity under
Subchapter S of the Code on the day prior to the closing of the IPO. The Company
elected to be taxed as a REIT under Sections 856 through 860 of the Code,
effective for its short taxable year beginning on the date of revocation of its
S election and ending on December 31, 1994. The Company believes that,
commencing with such taxable year, it has been organized and has operated in
such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that the Company will operate in a manner so as to qualify or remain
qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retrospectively.
Hunton & Williams has acted as counsel to the Company in connection with
the IPO, the Follow-on Offering, the Offering and the Company's election to be
taxed as a REIT. In the opinion of Hunton & Williams, the Company qualified to
be taxed as a REIT for its taxable years ending December 31, 1994 and December
31, 1995, and the Company's organization and current and proposed method of
operation will enable it to continue to qualify as a REIT for its taxable year
ended December 31, 1996, and in the future. Investors should be aware, however,
that opinions of counsel are not binding upon the Service or any court. It must
be emphasized that Hunton & Williams' opinion is based on various assumptions
and is conditioned upon certain representations made by the Company as to
factual matters, including representations regarding the nature of the Company's
properties, the Percentage Leases, and the future conduct of its business. Such
factual assumptions and representations are described below in this discussion
of "Federal Income Tax Considerations" and are set out in the federal income tax
opinion that will be delivered by Hunton & Williams at the closing of the
Offering. Moreover, such qualification and taxation as a REIT depends upon the
Company's ability to meet on a continuing basis, through actual annual operating
results, distribution levels, and share ownership, the various qualification
tests imposed under the Code discussed below. Hunton & Williams will not review
the Company's compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that the actual results of the Company's operation for
any particular taxable year will satisfy such requirements. For a discussion of
the tax consequences of failure to qualify as a REIT, see "Federal Income Tax
Considerations -- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder levels)
that generally results from investment in a corporation. However, the Company
will be subject to federal income tax in the following circumstances. First, the
Company will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the "alternative minimum tax" on
its items of tax preference, if any. Third, if the Company has (i) net income
from the sale or other disposition of "foreclosure property" that is held
primarily
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for sale to customers in the ordinary course of business, or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the 75% or
95% gross income test. Sixth, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if the Company acquires any asset from a
C corporation (i.e., a corporation generally subject to full corporate-level
tax) in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other asset) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the 10-year period beginning on the date on which such asset
was acquired by the Company, then to the extent of such asset's "built-in-gain"
(i.e., the excess of the fair market value of such asset at the time of
acquisition by the Company over the adjusted basis in such asset at such time),
such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in-gain" assume that the Company would make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and to maintain REIT status; (viii) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements of
the Code and Treasury Regulations promulgated thereunder; and (ix) that meets
certain other tests, described below, regarding the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months. For purposes of determining stock
ownership under the 5/50 Rule, a supplemental unemployment compensation benefits
plan, a private foundation, or a portion of a trust permanently set aside or
used exclusively for charitable purposes generally is considered an individual.
A trust that is a qualified trust under Code section 401(a), however, generally
is not considered an individual and beneficiaries of such trust are treated as
holding shares of a REIT in proportion to their actuarial interests in such
trust for purposes of the 5/50 Rule.
The Company has issued sufficient Common Shares with sufficient diversity
of ownership to allow it to satisfy requirements (v) and (vi) above. In
addition, the Company's Declaration of Trust provides for restrictions regarding
transfer of the Common Shares that are intended to assist the Company in
continuing to satisfy the share ownership requirements described in (v) and (vi)
above.
The Company currently has two corporate subsidiaries and may have
additional corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" shall not be treated as
a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of
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the REIT. A "qualified REIT subsidiary" is a corporation, all of the capital
stock of which has been held by the REIT at all times during the period such
corporation was in existence. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" acquired or formed by the Company will
be ignored, and all assets, liabilities, and items of income, deduction, and
credit of such subsidiaries will be treated as assets, liabilities and items of
income, deduction, and credit of the Company. The Company's current subsidiaries
are "qualified REIT subsidiaries." The Company's subsidiaries, therefore, will
not be subject to federal corporate income taxation, although they may be
subject to state and local taxes.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests, described below. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Partnership and the
Subsidiary Partnerships will be treated as assets, liabilities and items of
income of the Company for purposes of applying the requirements described
herein.
Income Tests
In order for the Company to maintain its qualification as a REIT, three
requirements relating to the Company's gross income must be satisfied annually.
First, at least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of defined types of
income derived directly or indirectly from investments relating to real property
or mortgages on real property (including "rents from real property" and, in
certain circumstances, interest) or temporary investment income. Second, at
least 95% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from such real property or
temporary investments, and from dividends, other types of interest, and gain
from the sale or disposition of stock or securities, or from any combination of
the foregoing. Third, not more than 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year may be gain
from the sale or other disposition of (i) stock or securities held for less than
one year, (ii) dealer property that is not foreclosure property, and (iii)
certain real property held for less than four years (apart from involuntary
conversions and sales of foreclosure property). The specific application of
these tests to the Company is discussed below.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the Company, or a direct or indirect owner of 10% or more of the
Company, directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, for rents
received to qualify as "rents from real property," the Company generally must
not operate or manage the property or furnish or render services to the tenants
of such property, other than through an "independent contractor" who is
adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant."
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Pursuant to the Percentage Leases, the Lessee leases from the Partnership
and the applicable Subsidiary Partnership the land, buildings, improvements,
furnishings and equipment comprising each Current Hotel for a 10-year period.
The Percentage Leases provide that the Lessee is obligated to pay to the
Partnership or the applicable Subsidiary Partnership (i) the greater of the Base
Rent or the Percentage Rent (collectively, the "Rents"), and (ii) certain other
Additional Charges. The Percentage Rent is calculated by multiplying fixed
percentages by room revenues for each of the Current Hotels in excess of certain
levels. Both the Base Rent and the threshold room revenue amount in each
Percentage Rent formula will be adjusted for inflation. The adjustment will be
calculated at the beginning of each calendar year based on the change in the CPI
during the prior calendar year. The Base Rent accrues and is required to be paid
monthly and the Percentage Rent (if any) accrues and is required to be paid
either monthly or quarterly, depending on the Hotel. The Partnership or a
Subsidiary Partnership, as applicable, plans to enter into a lease with the
Lessee with respect to each Acquisition Hotel that is substantially similar to
the Percentage Leases (an "Acquisition Lease"). For purposes of this section
entitled "Federal Income Tax Considerations," the term "Percentage Leases"
includes the Acquisition Leases and assumes that the terms of the Acquisition
Leases are substantially similar to the terms of the existing Percentage Leases.
In order for the Base Rent, the Percentage Rent and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement, (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the risk
of damage to the property) or the potential for economic gain (e.g.
appreciation) with respect to the property.
In addition, Code section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a lease
of property if the contract is properly treated as such, taking into account all
relevant factors, including whether or not: (i) the service recipient is in
physical possession of the property, (ii) the service recipient controls the
property, (iii) the service recipient has a significant economic or possessory
interest in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in value,
the recipient shares in any appreciation in the value of the property, the
recipient shares in savings in the property's operating costs, or the recipient
bears the risk of damage to or loss of the property), (iv) the service provider
does not bear any risk of substantially diminished receipts or substantially
increased expenditures if there is nonperformance under the contract, (v) the
service provider does not use the property concurrently to provide significant
services to entities unrelated to the service recipient, and (vi) the total
contract price does not substantially exceed the rental value of the property
for the contract period. Since the determination whether a service contract
should be treated as a lease is inherently factual, the presence or absence of
any single factor may not be dispositive in every case.
Hunton & Williams is of the opinion that the Percentage Leases will be
treated as true leases for federal income tax purposes. Such opinion is based,
in part, on the following facts: (i) the Partnership or a Subsidiary
Partnership, as applicable, and the Lessee intend for their relationship to be
that of a lessor and lessee and such relationship is documented by lease
agreements, (ii) the Lessee has the right to exclusive possession and use and
quiet enjoyment of the Hotels during the term of the Percentage Leases, (iii)
the Lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the Hotels, other than the cost of certain capital
expenditures, and dictates how the Hotels are operated, maintained, and
improved, (iv) the Lessee bears all of the costs and expenses of operating the
Hotels (including the cost of any inventory used in their operation) during the
term of the Percentage Leases (other than real and personal property taxes,
ground lease rent (where applicable), property and casualty insurance premiums
and the cost of certain furniture, fixtures and equipment, and certain capital
expenditures), (v) the Lessee benefits from any savings in the
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costs of operating the Hotels during the term of the Percentage Leases, (vi) in
the event of damage or destruction to a Hotel, the Lessee is at economic risk
because it will be obligated either (A) to restore the property to its prior
condition, in which event it will bear all costs of such restoration in excess
of any insurance proceeds or (B) to purchase the Hotel for an amount generally
equal to the fair market value of the Hotel, less any insurance proceeds, (vii)
the Lessee has indemnified the Partnership against all liabilities imposed on
the Partnership during the term of the Percentage Leases by reason of (A) injury
to persons or damage to property occurring at the Hotels or (B) the Lessee's
use, management, maintenance or repair of the Hotels, (viii) the Lessee is
obligated to pay substantial fixed rent for the period of use of the Hotels, and
(ix) the Lessee stands to incur substantial losses (or reap substantial gains)
depending on how successfully it operates the Hotels.
Investors should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of Hunton & Williams with respect to the relationship between the
Partnership or a Subsidiary Partnership, as applicable, and the Lessee is based
upon all of the facts and circumstances and upon rulings and judicial decisions
involving situations that are considered to be analogous. Opinions of counsel
are not binding upon the Service or any court, and there can be no complete
assurance that the Service will not assert successfully a contrary position. If
the Percentage Leases are recharacterized as service contracts or partnership
agreements, rather than true leases, part or all of the payments that the
Partnership or a Subsidiary Partnership receives from the Lessee may not be
considered rent or may not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or 95% gross income tests and, as a
result, would lose its REIT status.
In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising a Hotel must not be greater than 15% of the Rents
received under the applicable Percentage Lease. The Rents attributable to the
personal property in a Hotel is the amount that bears the same ratio to total
rent for the taxable year as the average of the adjusted bases of the personal
property in the Hotel at the beginning and at the end of the taxable year bears
to the average of the aggregate adjusted bases of both the real and personal
property comprising the Hotel at the beginning and at the end of such taxable
year (the "Adjusted Basis Ratio"). With respect to certain Acquisition Hotels
that the Partnership will acquire in exchange for Preferred Units, the initial
adjusted basis of the personal property in such Acquisition Hotels will be
greater than 15% of the initial adjusted bases of both the real and personal
property comprising such Acquisition Hotels. As a consequence, a portion of the
revenues derived under the Percentage Leases applicable to such Acquisition
Hotels (the portion attributable to the personal property) will not be
considered as "rents from real property." The amount of the anticipated
disqualified income under such Percentage Leases, however, will not prevent the
Company from qualifying as a REIT or subject it to any federal income taxation.
With respect to each other Hotel that the Partnership has acquired or will
acquire partially or wholly in exchange for Units, the initial adjusted basis of
the personal property in such Hotel is or will be less than 15% of the initial
adjusted bases of both the real and personal property comprising such Hotel. The
Company obtained or will obtain appraisals of the personal property at each
Hotel that the Partnership acquired or will acquire partially or wholly in
exchange for cash indicating that the appraised value of the personal property
at such hotel is less than 15% of the purchase price of such hotel. If the
Adjusted Basis Ratio with respect to any Hotel exceeds 15% and the income
attributable to excess personal property would prevent the Company from
qualifying as a REIT or would subject it to any federal income taxation, a
portion of the personal property at that Hotel will be acquired or leased (other
than from the Company or the Partnership) by the Lessee and the lease payments
under the Percentage Lease will be adjusted appropriately. Further, the Company
anticipates that any additional personal property that the Partnership or a
Subsidiary Partnership acquires with a portion of the proceeds of the Offering
will not cause the Company to lose its REIT status or subject it to any federal
income taxation. There can be no assurance, however, that the Service would not
assert that the personal property acquired by the Partnership or a Subsidiary
Partnership had a value in excess of the appraised value, or that a court would
not uphold such assertion. If such a challenge were successfully asserted, the
Adjusted Basis Ratio could exceed 15% with respect to one or more of the
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Hotels, which in turn potentially could cause the Company to fail to satisfy the
95% or 75% gross income test and thus lose its REIT status.
Another requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages (i) are fixed at the time the Percentage Leases are entered
into, (ii) are not renegotiated during the term of the Percentage Leases in a
manner that has the effect of basing Percentage Rent on income or profits, and
(iii) conform with normal business practice. More generally, the Percentage Rent
will not qualify as "rents from real property" if, considering the Percentage
Leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice, but is in reality used as a means of basing the
Percentage Rent on income or profits. Since the Percentage Rent is based on
fixed percentages of the gross revenues from the Hotels that are established in
the Percentage Leases, and the Company has represented that the percentages (i)
will not be renegotiated during the terms of the Percentage Leases in a manner
that has the effect of basing the Percentage Rent on income or profits and (ii)
conform with normal business practice, the Percentage Rent should not be
considered based in whole or in part on the income or profits of any person.
Furthermore, the Company has represented that, with respect to other hotels that
it acquires in the future, it will not charge rent for any property that is
based in whole or in part on the income or profits of any person (except by
reason of being based on a fixed percentage of gross revenues, as described
above).
A third requirement for qualification of the Rents as "rents from real
property" is that the Company must not own, actually or constructively, 10% or
more of the Lessee. The constructive ownership rules generally provide that, if
10% or more in value of the shares of the Company are owned, directly or
indirectly, by or for any person, the Company is considered as owning the shares
owned, directly or indirectly, by or for such person. The Company does not own
directly any stock of the Lessee. The Limited Partners of the Partnership,
including Mr. Fisher, who is the majority shareholder in the Lessee, may acquire
Common Shares by exercising their Redemption Rights. The Partnership Agreement,
however, provides that a redeeming Limited Partner will receive cash, rather
than Common Shares, at the election of the Company or if the acquisition of
Common Shares by such partner would cause the Company to own, actually or
constructively, 10% or more of the ownership interest, in a tenant of the
Company's or the Partnership's real property, within the meaning of section
856(d)(2)(B) of the Code. The Declaration of Trust likewise prohibits a
shareholder of the Company from owning Common Shares that would cause the
Company to own, actually or constructively, 10% or more of the ownership
interests in a tenant of the Company's or the Partnership's real property,
within the meaning of section 856(d)(2)(B) of the Code. Thus, the Company should
never own, actually or constructively, 10% or more of the Lessee. Furthermore,
the Company has represented that, with respect to other hotels that it acquires
in the future, it will not rent any property to a Related Party Tenant. However,
because the Code's constructive ownership rules for purposes of the Related
Party Tenant rules are broad and it is not possible to monitor continually
direct and indirect transfers of Common Shares, no absolute assurance can be
given that such transfers or other events of which the Company has no knowledge
will not cause the Company to own constructively 10% or more of the Lessee at
some future date.
A fourth requirement for qualification of the Rents as "rents from real
property" is that the Company cannot furnish or render noncustomary services to
the tenants of the Hotels, or manage or operate the Hotels, other than through
an independent contractor who is adequately compensated and from whom the
Company itself does not derive or receive any income. Provided that the
Percentage Leases are respected as true leases, the Company should satisfy that
requirement because the Partnership and the Subsidiary Partnerships are not
performing any services other than customary ones for the Lessee. Furthermore,
the Company has represented that, with respect to other hotels that it acquires
in the future, it will not perform noncustomary services with respect to the
tenant of the property. As described above, however, if the Percentage Leases
are recharacterized as service contracts or partnership agreements, the Rents
likely would be disqualified as "rents from real property" because the Company
would be considered to furnish or render services to the occupants of the Hotels
and to manage or operate the Hotels other than through an independent contractor
who is adequately compensated and from whom the Company derives or receives no
income.
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If the Rents do not qualify as "rents from real property" because the rents
attributable to personal property exceed 15% of the total Rents for a taxable
year, the portion of the Rents that is attributable to personal property will
not be qualifying income for purposes of the gross income tests. Thus, if the
Rents attributable to personal property, plus any other income received by the
Company in a taxable year that is nonqualifying income for purposes of the 95%
gross income test, exceed 5% of the Company's gross income during the year, the
Company would lose its REIT status. If, however, the Rents do not qualify as
"rents from real property" because either (i) the Percentage Rent is considered
based on the income or profits of the Lessee, (ii) the Company owns, actually or
constructively, 10% or more of the Lessee, or (iii) the Company furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor, none of the
Rents would qualify as "rents from real property." In that case, the Company
likely would lose its REIT status because it would be unable to satisfy either
the 75% or 95% gross income test.
In addition to the Rents, the Lessee is required to pay to the Partnership
or the applicable Subsidiary Partnership the Additional Charges. To the extent
that the Additional Charges represent either (i) reimbursements of amounts that
the Partnership or a Subsidiary Partnership is obligated to pay to third parties
or (ii) penalties for nonpayment or late payment of such amounts, the Additional
Charges should qualify as "rents from real property." To the extent, however,
that the Additional Charges represent interest that is accrued on the late
payment of the Rents or the Additional Charges, the Additional Charges should
not qualify as "rents from real property," but instead should be treated as
interest that qualifies for the 95% gross income test.
Based on the foregoing, Hunton & Williams is of the opinion that the Rents
and the Additional Charges will qualify as "rents from real property" for
purposes of the 75% and 95% gross income tests, except to the extent that the
Additional Charges represent interest that is accrued on the late payment of the
Rents or the Additional Charges (which will be qualifying gross income for the
95% test but not the 75% test). As described above, the opinion of Hunton &
Williams is based upon an analysis of all the facts and circumstances and upon
rulings and judicial decisions involving situations that are considered to be
analogous, as well as representations by the Company and assumptions that are
described above and set out in the federal income tax opinion of Hunton &
Williams, a form of which is attached as an Exhibit to the Registration
Statement of which this Prospectus is a part. Opinions of counsel are not
binding upon the Service or a court. Accordingly, there can be no complete
assurance that the Service will not assert successfully a contrary position and,
therefore, prevent the Company from qualifying as a REIT.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Furthermore, to the extent that interest from a loan that is based on
the residual cash proceeds from sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% income test necessary to qualify as a REIT (and the
net income from that transaction is subject to a 100% tax). The term "prohibited
transaction" generally includes a sale or other disposition (whether by the
Company, the Partnership or a Subsidiary Partnership) of property (other than
foreclosure property) that is held primarily for sale to customers in the
ordinary course of a trade or business. All inventory required in the operation
of the Hotels will be purchased by the Lessee or its designee as required by the
terms of the Percentage Leases. Accordingly, the Company believes that no asset
owned by the Company, the Partnership or a Subsidiary Partnership is held for
sale to customers and that a sale of any such asset will not be in the ordinary
course of business of the Company, or the Partnership or a Subsidiary
Partnership. Whether property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular property. Nevertheless, the Company will attempt to comply with the
terms of safe-harbor provisions in the Code prescribing when asset sales will
not be characterized as prohibited transactions. Complete assurance cannot be
given, however, that
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the Company can comply with the safe-harbor provisions of the Code or avoid
owning property that may be characterized as property held "primarily for sale
to customers in the ordinary course of a trade or business."
The Company will be subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualified
income under the 75% gross income test), less expenses directly connected with
the production of such income. However, gross income from such foreclosure
property will qualify under the 75% and 95% gross income tests. "Foreclosure
property" is defined as any real property (including interests in real property)
and any personal property incident to such real property (i) that is acquired by
a REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness that such property secured and (ii)
for which such REIT makes a proper election to treat such property as
foreclosure property. However, a REIT will not be considered to have foreclosed
on a property where such REIT takes control of the property as a
mortgagee-in-possession and cannot receive any profit or sustain any loss except
as a creditor of the mortgagor. Under the Code, property generally ceases to be
foreclosure property with respect to a REIT on the date that is two years after
the date such REIT acquired such property (or longer if an extension is granted
by the Secretary of the Treasury). The foregoing grace period is terminated and
foreclosure property ceases to be foreclosure property on the first day (i) on
which a lease is entered into with respect to such property that, by its terms,
will give rise to income that does not qualify under the 75% gross income test
or any amount is received or accrued, directly or indirectly, pursuant to a
lease entered into on or after such day that will give rise to income that does
not qualify under the 75% gross income test, (ii) on which any construction
takes place on such property (other than completion of a building, or any other
improvement, where more than 10% of the construction of such building or other
improvement was completed before default became imminent), or (iii) which is
more than 90 days after the day on which such property was acquired by the REIT
and the property is used in a trade or business that is conducted by the REIT
(other than through an independent contractor from whom the REIT itself does not
derive or receive any income). As a result of the rules with respect to
foreclosure property, if the Lessee defaults on its obligations under a
Percentage Lease for a Hotel, the Company terminates the Lessee's leasehold
interest, and the Company is unable to find a replacement lessee for such Hotel
within 90 days of such foreclosure, gross income from hotel operations conducted
by the Company from such Hotel would cease to qualify for the 75% and 95% gross
income tests. In such event, the Company likely would be unable to satisfy the
75% and 95% gross income tests and, thus, would fail to qualify as a REIT.
It is possible that, from time to time, the Company, the Partnership or a
Subsidiary Partnership will enter into hedging transactions with respect to one
or more of its assets or liabilities. Any such hedging transactions could take a
variety of forms, including interest rate swap contracts, interest rate cap or
floor contracts, futures or forward contracts, and options. To the extent that
the Company, the Partnership or a Subsidiary Partnership enters into an interest
rate swap or cap contract to hedge any variable rate indebtedness incurred to
acquire or carry real estate assets, any periodic income or gain from the
disposition of such contract should be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. Furthermore, any such
contract would be considered a "security" for purposes of applying the 30% gross
income test. To the extent that the Company, the Partnership or a Subsidiary
Partnership hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations -- Taxation of the
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Company," even if those relief provisions apply, a 100% tax would be imposed on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test. No such relief is available for
violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the value of the associated real property, and shares
of other REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its ownership
interest in the Partnership, a Subsidiary Partnership or a qualified REIT
subsidiary).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Partnership and each Subsidiary
Partnership, rather than its partnership interest in the Partnership or such
Subsidiary Partnership. The Company has represented that, at all times since it
has operated so as to qualify as a REIT, (i) at least 75% of the value of its
total assets has been represented by real estate assets, cash and cash items
(including receivables), and government securities and (ii) it has not owned (A)
securities of any one issuer the value of which exceeded 5% of the value of the
Company's total assets or (B) more than 10% of any one issuer's outstanding
voting securities (except for its interests in the Partnership, the Subsidiary
Partnerships, and any qualified REIT subsidiary). In addition, the Company has
represented that it will not acquire or dispose, or cause the Partnership or a
Subsidiary Partnership to acquire or dispose, of assets in the future in a way
that would cause it to violate either asset test. Based on the foregoing, Hunton
& Williams is of the opinion that the Company will satisfy both asset tests for
REIT status.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
tests either did not exist immediately after the acquisition of any particular
asset or was not wholly or partly caused by such an acquisition (i.e., the
discrepancy arose from changes in the market values of its assets). If the
condition described in clause (ii) of the preceding sentence were not satisfied,
the Company still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose.
Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends) to
its shareholders in an aggregate amount at least equal to (i) the sum of (A) 95%
of its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if the Company should fail to distribute
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during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain income for such year,
and (iii) any undistributed taxable income from prior periods, the Company would
be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. The Company has made, and
intends to continue to make, timely distributions sufficient to satisfy the
annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under one of the
Percentage Leases, the Percentage Rent is not due until 30 days after the end of
a calendar quarter. In that case, the Partnership still would be required to
recognize as income the Percentage Rent in the calendar quarter to which it
relates. Further, it is possible that, from time to time, the Company may be
allocated a share of net capital gain attributable to the sale of depreciated
property that exceeds its allocable share of cash attributable to that sale.
Therefore, the Company may have less cash than is necessary to meet its annual
95% distribution requirement or to avoid corporate income tax or the excise tax
imposed on certain undistributed income. In such a situation, the Company may
find it necessary to arrange for short-term (or possibly long-term) borrowings
or to raise funds through the issuance of additional Common or Preferred Shares.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, in order to be able to elect
to be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding shares. The Company intends to continue
to comply with such requirements.
Partnership Anti-Abuse Rule
The U.S. Treasury Department has issued a final regulation (the "Anti-Abuse
Rule") under the partnership provisions of the Code (the "Partnership
Provisions") that authorizes the Service, in certain "abusive" transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
applies where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a principal purpose of
substantially reducing the present value of the partners' aggregate federal tax
liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The
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example concludes that the use of the partnership is not inconsistent with the
intent of the Partnership Provisions and, thus, cannot be recast by the Service.
Based on the foregoing, Hunton & Williams is of the opinion that the Anti-Abuse
Rule will not have any adverse impact on the Company's ability to qualify as a
REIT. However, the Redemption Rights do not conform in all respects to the
redemption rights described in the foregoing example. Moreover, the Anti-Abuse
Rule is extraordinarily broad in scope and is applied based on an analysis of
all of the facts and circumstances. As a result, there can be no assurance that
the Service will not attempt to apply the Anti-Abuse Rule to the Company. If the
conditions of the Anti-Abuse Rule are met, the Service is authorized to take
appropriate enforcement action, including disregarding the Partnership for
federal tax purposes or treating one or more of its partners as nonpartners. Any
such action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be entitled
to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Shares that
for U.S. federal income tax purposes is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized in
or under the laws of the United States or of any political subdivision thereof,
or (iii) an estate or trust the income of which is subject to U.S. federal
income taxation regardless of its source. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held his Common
Shares. However, corporate shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that such distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a shareholder's
Common Shares, such distributions will be included in income as long-term
capital gain (or short-term capital gain if the Common Shares have been held for
one year or less) assuming the Common Shares are capital assets in the hands of
the shareholder. In addition, any distribution declared by the Company in
October, November, or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the shareholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Shares will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable
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distributions from the Company generally will be treated as investment income
for purposes of the investment interest limitations. Capital gains from the
disposition of Common Shares (or distributions treated as such), however, will
be treated as investment income only if the shareholder so elects, in which case
such capital gains will be taxed at ordinary income rates. The Company will
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Shares have been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Shares by a shareholder who has held such
shares for six months or less (after applying certain holding period rules),
will be treated as a long-term capital loss to the extent of distributions from
the Company required to be treated by such shareholder as long-term capital
gain. All or a portion of any loss realized upon a taxable disposition of the
Common Shares may be disallowed if other Common Shares are purchased within 30
days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is 39.6%,
and the tax rate on net capital gains applicable to individuals is 28%. Thus,
the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Service issued
proposed regulations in April 1996 regarding the backup withholding rules as
applied to Non-U.S. Shareholders. The proposed regulations would alter the
technical requirements relating to backup withholding compliance. The
regulations are proposed to be effective for distributions made after December
31, 1997. See "Federal Income Tax Considerations -- Taxation of Non-U.S.
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling,
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amounts distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition of
the Common Shares with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from the Company as UBTI. In addition, in
certain circumstances, a pension trust that owns more than 10% of the Company's
shares is required to treat a percentage of the dividends from the Company as
UBTI (the "UBTI Percentage"). The UBTI Percentage is the gross income derived by
the Company from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies to a pension trust holding
more than 10% of the Company's stock only if (i) the UBTI Percentage is at least
5%, (ii) the Company qualifies as a REIT by reason of the modification of the
5/50 Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interests in the
pension trust, and (iii) either (A) one pension trust owns more than 25% of the
value of the Company's shares or (B) a group of pension trusts individually
holding more than 10% of the value of the Company's shares collectively owns
more than 50% of the value of the Company's shares.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Shares is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions (and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a non-U.S. corporation). The
Company expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distributions made to a Non-U.S. Shareholder unless (i) a
lower treaty rate applies and any required form evidencing eligibility for that
reduced rate is filed with the Company or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is effectively
connected income. The Service issued proposed regulations in April 1996 that
would modify the manner in which the Company complies with the withholding
requirements. Distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Common Shares, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Common Shares, as described below. Because it generally cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the entire amount of any
distribution normally will be subject to withholding at the same rate as a
dividend. However, amounts so withheld are refundable to the extent it is
determined subsequently that such distribution was, in fact, in excess of the
current and accumulated earnings and profits of the Company.
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In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at the
normal capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). Distributions subject to FIRPTA also may be
subject to a 30% branch profits tax in the hands of a non-U.S. corporate
shareholder not entitled to treaty relief or exemption. The Company is required
to withhold 35% of any distribution that is designated by the Company as a
capital gains dividend. The amount withheld is creditable against the Non-U.S.
Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. It is currently anticipated that the Company
will be a "domestically controlled REIT" and, therefore, the sale of the Common
Shares will not be subject to taxation under FIRPTA. However, because the Common
Shares are publicly traded, no assurance can be given that the Company will
continue to be a "domestically controlled REIT." Furthermore, gain not subject
to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment in the
Common Shares is effectively connected with the Non-U.S. Shareholder's U.S.
trade or business, in which case the Non-U.S. Shareholder will be subject to the
same treatment as U.S. shareholders with respect to such gain, or (ii) the
Non-U.S. Shareholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and certain other
conditions apply, in which case the nonresident alien individual will be subject
to a 30% tax on the individual's capital gains. If the gain on the sale of the
Common Shares were to be subject to taxation under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as U.S. shareholders with
respect to such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations).
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Company's other qualified REIT
subsidiary, the Partnership, the Subsidiary Partnerships, or the Company's
shareholders may be subject to state or local taxation in various state or local
jurisdictions, including those in which it or they own property, transact
business, or reside. The state and local tax treatment of the Company and its
shareholders may not conform to the federal income tax consequences discussed
above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
THE COMPANY.
TAX ASPECTS OF THE PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Partnership and the Subsidiary Partnerships (each of the Partnership and the
Subsidiary Partnerships is referred to herein as a "Hotel Partnership"). The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
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Classification as a Partnership
The Company will be entitled to include in its income its distributive
share of each Hotel Partnership's income and to deduct its distributive share of
each Hotel Partnership's losses only if each Hotel Partnership is classified for
federal income tax purposes as a partnership rather than as a corporation or an
association taxable as a corporation. An organization formed as a partnership
will be treated as a partnership, rather than as a corporation, for federal
income tax purposes if it (i) has no more than two of the four corporate
characteristics that the Treasury Regulations use to distinguish a partnership
from a corporation for tax purposes and (ii) is not a "publicly traded"
partnership. Those four corporate characteristics are continuity of life,
centralization of management, limited liability, and free transferability of
interests. A publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market (or the substantial equivalent thereof). A publicly traded
partnership will be treated as a corporation for federal income tax purposes
unless at least 90% of such partnership's gross income for a taxable year
consists of "qualifying income" under section 7704(d) of the Code, which
generally includes any income that is qualifying income for purposes of the 95%
gross income test applicable to REITs (the "90% Passive-Type Income Exception").
See "Federal Income Tax Considerations -- Requirements for
Qualification -- Income Tests."
The U.S. Treasury Department recently issued regulations effective for
taxable years beginning after December 31, 1995 (the "PTP Regulations") that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors, (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily tradable
on a secondary market or the substantial equivalent thereof if (i) all interests
in the partnership were issued in a transaction (or transactions) that was not
required to be registered under the Securities Act of 1933, as amended, and (ii)
the partnership does not have more than 100 partners at any time during the
partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (b) a principal purpose of the use of the
tiered arrangement is to permit the partnership to satisfy the 100-partner
limitation. Each Hotel Partnership qualifies for the Private Placement
Exclusion. If a Hotel Partnership is considered a publicly traded partnership
under the PTP Regulations because it is deemed to have more than 100 partners,
such Hotel Partnership should not be treated as a corporation because it should
be eligible for the 90% Passive-Type Income Exception.
The Company has not requested, and does not intend to request, a ruling
from the Service that each Hotel Partnership will be classified as a partnership
for federal income tax purposes. Instead, Hunton & Williams is of the opinion
that, based on the provisions of the partnership agreement of each Hotel
Partnership, certain factual assumptions and representations, each Hotel
Partnership does not possess more than two corporate characteristics and, thus,
will be treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation or a publicly traded
partnership. Unlike a tax ruling, an opinion of counsel is not binding upon the
Service, and no assurance can be given that the Service will not challenge the
status of a Hotel Partnership as a partnership for federal income tax purposes.
If such challenge were sustained by a court, such Hotel Partnership would be
treated as a corporation for federal income tax purposes, as described below. In
addition, the opinion of Hunton & Williams is based on existing law, which is to
a great extent the result of administrative and judicial interpretation. No
assurance can be given that administrative or judicial changes would not modify
the conclusions expressed in the opinion.
If for any reason a Hotel Partnership were taxable as a corporation, rather
than as a partnership, for federal income tax purposes, the Company would not be
able to qualify as a REIT. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests" and
"-- Requirements for Qualification -- Asset Tests." In addition, any change in a
Hotel Partnership's status for tax purposes might be treated as a taxable event,
in which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations -- Requirements for
Qualification -- Distribution Requirements." Further, items of income and
deduction of such Hotel Partnership would not pass through to its partners, and
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its partners would be treated as shareholders for tax purposes. Consequently,
such Hotel Partnership would be required to pay income tax at corporate tax
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such Hotel Partnership's
taxable income.
Income Taxation of Each Hotel Partnership and its Partners
Partners, Not the Hotel Partnerships, Subject to Tax. A partnership is not
a taxable entity for federal income tax purposes. Rather, the Company will be
required to take into account its allocable share of each Hotel Partnership's
income, gains, losses, deductions, and credits for any taxable year of such
Hotel Partnership ending within or with the taxable year of the Company, without
regard to whether the Company has received or will receive any distribution from
such Hotel Partnership.
Hotel Partnership Allocations. Although a partnership agreement generally
will determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes under Section 704(b) of the
Code if they do not comply with the provisions of section 704(b) of the Code and
the Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Hotel Partnership's allocations of taxable income and
loss are intended to comply with the requirements of section 704(b) of the Code
and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department recently
issued regulations requiring partnerships to use a "reasonable method" for
allocating items affected by section 704(c) of the Code and outlining several
reasonable allocation methods. The Partnership generally has elected to use the
traditional method for allocating Code section 704(c) items with respect to
Hotels that it acquires in exchange for Units.
Under the partnership agreement for each Hotel Partnership, depreciation or
amortization deductions of the Hotel Partnership generally will be allocated
among the partners in accordance with their respective interests in the Hotel
Partnership, except to the extent that the Hotel Partnership is required under
Code section 704(c) to use a method for allocating tax depreciation deductions
attributable to the Hotels or other contributed properties that results in the
Company receiving a disproportionately large share of such deductions. In
addition, gain on sale of a Hotel will be specially allocated to the Limited
Partners to the extent of any "built-in" gain with respect to such Hotel for
federal income tax purposes. Because the Partnership generally has elected to
use the traditional method for allocating Code Section 704(c) items with respect
to the Hotels that it acquires in exchange for Units, the Company (i) may be
allocated lower amounts of depreciation deductions for tax purposes with respect
to such Hotels than would be allocated to the Company if such Hotels were to
have a tax basis equal to their fair market value at the time of contribution
and (ii) may be allocated taxable gain in the event of a sale of such Hotels in
excess of the economic profit allocated to the Company as a result of such sale.
These allocations possibly could cause the Company to recognize taxable income
in excess of cash proceeds, which might adversely affect the Company's ability
to comply with the REIT distribution requirements, although the Company does not
anticipate that this event will occur. The application of Section 704(c) to the
Hotel Partnerships is not entirely clear, however, and may be affected by
Treasury Regulations promulgated in the future.
Basis in Hotel Partnership Interest. The Company's adjusted tax basis in
its partnership interest in a Hotel Partnership generally is equal to (i) the
amount of cash and the basis of any other property contributed to the Hotel
Partnership by the Company, (ii) increased by (A) its allocable share of the
Hotel Partnership's
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income and (B) its allocable share of indebtedness of the Hotel Partnership, and
(iii) reduced, but not below zero, by (A) the Company's allocable share of the
Hotel Partnership's loss and (B) the amount of cash distributed to the Company,
including constructive cash distributions resulting from a reduction in the
Company's share of indebtedness of the Hotel Partnership.
If the allocation of the Company's distributive share of the Hotel
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Hotel Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Hotel Partnership's distributions, or any decrease in the Company's share of the
indebtedness of the Hotel Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) will constitute taxable income to the Company. Such distributions
and constructive distributions normally will be characterized as capital gain,
and, if the Company's partnership interest in the Hotel Partnership has been
held for longer than the long-term capital gain holding period (currently one
year), the distributions and constructive distributions will constitute long-
term capital gain.
Depreciation Deductions Available to the Partnership. Immediately after
the Offering, the Company will make a cash contribution, through its
wholly-owned subsidiaries, to the Partnership and the Second Subsidiary
Partnership in exchange for an additional partnership interest in such
partnerships and such partnerships will use such contribution to acquire the
Acquisition Hotels. To the extent that a Hotel Partnership has acquired or will
acquire the Hotels for cash, the Hotel Partnership's initial basis in such
Hotels for federal income tax purposes generally is or will be equal to the
purchase price paid by the Hotel Partnership. The Hotel Partnerships plan to
depreciate such depreciable Hotel property for federal income tax purposes under
either the modified accelerated cost recovery system of depreciation ("MACRS")
or the alternative depreciation system of depreciation ("ADS"). The Hotel
Partnerships plan to use MACRS for furnishings and equipment. Under MACRS, the
Hotel Partnerships generally will depreciate such furnishings and equipment over
a seven-year recovery period using a 200% declining balance method and a
half-year convention. If, however, a Hotel Partnership places more than 40% of
its furnishings and equipment in service during the last three months of a
taxable year, a mid-quarter depreciation convention must be used for the
furnishings and equipment placed in service during that year. The Hotel
Partnerships plan to use ADS for buildings and improvements. Under ADS, the
Hotel Partnerships generally will depreciate such buildings and improvements
over a 40-year recovery period using a straight line method and a mid-month
convention. However, to the extent that a Hotel Partnership has acquired or will
acquire the Hotels in exchange for Units, the Hotel Partnership's initial basis
in each Hotel for federal income tax purposes should be the same as the
transferor's basis in that Hotel on the date of acquisition. Although the law is
not entirely clear, the Hotel Partnerships generally intend to depreciate such
depreciable property for federal income tax purposes over the same remaining
useful lives and under the same methods used by the transferors. A Hotel
Partnership's tax depreciation deductions will be allocated among the partners
in accordance with their respective interests in the Hotel Partnership (except
to the extent that the Hotel Partnership is required under Code section 704(c)
to use a method for allocating depreciation deductions attributable to the
Hotels or other contributed properties that results in the Company receiving a
disproportionately large share of such deductions).
SALE OF THE PARTNERSHIP'S OR A SUBSIDIARY PARTNERSHIP'S PROPERTY
Generally, any gain realized by the Partnership or a Subsidiary Partnership
on the sale of property held for more than one year will be long-term capital
gain, except for any portion of such gain that is treated as depreciation or
cost recovery recapture. Any gain recognized by the Partnership or a Subsidiary
Partnership on the disposition of the Hotels will be allocated first to the
Limited Partners under section 704(c) of the Code to the extent of their
"built-in gain" on those Hotels for federal income tax purposes. The Limited
Partners' "built-in gain" on the Hotels sold will equal the excess of the
Limited Partners' proportionate share of the book value of those Hotels over the
Limited Partners' tax basis allocable to those Hotels at the time of the sale.
Any remaining gain recognized by the Partnership or a Subsidiary Partnership on
the disposition of the Hotels will be allocated among the partners in accordance
with the applicable partnership agreement. The
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Board of Trustees has adopted a policy that any decision to sell any Fisher
Initial Hotel will be made by a majority of the Independent Trustees. See "Risk
Factors -- Conflicts of Interest -- Conflicts Relating to Sales, Refinancing or
Prepayment of Indebtedness of Fisher Hotels."
The Company's share of any gain realized by the Partnership or a Subsidiary
Partnership on the sale of any property held by the Partnership or a Subsidiary
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Partnership's or a Subsidiary Partnership's trade
or business will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. See "Federal Income Tax
Considerations -- Requirements for Qualification -- Income Tests." Such
prohibited transaction income also may have an adverse effect upon the Company's
ability to satisfy the income tests for REIT status. See "Federal Income Tax
Considerations -- Requirements For Qualification -- Income Tests" above. The
Company, however, does not presently intend to allow the Partnership or a
Subsidiary Partnership to acquire or hold any property that represents inventory
or other property held primarily for sale to customers in the ordinary course of
the Company's, the Partnership's or a Subsidiary Partnership's trade or
business.
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UNDERWRITING
The Underwriters named below, represented by Montgomery Securities, Bear,
Stearns & Co. Inc., Alex. Brown & Sons Incorporated, Everen Securities, Inc. and
Morgan Keegan & Company, Inc. (the "Representatives"), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company the number of Common Shares indicated below opposite
their respective names at the Price to Public less the Underwriting Discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the shares,
if they purchase any. In the event of a default by an Underwriter, the
Underwriting Agreement provides that, in certain circumstances, the purchase
commitments of the nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities........................................................ 2,000,000
Bear, Stearns & Co. Inc...................................................... 2,000,000
Alex. Brown & Sons Incorporated.............................................. 2,000,000
Everen Securities, Inc....................................................... 2,000,000
Morgan Keegan & Company, Inc................................................. 2,000,000
---------
Total.............................................................. 10,000,000
=========
</TABLE>
The Representatives propose initially to offer the Common Shares to the
public at the Price to Public set forth on the cover page of this Prospectus.
The Underwriters may allow to selected dealers a concession of not more than
$0.35 per share; and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $0.10 per share to certain other dealers. The Common
Shares are offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part. After the Offering, the offering price, discount, allowances, concessions
and other selling terms may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 1,500,000 additional Common Shares to cover over-allotments, if any, at the
Offering Price, less the Underwriting Discount. To the extent that the
Underwriters exercise this option, the Underwriters will be committed, subject
to certain conditions, to purchase such additional Common Shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments to the Underwriters as may be
required to make in respect thereof.
The Company and certain shareholders of the Company will agree that, except
under certain circumstances, for a period of 90 days after the date of this
Prospectus, they will not, without the consent of Montgomery Securities, issue,
sell or dispose of any Common Shares or any shares convertible or exchangeable
into any Common Shares. See "Shares Eligible for Future Sale."
The Representatives have informed the Company that they do not expect to
make sales to accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Hunton & Williams. In addition, the description of federal income
tax consequences contained in the section of the Prospectus entitled "Federal
Income Tax Considerations" is based on the opinion of Hunton & Williams. Certain
legal matters related to the Offering will be passed upon for the Underwriters
by O'Melveny & Myers LLP, San Francisco, California. In rendering their
opinions, O'Melveny & Myers LLP will rely upon the
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opinion of Hunton & Williams as to certain matters of Virginia law, and Hunton &
Williams and O'Melveny & Myers LLP will rely upon the opinion of Ballard Spahr
Andrews & Ingersoll as to certain matters of Maryland law.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Innkeepers USA Trust, as of December 31, 1994 and 1995, and for the
period September 30, 1994 (inception) through December 31, 1994 and the year
ended December 31, 1995; the combined financial statements of JF Hotel, Inc. and
JF Hotel II, Inc. as of December 31, 1994 and 1995 and for the period September
30, 1994 (inception) through December 31, 1994 and the year ended December 31,
1995; the combined financial statements of the Fisher Initial Hotels as of
December 31, 1992 and 1993 and June 30, 1994 and for the years ended December
31, 1991, 1992 and 1993 and the six months ended June 30, 1994; the combined
financial statements of the DeBoer Hotels as of December 30, 1994 and December
31, 1995 and for the years ended December 31, 1993, December 30, 1994 and
December 31, 1995; and the financial statements of Amerimar Cherry Hill
Associates Limited Partnership as of December 31, 1995 and for the year ended
December 31, 1995 and the financial statements of BA Harrisburg Associates as of
December 31, 1995 and for the year ended December 31, 1995; all of which have
been included or incorporated by reference in this Prospectus have all been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their reports thereon included or incorporated by reference herein and in the
Registration Statement. Such financial statements and financial statement
schedule are included or incorporated herein by reference in reliance upon such
reports given on their authority as experts in accounting and auditing.
In addition, the financial statements of Liberty High Income Plus Limited
Partnership (referred to as the "Liberty Hotels") as of December 30, 1994 and
December 31, 1993 and for the 52-week periods ended December 30, 1994, December
31, 1993 and January 1, 1993 have been incorporated by reference herein and in
the Registration Statement, in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, and upon the authority of said
firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 0-24568)
pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996.
3. The Company's Current Reports on Form 8-K filed with the Commission
on February 21, 1996 and May 22, 1996 as amended on Form 8-K/A on July 17,
1996.
4. The description of the Common Shares of the Company included in the
Company's registration statement on Form 8-A, dated September 19, 1996;
5. Financial statements of the Liberty Hotels (seven of the Current
Hotels purchased by the Company in October 1995) for the years ended
December 30, 1993 and December 31, 1994 included in the Company's 8-K/A,
dated December 1, 1995;
6. Financial statements of the Fisher Initial Hotels included in the
Company's Form S-11 Registration Statement (File No. 33-95622); and
7. All other documents filed with the Commission under the Exchange
Act prior to the termination of the Offering.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
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documents which are incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
into such documents). Requests for such copies should be directed to Innkeepers
USA, 306 Royal Poinciana Way, Palm Beach, Florida 33480, Attention: Corporate
Secretary, telephone number (407) 835-1800.
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified shall not be deemed to constitute a part of
this Prospectus, except as so modified, and any statement so superseded shall
not be deemed to constitute a part of this Prospectus.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus.
"Acquisition Hotels" means the nine Residence Inn hotels and one Hampton
Inn hotel to be acquired by the Partnership concurrently with or shortly after
the closing of the Offering.
"ADR" means average daily room rate.
"Affiliate" means (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, five percent (5%) or
more of the outstanding capital shares, shares or equity interests of such
person, or (iii) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, shares
companies or associations, joint ventures, associations, companies, trusts,
banks, trust companies, land trusts, business trusts, or other entities and
governments and agencies and political subdivisions thereof. For the purposes of
this definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
"Assumed Indebtedness" means that certain indebtedness in the approximate
principal amount of approximately $24 million to be assumed by the Company in
connection with the acquisition of three of the DeBoer Hotels.
"Atlanta Hotels" means the Residence Inn-Atlanta (Downtown), Georgia hotel
and the Hampton Inn-Norcross, Georgia hotel, both of which are included in the
Acquisition Hotels.
"Base Rent" means the fixed obligation of the Lessee to pay a sum certain
in annual rent under each of the Percentage Leases.
"Board of Trustees" means the Board of Trustees of the Company.
"Bulger Employment Agreement" means the Company's employment agreement with
Mr. Bulger, dated April 10, 1995.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means the sum of (a) 4% of room revenues,
which the Company is obligated by the Percentage Leases to make available to the
Lessee for the periodic refurbishment and replacement of furniture, fixtures and
equipment at the Hotels, and (b) principal amortization on long-term debt and
adding the sum of (i) the amortization of franchise costs, (ii) the amortization
of loan origination fees, and (iii) the amortization of unearned Trustees'
Compensation, minus FFO.
"Choice" means Choice Hotels International, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the shares of beneficial interest, par value $0.01
per share, of the Company.
"Company" means, collectively, Innkeepers USA Trust, a Maryland real estate
investment trust, the Partnership and its Subsidiaries, unless the context
otherwise indicates.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 = 100)
"Current Hotels" means the 22 hotels currently owned by the Company.
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"DeBoer Group" means the Affiliates of Jack T. DeBoer from which the
Company is acquiring the DeBoer Hotels.
"DeBoer Hotels" means the seven Residence Inn hotels included in the
Acquisition Hotels that the Company is acquiring from the DeBoer Group.
"Debt Limitation" means the provision in the Company's Declaration of Trust
which limits consolidated indebtedness to 50% of the Company's investment in
Hotels, at cost, after giving effect to the Company's use of proceeds from any
indebtedness.
"Declaration of Trust" means the Amended and Restated Declaration of Trust
of the Company.
"Development Agreement" means that certain Exclusive Hotel Development
Agreement and Covenant Not to Compete between the Company and Mr. Fisher
restricting Mr. Fisher's ability to compete with the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fisher Employment Agreement" means the employment agreement between the
Company and Jeffrey H. Fisher, dated September 30, 1994 and amended in February
1996.
"Fisher Initial Hotels" means the Hampton Inn-West Palm Beach, -Willow
Grove (Philadelphia), -Islandia (Long Island) and -Naples hotels, and the
Sheraton Inn-Fort Lauderdale hotel.
"Follow-on Offering" means the follow-on public offering of Common Shares
of the Company, which was completed in October 1995.
"Funds From Operations" means net income, computed in accordance with GAAP,
excluding gains or losses from debt restructuring and sales of property, plus
depreciation of real property (including furniture, fixtures and equipment) and
after adjustments for unconsolidated partnerships and joint ventures.
"General Partner" means Innkeepers Financial Corporation, a wholly-owned
subsidiary of the Company in its capacity as the sole general partner of the
Partnership and its sister corporations that serve as general partners of the
Subsidiary Partnerships.
"Hotels" means collectively the Current Hotels and the Acquisition Hotels.
"Independent Trustee" means a Trustee of the Company who is not an officer
or employee of the Company or any Affiliate of (i) any lessee of any property of
the Company, (ii) any subsidiary of the Company, or (iii) any partnership which
is an Affiliate of the Company.
"IPO" means the initial public offering of Common Shares by the Company,
which was completed in September 1994.
"JF Atlanta" means JF Atlanta, LLC.
"Lender" means Nomura Asset Capital Corporation.
"Lessee" means JF Hotel, Inc., a Virginia corporation, which leases all 22
of the Current Hotels and operates 17 of the Current Hotels, and which will
lease all of the Acquisition Hotels and will operate one of the Acquisition
Hotels, together with its sister corporation, JF Hotel II, Inc.
"Limited Partners" means the limited partners of the Partnership.
"Line of Credit" means the $70 million line of credit facility provided to
the Company by the Lender.
"Loan Agreement" means the mortgage loan agreement applicable to the Line
of Credit.
"Marriott" means Marriott International, Inc. and its subsidiaries,
including Residence Inn by Marriott, Inc.
"Marriott Management Agreements" means the agreements between the Lessee
and Marriott, pursuant to which Marriott will operate the nine Residence Inn
hotels included in the Acquisition Hotels.
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"Marriott Units" means Units with an aggregate value of $859,000 issuable
to Marriott in connection with the Company's acquisition of the Residence
Inn-Portland, Maine hotel.
"Maryland REIT Law" means Title 8, as amended from time to time, of the
Corporations and Associations Article of the Annotated Code of Maryland.
"MGCL" means the Maryland General Corporation Law, as amended from time to
time.
"Mortgage Note" means the $3.8 million mortgage loan assumed by the
Partnership in connection with the acquisition of one of the Current Hotels.
"1994 Plan" means the Company's 1994 Share Incentive Program.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means the public offering price of the Common Shares to be
sold in the Offering.
"Original Units" means the Units issued by the Partnership in connection
with its acquisition of certain of the Hotels acquired in connection with the
IPO.
"Ownership Limitation" means the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.8%
of the outstanding Common Shares or any other class of outstanding Shares.
"Partnership" means, collectively, Innkeepers USA Limited Partnership, a
limited partnership organized under the laws of the Commonwealth of Virginia,
and its subsidiaries unless the context otherwise indicates.
"Partnership Agreement" means the partnership agreement of the Partnership
as amended and restated.
"Percentage Leases" means collectively the operating leases between the
Lessee and the Company (including the Subsidiary Partnerships) pursuant to which
the Lessee leases the Current Hotels from the Partnership, will lease the
Acquisition Hotels from the Partnership and will lease any additional hotels
acquired by the Company or the Partnership after the date of the Offering.
"Percentage Rent" means rent based on percentages of room revenue from the
Hotels payable by the Lessee pursuant to the Percentage Leases.
"Preferred Shares" means the preferred shares of beneficial interest, par
value $0.01 per share, of the Company.
"Preferred Units" means the preferred units of limited partnership interest
in the Partnership issuable to the DeBoer Group in connection with the Company's
acquisition of the DeBoer Hotels.
"Promus" means Promus Hotels, Inc.
"Redemption Agreements" mean the separate Redemption and Registration
Rights Agreements between the Company and the DeBoer Group and Marriott,
respectively, to be entered into upon the closing of the acquisition of the
Acquisition Hotels, pursuant to which the DeBoer Group and Marriott,
respectively, has been granted Redemption Rights and registration rights with
respect to the Preferred Units, the Release Units and the Marriott Units.
"Redemption Right" means the right of Limited Partners to cause the
redemption of Units in exchange for Common Shares on a one-for-one basis (or for
an equivalent amount of cash at the election of the Company or if the issuance
of Common Shares would result in any person owning, directly or indirectly, more
than 9.8% of the Common Shares).
"REIT" means real estate investment trust, as defined in Section 856 of the
Code.
"Release Units" means Units with an aggregate value of $500,000 issuable to
Marriott in connection with the acquisition of the DeBoer Hotels in exchange for
Marriott's release of the existing management agreements relating to such
hotels.
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"Representatives" means Montgomery Securities, Bear, Stearns & Co. Inc.,
Alex. Brown & Sons Incorporated, Everen Securities, Inc. and Morgan Keegan &
Company, Inc.
"Rent" means both the Base Rent and Percentage Rent.
"Residence Inn" means Residence Inn by Marriott hotels.
"REVPAR" means revenue per available room for the applicable period,
calculated by dividing room revenue by available rooms.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the United States Internal Revenue Service.
"Shares-in-Trust" means any shares of beneficial interest in the Company
designated as Shares-in-Trust pursuant to Article VIII of the Company's
Declaration of Trust.
"Sheraton" means ITT Sheraton Corporation.
"Subsidiary Partnerships" means the limited partnership subsidiaries that
hold or will hold title to certain of the Hotels.
"Term Loan" means the $30 million term financing from the Lender entered
into by the Company in connection with the acquisition of eight of the Current
Hotels.
"TMH" means TMH Hotels, Inc., which currently manages five of the Current
Hotels under management agreements with the Lessee.
"TMH Management Agreements" means the agreements between the Lessee and
TMH, pursuant to which TMH manages five of the Current Hotels.
"Treasury Regulations" means the final, temporary and proposed tax
regulations promulgated under the Code.
"Trustee" means a member of the Company's Board of Trustees.
"Trustees' Plan" means the Company's Trustees Share Incentive Plan.
"Underwriter" means the Underwriters named in this Prospectus.
"Units" means units of partnership interest in the Partnership, including,
unless the context requires otherwise, the Preferred Units.
"Windsor Units" means the 91,991 Units issued to THH Windsor Limited
Partnership in connection with the acquisition of the Residence Inn-Windsor,
Connecticut hotel.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INNKEEPERS USA TRUST
PRO FORMA
Pro Forma Consolidated Statements of Income for the year ended December 31, 1995, the
twelve months ended June 30, 1996, and the six months ended June 30, 1995 and 1996
(unaudited)........................................................................ F-2
Notes to Pro Forma Consolidated Statements of Income................................. F-5
Pro Forma Consolidated Balance Sheet as of June 30, 1996 (unaudited)................. F-6
Notes to Pro Forma Consolidated Balance Sheet........................................ F-7
HISTORICAL
Condensed Consolidated Balance Sheets as of December 31, 1995 and June 30, 1996
(unaudited)........................................................................ F-8
Condensed Consolidated Statements of Income for the three and six months ended June
30, 1995 and 1996 (unaudited)...................................................... F-9
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
1995 and 1996 (unaudited).......................................................... F-10
Notes to Condensed Consolidated Financial Statements................................. F-11
JF HOTEL, INC. AND JF HOTEL II, INC.
PRO FORMA
Pro Forma Statements of Income for the year ended December 31, 1995, the twelve
months ended June 30, 1996, and for the six months ended June 30, 1995 and 1996
(unaudited)........................................................................ F-15
Notes to Pro Forma Statements of Income.............................................. F-20
HISTORICAL
Condensed Combined Balance Sheets as of December 31, 1995 and June 30, 1996
(unaudited)........................................................................ F-21
Condensed Combined Statements of Income for the three and six months ended June 30,
1995 and 1996 (unaudited).......................................................... F-22
Condensed Combined Statements of Cash Flows for the six months ended June 30, 1995
and 1996 (unaudited)............................................................... F-23
Notes to Condensed Combined Financial Statements..................................... F-24
DEBOER HOTELS
HISTORICAL
Report of Independent Accountants.................................................... F-26
Combined Balance Sheets as of December 31, 1994, December 30, 1995 and June 14, 1996
(unaudited)........................................................................ F-27
Combined Statements of Operations for the fiscal years ended December 31, 1993,
December 30, 1994 and December 31, 1995 and for the six months ended June 16, 1995
and June 14, 1996 (unaudited)...................................................... F-28
Combined Statements of Changes in Partners' Deficit for the fiscal years ended
December 31, 1993, December 30, 1994, and December 31, 1995 and for the six months
ended June 16, 1995 and June 14, 1996 (unaudited).................................. F-29
Combined Statements of Cash Flows for the fiscal years ended December 31, 1993,
December 30, 1994, and December 31, 1995 and for the six months ended June 16, 1995
and June 14, 1996 (unaudited)...................................................... F-30
Notes to Combined Financial Statements............................................... F-31
</TABLE>
F-1
<PAGE> 110
INNKEEPERS USA TRUST
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995, THE TWELVE MONTHS ENDED
JUNE 30, 1996, AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
The following unaudited Pro forma Consolidated Statements of Income of
Innkeepers USA Trust are presented as if the acquisition of the Hotels and the
consummation of the Offering and the Follow-on Offering and the application of
the net proceeds of the Offering and the Follow-on Offering had occurred at the
beginning of the periods presented and all of the Hotels had been leased to the
Lessee pursuant to the Percentage Leases throughout the periods presented. Such
pro forma information is based in part upon the Consolidated Statements of
Income of the Company, and the Pro Forma and Historical Statements of Income of
the Lessee and should be read in conjunction with the financial statements
contained herein or incorporated by reference. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
The following unaudited Pro Forma Consolidated Statements of Income for the
periods presented are not necessarily indicative of what actual results of
operations of the Company would have been assuming such transactions had been
completed as of the beginning of the periods presented, nor does it purport to
represent the results of operations for future periods.
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CURRENT HOTELS(A) ACQUISITION HOTELS(A)
------------------------------------ ---------------------
PRO FORMA CURRENT OPERATING OTHER
HISTORICAL ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
---------- ----------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Percentage Lease revenue.......................... $ 11,268 $11,869(B) $23,137 $13,022(B) $ 2,355 $38,514
Other revenue..................................... 197 60(C) 257 257
------- ------- ------- ------- ------- -------
Total revenue............................... 11,465 11,929 23,394 13,022 2,355 38,771
------- ------- ------- ------- ------- -------
Depreciation and amortization..................... 3,182 4,030(D) 7,212 4,586(D) 1,441 13,239
Ground rent....................................... 336 83(E) 419 419
Interest expense.................................. 1,989 3,794(F) 5,783 2,079(F) 7,862
Amortization of loan origination fees............. 439 335(G) 774 774
Taxes and insurance............................... 1,105 1,335(H) 2,440 1,217(H) 329 3,986
General and administrative........................ 510 290(I) 800 80(I) 20 900
Amortization of unearned Trustees' compensation... 40 15(J) 55 55
------- ------- ------- ------- ------- -------
Total expenses.............................. 7,601 9,882 17,483 7,962 1,790 27,235
------- ------- ------- ------- ------- -------
Income before minority interest................... 3,864 $ 2,047 $5,911 $ 5,060 $ 565 11,536
======= ======= ======= =======
Minority interest in income....................... (397) (2,226)(K)
------- -------
Net income........................................ $ 3,467 $ 9,310
======= =======
Preferred Units distributions..................... 4,524
Net income per Common Share....................... $ 0.57 $ 0.32(L)
======= =======
Weighted average number of Common Shares and
Common Share equivalents outstanding............ 6,836 21,700
======= =======
</TABLE>
See Notes to Pro Forma Consolidated Statements of Income.
F-2
<PAGE> 111
TWELVE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CURRENT HOTELS(A) ACQUISITION HOTELS(A)
------------------------------------ ---------------------------
PRO FORMA CURRENT OPERATING OTHER
HISTORICAL ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
---------- ----------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Percentage Lease revenue......................... $ 18,800 $ 5,989(B) $24,789 $14,227(B) $ 2,355 $41,371
Other revenue.................................... 361 60(C) 421 421
------- ------ ------- ------- ------- -------
Total revenue.............................. 19,161 6,049 25,210 14,227 2,355 41,792
------- ------ ------- ------- ------- -------
Depreciation and amortization.................... 5,086 2,126(D) 7,212 4,586(D) 1,441 13,239
Ground rent...................................... 341 83(E) 424 424
Interest expense................................. 3,855 1,928(F) 5,783 2,079(F) 7,862
Amortization of loan origination fees............ 660 114(G) 774 774
Taxes and insurance.............................. 1,868 572(H) 2,440 1,217(H) 329 3,986
General and administrative....................... 826 260(I) 1,086 80(I) 20 1,186
Amortization of unearned Trustees'
compensation................................... 44 15(J) 59 59
------- ------ ------- ------- ------- -------
Total expenses............................. 12,680 5,098 17,778 7,962 1,790 27,530
------- ------ ------- ------- ------- -------
Income before minority interest.................. 6,481 $ 951 $ 7,432 $ 6,265 $ 565 14,262
====== ======= ======= =======
Minority interest in income...................... (459) (2,753)(K)
------- -------
Net income....................................... $ 6,022 11,509
======= =======
Preferred Units distributions.................... 4,524
Net income per Common Share...................... $ 0.65 $ 0.45(L)
======= =======
Weighted average number of Common Shares and
Common Share equivalents outstanding........... 9,923 21,700
======= =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
CURRENT HOTELS(A) ACQUISITION HOTELS(A)
------------------------------------ ---------------------------
PRO FORMA CURRENT OPERATING OTHER
HISTORICAL ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
---------- ----------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Percentage lease revenue......................... $ 4,518 $ 6,843(B) $11,361 $ 5,664(B) $ 1,178 $18,203
Other revenue.................................... 83 30(C) 113 113
------- ------ ------- ------- ------- -------
Total revenue.............................. 4,601 6,873 11,474 5,664 1,178 18,316
------- ------ ------- ------- ------- -------
Depreciation and amortization.................... 1,140 2,466(D) 3,606 2,294(D) 720 6,620
Ground rent...................................... 166 41(E) 207 207
Interest expense................................. 576 2,315(F) 2,891 1,040(F) 3,931
Amortization of loan origination fees............ 155 232(G) 387 387
Taxes and insurance.............................. 390 830(H) 1,220 608(H) 165 1,993
General and administrative....................... 295 30(I) 325 40(I) 10 375
Amortization of unearned trustees'
compensation................................... 20 7(J) 27 27
------- ------ ------- ------- ------- -------
Total expenses............................. 2,742 5,921 8,663 3,982 895 13,540
------- ------ ------- ------- ------- -------
Income before minority interest.................. 1,859 $ 952 $ 2,811 $ 1,682 $ 283 4,776
====== ======= ======= ======= =======
Minority interest in income...................... (229) (922)(K)
------- -------
Net income....................................... $ 1,630 $ 3,854
======= =======
Preferred Units distributions.................... 2,262
Net income per Common Share...................... $ 0.35 $ 0.12(L)
======= =======
Weighted average number of Common Shares and
Common Share equivalents outstanding........... 5,377 21,700
======= =======
</TABLE>
See Notes to Pro Forma Consolidated Statements of Income.
F-3
<PAGE> 112
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CURRENT HOTELS(A) ACQUISITION HOTELS(A)
------------------------------------ ---------------------
PRO FORMA CURRENT OPERATING OTHER
HISTORICAL ADJUSTMENTS HOTELS HOTELS HOTELS TOTAL
---------- ----------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Percentage Lease revenue.......................... $ 12,050 $ 963(B) $13,013 $ 6,869(B) $1,178 $21,060
Other revenue..................................... 247 30(C) 277 277
------- ------- ------- ------ ------ -------
Total revenue............................... 12,297 993 13,290 6,869 1,178 21,337
------- ------- ------- ------ ------ -------
Depreciation and amortization..................... 3,044 562(D) 3,606 2,294(D) 720 6,620
Ground rent....................................... 171 41(E) 212 212
Interest expense.................................. 2,442 449(F) 2,891 1,040(F) 3,931
Amortization of loan origination fees............. 376 11(G) 387 387
Taxes and insurance............................... 1,153 67(H) 1,220 608(H) 165 1,993
General and administrative........................ 611 611 40(I) 10 661
Amortization of unearned Trustees' compensation... 24 7(J) 31 31
------- ------- ------- ------ ------ -------
Total expenses.............................. 7,821 1,137 8,958 3,982 895 13,835
------- ------- ------- ------ ------ -------
Income before minority interest................... 4,476 $ (144) $4,332 $ 2,887 $ 283 7,502
======= ======= ====== ======
Minority interest in income....................... (291) (1,448) (K)
------- -------
Net income........................................ $ 4,185 $ 6,054
======= =======
Preferred Units distributions..................... 2,262
Net income per Common Share....................... $ 0.39 $ 0.24(L)
======= =======
Weighted average number of Common Shares and
Common Share equivalents outstanding............ 11,569 21,700
======= =======
</TABLE>
F-4
<PAGE> 113
INNKEEPERS USA TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(A) Represents results of operations for the Current Hotels and the
Acquisition Hotels on a pro forma basis as if the Current Hotels and Acquisition
Hotels (collectively the "Hotels") were owned by the Company at the beginning of
the periods presented and leased to the Lessee under the Percentage Leases
throughout the periods presented.
(B) Represents the Rent payment from the Lessee to the Company calculated on
a pro forma basis by applying the Rent provisions in the Percentage Leases to
the historical room revenue of the Hotels as if the beginning of the period was
the beginning of the lease year. For the three hotels which had no substantive
operations for the periods presented, the Percentage Lease Rent payment is
assumed to be equal only to the Base Rent provided for in the applicable
Percentage Leases.
(C) Represents rent income on land adjacent to the Holiday Inn
Express -- Lexington, Massachusetts hotel.
(D) Represents depreciation on the Hotel properties and renovations thereto
and amortization of capitalized franchise fees. Depreciation is computed based
upon estimated useful lives of 40 years for buildings and improvements and 5
years for furniture, fixtures and equipment. These estimated useful lives are
based on management's knowledge of the hotels and the hotel industry in general.
Amortization of franchise fees is computed using the straight line method over
the lives of the franchise agreements which range to 10 years.
(E) Represents ground rent at the Comfort Inn -- Woburn, Massachusetts
hotel.
(F) Represents interest expense on long-term debt as follows:
<TABLE>
<CAPTION>
INTEREST EXPENSE
------------------------------------
TWELVE
PRO FORMA MONTHS YEAR SIX MONTHS
OUTSTANDING INTEREST JUNE 30, DECEMBER 31, JUNE 30,
BALANCE RATE 1996 1995 1996
----------- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Current Hotels:
Mortgage Note........................................... $ 3,635 5.00% $ 182 $ 182 $ 91
Line of Credit.......................................... 42,000 7.50 3,150 3,150 1,575
Term Loan............................................... 30,000 8.17 2,451 2,451 1,225
----------- -------- ------ ----------
75,635 5,783 5,783 2,891
----------- -------- ------ ----------
Acquisition Hotels:
Mortgage note........................................... 14,000 10.35 1,449 1,449 725
Mortgage notes.......................................... 10,000 6.30 630 630 315
----------- -------- ------ ----------
24,000 2,079 2,079 1,040
----------- -------- ------ ----------
$99,635 $7,862 $7,862 $3,931
=========== ======= ============ ==========
</TABLE>
(G) Represents amortization of loan origination fees over the life of the
related indebtedness and assumes that such fees were paid at the beginning of
the periods presented.
(H) Represents real estate and personal property taxes and property
insurance to be paid by the Company. Such amounts were derived from historical
amounts paid with respect to the Hotels.
(I) Represents estimated expense for salaries, legal, audit and other
expenses. These expenses are to be paid by the Company.
(J) Represents amortization of 6,896 Common Shares granted to a Trustee over
the vesting period of 5 years.
(K) Calculated as 19.3% of income before minority interest, which represents
the pro forma Partnership Units outstanding (4,984,590) after the Offering and
the acquisition of the Acquisition Hotels divided by the total Common Shares and
Partnership Units outstanding (25,813,743) after the Offering and the
acquisition of the Acquisition Hotels.
(L) Net income per Common Share is computed by dividing income before
minority interest less the distributions on the Preferred Units by the weighted
average number of Common Shares and Common Share equivalents outstanding for the
periods presented.
F-5
<PAGE> 114
INNKEEPERS USA TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
The following unaudited Pro forma Consolidated Balance Sheet is presented
as if the acquisition of the Acquisition Hotels and the closing of the Offering
and the application of the net proceeds of the Offering had occurred on June 30,
1996. Such pro forma information is based in part upon the consolidated balance
sheets of the Company. Such information should be read in conjunction with the
financial statements contained herein or incorporated by reference. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
The following unaudited Pro forma Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transactions had been completed as of June 30, 1996, nor does it
purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Investment in Hotel properties, at cost................. $ 175,918 $ 149,766(A) $ 325,684
Accumulated depreciation................................ (13,151) (13,151)
---------- ----------- ---------
Net investment in Hotel properties...................... 162,767 149,766 312,533
Cash and cash equivalents............................... 6,511 18,493(B) 25,004
Due from Lessee......................................... 3,264 3,264
Deferred expenses, net.................................. 2,551 488(C) 3,039
Other assets............................................ 335 335
---------- ----------- ---------
Total assets.................................. $ 175,428 $ 168,747 $ 344,175
======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt.......................................... $ 78,673 $ 20,962(D) $ 99,635
Accounts payable and other accrued expenses............. 518 518
Distributions payable................................... 2,603 2,603
Minority interest in Partnership........................ 6,084 40,510(E) 46,594
---------- ----------- ---------
Total liabilities............................. 87,878 61,472 149,350
---------- ----------- ---------
Shareholders' Equity:
Preferred Shares......................................
Common Shares......................................... 108 100(F) 208
Additional paid-in capital............................ 90,630 107,250(G) 197,880
Unearned Trustees' compensation....................... (161) (75)(H) (236)
Distributions in excess of net earnings............... (3,027) (3,027)
---------- ----------- ---------
Total shareholders' equity.................... 87,550 107,275 194,825
---------- ----------- ---------
Total liabilities and shareholders' equity.... $ 175,428 $ 168,747 $ 344,175
======== ========= ========
</TABLE>
See Notes to the Pro Forma Consolidated Balance Sheet.
F-6
<PAGE> 115
INNKEEPERS USA TRUST
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(A) Represents the purchase prices ($142,033,000) of the Acquisition Hotels
net of deposits made prior to June 30, 1996 ($2,816,000), the purchase price of
the Comfort Inn -- Woburn, Massachusetts hotel ($2,977,000) net of deposits made
prior to June 30, 1996 ($106,000) purchased after June 30, 1996, closing costs
($2,428,000) of the Acquisition Hotels, and renovations at certain hotels
($5,250,000). Does not include certain discretionary renovations at the Comfort
Inn -- Woburn, Massachusetts and the Holiday Inn Express -- Lexington,
Massachusetts hotels ($3,000,000).
(B) Represents the net proceeds from the Offering ($101,700,000) less the
cash paid for the Acquisition Hotels and related renovations and closing costs
($76,810,000), the cash paid for the Comfort Inn -- Woburn, Massachusetts hotel
($2,871,000), the cash paid for franchise fees ($488,000), and the payment on
the Line of Credit ($3,038,000).
(C) Represents the capitalization of franchise fees ($488,000) for the
Comfort Inn -- Woburn, Massachusetts hotel and the Acquisition Hotels.
(D) Represents payment on the Line of Credit from the proceeds of the
Offering ($3,038,000) (See "Use of Proceeds") and the assumption of three
mortgages encumbering certain of the Acquisition Hotels ($24,000,000).
(E) Represents the value assigned to the Partnership Units issued to the
sellers of certain Acquisition Hotels ($46,085,000) as adjusted to reflect
dilution to the minority interest as a result of the Offering ($5,575,000).
(F) Reflects the par value of Common Shares expected to be sold in the
Offering and the Common Shares to be issued to a Trustee.
(G) Net increase reflects the gross proceeds from the Offering
($108,750,000) less the estimated underwriting and other expenses of the
Offering ($7,050,000), less the par value of the common shares issued
($100,000), plus the value of the Common Shares issued to a Trustee ($75,000)
and plus the allocation of equity from minority interest ($5,575,000).
(H) Represents the value of 6,896 Common Shares issued to a Trustee.
F-7
<PAGE> 116
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investment in Hotel properties, at cost:
Land........................................................... $ 17,380 $ 20,025
Buildings and improvements..................................... 112,899 136,413
Furniture and equipment........................................ 16,245 19,480
-------- --------
146,524 175,918
Accumulated depreciation....................................... (10,137) (13,151)
-------- --------
Net investment in Hotel properties............................. 136,387 162,767
Cash and cash equivalents........................................ 2,093 6,511
Due from Lessee.................................................. 2,048 3,264
Deferred expenses, net........................................... 2,300 2,551
Other assets..................................................... 511 335
-------- --------
Total assets........................................... $ 143,339 $ 175,428
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt................................................... $ 45,636 $ 78,673
Accrued expenses -- Offering..................................... 415 0
Accounts payable and other accrued expenses...................... 431 518
Distributions payable............................................ 2,487 2,603
Minority interest in Partnership................................. 6,124 6,084
-------- --------
Total liabilities...................................... 55,093 87,878
-------- --------
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred Shares, $.01 par value, 20,000,000 shares authorized,
no shares issued or outstanding............................. 0 0
Common Shares, $.01 par value, 100,000,000 shares authorized,
10,821,401 and 10,817,883 shares issued and outstanding at
June 30, 1996 and December 31, 1995, respectively........... 108 108
Additional paid-in capital..................................... 90,659 90,630
Unearned Trustees' compensation................................ (185) (161)
Distributions in excess of net earnings........................ (2,336) (3,027)
-------- --------
Total shareholders' equity............................. 88,246 87,550
-------- --------
Total liabilities and shareholders' equity............. $ 143,339 $ 175,428
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-8
<PAGE> 117
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Percentage Lease revenue.................... $ 2,238 $ 6,354 $ 4,518 $ 12,050
Other revenue............................... 51 153 83 247
----------- ----------- ---------- -----------
Total revenue....................... 2,289 6,507 4,601 12,297
----------- ----------- ---------- -----------
Expenses:
Depreciation and amortization............... 615 1,575 1,140 3,044
Ground rent................................. 83 86 166 171
Interest expense............................ 433 1,377 576 2,442
Amortization of loan origination fees....... 124 215 155 376
Real estate and personal property taxes and
property insurance....................... 212 638 390 1,153
General and administrative.................. 112 390 295 611
Amortization of unearned Trustees'
compensation............................. 10 12 20 24
----------- ----------- ---------- -----------
Total expenses...................... 1,589 4,293 2,742 7,821
----------- ----------- ---------- -----------
Income before minority interest............... 700 2,214 1,859 4,476
Minority interest in income................... (86) (144) (229) (291)
----------- ----------- ---------- -----------
Net income.................................... $ 614 $ 2,070 $ 1,630 $ 4,185
=========== =========== ========== ===========
Net income per Common Share................... $ .13 $ .19 $ .35 $ .39
=========== =========== ========== ===========
Weighted average number of Common Shares
and Common Share equivalents (units)
outstanding................................. 5,376,600 11,568,783 5,376,600 11,568,687
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-9
<PAGE> 118
INNKEEPERS USA TRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 1,630 $ 4,185
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 1,160 3,068
Amortization of loan origination fees.................... 155 376
Minority interest in Partnership......................... 229 291
Change in operating assets and liabilities:
(Increase) decrease in:
Due from Lessee.......................................... 42 (1,216)
Deferred expenses, net................................... (851) (10)
Other assets............................................. 156 176
Increase (decrease) in:
Accounts payable and other accrued expenses.............. (830) 87
------- --------
Net cash provided by operating activities........... 1,691 6,957
------- --------
Cash flows from investing activities:
Investment in Hotel properties.............................. (19,032) (26,544)
Cash paid for franchise fees................................ (154) (122)
Deposit on Acquisition Hotels............................... 0 (2,850)
------- --------
Net cash used in investing activities............... (19,186) (29,516)
------- --------
Cash flows from financing activities:
Proceeds from long-term debt................................ 21,867 35,086
Payments on long-term debt.................................. (782) (2,049)
Payments on dividend reinvestment plan...................... 0 (49)
Proceeds from issuance of Common Shares..................... 0 2
Payments on accrued expenses-Offering....................... (4) (397)
Distributions paid.......................................... (2,085) (5,091)
Loan origination fees paid.................................. (700) (525)
------- --------
Net cash provided by financing activities........... 18,296 26,977
------- --------
Net increase in cash and cash equivalents..................... 801 4,418
Cash and cash equivalents at beginning of period.............. 1,455 2,093
------- --------
Cash and cash equivalents at end of period.................... $ 2,256 $ 6,511
======= ========
Supplemental cash flow information:
Interest paid............................................... $ 547 $ 2,442
======= ========
</TABLE>
Supplemental non-cash financing activities:
The Company (and the Partnership) declared a quarterly distribution of
$0.19375 and $0.215 per Common Share and Common Share equivalent (Units)
outstanding for the quarters ending March 31 and June 30, 1995,
respectively. The Company declared a quarterly distribution of $0.225 per
Common Share and Common Share equivalent (Units) outstanding for the
quarters ending March 31 and June 30, 1996, respectively. The aggregate
amount of distributions paid for each such quarter was approximately
$1,042,000, $1,156,000, $2,603,000 and $2,603,000, respectively, and is to
be treated as ordinary income and return on capital for income tax purposes
on the part of the recipient.
The Company reversed $18,000 of accrued expenses-Offering which was
recorded in additional paid in capital for the period January 1, 1996
through June 30, 1996.
The accompanying notes are an integral part of these condensed consolidated
statements.
F-10
<PAGE> 119
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Innkeepers USA Trust (including its wholly owned subsidiaries, the
"Company") commenced operations on September 30, 1994 and owns 21 hotels in
eleven states at June 30, 1996. On September 30, 1994, the Company sold
4,690,000 common shares of beneficial interest ("Common Shares") in a public
offering (the "IPO") and used substantially all of the net proceeds of the IPO
to acquire an approximate 87.7% equity interest in Innkeepers USA Limited
Partnership (with its subsidiary partnerships, the "Partnership"). The
Partnership used substantially all of such proceeds to purchase seven existing
hotels (the "Initial Hotels"). The Company has acquired 14 hotels subsequent to
the IPO (the "Acquired Hotels" and together with the Initial Hotels, the "21
Hotels"). On October 6, 1995, the Company sold 6,100,000 common shares of
beneficial interest in a public offering (the "Follow-on Offering"), contributed
substantially all of the net proceeds to the Partnership and after such
contribution owned a 93.5% equity interest in the Partnership. The Partnership
used proceeds of the Follow-on Offering and a $30 million term loan ("Term
Loan") to purchase eight of the Acquired Hotels.
The Company leases the Hotels to JF Hotel, Inc. or JF Hotel II, Inc.
(collectively, the "Lessee") pursuant to leases which provide for rent based, in
substantial part, on the room revenues of the 21 Hotels ("Percentage Leases").
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments, which consist only of normal and
recurring adjustments, necessary for a fair presentation of results for the
periods indicated. The results of any interim period are not necessarily
indicative of results for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes thereto
for the year ended December 31, 1995. The December 31, 1995 condensed
consolidated balance sheet was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. RESTRICTED CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of approximately $5.5 million that is
required to be held in escrow accounts as specified by the terms of the
Company's $70 million line of credit ("Line of Credit") and the Term Loan. The
restricted cash and cash equivalents is to be used to pay for insurance, taxes,
furniture, fixtures and equipment and capital expenditures pertaining to the
twelve hotels that collateralize the Line of Credit and the eight hotels that
collateralize the Term Loan.
3. LONG-TERM DEBT
Long-term debt consists of a mortgage note collateralized by one hotel (the
"Mortgage Note"), outstanding borrowings under the Line of Credit and the Term
Loan.
The Mortgage Note is payable in monthly installments of $23,526 including
interest at 5.0% through January 2002. The outstanding principal balance on the
Mortgage Note was approximately $3.6 million at June 30, 1996.
Outstanding borrowings under the Line of Credit bear interest at the 30-day
LIBOR rate plus 175 basis points. The average interest rate on borrowings under
the Line of Credit for the six months ended June 30, 1996 was 7.45% per annum,
and the Line of Credit expires March 1998. The outstanding principal balance on
the Line of Credit was approximately $45 million at June 30, 1996.
F-11
<PAGE> 120
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Term Loan matures in 20 years and bears interest at a 8.17% fixed
annual rate. The Term Loan has scheduled principal amortization based on a
20-year term commencing on the second anniversary of the Term Loan. Interest on
the outstanding principal balance of the Term Loan will accrue at 13.17% per
annum if the outstanding principal balance is not paid in full by the twelfth
year of the Term Loan. The outstanding principal balance on the Term Loan was
$30 million at June 30, 1996.
Substantially all of the Company's assets, other than one of the 21 Hotels,
are pledged as collateral on the Line of Credit and Term Loan.
The scheduled principal payments to be made in future years are as follows
(in thousands):
<TABLE>
<S> <C>
1996............................................................... $ 51
1997............................................................... 45,295
1998............................................................... 745
1999............................................................... 805
2000............................................................... 870
Thereafter......................................................... 30,907
-------
$78,673
=======
</TABLE>
4. SHARE OPTION PLAN
The Company has adopted a share option plan which covers employees and
officers of the Company. The Company has reserved 800,000 Common Shares for
issuance upon the exercise of options under the plan. The plan provides for the
granting of incentive share options and non-qualified options. The option price
of incentive share options may not be less than the fair market value of the
Common Shares at the date of grant. The Company has granted 110,000 incentive
share options and 140,000 non-qualified options to an officer of the Company,
who is also a Trustee, at an exercise price of $10.00 per share. In February
1996, the Company granted an additional 156,000 non-qualified options to the
officer at an exercise price of $9.75. Additionally, the Company has granted
15,000 non-qualified options to three of its non-employee trustees at an
exercise price of $10.00 per share. The incentive share options vest over a ten
year period and the non-qualified options vest over a five year period, except
for the 156,000 non-qualified options granted in February 1996, of which 32,000
vest in each of 1996, 1997, and 1998, and 60,000 vest in 1999. The Company has
also granted 20,000 incentive share options to an officer of the Company at an
exercise price of $8.875, which vest over a three year period. No options were
exercised as of June 30, 1996.
5. ACQUISITIONS
In February 1996, the Company acquired an existing hotel from an
unaffiliated party for approximately $7,000,000 in cash.
In May 1996, the Company acquired two existing hotels from an unaffiliated
party for approximately $16,800,000 in cash.
6. COMMITMENTS AND RELATED PARTY TRANSACTIONS
Pursuant to the Partnership's Partnership Agreement, limited partners who
hold units of limited partnership interest in the Partnership ("Units") have
redemption rights which enable them to redeem their Units in exchange for cash
or, at the Company's option, for Common Shares on a one-for-one basis at any
time after September 30, 1995 or, in the case of 91,991 Units, October 7, 1997.
The aggregate number of Common Shares issuable upon exercise of the redemption
rights is 747,423 at June 30, 1996. In February 1996, 3,285 Units were redeemed
for 3,285 Common Shares.
F-12
<PAGE> 121
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 21 Hotels are operated under franchise agreements and are licensed as
Hampton Inn, Residence Inn, Sheraton Inn, Holiday Inn Express or Comfort Inn
hotels. The Company has paid or will pay the cost of obtaining or transferring
Franchise Licenses to the Lessee. The Franchise License require the payment of
fees based on a percentage of hotel room revenue. These fees are paid by the
Lessee, which holds the Franchise Licenses.
The Company earned Percentage Lease revenue of $12,050,000 and $4,518,000
for the six months ended June 30, 1996 and June 30, 1995, respectively. At June
30, 1996, the Lessee owed the Company approximately $3,491,000 in Percentage
Lease revenue under the Percentage Leases. The Company evaluated the
creditworthiness of the Lessee and has determined that an allowance for doubtful
accounts is not warranted. The Company has not incurred any losses pertaining to
Percentage Lease receivables for the six months ended June 30, 1996.
The Lessee has future minimum base lease commitments under the Percentage
Lease agreements to the Company through the year 2006. Minimum future Base Rent,
under the Percentage Leases, are as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................ $ 5,942
1997............................................................ 11,885
1998............................................................ 11,885
1999............................................................ 11,885
2000............................................................ 11,885
Thereafter...................................................... 53,949
</TABLE>
The Lessee's net income and gross room revenue were approximately $826,000
and $25,333,000, respectively, for the six months ended June 30, 1996 and
$410,000 and $9,514,000, respectively, for the six months ended June 30, 1995
and are derived solely from the operations of the Company's hotels.
At June 30, 1996, the Company's Declaration of Trust limited the
consolidated indebtedness of the Company to 50.0% of the Company's investment in
hotels, at cost, after giving effect to the Company's use of proceeds from any
indebtedness. The Company's consolidated indebtedness is 45% of its investment
in hotels, at cost, at June 30, 1996.
7. SUBSEQUENT EVENTS
ACQUISITIONS
In March 1996, the Company contracted to acquire on or about September 1,
1996 two Hotels under development from an unaffiliated party for approximately
$27,500,000 in cash.
In August 1996, the Company acquired an existing Hotel from an unaffiliated
party for approximately $3,000,000 in cash.
DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
In March 1996, the Company established a dividend reinvestment and share
purchase plan ("Plan") for its shareholders. In April and July 1996, 233 and 330
common shares were issued under the Plan, respectively.
REDEMPTION OF UNITS
In July 1996, 526 units were redeemed for 526 Common Shares.
F-13
<PAGE> 122
INNKEEPERS USA TRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The unaudited pro forma consolidated statements of income of the Company is
presented as if the acquisition of the 21 Hotels has occurred at the beginning
of the periods presented and all of the 21 Hotels had been leased to the Lessee
pursuant to the Percentage Leases throughout the periods presented.
The unaudited pro forma consolidated statements of income for the periods
presented are not necessarily indicative of what actual results of operations of
the Company would have been assuming such transactions had been completed as of
the beginning of the periods presented, nor does it purport to represent the
results of operations for future periods.
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
Operating Data:
Percentage Lease revenue......................................... $ 11,233 $ 12,781
Other revenue.................................................... 456 456
----------- -----------
Total Revenue............................................ 11,689 13,237
----------- -----------
Depreciation and amortization.................................... 3,449 3,449
Ground rent...................................................... 168 168
Interest expense................................................. 3,004 3,004
Amortization of origination fees................................. 480 480
Real estate and personal property taxes and property insurance... 1,164 1,164
General and administrative....................................... 500 500
Amortization of unearned Trustees' compensation.................. 24 24
----------- -----------
Total expenses........................................... 8,789 8,789
Income before minority interest.................................. 2,900 4,448
Minority interest in income...................................... (189 ) (289 )
----------- -----------
Net income............................................... $ 2,711 $ 4,159
=========== ===========
Net income per common share...................................... $ 0.25 $ 0.38
=========== ===========
Weighted average number of Common Shares and Common Share
equivalents (units) outstanding............................... 11,568,591 11,568,591
=========== ===========
</TABLE>
F-14
<PAGE> 123
JF HOTEL, INC. AND JF HOTEL II, INC.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995, TWELVE MONTHS ENDED
JUNE 30, 1996, AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED, AMOUNTS IN THOUSANDS)
The following unaudited Pro forma Statements of Income of JF Hotel, Inc.
and JF Hotel II, Inc. (the "Lessee") are presented as if the Hotels had been
leased from the Partnership pursuant to the Percentage Leases from the beginning
of the periods presented. Such pro forma information is based in part upon the
Statements of Income of the Lessee and the Hotels and should be read in
conjunction with the financial statements contained herein or incorporated by
reference. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
The following unaudited Pro forma Statements of Income for the periods
presented are not necessarily indicative of what actual results of operations of
the Lessee would have been assuming such transactions had been completed as of
the beginning of the periods presented, nor does it purport to represent the
results of operations for future periods.
F-15
<PAGE> 124
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CURRENT HOTELS
-----------------------------------------------------
PRIOR TO PRO FORMA
ACQUISITION ADJUSTMENTS
HISTORICAL (A) (B) PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Gross operating revenue:
Room revenue........................... $ 24,412 $26,884 $ (18) $ 51,278
Food and Beverage...................... 626 51 677
Telephone.............................. 743 1,056 1,799
Interest............................... 46 (46)
Other.................................. 526 640 (59) 1,107
---------- ----------- ----------- ---------
Total gross operating revenue.... 26,307 28,677 (123) 54,861
---------- ----------- ----------- ---------
Departmental Expenses:
Rooms.................................. 5,132 5,752 (216) 10,668
Food and Beverage...................... 596 15 611
Telephone.............................. 381 383 764
Other.................................. 166 273 439
---------- ----------- ----------- ---------
Total departmental expenses...... 6,275 6,423 (216) 12,482
---------- ----------- ----------- ---------
Gross profit..................... 20,032 22,254 93 42,379
---------- ----------- ----------- ---------
Unallocated Operating Expenses:
General and Administrative............. 1,598 3,190 (228) 4,560
Franchise Fees......................... 1,941 1,148 42 3,131
Advertising and Promotions............. 894 1,559 2,453
Utilities.............................. 1,505 1,637 3,142
Repairs and Maintenance................ 1,195 1,348 2,543
Base Management
Fees................................. 49 926 (826) 149
Incentive Management Fees.............. 353 (353)
---------- ----------- ----------- ---------
Unallocated Operating Expenses... 7,182 10,161 (1,365) 15,978
---------- ----------- ----------- ---------
Other Expenses:
Real Estate Taxes and insurance........ 239 1,480 (1,122) 597
Depreciation and amortization.......... 654 (569) 85
Interest............................... 1,359 (1,359)
---------- ----------- ----------- ---------
Total other expenses............. 239 3,493 (3,050) 682
---------- ----------- ----------- ---------
Net operating profit............. 12,611 8,600 4,508 25,719
Lessee overhead......................... (952) (300) (1,252)
Percentage lease
payments............................... (11,268) (11,869) (23,137)
---------- ----------- ----------- ---------
Net income before extraordinary item.... 391 8,600 (7,661) 1,330
---------- ----------- ----------- ---------
Extraordinary item......................
---------- ----------- ----------- ---------
Net income....................... $ 391 $ 8,600 $ (7,661) $ 1,330
========== =========== ============ ==========
<CAPTION>
ACQUISITION HOTELS
--------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA OTHER
OPERATING ADJUSTMENTS OPERATING HOTELS PRO FORMA
HOTELS(C) (D) HOTELS (E) COMBINED
------------ ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Room revenue...........................$ 26,876 $ 26,876 $ 78,154
Food and Beverage...................... 677
Telephone.............................. 1,079 1,079 2,878
Interest...............................
Other.................................. 695 $ (53) 642 1,749
------------ ----------- --------- ------- ---------
Total gross operating revenue.... 28,650 (53) 28,597 83,458
------------ ----------- --------- ------- ---------
Departmental Expenses:
Rooms.................................. 5,474 5,474 16,142
Food and Beverage...................... 611
Telephone.............................. 266 266 1,030
Other.................................. 272 272 711
------------ ----------- --------- ------- ---------
Total departmental expenses...... 6,012 6,012 18,494
------------ ----------- --------- ------- ---------
Gross profit..................... 22,638 (53) 22,585 64,964
------------ ----------- --------- ------- ---------
Unallocated Operating Expenses:
General and Administrative............. 3,212 (617) 2,595 7,155
Franchise Fees......................... 735 695 1,430 4,561
Advertising and Promotions............. 1,414 1,414 3,867
Utilities.............................. 1,198 1,198 4,340
Repairs and Maintenance................ 1,464 (100) 1,364 3,907
Base Management
Fees................................. 1,788 (1,216) 572 721
Incentive Management Fees.............. 521 521 521
------------ ----------- --------- ------- ---------
Unallocated Operating Expenses... 9,811 (717) 9,094 25,072
------------ ----------- --------- ------- ---------
Other Expenses:
Real Estate Taxes and insurance........ 1,289 (1,100) 189 786
Depreciation and amortization.......... 2,255 (2,255) 85
Interest............................... 5,312 (5,312)
------------ ----------- --------- ------- ---------
Total other expenses............. 8,856 (8,667) 189 871
------------ ----------- --------- ------- ---------
Net operating profit............. 3,971 9,331 13,302 39,021
Lessee overhead......................... (1,252 )
Percentage lease
payments............................... (13,022) (13,022 ) $(2,355) (38,514 )
------------ ----------- --------- ------- ---------
Net income before extraordinary item.... 3,971 (3,691) 280 (2,355) (745 )
------------ ----------- --------- ------- ---------
Extraordinary item...................... 10,356 (10,356)
------------ ----------- --------- ------- ---------
Net income.......................$ 14,327 $ (14,047) $ 280 $(2,355) $ (745 )
========= ============ ========== ======== ==========
</TABLE>
See Notes to Pro Forma Statements of Income.
F-16
<PAGE> 125
TWELVE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CURRENT HOTELS
--------------------------------------------------------
PRIOR TO PRO FORMA
HISTORICAL ACQUISITION(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Gross operating revenue:
Room revenue........................... $ 40,231 $ 13,558 $ (6) $53,783
Food and Beverage...................... 797 21 818
Telephone.............................. 1,363 499 1,862
Interest............................... 26 (19) 7
Other.................................. 868 319 (39) 1,148
-------- ------- ------- --------
Total gross operating revenue.... 43,259 14,423 (64) 57,618
-------- ------- ------- --------
Departmental Expenses:
Rooms.................................. 8,462 3,002 (141) 11,323
Food and Beverage...................... 735 735
Telephone.............................. 544 187 731
Other.................................. 243 127 370
-------- ------- ------- --------
Total departmental expenses...... 9,984 3,316 (141) 13,159
-------- ------- ------- --------
Gross profit..................... 33,275 11,107 77 44,459
-------- ------- ------- --------
Unallocated Operating Expenses:
General and
Administrative....................... 2,548 1,599 (132) 4,015
Franchise Fees......................... 3,105 612 77 3,794
Advertising and
Promotions........................... 1,572 774 2,346
Utilities.............................. 2,437 855 3,292
Repairs and Maintenance................ 2,062 688 2,750
Base Management Fees................... 154 457 (422) 189
Incentive Management
Fees................................. 0 123 (123)
-------- ------- ------- --------
Unallocated Operating Expenses... 11,878 5,108 (600) 16,386
-------- ------- ------- --------
Other Expenses:
Real Estate Taxes and insurance........ 340 621 (523) 438
Depreciation and amortization.......... 0 459 (447) 12
Interest............................... 0 1,043 (1,043)
-------- ------- ------- --------
Total Other
expenses....................... 340 2,123 (2,013) 450
-------- ------- ------- --------
Net operating
profit......................... 21,057 3,876 2,690 27,623
Lessee overhead......................... (1,445) (300) (1,745)
Percentage lease
payments............................... (18,800) (5,989) (24,789)
-------- ------- ------- --------
Net Income.............................. $ 812 $ 3,876 $ (3,599) $ 1,089
======== ======= ======= ========
<CAPTION>
ACQUISITION HOTELS
----------------------------------------------------
HISTORICAL PRO FORMA
OPERATING PRO FORMA OPERATING OTHER PRO FORMA
HOTELS(C) ADJUSTMENTS(D) HOTELS HOTELS(E) COMBINED
------------ -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Room revenue...........................$ 28,648 $ 28,648 $ 82,431
Food and Beverage...................... 818
Telephone.............................. 1,159 1,159 3,021
Interest............................... 7
Other.................................. 682 $ (10) 672 1,820
------- -------- -------- ------- --------
Total gross operating revenue.... 30,489 (10) 30,479 88,097
------- -------- -------- ------- --------
Departmental Expenses:
Rooms.................................. 5,628 5,628 16,951
Food and Beverage...................... 735
Telephone.............................. 285 285 1,016
Other.................................. 285 285 655
------- -------- -------- ------- --------
Total departmental expenses...... 6,198 6,198 19,357
------- -------- -------- ------- --------
Gross profit..................... 24,291 (10) 24,281 68,740
------- -------- -------- ------- --------
Unallocated Operating Expenses:
General and
Administrative....................... 3,912 (655) 3,257 7,272
Franchise Fees......................... 859 663 1,522 5,316
Advertising and
Promotions........................... 1,469 1,469 3,815
Utilities.............................. 1,182 1,182 4,474
Repairs and Maintenance................ 1,492 (100) 1,392 4,142
Base Management Fees................... 1,849 (1,243) 606 795
Incentive Management
Fees................................. 284 284 284
------- -------- -------- ------- --------
Unallocated Operating Expenses... 10,763 (1,051) 9,712 26,098
------- -------- -------- ------- --------
Other Expenses:
Real Estate Taxes and insurance........ 1,189 (1,000) 189 627
Depreciation and amortization.......... 1,551 (1,551) 12
Interest............................... 5,536 (5,536)
------- -------- -------- ------- --------
Total Other
expenses....................... 8,276 (8,087) 189 639
------- -------- -------- ------- --------
Net operating
profit......................... 5,252 9,128 14,380 42,003
Lessee overhead......................... (1,745 )
Percentage lease
payments............................... (14,227) (14,227 ) $(2,355) (41,371 )
------- -------- -------- ------- --------
Net Income..............................$ 5,252 $ (5,099) $ 153 $(2,355) $ (1,113 )
======= ======== ======== ======= ========
</TABLE>
F-17
<PAGE> 126
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
CURRENT HOTELS
--------------------------------------------------------
PRIOR TO PRO FORMA
HISTORICAL ACQUISITION(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Gross operating revenue:
Room revenue..................................... $ 25,333 $2,500 $ 7 $ 27,840
Food and Beverage................................ 441 8 449
Telephone........................................ 885 49 934
Interest......................................... 7 7
Other............................................ 567 49 (5) 611
---------- ------ ------- ---------
Total gross operating revenue.............. 27,226 2,613 2 29,841
---------- ------ ------- ---------
Departmental Expenses:
Rooms............................................ 5,169 579 (10) 5,738
Food and Beverage................................ 388 0 388
Telephone........................................ 307 34 341
Other............................................ 140 23 163
---------- ------ ------- ---------
Total departmental expenses................ 6,004 636 (10) 6,630
---------- ------ ------- ---------
Gross profit............................... 21,222 1,977 12 23,211
---------- ------ ------- ---------
Unallocated Operating Expenses:
General and
Administrative................................. 1,497 272 (44) 1,725
Franchise Fees................................... 1,922 108 10 2,040
Advertising and
Promotions..................................... 974 152 1,126
Utilities........................................ 1,466 194 1,660
Repairs and Maintenance.......................... 1,267 117 1,384
Base Management Fees............................. 105 114 (114) 105
Incentive Management
Fees...........................................
---------- ------ ------- ---------
Unallocated Operating Expenses............. 7,231 957 (148) 8,040
---------- ------ ------- ---------
Other Expenses:
Real Estate Taxes and insurance.................. 206 127 (116) 217
Depreciation and amortization.................... 140 (140)
Interest......................................... 333 (333)
---------- ------ ------- ---------
Total other
expenses................................. 206 600 (589) 217
---------- ------ ------- ---------
Net operating
profit................................... 13,785 420 749 14,954
Lessee overhead................................... (904) (904)
Percentage lease payments......................... (12,050) (963) (13,013)
---------- ------ ------- ---------
Net Income................................. $ 831 $ 420 $ (214) $ 1,037
========== ============== =============== ==========
<CAPTION>
ACQUISITION HOTELS
----------------------------------------------------
HISTORICAL PRO FORMA
OPERATING PRO FORMA OPERATING OTHER PRO FORMA
HOTELS(C) ADJUSTMENTS(D) HOTELS HOTELS(E) COMBINED
------------ -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Room revenue.....................................$ 13,966 $13,966 $ 41,806
Food and Beverage................................ 449
Telephone........................................ 566 566 1,500
Interest......................................... 7
Other............................................ 331 $ (8) 323 934
------------ ------- --------- --------- ---------
Total gross operating revenue.............. 14,863 (8) 14,855 44,696
------------ ------- --------- --------- ---------
Departmental Expenses:
Rooms............................................ 2,671 2,671 8,409
Food and Beverage................................ 388
Telephone........................................ 147 147 488
Other............................................ 132 132 295
------------ ------- --------- --------- ---------
Total departmental expenses................ 2,950 2,950 9,580
------------ ------- --------- --------- ---------
Gross profit............................... 11,913 (8) 11,905 35,116
------------ ------- --------- --------- ---------
Unallocated Operating Expenses:
General and
Administrative................................. 2,195 (360) 1,835 3,560
Franchise Fees................................... 420 323 743 2,783
Advertising and
Promotions..................................... 709 709 1,835
Utilities........................................ 504 504 2,164
Repairs and Maintenance.......................... 680 680 2,064
Base Management Fees............................. 904 (610) 294 399
Incentive Management
Fees........................................... 108 108 108
------------ ------- --------- --------- ---------
Unallocated Operating Expenses............. 5,412 (539) 4,873 12,913
------------ ------- --------- --------- ---------
Other Expenses:
Real Estate Taxes and insurance.................. 506 (400) 106 323
Depreciation and amortization.................... 786 (786)
Interest......................................... 2,431 (2,431)
------------ ------- --------- --------- ---------
Total other
expenses................................. 3,723 (3,617) 106 323
------------ ------- --------- --------- ---------
Net operating
profit................................... 2,778 4,148 6,926 21,880
Lessee overhead................................... (904 )
Percentage lease payments......................... (6,869) (6,869) $(1,178) (21,060 )
------------ ------- --------- --------- ---------
Net Income.................................$ 2,778 $ (2,721) $ 57 $(1,178) $ (84 )
========= ================ ========== ========== ==========
</TABLE>
F-18
<PAGE> 127
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
CURRENT HOTELS
--------------------------------------------------------
PRIOR TO PRO FORMA
HISTORICAL ACQUISITION(A) ADJUSTMENTS(B) PRO FORMA
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Gross operating revenue:
Room revenue........................... $ 9,514 $ 15,826 $ (5) $25,335
Food and Beverage...................... 270 38 308
Telephone.............................. 265 606 871
Interest............................... 27 (27)
Other.................................. 225 370 (25) 570
------- ------- ------- -------
Total gross operating revenue.... 10,274 16,867 (57) 27,084
------- ------- ------- -------
Departmental Expenses:
Rooms.................................. 1,839 3,329 (85) 5,083
Food and Beverage...................... 249 15 264
Telephone.............................. 144 230 374
Other.................................. 63 169 232
------- ------- ------- -------
Total departmental expenses...... 2,295 3,743 (85) 5,953
------- ------- ------- -------
Gross profit..................... 7,979 13,124 28 21,131
------- ------- ------- -------
Unallocated Operating Expenses:
General and
Administrative....................... 547 1,863 (140) 2,270
Franchise Fees......................... 758 644 (25) 1,377
Advertising and
Promotions........................... 296 937 1,233
Utilities.............................. 534 976 1,510
Repairs and Maintenance................ 400 777 1,177
Base Management Fees................... 583 (518) 65
Incentive Management
Fees................................. 230 (230)
------- ------- ------- -------
Unallocated Operating Expenses... 2,535 6,010 (913) 7,632
------- ------- ------- -------
Other Expenses:
Real Estate Taxes and insurance........ 105 986 (715) 376
Amortization........................... 335 (262) 73
Interest............................... 649 (649)
------- ------- ------- -------
Total other
expenses....................... 105 1,970 (1,626) 449
------- ------- ------- -------
Net operating
profit......................... 5,339 5,144 2,567 13,050
Lessee overhead......................... (411) (411)
Percentage lease payments............... (4,518) (6,843) (11,361)
------- ------- ------- -------
Net Income before extraordinary item.... 410 5,144 (4,276) 1,278
------- ------- ------- -------
Extraordinary Item......................
------- ------- ------- -------
Net income....................... $ 410 $ 5,144 $ (4,276) $ 1,278
======= ======= ======= =======
<CAPTION>
ACQUISITION HOTELS
----------------------------------------------------
HISTORICAL PRO FORMA
OPERATING PRO FORMA OPERATING OTHER PRO FORMA
HOTELS(C) ADJUSTMENTS(D) HOTELS HOTELS(E) COMBINED
------------ -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Room revenue...........................$ 12,194 $12,194 $37,529
Food and Beverage...................... 308
Telephone.............................. 486 486 1,357
Interest...............................
Other.................................. 344 $ (51) 293 863
------- ------- ------- ------- -------
Total gross operating revenue.... 13,024 $ (51) 12,973 40,057
------- ------- ------- ------- -------
Departmental Expenses:
Rooms.................................. 2,517 2,517 7,600
Food and Beverage...................... 264
Telephone.............................. 128 128 502
Other.................................. 119 119 351
------- ------- ------- ------- -------
Total departmental expenses...... 2,764 2,764 8,717
------- ------- ------- ------- -------
Gross profit..................... 10,260 (51) 10,209 31,340
------- ------- ------- ------- -------
Unallocated Operating Expenses:
General and
Administrative....................... 1,495 (322) 1,173 3,443
Franchise Fees......................... 296 355 651 2,028
Advertising and
Promotions........................... 654 654 1,887
Utilities.............................. 520 520 2,030
Repairs and Maintenance................ 652 652 1,829
Base Management Fees................... 843 (583) 260 325
Incentive Management
Fees................................. 345 345 345
------- ------- ------- ------- -------
Unallocated Operating Expenses... 4,460 (205) 4,255 11,887
------- ------- ------- ------- -------
Other Expenses:
Real Estate Taxes and insurance........ 606 (500) 106 482
Amortization........................... 1,490 (1,490) 73
Interest............................... 2,207 (2,207)
------- ------- ------- ------- -------
Total other
expenses....................... 4,303 (4,197) 106 555
------- ------- ------- ------- -------
Net operating
profit......................... 1,497 4,351 5,848 18,898
Lessee overhead......................... (411)
Percentage lease payments............... (5,664) (5,664) $(1,178) (18,203)
------- ------- ------- ------- -------
Net Income before extraordinary item.... 1,497 (1,313) 184 (1,178) 284
------- ------- ------- ------- -------
Extraordinary Item...................... 10,356 (10,356)
------- ------- ------- ------- -------
Net income.......................$ 11,853 $(11,669) $ 184 $(1,178) $ 284
======= ======= ======= ======= =======
</TABLE>
F-19
<PAGE> 128
JF HOTEL, INC. AND JF HOTEL II, INC.
NOTES TO PRO FORMA STATEMENTS OF INCOME
(A) Represents the results of operations of the Current Hotels prior to
acquisition by the Lessee.
(B) Represents adjustments for the following: the elimination of certain
revenues that will not recur, the reclassification of certain fees from
rooms expense to franchise fees, the reduction of certain franchise fees
pursuant to the new Franchise agreements, the elimination of management
fees on management agreements that were terminated in connection with the
acquisition of certain hotels and the elimination of expenses that will be
paid by the Company.
(C) Represents the results of operations of the DeBoer Hotels for the periods
presented.
(D) Represents adjustments for the following: interest income, the elimination
of certain operating lease expense for leases that will be terminated in
connection with the closing of the acquisition of the DeBoer Hotels,
certain partnership expenses incurred by the DeBoer Hotels that will not be
incurred by the Lessee, the adjustment of franchise fees and management
fees to reflect the terms of the Marriott Management Agreements, the
elimination of expenses that will be paid by the Company, and Percentage
Lease payments calculated on a pro forma basis by applying the Rent
provisions in the Percentage Leases to the historical room revenue of the
DeBoer Hotels as if the beginning of the period presented was the beginning
of the lease year.
(E) Represents three recently developed hotels that had no substantive
operations for the periods presented; the Percentage Lease payment is
assumed to be equal only to the Base Rent provided for in the Percentage
Lease agreement.
F-20
<PAGE> 129
JF HOTEL, INC. AND JF HOTEL II, INC.
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 2,894 $ 3,151
Marketable securities............................................ 260 763
Accounts receivable.............................................. 1,540 1,914
Due from shareholders............................................ 41 0
Inventory........................................................ 27 25
Prepaid expenses................................................. 219 56
Other assets..................................................... 154 214
----- -----
Total assets........................................... $ 5,135 $ 6,123
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................. $ 2,023 $ 1,220
Accrued expenses................................................. 1,062 1,103
Due to partnership............................................... 2,048 3,264
----- -----
Total liabilities...................................... 5,133 5,587
----- -----
Commitments and contingencies (Note 3)
Shareholders' equity:
Common Shares, $1 par value, 2,000 Common Shares authorized
issued and outstanding...................................... 2 2
Retained earnings.............................................. 0 534
----- -----
Total shareholders' equity............................. 2 536
----- -----
Total liabilities and shareholders' equity............. $ 5,135 $ 6,123
===== =====
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
F-21
<PAGE> 130
JF HOTEL, INC. AND JF HOTEL II, INC.
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
(JF HOTEL, INC.
AND (JF HOTEL, INC. AND
(JF HOTEL, INC.) JF HOTEL II, INC.) (JF HOTEL, INC.) JF HOTEL II, INC.)
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996
------------------ ------------------ ---------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Gross operating revenue:
Rooms..................... $ 4,839 $ 13,324 $ 9,514 $ 25,333
Food and beverage......... 140 254 270 441
Telephone................. 143 432 265 885
Other..................... 109 266 225 567
------- -------- ------- -------
Gross operating
revenue......... $ 5,231 $ 14,276 $ 10,274 $ 27,226
------- -------- ------- -------
Departmental Profit:
Rooms..................... $ 3,807 $ 10,549 $ 7,675 $ 20,164
Food and beverage......... (5) 18 21 53
Telephone................. 70 314 121 578
Other..................... 79 238 162 427
------- -------- ------- -------
Total departmental
profit.......... $ 3,951 $ 11,119 $ 7,979 $ 21,222
------- -------- ------- -------
Unallocated operating
expenses:
General and
administrative......... 306 785 547 1,497
Franchise fees............ 373 1,007 758 1,922
Advertising and
promotions............. 177 518 296 974
Utilities................. 279 675 534 1,466
Repairs and maintenance... 221 661 400 1,267
Management fees........... 0 54 0 105
------- -------- ------- -------
Total unallocated
operating
expenses........ 1,356 3,700 2,535 7,231
------- -------- ------- -------
Gross operating
profit.......... $ 2,595 $ 7,419 $ 5,444 $ 13,991
------- -------- ------- -------
Insurance................. (64) (109) (105) (206)
------- -------- ------- -------
Net operating
profit.......... 2,531 7,310 5,339 13,785
------- -------- ------- -------
Lessee overhead........... (201) (545) (411) (904)
Percentage Lease
payments............... (2,238) (6,354) (4,518) (12,050)
------- -------- ------- -------
Net income........ $ 92 $ 411 $ 410 $ 831
======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
F-22
<PAGE> 131
JF HOTEL, INC. AND JF HOTEL II, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES)
<TABLE>
<CAPTION>
(JF HOTEL, INC. AND
(JF HOTEL, INC.) JF HOTEL II, INC.)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1996
---------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 410 $ 831
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable................................. (192) (374)
Inventory........................................... 9 2
Prepaid expenses.................................... 96 163
Other assets........................................ (42) (60)
Increase (decrease) in:
Account payable..................................... 40 (803)
Accrued expenses.................................... 93 41
Due to partnership.................................. (42) 1,216
----- ------
Net cash provided by operating activities...... 372 1,016
----- ------
Cash flows from investing activities:
Purchase of marketable securities...................... 0 (503)
----- ------
Net cash used in investing activities.......... 0 (503)
----- ------
Cash flows from financing activities:
Dividends paid......................................... (269) (256)
----- ------
Net cash used in financing activities.......... (269) (256)
----- ------
Net increase in cash and cash equivalents................ 103 257
Cash and cash equivalents at beginning of period......... 549 2,894
----- ------
Cash and cash equivalents at end of period............... $ 652 $ 3,151
===== ======
</TABLE>
Supplemental non-cash financing activities:
The Lessee's shareholders repaid due from shareholders from retained
earnings in the amount of $41,000 for the period January 1, 1996 through
June 30, 1996.
The accompanying notes are an integral part of these condensed combined
statements.
F-23
<PAGE> 132
JF HOTEL, INC. AND JF HOTEL II, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
JF Hotel, Inc. was formed primarily to lease and operate hotels owned by
Innkeepers USA Trust (including its wholly owned subsidiaries, the "Company")
through Innkeepers USA Limited Partnership and its subsidiary partnerships
(collectively the "Partnership"). As of June 30, 1996, approximately 93.5% of
the Partnership was owned by the Company. The principal shareholder of the
Lessee is also the President, Chief Executive Officer and Chairman of the Board
of Trustees of the Company. JF Hotel, Inc. commenced the leasing and operation
of seven hotels owned by the Partnership (the "Initial Hotels") on September 30,
1994. The Company has acquired 14 hotels subsequent to September 30, 1994 (the
"Acquired Hotels" and together with the Initial Hotels, the "Hotels"). JF Hotel,
Inc. leases and operates six of the Acquired Hotels owned by the Company. JF
Hotel, Inc. leases and operates 13 hotels owned by the Company.
JF Hotel II, Inc., a company under common ownership with JF Hotel, Inc.,
was formed to lease eight of the Acquired Hotels owned by the Company (JF Hotel,
Inc. and JF Hotel II, Inc. are referred to collectively herein as the "Lessee").
JF Hotel II, Inc. has contracted with an unaffiliated party to operate five of
the eight Acquired Hotels that it leases.
Each hotel is leased by the Company to the Lessee under a percentage lease
agreement (a "Percentage Lease"). The Percentage Lease for each hotel provides
for the payment to the Company of monthly base rent and monthly percentage rent
based, in substantial part, on fixed percentages of gross room revenue in excess
of certain specified levels of room revenue.
Each hotel is operated under a Franchise License. The cost of obtaining the
Franchise Licenses is paid by the Company and the continuing franchise fees
(generally a percentage of room revenue) are paid by the Lessee. The Franchise
Licenses are held by the Lessee.
2. ACQUISITIONS
In February 1996, the Company acquired and leased to the Lessee an existing
hotel.
In May 1996, the Company acquired and leased to the Lessee two existing
hotels.
3. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Lessee has future minimum Base Rent commitments under the Percentage
Leases to the Company through the year 2006. Minimum future Base Rent payments
under the Percentage Leases, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
----------------------------------------------------------------- -------
<S> <C>
1996............................................................. $ 5,942
1997............................................................. 11,885
1998............................................................. 11,885
1999............................................................. 11,885
2000............................................................. 11,885
Thereafter....................................................... 53,949
</TABLE>
The Lessee has purchased 78,000 Common Shares of the Company which is
included in marketable securities.
F-24
<PAGE> 133
JF HOTEL, INC. AND JF HOTEL II, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUBSEQUENT EVENTS
In March 1996, the Company contracted to acquire on or about September 1,
1996, two hotels under development. It is anticipated that these hotels will be
leased to the Lessee.
In August 1996, the Company acquired and leased to the Lessee an existing
hotel.
F-25
<PAGE> 134
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Innkeepers USA Trust
We have audited the accompanying combined balance sheets for certain real
estate properties (the "DeBoer Hotels") described in Note 1 to the financial
statements as of December 31, 1994 and December 30, 1995 and the related
combined statements of operations, partners' deficit and cash flows for each of
the three fiscal years in the period ended December 31, 1995. These financial
statements are the responsibility of the management of the DeBoer Hotels. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DeBoer Hotels as of
December 31, 1994 and December 30, 1995 and the results of their operations and
their cash flows for each of the three fiscal years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
West Palm Beach, Florida
August 30, 1996
F-26
<PAGE> 135
DEBOER HOTELS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30, JUNE 14,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investment in Hotel properties:
Land..................................................... $ 17,289 $ 17,289 $ 17,289
Buildings and improvements............................... 35,038 35,059 35,071
Furniture and equipment.................................. 19,093 19,732 20,427
-------- -------- --------
71,420 72,080 72,787
Accumulated depreciation................................. (26,159) (26,978) (27,733)
-------- -------- --------
Net investment in Hotel properties....................... 45,261 45,102 45,054
Cash and cash equivalents.................................. 3,188 1,971 2,535
Restricted cash............................................ 653 1,179 211
Accounts receivable, net................................... 562 962 1,040
Prepaids and other assets.................................. 409 621 1,153
Deferred costs............................................. 1,445 1,100 1,212
-------- -------- --------
$ 51,518 $ 50,935 $ 51,205
======== ======== ========
LIABILITIES AND PARTNERS' DEFICIT
Accounts payable and accrued expenses...................... $ 1,893 $ 2,292 $ 1,810
Advances from affiliates................................... 4,508 4,729 4,671
Notes payable.............................................. 76,129 63,675 63,149
-------- -------- --------
Total liabilities................................ 82,530 70,696 69,630
Partners' deficit.......................................... (31,012) (19,761) (18,425)
-------- -------- --------
$ 51,518 $ 50,935 $ 51,205
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE> 136
DEBOER HOTELS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE FISCAL YEARS ENDED ENDED
------------------------------------------ ----------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31, JUNE 16, JUNE 14,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Room................................ $ 22,930 $ 24,456 $ 26,876 $ 12,194 $ 13,966
Telephone........................... 925 984 1,079 486 566
Other............................... 645 629 695 344 331
------- ------- ------- ------- -------
Gross operating revenue..... 24,500 26,069 28,650 13,024 14,863
------- ------- ------- ------- -------
Departmental expenses:
Rooms............................... 4,843 5,157 5,474 2,517 2,671
Telephone........................... 258 249 266 128 147
Other............................... 325 274 272 119 132
------- ------- ------- ------- -------
Departmental profit......... 19,074 20,389 22,638 10,260 11,913
------- ------- ------- ------- -------
Unallocated operating expenses:
General and administrative.......... 2,845 3,202 3,212 1,495 2,195
Franchise fees...................... 544 585 735 296 420
Advertising and promotions.......... 1,368 1,358 1,414 654 709
Utilities........................... 1,216 1,166 1,198 520 504
Repairs and maintenance............. 1,464 1,389 1,464 652 680
Real estate and personal property
taxes and insurance.............. 1,455 1,352 1,289 606 506
Management fees..................... 1,589 1,693 1,788 843 904
Interest............................ 5,500 5,125 5,312 2,207 2,431
Depreciation and amortization....... 1,661 2,045 2,255 1,490 786
------- ------- ------- ------- -------
Total unallocated operating
expenses.................. 17,642 17,915 18,667 8,763 9,135
------- ------- ------- ------- -------
Net income before extraordinary
item................................ 1,432 2,474 3,971 1,497 2,778
Extraordinary item.................... 10,356 10,356
------- ------- ------- ------- -------
Net income............................ $ 1,432 $ 2,474 $ 14,327 $ 11,853 $ 2,778
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE> 137
DEBOER HOTELS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
THE SIX MONTHS ENDED JUNE 14, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1993........................................................ $(32,580)
Contributions..................................................................... 6
Distributions..................................................................... (924)
Net income........................................................................ 1,432
--------
Balance at December 31, 1993...................................................... (32,066)
Distributions..................................................................... (1,420)
Net income........................................................................ 2,474
--------
Balance at December 30, 1994...................................................... (31,012)
Contributions..................................................................... 45
Distributions..................................................................... (3,121)
Net income........................................................................ 14,327
--------
Balance at December 31, 1995...................................................... (19,761)
Contributions (unaudited)......................................................... 822
Distributions (unaudited)......................................................... (2,264)
Net income (unaudited)............................................................ 2,778
--------
Balance at June 14, 1996 (unaudited).............................................. $(18,425)
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-29
<PAGE> 138
DEBOER HOTELS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE FISCAL YEARS ENDED ENDED
---------------------------------------------- ---------------------
DECEMBER 31, DECEMBER 30, DECEMBER 31, JUNE 16, JUNE 14,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.................... $ 1,432 $ 2,474 $ 14,327 $ 11,853 $2,778
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation............... 1,559 1,591 1,452 723 755
Amortization............... 102 454 803 767 31
Extraordinary item......... (10,356) (10,356)
Loss on disposition of
assets................... 44 21
Changes in assets and
liabilities:
Accounts receivable...... 101 (45) (400) (202) (78)
Prepaid and other
assets................ 175 (174) (212) (1,029) (532)
Accounts payable and
accrued expenses...... (133) (229) 399 (252) (482)
------- ------- -------- -------- ------
Net cash provided by
operating
activities.......... 3,280 4,071 6,034 1,504 2,472
------- ------- -------- -------- ------
Cash flows from investing
activities:
Advances from affiliates,
net........................ 9 87 221 610 (58)
(Deposits)withdrawals
into/from restricted cash,
net........................ (11) (334) (526) 618 968
Additional investments in
hotel properties........... (591) (528) (1,314) (448) (707)
------- ------- -------- -------- ------
Net cash provided
(used) by investing
activities.......... (593) (775) (1,619) 780 203
------- ------- -------- -------- ------
Cash flows from financing
activities:
Payment of loan fees and
costs...................... (699) (458) (438) (143)
Contributions from partners... 6 45 45 822
Distributions to partners..... (924) (1,420) (3,121) (936) (2,264)
Proceeds from issuance of
debt....................... 651 15,764 15,364
Principal payments on debt.... (1,665) (1,429) (17,862) (17,061) (526)
------- ------- -------- -------- ------
Net cash used in
financing
activities.......... (2,583) (2,897) (5,632) (3,026) (2,111)
------- ------- -------- -------- ------
Net increase
(decrease).......... 104 399 (1,217) (742) 564
Cash and cash equivalents:
Beginning of period........... 2,685 2,789 3,188 3,188 1,971
------- ------- -------- -------- ------
End of period................. $ 2,789 $ 3,188 $ 1,971 $ 2,446 $2,535
======= ======= ======== ======== ======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest for 1995, 1994 and 1993 was $5,156,
$6,060, and $5,067, respectively.
No amounts were paid for income taxes for 1995, 1994 or 1993.
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 139
DEBOER HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
The DeBoer Hotels (the "Company") consist of the following Residence Inn
hotels:
<TABLE>
<CAPTION>
NUMBER OF
OWNING PARTNERSHIP HOTEL LOCATION ROOMS
----------------------------------------------- ------------------------------- ---------
<S> <C> <C>
Kentwood Residence Associates.................. Grand Rapids, Michigan 96
East Lansing Residence Associates.............. East Lansing, Michigan 60
Denver Downtown Residence Associates........... Denver, Colorado 156
Wichita East Residence Associates.............. Wichita, Kansas 64
San Mateo Residence Associates................. San Mateo, California 159
Sunnyvale Residence Associates................. Silicon Valley I, California 247
Oakmead Residence Associates................... Silicon Valley II, California 231
</TABLE>
The hotels are designed for extended stay guests and provide limited
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF COMBINATION
The accompanying financial statements include the accounts of the
aforementioned limited partnerships. The limited partnerships are under common
control and substantially all of the partnership assets are under contract to be
sold to Innkeepers USA Partnership.
INVESTMENT IN HOTEL PROPERTIES
Hotel properties are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets of 40 years
for buildings and improvements and 5 years for furniture and equipment. Major
renewals, betterments and improvements are capitalized. At each reporting
period, the Company reviews the carrying value of each hotel property to
determine if facts and circumstances exist which would suggest that the
investment in the hotel property may be impaired or that the depreciation period
should be modified. If facts or circumstances exist which indicate impairment is
possible, the Company will prepare a projection of the undiscounted future cash
flows, without interest charges, of the specific hotel property and determine if
the investment in hotel property is recoverable based on the undiscounted future
cash flows. If impairment is indicated, an adjustment will be made to the
carrying value of the hotel property based on the discounted future cash flows.
The Company does not believe that there are any current facts or circumstances
indicating impairment of any of its investments in hotel properties at December
31, 1995.
Expenditures for maintenance and repairs are charged against operations as
incurred. Upon disposition, both the asset and accumulated depreciation accounts
are relieved and the related gain or loss is credited or charged to the income
statement.
CASH AND CASH EQUIVALENTS
All highly liquid debt investments with a maturity of three months or less
when purchased are considered to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of escrow accounts maintained in accordance with
the provisions of the Company's debt agreements.
F-31
<PAGE> 140
DEBOER HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Pursuant to Statement of Financial Accounting Standards No. 115, the
Company has classified its investments in debt and marketable equity securities
as available-for-sale. Debt and marketable equity securities are recorded at
cost which approximates fair value.
DEFERRED COSTS
Deferred costs consist primarily of franchise fees and loan costs which are
recorded at cost. Amortization of franchise fees and loan costs is computed
using the straight-line method over the term of the franchise agreement and
using the interest method over the life of the related note payable,
respectively. Accumulated amortization on the deferred costs is $578,000 and
$1,133,000 at December 31, 1995 and December 30, 1994, respectively.
REVENUE RECOGNITION
Revenue is recognized as earned. Ongoing credit evaluations are performed
and an allowance for potential credit losses is provided against the portion of
accounts receivable which is estimated to be uncollectible. Such losses have
been within management's expectations.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
PROVISION FOR INCOME TAXES
The Company (which is comprised of seven individual partnerships) is not a
tax paying entity for income tax purposes, and thus, no income tax expense has
been recorded in the financial statements. Income from the Company is taxed to
the partners in their individual returns.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-32
<PAGE> 141
DEBOER HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE
At December 30, 1994, December 31, 1995 and June 30, 1996, notes payable
consist of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS,
UNAUDITED)
<S> <C> <C> <C>
Industrial development bond payable (East
Lansing) -- interest payable monthly at a
variable rate which was 3.8% and 3.9% at
December 31, 1995 and December 30, 1994,
respectively, matures on December 1,
2014....................................... $ 4,100 $ 4,100 $ 4,100
Industrial development bond payable
(Kentwood) -- interest payable monthly at a
variable rate which was 3.8% and 3.9% at
December 31, 1995 and December 30, 1994,
respectively, matures on November 1,
2014....................................... 5,900 5,900 5,900
First mortgage note payable
(Denver) -- monthly installments of $71 due
through February 1, 2001, including
interest at a fixed rate of 11%............ 6,954 6,868 6,829
Second mortgage note payable (Denver) -- non-
interest bearing paid in 1995 at a discount
of $956.................................... 1,431
Related party note payable
(Denver) -- interest based on a variable
rate....................................... 86
Mortgage note payable (San Mateo) -- monthly
installments of $93 due through January 20,
2016, including interest based on a
variable rate (which was 7.6% and 7.5% at
December 31, 1995 and December 30, 1994,
respectively) plus 2.5%.................... 11,801 11,566 11,460
Mortgage note payable (Wichita
East) -- monthly installments of $25 due
through October 20, 2016, including
interest based on a variable rate (which
was 7.6% and 6.7% at December 31, 1995 and
December 30, 1994, respectively) plus
2.5%....................................... 3,235 3,176 3,149
Mortgage note payable (Oakmead) -- monthly
installments of $141 due through May 10,
2014, including interest based on a
variable rate (which was 7.6% and 6.9% at
December 31, 1995 and December 30, 1994,
respectively) plus 2.5%.................... 17,291 16,916 16,706
First and second mortgage notes payable
(Sunnyvale) -- paid in 1995 at a discount
of $9,400.................................. 24,766
MICC note payable (Sunnyvale) -- non-interest
bearing paid in 1995....................... 651
</TABLE>
F-33
<PAGE> 142
DEBOER HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------------
(IN THOUSANDS,
(IN THOUSANDS) (IN THOUSANDS) UNAUDITED)
<S> <C> <C> <C>
Promissory note payable
(Sunnyvale) -- monthly installments of $141
due through May 1, 2010, including interest
at a fixed rate of 10.35%.................. 15,063 15,005
------- ------- --------
$ 76,129 $ 63,675 $ 63,149
======= ======= ========
</TABLE>
Aggregate principal payments for the Company's long-term debt as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------ --------------
(IN THOUSANDS)
<S> <C>
1996........................................................ $ 995
1997........................................................ 1,076
1998........................................................ 1,169
1999........................................................ 1,270
2000........................................................ 1,380
Thereafter.................................................. 57,785
-------
$ 63,675
=======
</TABLE>
During 1994. the Company entered into an agreement with Marriott
International Capital Corporation (MICC) whereby MICC acquired two mortgage
notes payable from the receiver of the original lender. MICC acquired such debt
instruments at a discount. As consideration, the Company incurred certain
underwriting and temporary financing costs which were capitalized and amortized
over the period that such loans were owned by MICC. At December 30, 1994, the
Company owed MICC $651 for the fees paid by MICC on the Company's behalf. In May
1995, the Company entered into a Promissory Note with an insurance company for
$15,140,000. The proceeds were used to extinguish the two mortgages purchased by
MICC. The amount paid to MICC was equivalent to MICC's acquisition costs of the
related mortgage notes payable. In connection with the extinguishment of the two
mortgage notes payable, the Company recorded an extraordinary gain of $9,400,000
since such debt was repaid for an amount less than the Company's carrying value.
The industrial development bonds payable are collateralized by first
mortgages on the hotel properties and letters of credit with outstanding
balances of $10,287,000 at December 31, 1995 and bear interest at 2.5% per
annum. The remaining notes payable are collateralized by first and/or second
mortgages on the remaining hotel properties.
F-34
<PAGE> 143
DEBOER HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment under noncancelable operating lease
agreements expiring at varying intervals through 2001. The future minimum rental
payments required under these leases as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
--------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1996........................................................... $316,668
1997........................................................... 189,265
1998........................................................... 141,353
1999........................................................... 93,315
2000........................................................... 10,504
Thereafter..................................................... 1,650
--------
$752,755
========
</TABLE>
Rental expense was approximately $399,000, $358,000 and $349,000 for the
fiscal years ended December 31, 1995, 1994 and 1993, respectively.
The Company has management agreements covering the operations of each hotel
with a major hotel management company. The management agreements have terms
ranging from two to 13 years and provide for a base fee generally based on a
percentage of each hotel's total revenue. The management agreements also provide
for certain penalties if the agreements are terminated early.
The Franchise Licenses held by the Company require the payment of certain
franchise and marketing fees to the franchisor. The fees are generally based on
a percentage of room revenue.
5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
The carrying amount approximates fair value because of the short maturity
of those instruments.
NOTES PAYABLE
The fair value of the Company's notes payable is based on the current rates
offered to the Company for similar debt instruments of the same remaining
maturities.
The estimated fair value of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------
CARRYING FAIR
AMOUNT VALUE
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents and restricted cash...................... $ 3,150 $ 3,150
Notes payable...................................................... 63,675 57,857
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company pays accounting fees to Hotel Corporation ("HC"). Certain
partners of the Company are officers or shareholders of HC. Accounting fees
charged to the Company by HC were $32,000, $42,000 and $42,000 in 1995, 1994 and
1993, respectively.
F-35
<PAGE> 144
DEBOER HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Company periodically makes advances to Hotel Finance Corporation
("HFC"). Certain partners of the Company are officers or shareholders of HFC.
Such advances are classified in prepaid and other assets in the Company's
combined balance sheets and had balances of $77,000 and $188,000 at December 31,
1995 and December 30, 1994, respectively.
The Company periodically receives advances from certain partners, or
shareholders, of the Company, HC and HFC. Proceeds from such advances are
primarily used to make debt service payments and to fund improvements at the
various hotel properties owned by the Company. The advances are evidenced by
demand notes payable. Amounts owed to the aforementioned individuals and
entities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1995 1994
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Partners..................................................... $2,878 $2,759
HFC.......................................................... 1,851 1,739
HC........................................................... 10
------ ------
$4,729 $4,508
====== ======
</TABLE>
The Company recognized $102,000 in 1995 for interest expense on advances
from HFC. No interest expense was charged on the advances from HFC in 1994 or
1993. No interest expense was charged on the advances from partners in 1995,
1994 or 1993.
F-36
<PAGE> 145
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No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
Offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any securities
other than the Common Shares, or to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has been no change in the affairs of the Company or that information
contained herein is correct as of any time subsequent to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Additional Information................ (iii)
Prospectus Summary.................... 1
Risk Factors.......................... 12
The Company........................... 26
Acquisitions.......................... 26
Use of Proceeds....................... 27
Price Range of Common Shares and
Distributions....................... 28
Capitalization........................ 29
Selected Financial Information........ 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business and Properties............... 44
Management............................ 66
The Lessee............................ 72
Principal Shareholders................ 73
Shares Available for Future Sale...... 75
Partnership Agreement................. 76
Federal Income Tax Considerations..... 79
Underwriting.......................... 98
Legal Matters......................... 98
Experts............................... 99
Incorporation of Certain Documents by
Reference........................... 99
Glossary.............................. 101
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,000,000 SHARES
(LOGO) INNKEEPERS USA
INNKEEPERS USA TRUST
COMMON SHARES
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS
INCORPORATED
EVEREN SECURITIES, INC.
MORGAN KEEGAN &
COMPANY, INC.
October 21, 1996
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