<PAGE> 1
Filed pursuant to Rule 424(b)(5)
Registration Statement No. 333-20309
PROSPECTUS SUPPLEMENT
(To Prospectus dated April 11, 1997)
9,500,000 SHARES
[INN KEEPERS USA LOGO]
COMMON SHARES OF BENEFICIAL INTEREST
---------------------------
Innkeepers USA Trust (the "Company") is a self-administered real estate
investment trust ("REIT") that is the largest owner of upscale extended-stay
hotels in the United States. The Company currently owns 47 upscale extended-stay
and mid-priced hotels with an aggregate of 5,727 rooms in 18 states (the
"Hotels"). The Hotels operate as Residence Inn by Marriott(R) hotels (23),
Hampton Inn(R) hotels (12), Summerfield Suites(R) hotels (6), Sierra Suites(sm)
hotels (2), a Comfort Inn(R) hotel, a Holiday Inn Express(R) hotel, a Sheraton
Inn(R) hotel and a Sunrise Suites(R) hotel. The Summerfield Suites hotels, the
Sierra Suites hotels and the Sunrise Suites hotel were acquired from affiliates
of the Summerfield Hotel Corporation as of June 20, 1997. The Company's
objective is to increase shareholder value by focusing on the acquisition of
upscale extended-stay hotels that meet the Company's investment criteria and are
located in its target markets, which generally have high barriers to entry and
strong demand characteristics.
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
listing symbol "KPA." On July 23, 1997, the last reported sale price per share
of the Common Shares on the NYSE was $14. Substantially all of the net proceeds
from this offering will be used to repay debt incurred in connection with the
acquisition of certain of the Hotels.
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS (1) COMPANY (2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $14.00 $0.77 $13.23
- ----------------------------------------------------------------------------------------------------------------------
Total (3)............................... $133,000,000 $7,315,000 $125,685,000
======================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at approximately
$500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 1,425,000 Common Shares solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discount and Commissions and Proceeds to Company will be
$152,950,000, $8,412,250 and $144,537,750, respectively. See "Underwriting."
---------------------------
The Common Shares offered by this Prospectus Supplement are offered by the
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the Underwriters and
to certain further conditions. It is expected that delivery of the Common Shares
offered hereby will be made against payment therefor at the office of Lehman
Brothers Inc., New York, New York on or about July 29, 1997.
---------------------------
LEHMAN BROTHERS MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS
INCORPORATED
EVEREN SECURITIES, INC.
SALOMON BROTHERS INC
July 24, 1997
Inside Front Cover
Pictures of representative Residence Inn Hotels and Summerfield Suites Hotels,
a map indicating the location of each of the Hotels and a standard floor plan
for a Summerfield Suites room.
Map indicating the location of each Summerfield Acquisition Hotel to
demonstrate that the states containing most of such Hotels are in the lowest
two tiers with respect to new construction. Map indicating the location of
each Summerfield Acquisition Hotel to demonstrate that the states containing
most of such Hotels are in the highest two tiers with respect to occupancy
gains.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO PRICING OF
THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES, THE
PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THE OFFERING TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON SHARES OR FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE COMMON SHARES, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) incorporated
by reference in this Prospectus Supplement or in the accompanying 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 "JF 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 Supplement assumes no exercise
of the Underwriters' over-allotment option. See "Glossary" for the definitions
of certain capitalized terms used in this Prospectus Supplement. This Prospectus
Supplement contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in such forward-looking statements.
Factors that might cause such a difference include those discussed in "Risk
Factors" and in the Company's periodic reports filed with the Securities and
Exchange Commission under the Exchange Act.
THE COMPANY
Innkeepers USA Trust is the largest owner of upscale extended-stay hotels
in the United States and is the only publicly-traded REIT primarily focused on
the multi-brand ownership of upscale extended-stay hotels. The Company currently
owns 47 hotels containing an aggregate of 5,727 rooms located in 18 states. The
Hotels consist of (i) 30 upscale and two mid-priced extended-stay hotels,
including 23 Residence Inn hotels, six Summerfield Suites hotels, two Sierra
Suites hotels and one Sunrise Suites hotel, and (ii) 15 mid-priced limited or
full service hotels, including 12 Hampton Inn hotels, one Comfort Inn hotel, one
Holiday Inn Express hotel and one Sheraton Inn hotel. The Company's primary
objective is to acquire high quality assets in its target markets, which
generally have high barriers to entry and strong demand characteristics. The
Company recently completed an acquisition of nine hotels from affiliates of
Summerfield Hotel Corporation ("Summerfield"), which included six Summerfield
Suites hotels, two Sierra Suites hotels and one Sunrise Suites hotel
(collectively, the "Summerfield Acquisition Hotels").
The Company has implemented a strategy of utilizing multiple lessees and
hotel management companies for its hotel properties. The Company leases 38 of
the Hotels to the JF Lessee and leases the nine Summerfield Acquisition Hotels
to an affiliate of Summerfield (the "Summerfield Lessee" and, together with the
JF Lessee, the "Lessees") pursuant to percentage leases (the "Percentage
Leases"). The Percentage Leases allow the Company to participate in increased
revenue from the Hotels by providing for the payment of rent based on
percentages of room revenues. The JF Lessee has entered into management
contracts with Residence Inn by Marriott, Inc., a subsidiary of Marriott
International, Inc. ("Marriott"), the largest operator of upscale extended-stay
hotels in the United States, to manage 12 of the Residence Inn Hotels and with
TMH, Inc. to manage two of the Hotels. The Summerfield Lessee has entered into
management contracts with another affiliate of Summerfield to manage the nine
Summerfield Acquisition Hotels. The Company believes that Marriott's and
Summerfield's resources and hotel operations experience will continue to enhance
the Company's ability to grow. For the year ended December 31, 1996,
approximately 58% of the Company's pro forma Percentage Lease revenue from the
47 Hotels was derived from Hotels leased or managed by parties other than the JF
Lessee.
S-1
<PAGE> 3
UPSCALE EXTENDED-STAY SEGMENT
The Company's acquisition strategy focuses primarily on upscale
extended-stay hotels. Smith Travel Research ("Smith Travel") defines the upscale
extended-stay hotel segment as those extended-stay hotels having an average
daily rate ("ADR") of $85 or greater. Smith Travel's April 1997 census estimates
that there are at least 322 upscale extended-stay hotels containing at least
38,102 rooms.
Upscale extended-stay hotels are distinguishable from mid-priced, economy
and budget extended-stay hotels generally as follows:
<TABLE>
<CAPTION>
EXTENDED-STAY HOTELS
--------------------------------------------------------------------------------------
MID-PRICED, ECONOMY AND BUDGET UPSCALE
------------------------------------------ ------------------------------------------
<S> <C> <C>
Principal Customer
Base............... Independent business travelers; govern- Corporations for executive training and
ment workers; families consulting; project assignment; corporate
relocations
Services/Amenities... Minimal meeting space; limited lobby Complimentary breakfast and evening
space; limited on-site food; limited front cocktails; meeting space; daily linen and
desk hours; weekly maid service and room cleaning service; 24-hour front desk;
twice-weekly linen service guest grocery services; 24-hour security
and maintenance; on-site convenience store
Physical
Facilities......... Smaller rooms; fewer kitchen amenities; Larger rooms; higher quality construc-
limited facility amenities tion; higher level of kitchen amenities;
higher level of room furnishings; pool;
exercise facilities
</TABLE>
The Company believes the demand for upscale extended-stay rooms
substantially exceeds the available supply in its markets, which the Company
expects will allow its Hotels to continue to provide attractive returns to the
Company in the near term. Over the longer term, the Company believes that new
supply will continue to be limited in its target markets by the relatively high
barriers to entry. High barriers to entry include scarcity of land, extensive
permit and approval requirements, the relatively long lead time required to
develop an upscale extended-stay hotel, particularly in New England and the
mid-Atlantic and Pacific states, and the relatively high costs associated with
such development.
The upscale extended-stay hotel concept was developed by Jack P. DeBoer and
Rolf E. Ruhfus, Trustees of the Company, who co-founded both the Residence Inn
and Summerfield Suites brands. The Company believes its relationships with
Marriott, Summerfield and Messrs. DeBoer and Ruhfus, affiliates of each of which
own an equity interest in the Company, have provided and will provide the
Company with attractive opportunities to acquire additional upscale
extended-stay hotels. The Company believes its access to the debt and equity
markets will provide it with a competitive acquisition advantage over certain
other prospective purchasers of upscale extended-stay hotels.
BUSINESS STRATEGY
The Company's objective is to increase shareholder value by acquiring high
quality assets in its target markets, which have high barriers to entry and
strong demand characteristics. The Company focuses primarily on acquiring
upscale extended-stay hotels that meet the Company's investment criteria, such
as Residence Inn hotels and Summerfield Suites hotels. The Company also seeks to
continue to achieve internal growth through the continued implementation of a
focused operating strategy designed to generate increases in revenue per
available room ("RevPAR") and, as a result, higher Percentage Lease payments.
Acquisition Strategy. The Company has developed a multi-brand upscale
extended-stay acquisition focus designed to position itself as a leading owner
of upscale extended-stay hotels in the Company's target markets. The Company's
acquisition strategy focuses on acquiring hotels that are (i) upscale
extended-stay
S-2
<PAGE> 4
hotels, (ii) located in markets with relatively high barriers to entry and
strong demand characteristics and (iii) located near other hotels owned by the
Company thereby allowing the Company to enhance revenues by capitalizing on
local market knowledge and directing overflow business to Company-owned hotels.
The Company also intends to selectively acquire underperforming hotels to which
the Company can add value through repositioning in the market, reflagging to
premium franchise brands or renovation.
The Company seeks to acquire hotels in strong markets where limited new
construction is projected for the next several years because of the relatively
high barriers to entry. Approximately 74% of the Hotels are located in states
that, according to Coopers & Lybrand Hospitality Directions, February 1997
("Hospitality Directions"), have low new construction rates (generally states
where new construction rates are not expected to exceed 2.3% per annum). By
concentrating its investments in hotels in such areas, the Company expects to
continue to benefit from the favorable supply and demand characteristics in the
upscale extended-stay segment in these markets.
Internal Growth Strategy. The Percentage Leases are designed to allow the
Company to participate in growth in room revenue at the Hotels by providing for
the payment of rent based upon percentages of room revenues ("Percentage Rent").
Under the Percentage Leases, once room revenues at a Hotel reach certain
specified levels, the Company receives between 68% and 70% of incremental room
revenues. For the year ended December 31, 1996, room revenues from each of the
Current Hotels, except the Summerfield Acquisition Hotels and two other Hotels
under renovation during the period, exceeded the specified level necessary for
the payment of the higher tier of Percentage Rent under the applicable
Percentage Lease. On a pro forma basis, Percentage Lease revenue for the Hotels
other than the Summerfield Acquisition Hotels (the "Current Hotels") increased
approximately $1.9 million, or 17%, from approximately $11.2 million for the
three months ended March 31, 1996 to $13.1 million for the three months ended
March 31, 1997. See "The Hotels -- The Percentage Leases" and "Exhibit
A -- Information Concerning the Hotels."
Following the completion of this offering (the "Offering") and the
application of the net proceeds therefrom as described in "Use of Proceeds," the
Company will have outstanding indebtedness of approximately $100 million. The
Company's Declaration of Trust limits the 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"). Upon the closing of the Offering and the
application of the net proceeds, the Company will have additional borrowing
capacity of approximately $260 million under the Company's various credit
facilities assuming all proceeds of any borrowings are used for investments in
hotels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
RELATIONSHIPS
The Company has formed relationships with the owners of two of the premier
brands in the upscale extended-stay segment, Marriott and Summerfield.
Marriott. The Company owns 23 Residence Inn hotels, including 12 managed
by Marriott. Marriott's management of Company-owned Hotels enables the Company
to realize the benefits of Marriott's resources and hotel operations experience
and enhances the Company's ability to grow. The Company believes that its
relationship with Marriott may provide the Company access to Residence Inn
developers and potential sellers to which it might not otherwise have meaningful
access. The Company expects that Marriott will manage certain additional
Residence Inn hotels that may be acquired in the future, although no assurance
can be given in this regard. In connection with certain acquisitions by the
Company of Marriott-managed Residence Inns, Marriott exchanged a portion of its
interests therein for approximately 298,000 units of common limited partnership
interest in the Partnership ("Units") and preferred units of limited partnership
interest in the Partnership ("Preferred Units").
Summerfield. The Company's strategic relationship with Summerfield
includes (i) the acquisition of the nine Summerfield Acquisition Hotels (the
"Summerfield Acquisition"), (ii) the leasing of the Summerfield Acquisition
Hotels to an affiliate of Summerfield, (iii) the issuance of Units to affiliates
of Summerfield representing a 5.0% interest in the consolidated equity of the
Company (after completion of the Offering)
S-3
<PAGE> 5
in exchange for substantially all of their equity interests in the Summerfield
Acquisition Hotels, (iv) the appointment of Mr. Ruhfus, Chairman of the Board of
Summerfield, as a Trustee of the Company and (v) the receipt by the Company of a
right of first refusal to acquire certain Summerfield Suites or Sierra Suites
hotels developed in the future by Summerfield (the "Right of First Refusal").
The relationship with Summerfield provides the Company with a multi-tenant
structure and increases the number of upscale extended-stay suites in the
Company's portfolio to 3,568 suites (approximately 62% of its room portfolio).
The Company believes Summerfield Suites hotels are distinguishable from
traditional upscale extended-stay hotels based upon:
- higher ADR for the most recent reporting period of $115.70, as compared
to the average ADR of $91.38 for all other upscale extended-stay hotels,
reflecting in part Summerfield's focus on two-bedroom, two-bath suites;
- Summerfield Suites hotels' substantial number of two-bedroom, two-bath
suites that share a living room and kitchen, as compared to
single-bedroom, single-bath suites at most upscale extended-stay hotels;
- Summerfield Suites hotels' meeting rooms designed to accommodate
corporate training; and
- the higher level of finish in suites and public areas, including lobbies,
at Summerfield Suites hotels, which is generally comparable to the level
of finish of full service hotels.
THE HOTELS
The Company currently owns 47 hotels, including 40 Hotels acquired since
the Company's initial public offering in 1994 (the "IPO"). In 1995, the Company
acquired 11 Hotels with a book value of approximately $91 million, in 1996 the
Company acquired 14 Hotels with a book value of approximately $180 million and
to date in 1997 the Company has acquired 15 Hotels with a book value of
approximately $180 million.
The following chart sets forth certain information with respect to the
Hotels:
<TABLE>
<CAPTION>
NUMBER OF
FRANCHISE AFFILIATION NUMBER OF HOTELS ROOMS/SUITES
- --------------------- ---------------- ------------
<S> <C> <C>
Upscale Extended-Stay
Residence Inn.......................................... 23 2,713
Summerfield Suites..................................... 6 759*
Sunrise Suites......................................... 1 96
-- -----
30 3,568
-- -----
Mid-Priced Extended-Stay
Sierra Suites.......................................... 2 202
-- -----
Mid-Priced
Hampton Inn............................................ 12 1,527
Comfort Inn............................................ 1 127
Holiday Inn Express.................................... 1 164
Sheraton Inn........................................... 1 139
-- -----
15 1,957
-- -----
47 5,727
== =====
</TABLE>
- ---------------
* Contains a total of 1,057 bedrooms.
S-4
<PAGE> 6
Pro forma RevPAR period over period growth at the Current Hotels is as
shown in the following chart (excluding all Hotels commencing operations in
1996):
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31,
---------
PRO FORMA REVPAR GROWTH 1995 1996 1997
- ----------------------- ------- ------- ---------
<S> <C> <C> <C>
By Year of Acquisition
1995 Acquisitions....................................... 7.8% 11.0% 11.0%
1996 Acquisitions....................................... 7.9 14.5 9.8
By Type of Property
Upscale Extended-Stay................................... 7.5% 12.0% 11.0%
Limited Service......................................... 5.8 9.3 5.5
By Franchise Affiliation
Residence Inn........................................... 7.5% 12.0% 11.0%
Hampton Inn............................................. 4.6 7.7 4.9
All Hotels................................................ 7.0% 11.4% 9.2%
</TABLE>
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 S-9.
OTHER RECENT DEVELOPMENTS
Other Recently Completed Acquisitions. Since the completion of the
Company's most recent follow-on public offering of Common Shares in October 1996
(the "1996 Offering"), the Company has implemented its acquisition growth
strategy by acquiring, in the first quarter of 1997, three Residence Inn hotels
containing 390 suites in addition to the Summerfield Acquisition Hotels. The
aggregate consideration for these Hotels was approximately $36.3 million, of
which approximately $4.9 million was paid through the issuance of Units and the
remainder was paid from proceeds from the 1996 Offering and borrowings under the
Company's line of credit (the "Line of Credit"). The Company also purchased
three Hampton Inn hotels located in the Chicago metropolitan area for a cash
purchase price of $19.1 million on June 26, 1997 using borrowings under the Line
of Credit. See "Risk Factors -- Emphasis on Acquiring Hotels with Certain
Franchise Affiliations" and "The Hotels."
Increased Line of Credit. In May 1997, the Company increased the amount
available under its Line of Credit from $70 million to $190 million, of which
approximately $40 million is unsecured. The Line of Credit matures in May 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Acquisition Credit Facility. In June 1997, the Company obtained a one-year
term loan from an affiliate of Lehman Brothers Inc. for an amount of
approximately $89.5 million (the "Acquisition Loan"). The Acquisition Loan will
be fully repaid from the proceeds of the Offering. Following the Offering, $70
million of this credit facility will remain available to the Company for the
acquisition of additional hotels. Borrowings under this credit facility will be
secured, bear interest at 30-day LIBOR plus 160 basis points, mature in June
1998 (excluding extension options) and be subject to customary underwriting
criteria.
Dividend Increase. Effective with the regular quarterly dividend paid on
April 15, 1997, the Company increased its quarterly distribution per share from
$.225 per share to $.25 per share. The Company's annualized dividend rate is now
$1.00 per share, a 29% increase over the annualized dividend rate at the time of
the IPO.
S-5
<PAGE> 7
Management Team. In April 1997, the Company appointed Frederic M. Shaw as
Executive Vice President and Chief Operating Officer and Mark A. Murphy as
General Counsel and Secretary. Mr. Shaw also continues to serve as President of
the JF Lessee, the lessee of all of the Current Hotels, a position he has held
since the IPO. Mr. Murphy is a former partner of the law firm of Hunton &
Williams and had served as outside counsel to the Company since the IPO.
Alignment of the JF Lessee's Interest with the Interests of the
Shareholders of the Company. The principal shareholders of the JF Lessee, which
leases 38 of the Hotels, are Mr. Fisher, Chairman of the Company, and Mr. Shaw,
Chief Operating Officer of the Company. In order to reduce potential conflicts
of interest and more closely align the interests of the JF Lessee with those of
the Company, effective October 1996, Messrs. Fisher and Shaw agreed to invest
75% of the JF Lessee's net income (after distributions to pay taxes and
establishment of necessary working capital reserves) in Common Shares. The JF
Lessee currently owns 163,950 Common Shares. In addition, certain senior
managers of the JF Lessee, as part of their compensation packages, have
incentives related to the performance of the Company.
THE OFFERING
Common Shares offered by the
Company............................. 9,500,000
Common Shares and Units
to be outstanding
after the Offering................ 39,176,821(1)
Use of Proceeds..................... To repay outstanding indebtedness under
the Acquisition Loan and the Line of
Credit and for working capital.
NYSE symbol......................... KPA
- ---------------
(1) Includes 7,237,463 Units and Preferred Units that are redeemable on a
one-for-one basis for Units. Excludes Common Shares reserved for issuance
pursuant to awards under the Company's 1994 Share Incentive Plans and the
Trustees Share Incentive Plan.
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 incorporated by reference in this
Prospectus Supplement or the accompanying Prospectus. The pro forma operating
and other data, as adjusted, for the Company is presented as if the purchase of
each Hotel acquired in 1996 and 1997, the 1996 Offering and the Offering had
occurred as of the beginning of the periods presented. The pro forma balance
sheet data, as adjusted, is presented as if the purchase of the three Hampton
Inn hotels acquired on June 26, 1997 and the Summerfield Acquisition Hotels and
the application of the net proceeds of the Offering had occurred on March 31,
1997.
S-6
<PAGE> 8
INNKEEPERS USA TRUST
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
SEPTEMBER 30, ------------------------------------- -------------------------------------
1994 PRO PRO
(INCEPTION) FORMA, FORMA,
THROUGH HISTORICAL HISTORICAL AS ADJUSTED HISTORICAL HISTORICAL AS ADJUSTED
DECEMBER 31, 1994 1995 1996 1996(1) 1996 1997 1997(1)
----------------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage lease revenue...... $ 1,480 $ 11,268 $ 27,466 $ 64,675 $ 5,696 $ 12,380 $ 16,530
Income before minority
interest.................... 420 3,864 9,749 28,020 2,262 5,581 7,144
Net income per Common Share
outstanding(2).............. $ 0.08 $ 0.57 $ 0.65 $ 0.67 $ 0.20 $ 0.19 $ 0.17
Weighted average number of
Common Shares and Common
Share equivalents (Units)
outstanding(3).............. 5,383 6,836 13,829 35,121 11,569 23,584 35,141
OTHER DATA:
Lessee room revenue........... $ 3,404 $ 24,412 $ 58,501 $122,926 $ 12,009 $ 25,533 $ 34,304
Funds From Operations(4)...... 900 7,015 17,170 47,296 3,717 8,798 12,246
Cash Available for
Distribution(5)............. 924 6,453 15,733 43,529 3,212 7,910 11,219
Cash provided by operating
activities(6)............... 670 4,925 17,194 48,696 3,016 4,878 12,654
Cash used in investing
activities(7)............... (172) (90,929) (109,714) (225,868) (11,540) (34,600) (147,209)
Cash provided by (used in)
financing activities(8)..... (1,764) 86,642 135,166 229,704 13,205 (664) 114,167
BALANCE SHEET DATA:
Investment in Hotels, at
cost........................ $366,140 $506,317
Total assets.................. 370,725 519,640
Total long-term debt.......... 105,834 100,494
Minority interest in
Partnership(9).............. 49,247 76,058
Total shareholders' equity.... 207,621 335,064
</TABLE>
- ---------------
(1) The pro forma, as adjusted, information does not purport to represent what
the Company's financial position or results of operations actually would
have been if the acquisition of the Current Hotels and the Summerfield
Acquisition Hotels and the closing of the 1996 Offering and the Offering
had, in fact, occurred at the beginning of the periods presented, or to
project the Company's financial position or results of operations at any
future date or for any future period. The pro forma, as adjusted,
information assumes the Company owned and leased the Current Hotels and the
Summerfield Acquisition Hotels throughout the periods presented. Pro forma
Percentage Lease revenue represents Rent due from the Lessees to the Company
calculated by applying the Rent provisions of the Percentage Leases to the
historical revenue of the Hotels. The pro forma Percentage Lease payments
for the Summerfield Acquisition Hotels and certain other Hotels, which had
no substantive operations for the periods presented, represent the fixed
obligations of the Lessees to pay a certain sum in annual rent regardless of
the level of room revenues achieved (the "Base Rent" and, together with the
Percentage Rent, the "Rent"), as set forth in the applicable Percentage
Leases. See "The Hotels -- the Percentage Leases" and "Exhibit
A -- Information Concerning the Hotels" for a description of the Rent
formulas for the Hotels.
(2) 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, including
Units, outstanding.
S-7
<PAGE> 9
(3) The pro forma information, as adjusted, includes the Common Shares to be
outstanding after the Offering and the Units issued in connection with the
Summerfield Acquisition and excludes 116,250 Common Shares issued to certain
officers of the Company in May 1997.
(4) Consistent with the definition adopted by the National Association of Real
Estate Investment Trusts ("NAREIT"), Funds From Operations ("FFO") consists
of net income, computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains or losses from debt restructurings and
sales of property, plus depreciation of real property (including furniture
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 GAAP
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.
(5) Cash Available for Distribution is computed by subtracting from FFO the sum
of (a) an amount equal to 4% of Hotel room revenues, which the Company is
obligated by the Percentage Leases to make available to the Lessees 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.
(6) Pro forma cash provided by operating activities represents net income plus
minority interest, depreciation, amortization of franchise costs,
amortization of loan origination fees and amortization of unearned Trustees'
compensation. No adjustments are included for changes in working capital
items.
(7) Pro forma cash used in investing activities includes the purchase of Hotels
acquired, the payment of certain franchise fees and an amount equal to 4% of
room revenues, which the Company is obligated by the Percentage Leases to
make available to the Lessees for the periodic refurbishment and replacement
of furniture, fixtures and equipment at the Hotels.
(8) Pro forma cash provided (used) by financing activities is computed as the
sum of (i) distributions per Common Share (and per Unit) of $0.25 for the
first quarter of 1997 and $0.90 for the year ended December 31, 1996; (ii)
distributions of $0.275 per quarter on the Preferred Units; (iii) proceeds
from the issuance of long-term debt used to acquire the Hotels; (iv)
principal payments and other re-payments on the long-term debt; (v) the net
proceeds from the 1996 Offering and the Offering; and (vi) the payment of
loan origination fees.
(9) On a historical basis, represents an approximately 19.2% interest in the
Partnership and on a pro forma, as adjusted, basis, represents an
approximately 18.5% interest in the Partnership.
S-8
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus
Supplement and the accompanying Prospectus, including information incorporated
herein by reference, prospective investors should carefully consider the
following factors in evaluating an investment in the Common Shares offered
hereby. The Prospectus Supplement and the accompanying Prospectus contain
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 OF RAPID GROWTH; DEPENDENCE ON LESSEES AND THIRD-PARTY MANAGERS
The Company's ability to grow depends upon the ability of the Lessees and
any third-party manager retained by the Lessees, such as Marriott or Summerfield
Suites Management Company, L.P. (the "Summerfield Manager"), to manage
effectively the Hotels, as well as any additional hotels in which the Company
invests. The Lessees' or any third-party managers' ability to operate additional
hotels under Percentage Leases or management agreements, as applicable, with
current staffing levels and office locations, may diminish as the Company
acquires additional hotels. Such growth may require the Lessees to hire
additional personnel, engage additional third-party managers and operate in new
geographic locations. In order to qualify as a REIT, the Company cannot operate
the Hotels or participate in decisions affecting the daily operations of the
Hotels. The Lessees have limited assets and generally the Lessees must generate
sufficient cash flow from the operation of the Hotels, after payment of all
operating expenses, to fund the Lessees' Rent obligations under the Percentage
Leases. There can be no assurance that the Lessees or their third-party managers
will effectively operate the Hotels. In the event that the Lessees and their
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. If the Company terminates a Percentage Lease following a default
without the consent of the lender, a default could concurrently be triggered
under the Line of Credit and the Acquisition Loan, which could result in a
foreclosure of the Hotels securing the Line of Credit and the Acquisition Loan.
In addition, a material default under a Percentage Lease could trigger
cross-defaults under one or more Percentage Leases, which could have a material
adverse effect on Cash Available for Distribution.
ACQUISITION OF HOTELS WITH LIMITED OPERATING HISTORY
Eight of the Hotels have little operating history, including five of the
Summerfield Acquisition Hotels. The Company and the Lessees have negotiated the
Percentage Rent formulas for these Hotels based on certain assumptions of
occupancy and ADR for these Hotels on an anticipated stabilized basis.
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 anticipated time frames. 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. Base Rent for
the Summerfield Acquisition Hotels reduces under the terms of the Summerfield
Percentage Leases beginning in 1999, when the Rent becomes more weighted towards
Percentage Rent. If the room revenues at that time were less than currently
anticipated, the Rent payable with respect to these Hotels would be lower than
anticipated, which could have a material adverse effect on Cash Available for
Distribution.
MULTI-HOTEL ACQUISITION RISKS
Since its IPO, the Company has increasingly emphasized and intends to
continue to emphasize acquisitions of multiple hotels in a single transaction.
Multiple-hotel acquisitions are often more complex, require a larger investment
of management's time and the Company's resources and may require more
complicated financing and greater due diligence expenses than single-hotel
acquisitions. The risk that a multiple-hotel acquisition will not close may be
greater than in a single-hotel acquisition. Because due diligence and other
costs are generally greater in a multi-hotel acquisition than a single-hotel
acquisition, if the Company fails to close such acquisitions, its Cash Available
for Distribution will be adversely affected.
S-9
<PAGE> 11
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 do not meet the Company's investment criteria.
In such cases, the Company may be required to purchase the group of hotels and
may seek to re-sell those that do not meet its criteria. In such circumstances,
there is no assurance as to whether the Company decides to sell such hotels, 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 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 -- Requirements for Qualification -- Income Tests" in the
accompanying Prospectus.
CONCENTRATION OF INVESTMENTS IN CALIFORNIA
Nine of the 47 Hotels are located in California. See "The Hotels." As a
result, localized adverse events or conditions, such as economic recessions and
natural disasters, including earthquakes, could have a significant negative
effect on the operations of the combined Hotels, and ultimately Cash Available
for Distribution to shareholders of the Company.
CONCENTRATION OF PERCENTAGE LEASE PAYMENTS
On a pro forma basis, for the year ended December 31, 1996, Rent from five
of the Hotels (the Residence Inn -- Mountain View, California, -- San Mateo,
California, -- Silicon Valley I, California and -- Silicon Valley II,
California hotels and the Summerfield Suites -- Belmont, California hotel)
generated approximately 26% of the aggregate 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.
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY; EMPHASIS ON UPSCALE EXTENDED-STAY
MARKET SEGMENT
The Company's current growth strategy is to acquire primarily upscale
extended-stay hotels. The Company will not seek to invest in assets selected to
reduce the risks associated with an investment in that segment of the hotel
industry, and, therefore, is subject to risks inherent in concentrating
investments in a single industry and in a single market segment within that
industry. The upscale extended-stay segment is particularly dependent on
corporate training and consultant activity, both of which would be adversely
affected by an economic downturn. Therefore, the adverse effect on Rent under
the Percentage Leases and Cash Available for Distribution to shareholders of the
Company resulting from a downturn in the hotel industry or the failure of the
upscale extended-stay market segment to continue to grow in accordance with
expectations would be more pronounced than if the Company had diversified its
investments outside of the hotel industry or in additional hotel market
segments. See "The Lodging Industry."
EMPHASIS ON ACQUIRING HOTELS WITH CERTAIN FRANCHISE AFFILIATIONS
The Company owns 47 Hotels. Twenty-three of the Hotels operate as Residence
Inn hotels and 12 operate as Hampton Inn hotels. The Summerfield Acquisition
Hotels include six Summerfield Suites hotels. The Company will be subject to
risks inherent in concentrating investments in any franchise brand, in
particular the Residence Inn, Summerfield Suites 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. Furthermore, the
Summerfield Suites and Sierra Suites brands are relatively new brands with a
relatively small number of hotels currently opened (including only three Sierra
Suites hotels) and do not currently have, and may not develop in the future,
substantial name recognition or effective reservation systems. If name
recognition and effective registration systems are not established, the revenues
from such hotels, and therefore the Summerfield Lessee's obligation to make
Percentage Rent payments, particularly at the higher tier, may be adversely
affected, in which case Cash Available for Distribution would be adversely
affected. In addition, dependence upon a lessee, manager or major franchisor
such as Marriott, Promus or Summerfield, respectively, may adversely affect the
Company's ability to negotiate favorable contractual provisions with such
franchisors, Lessees or managers. See "The Hotels -- Description of the
Hotels -- Summerfield Suites Hotels" and "-- Residence Inn Hotels."
S-10
<PAGE> 12
NO ASSURANCE OF FUTURE ACQUISITIONS
While the Company believes that its relationships with Marriott,
Summerfield and Messrs. DeBoer and Ruhfus (the co-founders of the Residence Inn
and Summerfield Suites brands and Trustees of the Company) will continue to
provide the Company with acquisition opportunities, the Company has no
definitive agreement with respect to the acquisition of any hotels, and there
can be no assurance that the Company will acquire any additional Marriott or
Summerfield Suites brand hotels.
CONFLICTS OF INTEREST
Mr. Fisher is Chairman of the Board and Chief Executive Officer of the
Company, Mr. Shaw is Executive Vice President and Chief Operating Officer of the
Company and Messrs. Fisher and Shaw are the shareholders of the JF Lessee. Mr.
Ruhfus, who has been appointed as a Trustee of the Company, is the Chairman of
the Board of Summerfield, an affiliate of which is the general partner of the
Summerfield Lessee and the Summerfield Manager. As a result, 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.
Percentage Leases
Because Messrs. Fisher and Ruhfus are the principal equity owners of the JF
Lessee and the Summerfield Lessee, respectively, as well as Trustees 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 any future percentage leases between such Lessees and the Company. The
economic interests of Messrs. Fisher and Ruhfus in the Lessees 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.
Possible Competition From Hotels Developed by the Summerfield Hotel
Corporation
Mr. Ruhfus is a Trustee of the Company and an equity owner of the
Summerfield Lessee and the Summerfield Manager, and certain of his affiliates
have in the past been, and continue to be, involved in the development of
hotels, including extended stay hotels. Mr. Ruhfus is Chairman of the Board and
a principal shareholder of Summerfield, which is the developer and franchisor of
Summerfield Suites, Sierra Suites and Sunrise Suites hotels. Hotels developed by
Mr. Ruhfus and his affiliates, including Summerfield Suites hotels, Sierra
Suites hotels and Sunrise Suites hotels, may compete with the Hotels for guests,
and other hotel companies with which Mr. Ruhfus is affiliated may compete with
the Company for acquisition opportunities. Accordingly, the interests of the
Company, Mr. Ruhfus and Summerfield could differ with respect to the Hotels or
proposed acquisitions that are competitive with hotels owned or being considered
for acquisition or development by Mr. Ruhfus and his affiliates.
Conflicts Relating to Sales of Summerfield Acquisition Hotels
Due to the potential adverse tax consequences for certain Summerfield
affiliates that may result from the sale of any or all of the Summerfield
Acquisition Hotels, the Company has agreed that for a period of up to seven
years following the closing of the acquisition of the Summerfield Acquisition
Hotels, any taxable sale of a Summerfield Acquisition Hotel will require the
consent of the applicable Summerfield affiliates, which may cause the Company to
be unable to sell some or all of the Summerfield Acquisition Hotels in
circumstances in which it would be advantageous for the Company to do so. If the
Company sells a Summerfield Acquisition Hotel without such consent, the Company
could be liable for the tax liability on the built-in gain of the Summerfield
affiliates.
SUMMERFIELD SUITES - WEST HOLLYWOOD, CALIFORNIA
The Summerfield Suites - West Hollywood, California formerly was an
apartment/hotel. In obtaining land use approvals for the hotel, the former
owners agreed, among other things, that nine apartment residents in the hotel
would be permitted to continue residing in the building under their existing,
rent-controlled apartment leases. The owners also agreed to conduct business in
a manner consistent with the surrounding property uses (primarily residential);
specifically, among other things, refuse pick-up and deliveries are
S-11
<PAGE> 13
prohibited during certain night-time hours, free on-site parking must be
provided to hotel employees, functions must be limited to 25 people and at night
must be held indoors, limits are placed on the manner and timing of (a)
unloading guests in front of the hotel, (b) service of food and alcohol and (c)
use of outdoor patio and roof-top deck, and reasonable measures must be taken to
assure that noise and odors from the kitchen do not disturb neighbors. The
municipality also imposed a fee for occupancy taxes that were then-past due and
for the loss of apartment rental units at the building. The approximately
$60,000 annual fee is payable through 2009. Under the Summerfield Percentage
Lease applicable to the hotel, the Summerfield Lessee is responsible for making
the payment to the municipality. If the fee is not paid, the municipality may
have the right to revert the building from its currently authorized use mix,
which includes nine apartment units and the balance permitted for hotel use, to
a 50/71 apartment/hotel mix, with the reverted apartment units possibly subject
to any then-applicable rent control provisions. Any such reversion would have a
material adverse affect on the revenues at the hotel, the lease payment payable
by the Summerfield Lessee and, therefore, the Company's cash available for
distributions.
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 issue an aggregate of 58,123,179 unissued
and 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 7,237,463 Common
Shares that could be issued upon the redemption of Units and Preferred Units of
the Partnership. The Company has effected a shelf registration of 654,906 Common
Shares issuable to certain limited partners of the Partnership upon redemption
of their Units so as to permit such shares to be freely tradeable. The Company
has also agreed to effect, on or before August 1, 1997, November 1, 1997 and
November 1, 1998, shelf registrations of 369,816, 211,465 and 4,063,329 Common
Shares, respectively, issuable upon redemption of Units and Preferred Units
outstanding and issued in connection with the acquisition of various Current
Hotels. In connection with the purchase of the Summerfield Acquisition Hotels,
certain affiliates of Summerfield received an aggregate of 1,937,947 Units (the
"Summerfield Units"). In addition to its obligation to effect a shelf
registration of a substantial portion of the Common Shares issuable upon the
redemption of the Summerfield Units (the "Summerfield Redemption Shares") on or
before June 20, 1998 (and to effect a shelf registration of the remainder of the
Summerfield Redemption Shares on or before June 20, 1999), the Company has
granted the holders of the Summerfield Units the right to require the Company to
effect two underwritten offerings of the Summerfield Redemption Shares upon
demand by the holders thereof. In addition, the holders of the Summerfield Units
will have the right beginning June 20, 1998, to include the Summerfield
Redemption Shares in certain registration statements filed by the Company with
respect to underwritten public offerings of Common Shares, subject to customary
approvals and rights of the Company's underwriters. The existence of such shelf
registration statements and demand registration rights, the ability of holders
of Units to receive Common Shares in exchange for their Units and to thereafter
sell such Common Shares, may have an adverse affect on the market price of the
Common Shares.
COMMON SHARE PRICE FLUCTUATIONS
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.
S-12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the Offering will be approximately
$125.2 million ($144.0 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 will own, through its wholly-owned subsidiaries, approximately
an 81.5% interest in the Partnership (82.2% if the over-allotment option is
fully exercised). The Partnership will use the net proceeds of the Offering to
repay outstanding indebtedness under the Acquisition Loan and the Line of Credit
and for working capital.
DISTRIBUTION POLICY AND PRICE RANGE OF COMMON SHARES
The Company currently pays regular quarterly distributions to the holders
of Common Shares. The Company declared dividends of $0.25 per share for the
first and second quarters of 1997, a 29% increase over the quarterly
distribution rate at the time of the IPO. 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.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes generally will be taxable
to shareholders as ordinary income. Distributions in excess of current and
accumulated earnings and profits will be treated as a non-taxable return of
capital and a reduction of the shareholder's basis in the Common Shares to the
extent thereof, and thereafter as taxable gain. Distributions that are treated
as a reduction of the shareholder's basis in its Common Shares will have the
effect of deferring taxation until the sale of its Common Shares. The Company
has determined that, for federal income tax purposes, approximately 21% of the
per share distribution paid for the year ended December 31, 1996 represented a
return of capital to shareholders.
The Common Shares were listed for quotation on The Nasdaq Stock Market
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 sales
prices for the Common Shares and the cash distributions declared per share:
<TABLE>
<CAPTION>
PRICE RANGE
---------------- CASH DISTRIBUTION
HIGH LOW DECLARED PER SHARE
------- ------ ------------------
<S> <C> <C> <C>
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....................................... 10.250 8.875 0.225
Second Quarter...................................... 10.250 9.000 0.225
Third Quarter....................................... 11.250 9.500 0.225
Fourth Quarter...................................... 13.875 10.500 0.225
1997
First Quarter....................................... 15.500 13.000 0.250
Second Quarter...................................... 15.000 12.875 0.250
</TABLE>
On July 23, 1997, the last reported sale price of the Common Shares on the
NYSE was $14 per share. As of June 26, 1997, the Company had approximately 120
shareholders of record and approximately 4,900 beneficial owners.
S-13
<PAGE> 15
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of March 31, 1997 and as adjusted to reflect the sale by the Company of
9,500,000 Common Shares offered hereby and the application of the net proceeds
as set forth in "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
PRO FORMA,
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $105,834 $100,494
Minority interest........................................... 49,247 76,058
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, 22,322,817 shares issued and
outstanding, and 31,822,817 shares issued and
outstanding, as adjusted(1)............................ 223 318
Additional paid-in capital.................................. 215,049 342,397
Unearned Trustees' compensation............................. (128) (128)
Distributions in excess of net earnings..................... (7,523) (7,523)
-------- --------
Total shareholders' equity........................ 207,621 335,064
-------- --------
Total capitalization.............................. $362,702 $511,616
======== ========
</TABLE>
- ---------------
(1) Excludes approximately 7,237,463 Common Shares issuable upon redemption of
Units and Preferred Units held by limited partners of the Partnership. Also
excludes Common Shares reserved for issuance pursuant to awards under the
Company's 1994 Share Incentive Plan and the Trustees Share Incentive Plan.
Assuming all of the Units and Preferred Units are converted into Common
Shares, there would be 39,176,821 Common Shares outstanding upon the closing
of the Offering.
S-14
<PAGE> 16
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical and pro forma operating
and financial data for the Company.
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 years ended December 31, 1995 and
1996 and the three months ended March 31, 1996 and 1997, (ii) selected
historical balance sheet data as of March 31, 1997, (iii) selected pro forma
operating and other financial data for the year ended December 31, 1996 and the
three months ended March 31, 1997 and (iv) selected pro forma balance sheet data
as of March 31, 1997.
The selected historical financial data for the Company for the period
September 30, 1994 (inception) through December 31, 1994 and the years ended
December 31, 1995 and 1996 has been derived from the historical financial
statements of the Company audited by Coopers & Lybrand L.L.P., independent
accountants, whose reports with respect thereto are incorporated by reference in
this Prospectus Supplement or the accompanying Prospectus. The selected
historical financial data as of and for the three months ended March 31, 1996
and 1997 have been prepared by management on the same basis as the audited
financial statements of the Company, and, in the opinion of management, include
all adjustments, consisting of normal recurring accruals, that the Company
considers necessary for a fair presentation of the results for such periods.
Such results of operations for the three months ended March 31, 1996 and 1997
are not necessarily indicative of the results for the entire year.
The unaudited pro forma operating and other financial data, as adjusted,
for the Company is presented as if the purchase of each Hotel acquired in 1996
and 1997, the 1996 Offering and the Offering had occurred as of the beginning of
the periods presented. The pro forma balance sheet data, as adjusted, is
presented as if the purchase of the three Hampton Inn hotels acquired on June
26, 1997 and the Summerfield Acquisition Hotels acquired as of June 20, 1997 and
the application of the net proceeds of the Offering had occurred on March 31,
1997.
S-15
<PAGE> 17
INNKEEPERS USA TRUST
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PROPERTY DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------------------
1994 PRO FORMA 1996(1)
(INCEPTION) ---------------------------------------------
THROUGH HISTORICAL SIERRA
DECEMBER 31, ------------------- PRE-1997 OTHER 1997 SUITES
1994 1995 1996 ACQUISITIONS(2) ACQUISITIONS(2) HOTELS(2)
------------- -------- -------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage Lease revenue.... $ 1,480 $ 11,268 $ 27,466 $43,971 $ 7,096 $978
Other revenue............... 39 197 911 916
------- -------- -------- ------- ------- ----
Total revenue....... 1,519 11,465 28,377 44,887 7,096 978
------- -------- -------- ------- ------- ----
Depreciation................ 480 3,151 7,421 11,736 2,368 529
Amortization of franchise
costs..................... 20 31 89 120 13
Ground rent................. 83 336 376 424
Interest expense............ 61 1,989 5,839 7,759
Amortization of loan
origination fees.......... 148 439 867 977 23
Taxes and insurance......... 159 1,105 2,803 4,227 1,171 246
General and
administrative............ 133 510 1,186 1,500 50
Amortization of unearned
Trustees' compensation.... 15 40 47 47
------- -------- -------- ------- ------- ----
Total expenses...... 1,099 7,601 18,628 26,790 3,552 848
------- -------- -------- ------- ------- ----
Income before minority
interest.................. 420 3,864 9,749 18,097 3,544 130
Minority interest, Common... (52) (397) (531) (709) (46) (12)
Minority interest, Preferred... (729) (4,470)
------- -------- -------- ------- ------- ----
Net income.................. $ 368 $ 3,467 $ 8,489 $12,918 $ 3,498 $118
======= ======== ======== ======= ======= ====
Net income per Common
Share(3).................. $ 0.08 $ 0.57 $ 0.65 $ 0.58
======= ======== ======== =======
Weighted average number of
Common Shares and Common
Share equivalents (Units)
outstanding(4)............ 5,383 6,836 13,829 23,313
======= ======== ======== =======
OTHER DATA:
Lessee room revenue......... $ 3,404 $ 24,412 $ 58,501 $87,334 $15,351 $642
Funds From Operations(5).... 900 7,015 17,170 29,833 5,912 659
Cash Available for
Distribution(6)........... 924 6,453 15,733 27,234 5,311 656
Cash provided by operating
activities(7)............. 670 4,925 17,194
Cash used in investing
activities(8)............. (172) (90,929) (109,714)
Cash provided (used) by
financing activities(9)... (1,764) 86,642 135,166
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
PRO FORMA 1996(1)
-------------------------
SUMMERFIELD
SUITES PRO FORMA,
HOTELS(2) AS ADJUSTED
----------- -----------
<S> <C> <C>
OPERATING DATA:
Percentage Lease revenue.... $12,630 $ 64,675
Other revenue............... 916
------- ---------
Total revenue....... 12,630 65,591
------- ---------
Depreciation................ 4,643 19,276
Amortization of franchise
costs..................... 133
Ground rent................. 424
Interest expense............ 7,759
Amortization of loan
origination fees.......... 220 1,220
Taxes and insurance......... 1,268 6,912
General and
administrative............ 250 1,800
Amortization of unearned
Trustees' compensation.... 47
------- ---------
Total expenses...... 6,381 37,571
------- ---------
Income before minority
interest.................. 6,249 28,020
Minority interest, Common... (569) (2,143)
Minority interest, Preferred.. (4,470)
------- ---------
Net income.................. $ 5,680 $ 21,407
======= =========
Net income per Common
Share(3).................. $ 0.67
=========
Weighted average number of
Common Shares and Common
Share equivalents (Units)
outstanding(4)............ 35,121
=========
OTHER DATA:
Lessee room revenue......... $19,599 $ 122,926
Funds From Operations(5).... 10,892 47,296
Cash Available for
Distribution(6)........... 10,328 43,529
Cash provided by operating
activities(7)............. 48,696
Cash used in investing
activities(8)............. (225,868)
Cash provided (used) by
financing activities(9)... 229,704
</TABLE>
S-16
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------------------------------
PRO FORMA 1997(1)
------------------------------------------------------------------------------
HISTORICAL SIERRA
------------------- PRE-1997 OTHER 1997 SUITES SUMMERFIELD PRO FORMA,
1996 1997 ACQUISITIONS(2) ACQUISITIONS(2) HOTELS(2) SUITES HOTELS(2) AS ADJUSTED
-------- -------- --------------- --------------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Percentage Lease revenue... $ 5,696 $ 12,380 $11,547 $1,581 $244 $3,158 $ 16,530
Other revenue.............. 94 345 345 345
-------- -------- ------- ------ ---- ------ --------
Total revenue...... 5,790 12,725 11,892 1,581 244 3,158 16,875
-------- -------- ------- ------ ---- ------ --------
Depreciation............... 1,455 3,217 3,217 592 132 1,161 5,102
Amortization of franchise
costs.................... 14 17 17 3 20
Ground rent................ 85 88 88 88
Interest expense........... 1,065 1,997 1,940 1,940
Amortization of loan
origination fees......... 161 256 256 12 110 378
Taxes and insurance........ 515 1,129 1,009 299 62 317 1,687
General and
administrative........... 221 430 430 13 63 506
Amortization of unearned
Trustees' fees........... 12 10 10 10
-------- -------- ------- ------ ---- ------ --------
Total expenses..... 3,528 7,144 6,967 894 219 1,651 9,731
-------- -------- ------- ------ ---- ------ --------
Income before minority
interest................. 2,262 5,581 4,925 687 25 1,507 7,144
Minority interest,
Common................... (147) (234) (198) (9) (2) (137) (548)
Minority interest,
Preferred................ (1,117) (1,117) (1,117)
-------- -------- ------- ------ ---- ------ --------
Net income................. $ 2,115 $ 4,230 $ 3,610 $ 678 $ 23 $1,370 $ 5,479
======== ======== ======= ====== ==== ====== ========
Net income per Common
Share(3)................. $ 0.20 $ 0.19 $ 0.16 $ 0.17
======== ======== ======= ========
Weighted average number of
Common Shares and Common
Share equivalents (Units)
outstanding(4)........... 11,569 23,584 23,333 35,141
======== ======== ======= ========
OTHER DATA:
Lessee room revenue........ $ 12,009 $ 25,533 $23,790 $3,618 $828 $6,068 $ 34,304
Funds From Operations(5)... 3,717 8,798 8,142 1,279 157 2,668 12,246
Cash Available for
Distribution(6).......... 3,212 7,910 7,410 1,137 136 2,535 11,219
Cash provided by operating
activities(7)............ 3,016 4,878 12,654
Cash used in investing
activities(8)............ (11,540) (34,600) (147,209)
Cash provided (used) by
financing
activities(9)............ 13,205 (664) 114,167
BALANCE SHEET DATA:
Investment in Hotels, at
cost..................... $366,140 $506,317
Total assets............... 370,725 519,640
Total long-term debt....... 105,834 100,494
Minority interest in
Partnership(10).......... 49,247 76,058
Total shareholders'
equity................... 207,621 335,064
</TABLE>
- ---------------
(1) The pro forma and pro forma, as adjusted, information does not purport to
represent what the Company's financial position or results of operations
actually would have been if the acquisition of the Current Hotels and the
Summerfield Acquisition Hotels and the consummation of the 1996 Offering
and the Offering had, in fact, occurred at the beginning of the period
presented, or to project the Company's financial position or results of
operations at any future date or for any future period. The pro forma
information assumes the Company owned and leased the Current Hotels
throughout the periods presented. The pro forma, as adjusted, information
assumes the Company owned and leased the Current Hotels and the Summerfield
Acquisition Hotels throughout the periods presented. Pro forma lease
revenue represents Rent due from the Lessees to the Company calculated by
applying the Rent provisions of the Percentage Leases to the historical
revenue of the Hotels. The pro forma lease payments for the Summerfield
Acquisition Hotels and certain other Hotels, which had no substantive
operations for the periods presented, represent Base Rent as set forth in
the applicable Percentage Leases. See "The Hotels -- The Percentage Leases"
and "Exhibit A -- Information Concerning the Hotels" for a description of
the Rent formulas for the Hotels.
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<PAGE> 19
(2) The Pre-1997 Acquisitions information relates to the 32 Hotels owned by the
Company at December 31, 1996. The Other 1997 Acquisitions information
relates to the three Residence Inn hotels acquired in the first quarter of
1997 and the three Hampton Inn hotels acquired on June 26, 1997. The Sierra
Suites Hotels information relates to the two Sierra Suites hotels acquired
as of June 20, 1997. The Summerfield Suites Hotels information relates to
the six Summerfield Suites hotels and the Sunrise Suites hotel acquired as
of June 20, 1997.
(3) 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, including
Units, outstanding.
(4) The pro forma information, as adjusted, includes the Common Shares to be
outstanding after the closing of the Offering and the Units issued in
connection with the Summerfield Acquisition and excludes 116,250 Common
Shares issued to certain officers of the Company in May 1997.
(5) Consistent with the definitions adopted by NAREIT, FFO consists of net
income, computed in accordance with GAAP, excluding gains or losses from
debt restructurings and sales of property, plus depreciation of real
property (including furniture 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 GAAP 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.
(6) Cash Available for Distribution is computed by subtracting from FFO the sum
of (a) an amount equal to 4% of Hotel room revenues, which the Company is
obligated by the Percentage Leases to make available to the Lessees 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'
fees.
(7) Pro forma cash provided by operating activities represents net income plus
minority interest, depreciation, amortization of franchise costs,
amortization of loan origination fees and amortization of unearned
Trustees' fees. No adjustments are included for changes in working capital
items.
(8) Pro forma cash used in investing activities includes the purchase of Hotels
acquired, the payment of certain franchise fees and an amount equal to 4%
of room revenues, which the Company is obligated by the Percentage Leases
to make available to the Lessees for the periodic refurbishment and
replacement of furniture, fixtures and equipment at the Hotels.
(9) Pro forma cash provided (used) by financing activities is computed as the
sum of (i) distributions per Common Share and per Unit of $0.25 for the
first quarter of 1997 and $0.90 for the year ended December 31, 1996; (ii)
distributions of $0.275 per quarter on the Preferred Units; (iii) proceeds
from the issuance of long-term debt used to acquire the Hotels; (iv)
principal payments and other re-payments on the long-term debt; (v) the net
proceeds from the 1996 Offering and the Offering; and (vi) the payment of
loan origination fees.
(10) On a historical basis, represents an approximately 19.2% interest in the
Partnership and on a pro forma, as adjusted, basis, represents an
approximately 18.5% interest in the Partnership.
S-18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
The Company commenced operations on September 30, 1994. As of March 31,
1997 the Company owned 35 Hotels in 16 states, including 23 Residence Inn
hotels, 9 Hampton Inn hotels, one Comfort Inn hotel, one Sheraton Inn hotel and
one Holiday Inn Express hotel. As of June 20, 1997, the Company completed the
Summerfield Acquisition, thereby acquiring six Summerfield Suites hotels, two
Sierra Suites hotels and one Sunrise Suites hotel. On June 26, 1997, the Company
completed the acquisition of three Hampton Inn hotels located in the Chicago
metropolitan area. In addition, in May 1997, the Company increased the amount
available under its Line of Credit from $70 million to $190 million, of which
approximately $40 million is unsecured. The Line of Credit matures in 2000.
The Company leases the Current Hotels to the JF Lessee and the Summerfield
Acquisition Hotels to the Summerfield Lessee pursuant to Percentage Leases. The
JF Lessee operates 24 of the Hotels, Residence Inn, a wholly-owned subsidiary of
Marriott, operates 12 of the Residence Inn hotels, the Summerfield Manager
operates the nine Summerfield Acquisition Hotels and an unaffiliated party
manages two of the Hotels. The managed Hotels are operated under management
agreements between the manager and the Lessee of the Hotel. The Hotels not
managed by Marriott are operated under Franchise Licenses held by the Lessees.
The right to operate the 12 Marriott-managed Hotels as Residence Inn hotels is
contained in the management contracts entered into by the JF Lessee with an
affiliate of Marriott (the "Marriott Management Agreements"). Continuing
franchise and management fees are paid by the JF Lessee or the Summerfield
Lessee pursuant to the applicable Franchise Licenses and management agreements,
respectively.
Pro forma RevPAR for the Current Hotels, presented as if the acquisition of
all the Hotels had occurred at the beginning of the periods presented, increased
9.2% for the three months ended March 31, 1997 as compared to the three months
ended March 31, 1996, excluding results for the Residence Inns in Atlanta
(Downtown), Georgia, Portland, Maine and Addison, Texas and the Hampton
Inn -- Norcross, Georgia, each of which was initially opened in mid or late
1996, and the Hampton Inn -- Woburn, Massachusetts, which was closed for
renovation during the three months ended March 31, 1997. Management believes the
growth in RevPAR at the Current Hotels reflects the results of the Company's
focused acquisition strategy, the continued implementation of professional
management techniques by the JF Lessee and third party management and industry
conditions. The following table sets forth pro forma information with respect to
occupancy, ADR and RevPAR for the three months ended March 31, 1997 as compared
to the three months ended March 31, 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,
hospitality or other industry conditions.
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS ENDED
THREE MONTHS ENDED MARCH 31, 1996 PERCENTAGE
MARCH 31, 1997 (ACTUAL) CHANGE
------------------ ------------------ ----------
<S> <C> <C> <C>
Occupancy........................................ 79.3% 81.5% (2.6)%
ADR.............................................. $91.39 $81.50 12.1%
RevPAR........................................... $72.50 $66.38 9.2%
</TABLE>
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended
March 31, 1996 (actual)
The Company had revenues of $12,725,000, consisting of $12,380,000 of Rent
under the Percentage Leases from the JF Lessee and $345,000 of other revenue,
for the three-month period in 1997 (the "1997 Three Months") compared with
$5,790,000, $5,696,000 and $94,000, respectively, for the same period in 1996
(the "1996 Three Months"). Depreciation and amortization, amortization of loan
origination fees and amortization of unearned trustees' compensation
("Depreciation and Amortization") were $3,500,000 in the
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<PAGE> 21
aggregate for the 1997 Three Months compared with $1,642,000 for the 1996 Three
Months. Real estate and personal property taxes and property insurance were
$1,129,000 for the 1997 Three Months compared with $515,000 for the 1996 Three
Months. Interest expense for the 1997 Three Months was $1,997,000 compared with
$1,065,000 for the 1996 Three Months. Interest expense for the 1997 Three Months
consisted primarily of interest incurred on borrowings outstanding under the
Line of Credit and the Term Loans (hereinafter defined). Interest expense for
the 1996 Three Months consisted primarily of interest incurred on borrowings
outstanding under the Line of Credit and the First Term Loan (hereinafter
defined). Net income before minority interest was $5,581,000, or $0.19 per
share, for the 1997 Three Months compared with $2,262,000, or $0.20 per share,
for the 1996 Three Months. Rent under the Percentage Leases, Depreciation and
Amortization, interest expense and real estate and personal property taxes and
property insurance increased substantially for the 1997 Three Months compared
with the 1996 Three Months, primarily due to the number of Hotels owned
increasing from 18 at January 1, 1996 to 32 at December 31, 1996 and 35 at March
31, 1997.
FFO was $8,798,000, or $0.32 per share, for the 1997 Three Months compared
with $3,717,000, or $0.32 per share, for the 1996 Three Months. FFO per share
was impacted by the 100% increase in the number of Common Shares outstanding in
the 1997 Three Months compared to the 1996 Three Months, which was primarily due
to the 1996 Offering. Proceeds from the 1996 Offering were used for the
acquisition of 10 Hotels, which have historically yielded the strongest results
in the second and third quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity is Rent payments from the
Lessees under the Percentage Leases, and the Company is dependent on the Lessees
to make such payments to provide cash for debt service, distributions, certain
capital expenditures on its hotels and working capital. The Company believes
that its cash provided by operations will be adequate to meet some of its
liquidity needs, which primarily include funding distributions and paying
operating expenses. The Company also currently expects to fund its growth
objectives in part by accessing the capital markets, borrowing on its credit
facilities and exchanging equity for hotel properties as necessary and as market
conditions permit.
Cash and cash equivalents at March 31, 1997 were $14,353,000, including
approximately $1,400,000 that the Company is required, under the Percentage
Leases, to make available to the JF Lessee for the replacement and refurbishment
of furniture, fixtures and equipment. Additionally, cash and cash equivalents
include approximately $7,300,000 that is held in escrow to pay for insurance,
taxes and capital expenditures pertaining primarily to the 11 Current Hotels
that collateralize the Line of Credit and the 16 Current Hotels that
collateralize the Term Loans.
Net cash provided by operating activities for the three months ended March
31, 1997 was $4,878,000.
Net cash used in investing activities was $34,600,000 for the three months
ended March 31, 1997, consisting of the Company's acquisition of a Residence Inn
Hotel in Eden Prairie, Minnesota for approximately $10,630,000 in cash and
approximately $620,000 in Units, a Residence Inn in Arlington, Texas for
$10,500,000 in cash and a Residence Inn in Addison, Texas for approximately
$10,200,000 in cash and approximately $4,300,000 in Units.
Net cash used by financing activities was $664,000 for the three months
ended March 31, 1997, consisting primarily of proceeds from long-term debt of
$5,120,000 and Common Share distributions paid of $5,217,000.
The Company (and the Partnership) paid an aggregate of $5,217,000 ($0.225
per Common Share and Unit) in distributions to holders of Common Shares and
Units during the three months ended March 31, 1997. In March 1997, the Company
declared an increase in its quarterly distribution to $0.25 per Common Share
from $0.225 per Common Share, which on an annualized basis represents a
distribution of $1.00 per Common Share. Annual preferred distributions of $1.10
are payable on each preferred unit of limited partnership interest in the
Partnership (a "Preferred Unit"), which may increase up to $1.155 for each
Preferred Unit, based on increases in distributions payable on the Common
Shares. The Preferred Units are convertible at any time into Units on a
one-for-one basis. On or after November 1998, the holders of the
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<PAGE> 22
Preferred Units may redeem their Units for Common Shares of the Company or, at
the election of the Company, an equivalent amount of cash. Under federal income
tax law provisions applicable to a REIT, the Company is required to distribute
at least 95% of its annual taxable income to maintain its status as a REIT.
In making additional investments in hotel properties, the Company may
incur, or cause the Partnership to incur, indebtedness to make such investments.
The Company may also incur indebtedness to meet distribution requirements
imposed on a REIT under the Code to the extent that working capital and cash
flow from the Company's investments are insufficient to make such distributions.
The Company's Declaration of Trust limits aggregate indebtedness to 50% of the
Company's investment in hotel properties, at cost, after giving effect to the
Company's use of proceeds from any indebtedness. The Company's consolidated
indebtedness was 29% of its investment in Hotels, at cost, at March 31, 1997. At
March 31, 1997, the Company had outstanding indebtedness of approximately
$105,834,000. Approximately 86% of the Company's indebtedness at March 31, 1997
bore interest at a weighted average fixed rate of 7.9% per annum.
The Company's long-term debt at March 31, 1997 consisted of (a) mortgage
notes collateralized by one Current Hotel located in Florida (the "Florida
Mortgage Note"), one Current Hotel located in California (the "California
Mortgage Note") and two Current Hotels located in Michigan (the "Michigan
Mortgage Note"), (b) outstanding borrowings under the Line of Credit and (c) two
term loans (the "First Term Loan" and the "Second Term Loan"), which are
currently collateralized by first mortgages on 16 Hotels.
The Florida Mortgage Note is payable in equal monthly installments of
$23,526 including interest at a fixed rate of 5.0% per annum through January
2002, at which time all outstanding principal and interest is due. The
outstanding principal balance on the Florida Mortgage Note was approximately
$3.6 million at March 31, 1997 and December 31, 1996. The California Mortgage
Note is payable in equal monthly installments of $141,331 including interest at
a fixed rate of 10.35% per annum through June 2010, at which time all
outstanding principal and interest is due. The outstanding principal balance on
the California Mortgage Note was approximately $14.9 million at March 31, 1997
and December 31, 1996. The Michigan Mortgage Note is payable in monthly interest
only payments, at a variable interest rate based upon the 30-day yield of tax
exempt securities selected by an independent party, through December 2014, at
which time all outstanding principal and interest is due. The Michigan Mortgage
Note is also collateralized by irrevocable letters of credit collateralized by
two hotel properties located in Michigan. The interest rate and outstanding
principal balance on the Michigan Mortgage Note was 3.6% and $10.0 million,
respectively, at March 31, 1997 and 3.9% and $10.0 million, respectively, at
December 31, 1996.
In May 1997, the Company obtained from the Line of Credit lender an amended
and expanded line of credit that resulted in an increase in the borrowing amount
available under the Line of Credit from $70 million to $190 million, of which
$40 million is unsecured. The maturity date on the Line of Credit was extended
to May 2000. Outstanding borrowings under the Line of Credit bear interest at
the 30-day LIBOR rate plus 175 basis points for the secured portion and at the
30-day LIBOR rate plus 195 basis points for the unsecured portion. The secured
portion of the Line of Credit is collateralized by first mortgages on 11 Current
Hotels and will be collateralized by mortgages on any additional hotels financed
with the secured portion. The interest rate on borrowings under the Line of
Credit at March 31, 1997 was 7.2% per annum and at December 31, 1996 was 7.1%
per annum. The outstanding principal balance on the Line of Credit was
approximately $5.3 million and $42.2 million at March 31, 1997 and December 31,
1996, respectively.
The First Term Loan, obtained from the Line of Credit lender, matures in
2015 and bears interest at an 8.17% fixed annual rate. The First Term Loan has
scheduled principal amortization over a twenty-year term commencing in October
1997. Interest on the outstanding principal balance of the First Term Loan will
accrue at 13.17% per annum if the outstanding principal balance is not paid in
full by October 2007. The First Term Loan may be prepaid in full without penalty
on and after October 2007, when the Company expects to repay the loan in full.
The outstanding principal balance on the First Term Loan was $30 million at
March 31, 1997 and December 31, 1996. The First Term Loan is secured by first
mortgages on eight Residence Inn Hotels.
In March 1997, the Company fixed the interest rate on $42 million of
borrowings previously outstanding under the variable interest rate Line of
Credit by refinancing such amounts as a Second Term Loan from the
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<PAGE> 23
Line of Credit lender. The Second Term Loan matures in twenty years and bears
interest at an 8.15% fixed annual rate. The Second Term Loan has scheduled
principal amortization over a twenty-year term commencing in March 1999.
Interest on the outstanding principal balance of the Second Term Loan will begin
to accrue at 13.15% per annum if the outstanding principal balance is not paid
in full by March 2009. The Second Term Loan may be prepaid in full without
penalty in March 2009, when the Company expects to pay off the loan in full. The
outstanding principal balance on the Second Term Loan was $42 million at March
31, 1997. The Second Term Loan is secured by first mortgages on eight Current
Hotels.
In June 1997, the Company obtained the Acquisition Loan for an amount of
approximately $89.5 million, the proceeds of which were used to fund the cash
portion of the Summerfield Acquisition. The Acquisition Loan will be fully
repaid from the proceeds of the Offering. Under the terms of the Acquisition
Loan, the Company has the ability to re-borrow up to $70 million. Borrowings
under this credit facility will be secured and will bear interest at 30-day
LIBOR plus 160 basis points, mature on June 20, 1998 (excluding extension
options) and be subject to customary underwriting criteria.
Following the completion of the Offering and the application of the net
proceeds therefrom as described in "Use of Proceeds," the Company will have
outstanding indebtedness of approximately $100 million. The Debt Limitation
limits the indebtedness of the Company to 50% of its investment in hotels, at
cost, after giving effect to the use of such indebtedness. Upon the closing of
the Offering and the application of the net proceeds, the Company will have
additional borrowing capacity of approximately $260 million under the Company's
various credit facilities assuming all proceeds of any borrowings are used for
investments in hotels. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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, short-term or long-term,
fixed or variable interest rate and may be subject to such other terms as the
Board of Trustees of the Company deems prudent.
The Percentage Leases require the Company to make available to the Lessees
an amount equal to 4.0% of room revenues from all of the Hotels, on a monthly
basis, for the periodic replacement or refurbishment of furniture, fixtures and
equipment and other capital expenditures at the Hotels. The Second Term Loan
requires that the Company make available for such purposes 5% of room revenues
from the eight Current Hotels that secure the Second Term Loan. The Partnership
made available to the JF Lessee approximately $7,800,000 for such purposes from
September 30, 1994 to March 31, 1997. 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 agreement and otherwise
to the extent that the Company deems such expenditures to be in the best
interest of the Company. Management believes that the amounts required to be
made available by the Company will be sufficient to meet required expenditures
for furniture, fixtures and equipment and other capital expenditures at the
Hotels. The Company currently intends to pay for the cost of capital
improvements and any additional furniture, fixture and equipment requirements
from undistributed cash or, to the extent that undistributed cash is
insufficient to pay such costs, the Line of Credit.
In May 1997, the Company completed the conversion of the Comfort Inn Hotel
in Woburn, Massachusetts to a Hampton Inn and expended $2.7 million for such
conversion and improvements to the property.
In order to reduce potential conflicts and more closely align their
interests with those of the shareholders of the Company, effective October 1996,
the shareholders of the JF Lessee, Mr. Fisher, Chairman of the Company, and Mr.
Shaw, Chief Operating Officer of the Company, agreed to invest 75% of the JF
Lessee's net income (after distributions to pay taxes and establishment of
necessary working capital reserves) in Common Shares. 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 purchase. The JF Lessee currently owns 163,950 Common Shares. In addition,
certain senior managers of the JF Lessee, as part of their compensation
packages, have incentives related to the performance of the Company.
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<PAGE> 24
SEASONALITY OF HOTEL BUSINESS
The hotel industry is seasonal in nature. Historically, the Current Hotels'
operations have generally reflected higher occupancy rates and ADR during the
second and third quarters. To the extent that the Company's cash flow from the
Percentage Leases for a quarter is insufficient to fund all of the distributions
for such quarter due to seasonal or other factors, the Company may maintain the
annual distribution rate by funding quarterly distributions with available cash
or borrowings under the Line of Credit.
INFLATION
Operators of hotels, including the Lessees and any third-party managers
retained by the Lessees, 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 Lessees and any third-party managers retained by the Lessees
to raise room rates in response to inflation.
S-23
<PAGE> 25
THE COMPANY
Innkeepers USA Trust is the largest owner of upscale extended-stay hotels
in the United States and is the only publicly-traded REIT primarily focused on
the multi-brand ownership of upscale extended-stay hotels. The Company currently
owns 47 hotels containing an aggregate of 5,727 rooms located in 18 states. The
Hotels consist of (i) 30 upscale and two mid-priced extended-stay hotels,
including 23 Residence Inn hotels, six Summerfield Suites hotels, two Sierra
Suites hotels and one Sunrise Suites hotel and (ii) 15 mid-priced limited or
full service hotels, including 12 Hampton Inn hotels, one Comfort Inn hotel, one
Holiday Inn Express hotel and one Sheraton Inn hotel. The Company's primary
objective is to acquire high quality assets in its target markets, which have
high barriers to entry and strong demand characteristics. The Company recently
completed the Summerfield Acquisition, which included six Summerfield Suites
hotels, two Sierra Suites hotels and one Sunrise Suites hotel.
The Company focuses primarily on acquiring upscale extended-stay hotels
that meet the Company's investment criteria, such as Residence Inn hotels and
Summerfield Suites hotels. The Company also seeks to continue to achieve
internal growth through the continued implementation of a focused operating
strategy designed to generate increases in RevPAR and, as a result, higher
Percentage Lease payments.
The Company's executive offices are located at 306 Royal Poinciana Way,
Palm Beach, Florida 33480, and its telephone number is (561) 835-1800. The
Company also maintains a website at www.innkeepersusa.com.
STRATEGIC RELATIONSHIP WITH SUMMERFIELD
The strategic relationship with Summerfield, which was entered into as of
June 20, 1997, includes (i) the acquisition by the Company and lease by the
Summerfield Lessee of the nine Summerfield Acquisition Hotels, (ii) the
acquisition by Summerfield's senior management of Units in exchange for
substantially all of their equity interests in such Hotels, (iii) the
appointment of Mr. Ruhfus to the Company's Board of Trustees and (iv) the grant
to the Company of the Right of First Refusal.
The Summerfield Acquisition Hotels consist of six Summerfield Suites
hotels, two Sierra Suites hotels and one Sunrise Suites hotel. Summerfield
Suites hotels are distinguishable from other upscale extended-stay hotels by
higher average ADR ($115.70 at Summerfield Suites hotels for April 1997, the
most recent reporting period, as compared to the average ADR of $91.38 for all
other upscale extended-stay hotels for the same period); a substantial number of
two-bedroom, two-bath suites that share a living room and kitchen at a
Summerfield Suites hotel, as compared to 100% single-bedroom, single-bath suites
at most upscale extended-stay hotels; the availability of meeting rooms designed
to accommodate corporate training; and the higher level of finish in public
areas and guest rooms at a Summerfield Suites hotel, which is generally
comparable to the level of finish at full-service hotels. According to the most
recently reported data (for April 1997), overall occupancy for all Summerfield
Suites hotels was approximately 83% as compared to approximately 81% for all
other upscale extended-stay hotels and approximately 65% for the hotel industry
overall. Each of the Summerfield Acquisition Hotels was developed or redeveloped
and operated prior to the Summerfield Acquisition by affiliates of Summerfield.
The consideration for the Summerfield Acquisition Hotels was approximately
$118.6 million, which was paid through the issuance of 1,937,947 Units in
exchange for substantially all of the equity interests of the Summerfield
affiliates in such Hotels (approximately $29.1 million) and approximately $89.5
million in cash. The Company funded the cash portion of the purchase price for
the Summerfield Acquisition Hotels from the proceeds of the Acquisition Loan.
The Acquisition Loan bears an adjustable interest rate of 30-day LIBOR plus 175
basis points per annum and is secured by first mortgages on each of the
Summerfield Acquisition Hotels. The Company intends to use the net proceeds of
the Offering to repay the Acquisition Loan. As a result of the Summerfield
Acquisition, assuming the closing of the Offering, affiliates of Summerfield own
approximately 5.0% of the consolidated equity of the Company.
All of the Summerfield Acquisition Hotels are leased by the Company to the
Summerfield Lessee pursuant to percentage leases (the "Summerfield Percentage
Leases"). See "The Hotels -- The Percentage
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<PAGE> 26
Leases." The Summerfield Lessee has entered into agreements (the "Summerfield
Management Agreements") with the Summerfield Manager to manage the Summerfield
Acquisition Hotels.
The following is a summary of certain information regarding the Summerfield
Acquisition Hotels:
<TABLE>
<C> <S>
[MAP] Summerfield
Suites -- Belmont,
California. Opened in
November 1995, the hotel is
along Highway 101, just
north of Marine World
Parkway. The market includes
major high- tech industries
including the world
headquarters for Oracle
Corporation.
Hewlett-Packard, Network
Equipment and Sun
Microsystems are also
located in the market. The
hotel contains 67
one-bedroom suites and 65
two-bedroom suites.
[MAP] Summerfield Suites -- West
Hollywood, California.
Renovated in May 1994, the
hotel is located on
Westmount Drive north of
Santa Monica Boulevard and
west of La Cienega. The
market includes major
corporations including
Eastman Kodak, Paramount
Pictures, Universal Pictures
and Castle Rock
Entertainment. The hotel
contains 109 one-bedroom
suites.
[MAP] Summerfield
Suites -- Addison, Texas.
Opened in February 1996, the
hotel is near the
intersections of the North
Dallas Tollway and
Interstate 635. The market
includes major corporations
including Sun Microsystems,
Occidental Chemical, Pizza
Hut and Pepsi. The hotel
contains 77 one-bedroom
suites and 55 two-bedroom
suites.
[MAP] Sierra Suites -- Atlanta,
Georgia. Opened in July
1996, the hotel is located
the Northwest Cumberland
area on Powers Ferry Road
south of Windy Hill Road.
The market includes major
corporations including IBM,
AT&T, Southern Bell, Home
Depot, Lockheed, Coca Cola
and Georgia Pacific. The
hotel is also located near a
Naval Air Station. The hotel
contains 89 suites.
[MAP] Summerfield Suites -- El
Segundo, California. Opened
in March 1995, the hotel is
located along Rosecrans
Avenue, east of Sepulveda
and west of Interstate 405
near Manhattan Village Mall.
The market includes major
corporations including
Chevron, Oracle, Sun
Microsystems, Xerox and
Arthur Andersen. The hotel
contains 62 one-bedroom
suites and 60 two-bedroom
suites.
[MAP] Summerfield Suites -- Mount
Laurel, New Jersey. Opened
in August 1996, the hotel is
located near Highway 73 and
south of the New Jersey
Turnpike. The market
includes major corporations
including General Electric,
Tyco, Campbell Soup and ADP.
The hotel contains 68
one-bedroom suites and 48
two-bedroom suites.
[MAP] Summerfield Suites -- Las
Colinas, Texas. Opened in
February 1996, the hotel is
located on North MacArthur
Boulevard along Highway 114.
The market includes major
corporations including
Merck, Microsoft, Hitachi,
Johnson & Johnson,
Hewlett-Packard and Exxon.
The hotel contains 78
one-bedroom suites and 70
two-bedroom suites.
[MAP] Sierra Suites -- Phoenix,
Arizona. Opened in January
1997, the hotel is located
in the Camelback area on
North 16th Street north of
Colter Avenue and along
Squaw Peak. The market
includes major corporations
including MCI, American
Express, Charles Schwab,
Phelps Dodge, Dell Webb, US
West, Motorola, Dial and
Banc One. The hotel contains
113 suites.
[MAP] Sunrise Suites -- Eatontown, New
Jersey. Renovated in June 1995,
the hotel is located on Hope
Road along Highway 18. The
market includes major
corporations including ATT.
Additional demand generators
include the Earle Naval Station,
a U.S. Army installation and
proximity to Six Flags Great
Adventure. The hotel contains 96
suites.
</TABLE>
The Company and Summerfield entered into an agreement in principle pursuant
to which the Company has a right of first refusal to acquire or own any
all-suite hotel development project (a "Development Hotel") undertaken by
Summerfield through June 2002, other than certain hotels currently in
development and an
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<PAGE> 27
additional two development projects per year selected by Summerfield, with
respect to which the Company has no rights. The right of first refusal will
terminate earlier upon the occurrence of certain events, including the Company's
failure to accept 10 consecutive development projects offered by Summerfield or
the sale of all or substantially all of the Summerfield Lessee's assets or
ownership interests. The Company's cost for a Development Hotel shall be no
greater than Summerfield's development budget for the Development Hotel plus a
specified development fee. The Company will lease any Development Hotel that it
acquires to the Summerfield Lessee, pursuant to a percentage lease substantially
similar to the Summerfield Percentage Leases and providing for an additional
payment to the Summerfield Lessee equal to a specified percentage of any
increase in value of the Development Hotel over the Company's cost, measured at
the second (for Sierra Suites hotels) or third (for Summerfield Suites hotels)
anniversary of the opening of the Development Hotel. If a Development Hotel is
to be acquired from Summerfield upon completion of construction, the Company
shall close on the acquisition generally upon issuance of a certificate of
occupancy and the satisfaction of customary closing conditions. If the Company
commits to a Development Hotel project, the Company expects to provide credit
enhancement or a refinancing or repayment commitment to Summerfield's
construction lender, or to provide construction funding directly. Until
definitive agreements are executed, the Company has no obligation with respect
to any Development Hotel, and there are no assurances that the Company will
acquire or own any Development Hotel.
BUSINESS STRATEGY
ACQUISITION STRATEGY
The Company has developed a multi-brand upscale extended-stay acquisition
focus designed to position itself as a leading owner of upscale extended-stay
hotels in the Company's target markets. The Company's primary acquisition
strategy includes acquiring hotels that are (i) upscale extended-stay hotels,
(ii) located in markets with relatively high barriers to entry or strong demand
characteristics and (iii) located near other hotels owned by the Company thereby
allowing the Lessee to enhance revenue by capitalizing on local knowledge and
directing overflow business to Company-owned hotels. The Company also seeks to
selectively acquire underperforming hotels to which the Company can add value
through repositioning in the market, reflagging to premium hotel brands or
renovation.
Acquisition of Upscale Extended-Stay Hotels
As a result of the Summerfield Acquisition, the Company has increased the
number of upscale extended-stay hotel rooms in its portfolio by 32%. The Company
has focused, and intends to continue to focus, on acquiring upscale
extended-stay hotels because of the strong performance of that segment, which
has resulted primarily from (i) the excess of demand over available supply of
extended-stay hotels, (ii) the prevailing social and economic changes that are
increasing the demand for upscale extended-stay hotels, including the increasing
tendency of businesses to conduct on- and off-site training to employees,
corporate out-sourcing and the use of consultants, and the general increased
mobility of the United States workforce and (iii) the ability to generate a more
consistent revenue stream than traditional hotels due to higher average
occupancies and longer average stays. The Company also believes that its
relationships with Marriott, Summerfield and Messrs. DeBoer and Ruhfus will
provide it with opportunities to acquire desirable hotel properties, primarily
in the upscale extended-stay segment, through non-competitive bid situations on
terms that may be generally more favorable than those available in traditional
brokered transactions.
Target Markets
The Company's focus is on markets that have high barriers to entry, such as
in New England and the mid-Atlantic and Pacific states, which are characterized
by scarcity of available land, extensive permit and approval requirements, a
relatively long lead time required to develop an upscale extended-stay hotel and
the high costs associated with such development. In addition, the Company seeks
out submarkets within favorable regions that have multiple fast-growing demand
generators, such as major office, manufacturing or retail complexes, airports,
major colleges and universities and medical centers with convenient access to
major thoroughfares. The Company believes that its focus on these target markets
has been a major factor in the Hotels achieving occupancy, ADR and RevPAR that
exceed industry averages.
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<PAGE> 28
The following maps indicate the number of Hotels owned by the Company in
each state, the location of the Hotels, including the Summerfield Acquisition
Hotels, and also indicate the regions of the United States with (i) the lowest
per annum rate of new construction and (ii) the largest advances in occupancy.
[U.S. MAP]
[U.S. MAP]
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<PAGE> 29
Acquisition of Underperforming Hotels
Although the primary focus of the Company is on the upscale extended-stay
segment, the Company will from time to time consider acquisition of
underperforming mid-priced hotels that have the potential for strategic
repositioning in the market, reflagging to a premium franchise brand or
renovation. Generally, hotels that meet the Company's investment criteria
include (i) poorly managed hotels that have the potential for increased
performance following the introduction of a quality management team, (ii) hotels
in deteriorated physical condition that could benefit significantly from
renovations or (iii) 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 or Courtyard by Marriott. For example,
the Company recently repositioned a Ramada Inn in Germantown, Maryland and a
Comfort Inn in Woburn, Massachusetts into Hampton Inn hotels. The repositioning
in Germantown, Maryland, completed in January 1996, resulted in a RevPAR
increase of 38% for the year ended 1996 over the year ended 1995 and a RevPAR
increase of 18% for the five months ended May 31, 1997 over the five months
ended May 31, 1996. The repositioning in Woburn, Massachusetts, completed in May
1997, resulted in a RevPAR increase of 30% for the month of May 1997 over the
month of May 1996.
OPERATING STRATEGY
Percentage Leases
The Percentage Leases are designed to allow the Company to participate in
revenue growth at the Hotels. Under the Percentage Leases, once room revenues at
the applicable Hotel reach certain specified levels (subject to annual inflation
adjustments), the Company receives between 68% and 70% of incremental room
revenues. For the three-month period ended March 31, 1997, room revenues from
each Current Hotel exceeded the specified level necessary for the payment of the
higher tier of Percentage Rent under the applicable Percentage Lease. On a pro
forma basis, aggregate Percentage Lease revenue for the Current Hotels increased
approximately $1.9 million, or 17%, from approximately $11.2 million for the
three months ended March 31, 1996 to $13.1 million for the three months ended
March 31, 1997. See "The Hotels -- The Percentage Leases" and "Exhibit
A -- Information Concerning the Hotels."
Effective Centralized Controls and Support
The JF Lessee has implemented centralized controls that provide corporate,
regional and property-specific support services to Hotels leased by the JF
Lessee. Management information systems monitor the performance of individual
hotels by tracking key information such as room yield utilization, labor and
cash management and property expenses on a daily and weekly basis. Other
centralized support services include accounting, payroll, data processing,
interior design, sales and marketing, advertising and vendor purchasing. The JF
Lessee and the Summerfield Lessee use market-oriented sales management programs
to coordinate, direct and manage the sales activities of personnel located at
the Hotels. The JF Lessee employs four regional managers to oversee sales and
marketing efforts at the Hotels it leases, including Hotels managed by third-
party operators. Weekly sales reports are generated by each salesperson through
the daily input of all sales-related activities (e.g., appointments, sales
calls, direct mailings, incoming calls) and the results of such activities
(e.g., appointments made, literature sent, rooms reserved). Each salesperson
also inputs any comments received from 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 to the marketing and business plan
established for each Hotel and allow management to adapt marketing and business
plans accordingly.
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<PAGE> 30
THE LODGING INDUSTRY
The fundamentals of the lodging industry have improved significantly each
year since 1991. The industry as a whole generated record revenues and earnings
in 1996, with industry-wide revenues of $83 billion and pre-tax profits of $11.2
billion. Revenues and profits were up 9.5% and 31%, respectively, from 1995
levels and represented the industry's fourth consecutive year of profitability.
This trend is expected to continue for 1997 according to Hospitality Directions,
which projects that industry profits will reach $13.7 billion in 1997.
The industry's record profits are attributable to strong underlying
fundamentals, including increasing occupancy, ADR and seasonally-adjusted
RevPAR. For example, industry-wide occupancies rose from 64.5% in 1994 to 65.8%
in 1996 (a 2% increase), ADR rose from $64.31 in 1994 to $71.73 in 1996 (an
11.5% increase) and RevPAR increased from $41.50 in 1994 to $47.20 in 1996 (a
13.7% increase). According to Hospitality Directions, industry fundamentals will
remain strong through at least 1999 with occupancies remaining stable at
approximately 65.5%, and ADR and RevPAR increasing 17.2% and 16.7%,
respectively, over the period 1996 through 1999.
The following graph illustrates the growth in RevPAR and ADR in the U.S.
hotel industry:
[GROWTH CHART]
Chart showing RevPAR and ADR Growth in the U.S. Hotel Industry for each
year in 1994 through 1997.
Source: 1994-1996 data based on Smith Travel Research data
* Based on Coopers & Lybrand L.L.P. projections.
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<PAGE> 31
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-Priced U.S. Hotels for the periods indicated.
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED DECEMBER 31, ENDED APRIL 30,
------------------------------------------ ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OCCUPANCY:
U.S. Hotels............................ 62.6% 63.5% 64.7% 65.1% 65.2% 61.8% 61.9%
Upscale Extended-Stay Hotels(1)........ 77.6 80.4 82.3 81.9 81.2 80.6 80.4
Mid-Priced U.S. Hotels(2).............. 60.5 61.2 62.2 62.5 62.3 62.7 62.6
ADR:
U.S. Hotels............................ $58.91 $60.55 $62.89 $65.85 $69.98 $69.93 $74.77
Upscale Extended-Stay Hotels(1)........ 74.86 76.51 78.81 83.50 88.94 86.46 93.14
Mid-Priced U.S. Hotels(2).............. 53.06 54.03 55.58 57.99 61.11 63.15 67.41
REVPAR:
U.S. Hotels............................ $36.88 $38.45 $40.69 $42.87 $45.63 $43.22 $46.28
Upscale Extended-Stay Hotels(1)........ 58.07 61.49 64.86 68.35 72.25 69.65 74.85
Mid-Priced U.S. Hotels(2).............. 32.10 33.07 34.57 36.24 38.07 39.60 42.20
</TABLE>
- ---------------
Source: Smith Travel through April 30, 1997.
(1) Includes Residence Inn hotels, Hawthorn Inns, Homewood Suites, Summerfield
Suites and Woodfin Suites.
(2) For each Metropolitan Statistical Area ("MSA") in the U.S., the "Mid-Priced
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 has not
provided advice regarding any aspect of the Offering and is not associated
with the Offering in any way.
THE UPSCALE EXTENDED-STAY SEGMENT
CREATION OF THE UPSCALE EXTENDED-STAY CONCEPT
The concept of an extended-stay hotel was created in the mid-1980's by
Messrs. DeBoer and Ruhfus, Trustees of the Company, who founded the Residence
Inn brand. Residence Inn was the only significant operator of extended-stay
hotels until the 1980's, when competitors emerged, including brands catering to
the lower price point extended-stay customer. Upscale extended-stay hotels are
designed to provide the amenities of a mid- to full-service hotel at a cost that
is more comparable to an apartment lease. In 1987, Messrs. DeBoer and Ruhfus
created Summerfield Suites to cater to the most upscale portion of the segment.
Today, the upscale extended-stay segment is one of the fastest growing segments
of the hotel industry with higher occupancy rates, higher margins and more
attractive yields than for the industry overall. According to Hospitality
Directions, some of the most successful brands of the past 16 years are "those
that stretched the concept of limited service from economy/budget to
midprice/upscale."
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<PAGE> 32
The following charts illustrate the growth in RevPAR and ADR in the upscale
extended-stay segment:
[CHART]
Chart illustrating RevPAR growth since 1991 in the upscale
extended-stay segment.
Chart illustrating ADR growth since 1991 in the upscale extended-stay
segment.
Source: Smith Travel Research data
DIFFERENTIATION OF THE UPSCALE EXTENDED-STAY SEGMENT
The general breakdown by ADR of certain brands and the approximate number
of hotels of each such brand in the extended-stay segment is as follows:
[Pyramid]
Breakdown of the brands and the number of hotels of each such brand in
the upscale extended-stay segment by price point.
THE HOTELS
DESCRIPTION OF THE HOTELS
The Company owns 23 Residence Inn hotels, six Summerfield Suites hotels, 12
Hampton Inn hotels, two Sierra Suites hotels, one Comfort Inn, one Holiday Inn
Express, one Sheraton Inn and one Sunrise Suites hotel. The Company is one of
the largest owners of Residence Inn hotels with approximately 10% of all
existing Residence Inn hotels. Residence Inn and Summerfield Suites 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 primarily
as a result of relocations, consulting work, corporate training and project
assignments. Sierra Suites hotels are mid-priced extended stay hotels designed
to appeal to business travelers. Hampton Inn, Sheraton Inn and Comfort Inn are
mid-priced hotels, which are designed for business and leisure travelers.
Mid-priced hotels generally minimize public meeting areas and have functional,
moderate guest and lobby finishes. All of
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<PAGE> 33
the Hotels (other than the Sunrise Suites - Tinton Falls, New Jersey) 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 JF Lessee as Residence Inn hotels. Twelve of the Hotels are 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. 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. Many 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, fireplaces in some suites, a private entrance to each
suite and 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
July 1, 1997, 236 Residence Inn hotels were open and operating in 43 states,
Canada and Mexico.
Summerfield Suites Hotels
Summerfield Hotel Corporation was founded in 1988 to develop, own and
manage a chain of upscale all-suite hotels located in major metropolitan
markets. Summerfield Suites hotels are upscale extended stay hotels designed to
target corporate business travelers through the availability of meeting rooms
for corporate training and a level of finish in guest rooms and public areas
which is similar to full service hotels. Messrs. DeBoer and Ruhfus, the founders
of Summerfield, were also the founders of the Residence Inn system. The Company
believes that the design of the Summerfield Suites hotel addresses the needs of
extended-stay guests by providing separate living and sleeping areas, full
kitchens, enhanced work areas, a complimentary breakfast and an evening social
hour. The prototype Summerfield Suites hotel features high quality construction
and contains approximately 51 two-bedroom, two-bath suites and approximately 77
one-bedroom, one-bath suites (see the inside front cover page of this Prospectus
Supplement for a standard two-bedroom room layout). Each bedroom in a
Summerfield Suites hotel has a separate bathroom and is equipped with separate
phone lines and cable and on-request television, and billing is available for
each bedroom separately. The first Summerfield Suites hotel opened in 1989.
According to Summerfield, currently there are 26 Summerfield Suites hotels
located in 12 states with an additional five hotels under construction and eight
hotels in pre-construction planning. The first Sierra Suites hotel was opened in
July 1996 by affiliates of Summerfield as a mid-priced extended-stay hotel
designed to appeal to business travelers.
Hampton Inn Hotels
Twelve of the Current 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. Hampton Inn hotels operate in the United States,
Mexico and Canada. The Company believes that the Hampton Inn brand is one of the
leading brands for mid-priced hotels.
THE PERCENTAGE LEASES
For the Company to qualify as a REIT, the Company cannot operate hotels.
The Company, therefore, leases the Current Hotels to the JF Lessee and leases
the Summerfield Acquisition Hotels to the Summerfield Lessee. The JF Lessee
operates 24 of the Current Hotels pursuant to the JF Percentage Leases, third
parties (including Marriott) operate 14 of the Current Hotels and the
Summerfield Manager operates the nine Summerfield Acquisition Hotels under
management agreements with the Summerfield Lessee.
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<PAGE> 34
During the term of each Percentage Lease, the applicable 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 specified
percentages of room revenues for each of the Hotels. Under the Percentage
Leases, both the Base Rent and the specified levels above which a higher
percentage of room revenues is paid as Percentage Rent are adjusted annually at
the beginning of each calendar year based upon the change in the CPI during the
prior calendar year.
JF Lessee
Mr. Fisher is the majority shareholder and Mr. Shaw is the other
shareholder of the JF Lessee. The JF Lessee leases all of the Current Hotels and
operates 24 of such Hotels. The JF Lessee may not operate any hotels other than
those owned by the Company.
Summerfield Lessee
The Summerfield Lessee is a newly formed affiliate of Summerfield, which
leases the nine Summerfield Acquisition Hotels pursuant to the Summerfield
Percentage Leases. Mr. Ruhfus, a trustee of the Company, is an officer and
principal equity owner of the Summerfield Lessee. The Summerfield Lessee may not
engage in any business other than leasing hotels owned by the Company.
Certain Terms of Summerfield Percentage Leases
Term. The initial term of the Summerfield Percentage Leases is 15 years.
The Summerfield Percentage Leases provide for up to two consecutive seven and
one-half year renewal term options, which the Summerfield Lessee can exercise by
providing notice to the Company at least two years before the end of the
then-current term or renewal term. The terms of the Summerfield Percentage
Leases during any renewal terms are expected to be substantially the same as the
terms applicable during the initial term of such Percentage Leases, other than
the Rent provisions. The Rent provisions of each Summerfield Percentage Lease
for a renewal term will be reset as the parties may agree at the time of the
renewal or, if the parties cannot agree, by an independent third party.
Minimum Rent. While the Rent provisions applicable throughout the Term are
generally as described above, the Summerfield Lessee has agreed that for the
remainder of 1997 and for 1998, the Base Rent payable for the six Summerfield
Suites and the Sunrise Suites hotel shall be an amount equal to the Percentage
Rent that would be payable under the formulas set forth in the applicable
Summerfield Percentage Leases if such respective hotels achieved the room
revenues budgeted for such periods. In addition, during such periods, the
aggregate Base Rent payable for five of such seven hotels, excluding the
Summerfield Suites -- West Hollywood, California and the Sunrise
Suites -- Tinton Falls, New Jersey, shall be the aggregate of the Base Rent
amounts set forth in the Summerfield Percentage Leases for such five hotels for
the period on a consolidated basis, to the effect that any rent paid in excess
of Base Rent for any of these five hotels shall be credited to the aggregate
Base Rent payable for any or all of the other hotels in the group. In 1999 and
subsequent years, Base Rent for these hotels shall be reduced from the levels
applicable in 1997 and 1998, but the Percentage Rent Formula will remain the
same (subject to adjustments based on CPI as described above). See "Exhibit
A -- Information Concerning the Hotels."
FF&E Set-Asides. Under the Summerfield Percentage Leases, the Company's
obligations to pay hotel-level expenses are limited to real estate and personal
property taxes and to make available for the repair and replacement of
furniture, fixtures and equipment and for other capital expenditures an amount
equal to 4% of room revenues annually (the "Set-Aside"). The Summerfield Lessee
generally is responsible for all other costs and expenses, including for capital
expenditures, in excess of the Set-Aside.
Maintenance and Modifications. The Summerfield Lessee is obligated to
maintain the Summerfield Acquisition Hotels in good order and repair and comply
with the Franchise Licenses. The Company is required to make the Set-Asides
available to the Summerfield Lessee when and as deemed necessary by the
Summerfield Lessee. The Summerfield Lessee will spend Set-Aside amounts only on
items appearing on a capital budget, which is required to be prepared each year
and approved by the Company. The Summerfield Lessee is required to make capital
expenditures in excess of the Set-Aside to the extent required to maintain the
Franchise Licenses and as required by law.
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<PAGE> 35
Assignment and Subleasing. The Summerfield Lessee and the Summerfield
Manager have each agreed that they will not merge or transfer all of their
assets without the Company's prior written consent, which consent will not be
withheld if the transfer includes all of the Summerfield Percentage Leases or
Summerfield Management Agreements, as the case may be, and the transferee (i) is
an established hotel management company having a good reputation in the
industry, (ii) is operating at least 50 hotels with not less than 7,500 rooms,
(iii) hires substantially all of the hotel-level personnel, regional managers
and corporate sales staff of the Summerfield Lessee or the Summerfield Manager,
as the case may be, and (iv) has a net worth of not less than $25 million (a
"Transfer").
Damage to Hotels; Insurance. Under the Summerfield Percentage Leases, if a
Hotel is rendered unsuitable for its primary intended use by casualty, the
relevant Summerfield Percentage Lease will terminate and the Company will retain
any insurance proceeds therefor. If the Hotel is not rendered unsuitable for its
primary intended use, the Company or, at the election of the Company, the
Summerfield Lessee shall restore the Hotel. If the Summerfield Lessee restores
the Hotel, the Company shall make the insurance proceeds available to the
Summerfield Lessee upon satisfaction of certain terms and conditions specified
by the Company, and the Company is obligated to fund any costs in excess of
available insurance proceeds. In cases where the casualty is not covered by
insurance or when any lender is entitled to and does not release the insurance
proceeds, the Company may either terminate the Summerfield Percentage Lease
without liability or restore the Hotel at its expense, in which case the
Summerfield Percentage Lease will not terminate. The Summerfield Lessee is
obligated to obtain and maintain casualty, liability, business loss and, in
California, earthquake insurance with insurers and policy terms and limits which
(i) are substantially similar to the insurance maintained for the Hotels leased
to the JF Lessee and (ii) the Company believes are adequate and customary.
Events of Default. The failure of the Summerfield Lessee to pay any of the
Base Rent, Percentage Rent or Additional Charges when due under any other
Summerfield Percentage Lease will constitute an event of default under each
other Summerfield Percentage Lease. In addition, a default by the Summerfield
Lessee under the Lease Master Agreement between the Company and the Summerfield
Lessee (the "Lease Master Agreement") will constitute an event of default under
each Summerfield Percentage Lease. See "-- Certain Agreements with Respect to
the Summerfield Acquisition Hotels -- The Lease Master Agreement". Each
Summerfield Percentage Lease also contains customary non-monetary default
provisions, which if invoked will not constitute an event of default under any
other Summerfield Percentage Leases.
Termination of Percentage Leases on Disposition of the Hotels. Subject to
cure rights by the Summerfield Lessee, the Company may be entitled to terminate
the Summerfield Percentage Lease at a Summerfield Acquisition Hotel if the
Summerfield Lessee fails to achieve certain operating results (revenues, gross
operating percentage or RevPAR) in a year as compared to the budget for the
then-current year (and, in some cases, one or more past years) or operating
results for the past year. If the Company terminates a Summerfield Percentage
Lease for failure to achieve such operating results, the Summerfield Lessee will
not be liable for any Rent or other damages after the date of such termination.
The Company also may terminate a Summerfield Percentage Lease upon the Company's
sale of a Summerfield Acquisition Hotel if the Company either (i) offers to
lease to the Summerfield Lessee, and the Summerfield Lessee agrees to lease, one
or more substitute hotels pursuant to a lease which provides the Summerfield
Lessee with a leasehold interest having a fair-market value at least equal to
the fair market value of the remaining term of the Summerfield Percentage Lease
being terminated or (ii) pays the Summerfield Lessee a termination fee based on
the net present value of the Summerfield Lessee's leasehold interest in the
Summerfield Percentage Lease being terminated.
Right of First Offer for Summerfield Lessee. Before selling any
Summerfield Acquisition Hotel leased to the Summerfield Lessee, the Company must
first notify the Summerfield Lessee and, if desired by the Summerfield Lessee,
for a period of 40 days attempt to negotiate the terms of a sale of the Hotel to
the Summerfield Lessee prior to offering the Summerfield Acquisition Hotel for
sale to any other party. Notwithstanding the foregoing, the Summerfield Lessee
has no rights of first offer if the contemplated sale includes 10 or more Hotels
leased by the Summerfield Lessee or if the Summerfield Lessee is in default
under the Summerfield Percentage Leases.
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<PAGE> 36
Summerfield Franchise Licenses. The Summerfield Manager is the franchisor
of Summerfield Suites and Sierra Suites brands (the "Summerfield Controlled
Brands"). The Summerfield Lessee is the licensee under the Franchise Licenses on
the Summerfield Acquisition Hotels (other than the Sunrise Suites hotel in
Tinton Falls, New Jersey, which is not part of a chain or subject to a Franchise
License). Upon the occurrence of certain events of default by the Summerfield
Lessee under a Franchise License, the Summerfield Manager has agreed to transfer
the Franchise License for the Hotel to a designee of the Company reasonably
acceptable to the Summerfield Manager, without fee or cost.
Summerfield Management Agreements. The Summerfield Percentage Leases
provide that any management agreement entered into by the Summerfield Lessee
with respect to the management of a Summerfield Acquisition Hotel (i) is subject
to the reasonable approval of the Company and (ii) must provide that (a) any
fees payable thereunder are subordinated to Rent payments under the Percentage
Leases and (b) the management agreement terminates upon any termination of the
related Summerfield Percentage Lease, without fee or cost to the Company.
CERTAIN AGREEMENTS WITH RESPECT TO THE SUMMERFIELD ACQUISITION HOTELS
Redemption and Registration Rights
After the expiration of the "lock-up" periods described herein, the holders
of the Summerfield Units may elect to cause the Partnership to redeem the
Summerfield Units. In such event, the Company may elect to exchange each
Summerfield Unit tendered for redemption for one Common Share or cash in an
amount equal to the value of one Common Share, based on then-recent trading
prices. 75% of the Summerfield Units held directly or indirectly by Mr. Ruhfus
and B. Anthony Isaac, President of Summerfield and a principal equity owner of
the Summerfield Lessee (and Summerfield Manager), may not be redeemed before
June 20, 1999. The other Summerfield Units generally may not be redeemed before
June 20, 1998. The Company has agreed to file on or before June 20, 1998 one or
more shelf registration statements covering the Summerfield Redemption Shares
which become redeemable on June 20, 1998, and to file on or before June 20, 1999
one or more shelf registration statements covering the Summerfield Units which
become redeemable on June 20, 1999. The Company has also granted the holders of
the Summerfield Units the right beginning June 20, 1998, to cause the Company to
effect two registration statements with respect to underwritten offerings of the
Summerfield Redemption Shares, subject to certain customary limitations
(primarily blackout periods when the Company is seeking to undertake a public
offering of its securities). In addition, the holders of the Summerfield Units
will have the right beginning June 20, 1998, to include the Summerfield
Redemption Shares in certain registration statements filed by the Company with
respect to underwritten public offerings of Common Shares, subject to customary
approvals and rights of the Company's underwriters. See "Risk Factors -- Shares
Available for Future Sale."
Agreement on Franchise Matters
The Company has entered into an agreement on franchise matters with the
Summerfield Manager, the owner of the Summerfield Controlled brands, providing,
among other things, that (i) the Summerfield Lessee and the Summerfield Manager
cannot amend, modify or terminate the Summerfield Management Agreements without
the consent of the Company; (ii) if and for so long as the Company owns at least
10% of the hotels operating under the Summerfield Controlled Brands, the Company
will be entitled to have one designee as a member of the Summerfield marketing
association board and franchisee association board; (iii) if the Company owns at
least 75% of the hotels operating under the Summerfield Controlled Brands, the
Summerfield Manager will not make any material changes to the Summerfield
Controlled Brands without the Company's consent; (iv) the Summerfield Manager
will enforce requirements of the Summerfield Lessee to complete certain
scheduled periodic refurbishments, renovations or improvements to the
Summerfield Acquisition Hotels; (v) the Summerfield Manager will not develop
own, lease, operate, manage, franchise or have any interest in any Summerfield
Suites hotel or Sierra Suites hotel within a five mile radius of any Summerfield
Suites hotel or Sierra Suites hotel, respectively, owned by the Company; (vi)
during the term of the Franchise Licenses, the Company shall have a right of
first offer to acquire from the Summerfield Manager any hotel acquired or
developed by the Summerfield Manager within a five mile radius of any
Summerfield Suites or Sierra Suites hotel owned by the Company; and (vii) the
Company shall have the
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<PAGE> 37
right, but not the obligation, to cure defaults by the Summerfield Lessee under
any Franchise Licenses. Mr. Ruhfus, the Chairman of the Board of Summerfield and
a Trustee of the Company, is one of the principal equity owners of the
Summerfield Lessee and the Summerfield Manager.
The Lease Master Agreement
The Lease Master Agreement provides, among other things, that during the
terms of the Summerfield Percentage Leases (i) the Summerfield Lessee shall
maintain a minimum net worth of at least approximately $2.5 million in 1997 and,
for any year thereafter, 17.5% of the aggregate annual Rent budgeted to be paid
by the Summerfield Lessee for such year (but not to exceed $5 million); (ii) the
Summerfield Lessee shall maintain a ratio of debt to net worth of less than 50%;
(iii) the Summerfield Lessee has pledged 84,667 Units as collateral for the
Summerfield Lessee's performance under the Summerfield Percentage Leases
(subject to release after expiration of a three-year period if the Summerfield
Lessee has not defaulted in the payment of Rent under the Summerfield Percentage
Leases); (iv) the Summerfield Lessee will not develop, build, own, lease,
operate, manage, franchise or have any interest in a Summerfield Suites hotel or
Sierra Suites hotel that is located within a five mile radius of any Summerfield
Suites hotel or Sierra Suites hotel, respectively, owned by the Company; (v) for
so long as (A) there are 25 or fewer Sierra Suites hotels open and operating or
(B) the Company has not received an annual return of 12% on its investment in
its Sierra Suites hotels, if the Summerfield Manager sells the Sierra Suites
brand to a third party and such party proposes to change the trade name "Sierra
Suites" or if a Transfer (defined in "The Percentage Leases -- Assignment and
Subleasing") occurs, the Company may terminate the Summerfield Percentage Leases
for the Sierra Suites hotels then-owned by the Company without fee or penalty;
(vi) if the Company elects to terminate the Summerfield Percentages Leases as
described in (v) above, the Summerfield Lessee will have the right to purchase
all but not less than all the Sierra Suites hotels from the Company for a price
per hotel equal to the greater of (A) an amount equal to the budgeted operating
income for the hotel (before Rent payments under the Summerfield Percentage
Leases and after an assumed 3% management fee) for the twelve month period
following the purchase and sale, divided by 0.12, or (B) the Company's
cumulative investment in the hotel, plus a 12% annual return on such investment;
and (vii) the Summerfield Lessee will not engage in any business other than
leasing hotels owned by the Company.
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) ARE REGISTERED TRADEMARKS OF HOLIDAY INN FRANCHISING, SHERATON INN(R)
IS A REGISTERED TRADEMARK OF SHERATON AND SUMMERFIELD SUITES(R) AND SUNRISE
SUITES(R) ARE REGISTERED TRADEMARKS OF SUMMERFIELD. SIERRA SUITES IS A TRADEMARK
OF SUMMERFIELD THAT IS THE SUBJECT OF A PENDING REGISTRATION APPLICATION. NONE
OF PROMUS, CHOICE, MARRIOTT, HOLIDAY INN FRANCHISING, SHERATON OR SUMMERFIELD
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,
SHERATON INN, SUMMERFIELD SUITES, SIERRA SUITES OR SUNRISE SUITES 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, SHERATON OR SUMMERFIELD (OR ANY OF THEIR AFFILIATES,
SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, THE PARTNERSHIP OR APPROVAL OF THE
COMMON SHARES OFFERED HEREBY.
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 Lessees have advised the Company that they
are not currently involved in any material litigation.
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<PAGE> 38
MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The Company's Board of Trustees currently consists of seven members, four
of whom are Independent Trustees, and is divided into three classes.
Certain information regarding the Company's trustees and executive officers
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 Officer Class III 2000
and President
Frederic M. Shaw........... 46 Chief Operating Officer and Executive Vice
President
David Bulger............... 43 Chief Financial Officer and Treasurer
Mark A. Murphy............. 36 General Counsel and Secretary
Miles Berger............... 66 Independent Trustee Class II 1999
Thomas J. Crocker.......... 43 Independent Trustee Class III 2000
Jack P. DeBoer............. 66 Trustee Class I 1998
C. Gerald Goldsmith........ 68 Independent Trustee Class II 1999
Rolf E. Ruhfus............. 53 Trustee Class III 2000
Bruce Zenkel............... 66 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 JF 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.
Frederic M. Shaw has been the Chief Operating Officer and Executive Vice
President of the Company since April 1997 and the President of the JF Lessee
since its formation in 1994. From 1993 to September 1994, he served as Vice
President and Chief Financial Officer of JF Hotel Management, Inc., an affiliate
of the JF Lessee. He served as Controller of JF Hotel Management, Inc. from 1988
to 1993. He holds a B.B.A. in public accounting from Pace University and is a
certified public accountant licensed in New York and Florida.
David Bulger has served as Chief Financial Officer and Treasurer 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. Mr.
Bulger is a certified public accountant licensed in New York and Florida.
Mark A. Murphy has served as General Counsel and Secretary of the Company
since April 1997. Between 1988 and 1997 he served as an associate and partner of
Hunton & Williams where he represented a number of hotel REITs, including the
Company since the IPO. He holds a B.S. in Industrial Relations from LeMoyne
College and a J.D. from Washington & Lee University.
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.
Rolf E. Ruhfus has served as Chairman and Chief Executive Officer of
Summerfield since its founding in 1988. Mr. Ruhfus served as President of The
Residence Inn Company from February 1983 through July 1987 (Residence Inn was
acquired by Marriott in July 1987). Mr. Ruhfus joined The Residence Inn Company
after spending four years as Director of Marketing for VARTA Battery, Europe's
largest battery manufacturer. Prior to this position, he was a management
consultant for McKinsey and Company in its Dusseldorf, Germany office. Mr.
Ruhfus is a German Air Force Lieutenant, and received a bachelor's degree from
Western Michigan University in 1968. His graduate degrees include an M.B.A. from
the Wharton School in
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<PAGE> 39
1971 and a Ph.D. in marketing from the University of Muenster in 1974. Mr.
Ruhfus is a member of the international chapter of The Young Presidents
Organization and serves on the boards of several European companies.
Thomas J. Crocker was Chairman of the Board of Crocker Realty Trust, Inc.,
one of the largest office-based real estate investment trusts in the southeast
U.S., from that company's inception until June 30, 1996. Crocker Realty Trust,
Inc. owned approximately 5.7 million square feet in 70 buildings in seven
states, plus more than 200 acres of developable land. Prior to forming Crocker
Realty Trust, Inc., Mr. Crocker headed Crocker & Co., a privately-held firm
responsible for development, leasing and property management services to
approximately 1.71 million square feet of commercial property and 272
residential units. Prior to 1984, Mr. Crocker was a real estate lending officer
at Chemical Bank.
Jack P. DeBoer has served as Chairman of the Board, President and Chief
Executive Officer of Candlewood Hotel Company 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 Summerfield.
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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." Hunton &
Williams has acted as counsel to the Company in connection with 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 pursuant to sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), for
its taxable years ended December 31, 1994 through December 31, 1996, and the
Company's organization and proposed method of operation will enable it to
qualify to be taxed as a REIT for its taxable year ending December 31, 1997, and
future taxable years. Investors should be aware, however, that opinions of
counsel are not binding upon the United States Internal Revenue 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 and the future conduct of its business. Such factual
assumptions and representations are set out in Hunton & Williams' federal income
tax opinion. Moreover, such qualification and taxation as a REIT depend upon the
Company's ability to meet on a continuing basis, through actual annual operating
results, distribution levels and stock ownership, the various qualification
tests imposed under the Code. 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 operations 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" in the accompanying Prospectus.
President Clinton has proposed legislation that would require REITs to
recognize built-in gain immediately upon the acquisition of an asset with
built-in gain from a large C corporation (i.e., a C corporation the fair market
value of whose stock exceeds $5 million at the time of the transfer of the
asset). If such legislation is enacted as currently written, if a REIT failed to
qualify as a REIT, no relief provisions applied, and the REIT re-elected REIT
status after the four-year disqualification period, upon such re-election, the
REIT would be required to recognize any built-in gain associated with its
assets. That proposed legislation, if enacted in its present form, would be
effective for transfers of assets made after December 31, 1997.
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<PAGE> 40
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
underwriters named below (the "Underwriters") for whom Lehman Brothers Inc.,
Montgomery Securities, Bear, Stearns & Co. Inc., Alex. Brown & Sons
Incorporated, EVEREN Securities, Inc. and Salomon Brothers Inc are acting as
representatives (the "Representatives"), and each of the Underwriters has
severally agreed to purchase, the respective number of Common Shares set forth
below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ----------------
<S> <C>
Lehman Brothers Inc......................................... 1,260,875
Montgomery Securities....................................... 1,260,875
Bear, Stearns & Co. Inc..................................... 1,260,875
Alex. Brown & Sons Incorporated............................. 1,260,875
EVEREN Securities, Inc...................................... 1,260,875
Salomon Brothers Inc........................................ 1,260,875
Deutsche Morgan Grenfell Inc................................ 150,000
A.G. Edwards & Sons, Inc.................................... 150,000
Legg Mason Wood Walker, Incorporated........................ 150,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... 150,000
Morgan Keegan & Company, Inc................................ 150,000
PaineWebber Incorporated.................................... 150,000
Prudential Securities Incorporated.......................... 150,000
Smith Barney Inc............................................ 150,000
Arnhold and S. Bleichroeder, Inc............................ 105,000
J.C. Bradford & Co.......................................... 105,000
Genesis Merchant Group Securities LLC....................... 105,000
Raymond James & Associates, Inc............................. 105,000
Ryan, Beck & Co............................................. 105,000
Sands Brothers & Co., Ltd................................... 105,000
Tucker Anthony Incorporated................................. 105,000
---------
Total............................................. 9,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Common Shares are subject to certain conditions
precedent and that if any of the foregoing Common Shares are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such Common Shares must
be so purchased.
The Company has been advised by the Underwriters that they propose to offer
the Common Shares directly to the public initially at the public offering price
set forth on the cover page of this Prospectus Supplement and to certain dealers
at such public offering price less a concession not in excess of $.45 per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $.10 per share to certain other underwriters or to certain other
brokers or dealers. After the initial offering, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
additional 1,425,000 Common Shares at the public offering price less
underwriting discounts and commissions, solely to cover over-allotments, if any.
The Underwriters may exercise this option at any time up to 30 days after the
date of this Prospectus Supplement. To the extent that the Underwriters exercise
this option, each of the Underwriters will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares proportionate to
such Underwriter's initial commitment reflected in the foregoing table.
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<PAGE> 41
The Company has agreed that it will not, without the prior written consent
of Lehman Brothers Inc., offer for sale, contract to sell, sell or otherwise
dispose of, directly or indirectly, any Common Shares (other than shares offered
hereby, shares issued pursuant to the 1994 Plan and any Units or Common Shares
that may be issued in connection with any acquisition of a property), or sell or
grant options, rights or warrants with respect to any Common Shares (other than
the grant of options pursuant to the 1994 Plan), for a period of 90 days after
the closing of the Offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments the Underwriters may be required to make in respect thereof.
Until the distribution of the Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase Common Shares. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Shares. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering, (i.e., if they sell more Common Shares than are
set forth on the cover page of this Prospectus Supplement), the Underwriters may
reduce that short position by purchasing Common Shares in the open market. The
Underwriters also may elect to reduce any short position by exercising all or
part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Shares in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Shares, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Common Shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Certain of the Underwriters and their affiliates have from time to time
performed, and may continue to perform in the future, various investment banking
services for the Company, for which customary compensation has been received. In
connection with the Offering, an affiliate of Lehman Brothers Inc. will be
repaid a mortgage loan in the principal amount of approximately $89 million made
by it to the Company prior to the Offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Although the Conduct Rules of the National Association of Securities
Dealers, Inc. (the "Conduct Rules") exempt REITs and offerings of equity
securities for which a bona fide independent market exists, as is the case with
the Offering, from the conflict provisions thereof, because affiliates of Lehman
Brothers Inc. will receive more than 10% of the net proceeds of the Offering in
repayment of currently outstanding indebtedness, the Underwriters have
determined to conduct the Offering in accordance with the applicable provisions
of Rule 2710(c)(8) and Rule 2720 of the Conduct Rules. In accordance with the
Conduct Rules, Montgomery Securities (the "Independent Underwriter") is assuming
the responsibilities of acting as "qualified independent underwriter," and will
recommend the maximum public offering price for the Common Shares in compliance
with the requirements of the Conduct Rules. In connection with the Offering, the
Independent Underwriter is performing due diligence investigations and is
reviewing and participating in the preparation of
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<PAGE> 42
this Prospectus Supplement and the Registration Statement of which this
Prospectus Supplement forms a part. The public offering price of the Common
Shares will be no higher than the price recommended by the Independent
Underwriter.
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 sections of the Prospectus and this Prospectus
Supplement entitled "Federal Income Tax Considerations" and "Certain 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.
EXPERTS
The consolidated financial statements and related financial statement
schedule of Innkeepers USA Trust, as of December 31, 1995 and 1996, and for the
period September 30, 1994 (inception) through December 31, 1994 and the years
ended December 31, 1995 and 1996; the combined financial statements of the JF
Lessee as of December 31, 1995 and 1996 and for the period September 30, 1994
(inception) through December 31, 1994 and the years ended December 31, 1995 and
1996; 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
29, 1995 and for the years ended December 31, 1993, December 30, 1994 and
December 29, 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 incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus, have all been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their reports thereon incorporated by reference
herein or in the accompanying Prospectus. Such financial statements and
financial statement schedule are incorporated herein or in the accompanying
Prospectus by reference in reliance upon such reports given on their authority
as experts in accounting and auditing.
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<PAGE> 43
GLOSSARY
Unless the context otherwise requires, the following capitalized terms
shall have the meanings set forth below for the purposes of this Prospectus
Supplement.
"Acquisition Loan" means a term loan of approximately $89 million provided
by an affiliate of Lehman Brothers Inc. to the Company to fund the cash portion
of the purchase price of the Summerfield Acquisition Hotels.
"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.
"Base Rent" means the fixed obligation of the Lessees to pay a certain sum
in annual rent under each of the Percentage Leases regardless of the level of
room revenue achieved.
"Board of Trustees" means the Board of Trustees of the Company.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means the amount computed by subtracting
from FFO the sum of (a) an amount equal to 4% of room revenues, which the
Company is obligated by the Percentage Leases to make available to the Lessees
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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the common 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.
"Current Hotels" means the Hotels currently owned by the Company, other
than the Summerfield Acquisition Hotels.
"CPI" means the United States Consumer Price Index, All Urban Consumers,
U.S. City Average, All Items (1982-84 = 100).
"Debt Limitation" means the provision in the Company's Declaration of Trust
that 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.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
S-42
<PAGE> 44
"Franchise License" means a license from a franchisor pursuant to which the
Company's hotels are operated.
"Funds From Operations" or "FFO" 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.
"Hotels" means collectively the Current Hotels and the Summerfield
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 Lessee" means JF Hotel, Inc., a Virginia corporation, together with its
sister corporations, which lease all 38 of the Current Hotels and operate 24 of
the Current Hotels.
"JF Percentage Leases" means the Percentage Leases for the Current Hotels.
"Lessees" means, collectively, the JF Lessee and the Summerfield Lessee.
"Line of Credit" means the Company's $190 million line of credit facility.
"Marriott" means Marriott International, Inc. and its subsidiaries,
including Residence Inn by Marriott, Inc.
"Marriott Management Agreements" means the agreements between the JF Lessee
and Residence Inn by Marriott, Inc., pursuant to which Residence Inn by
Marriott, Inc. operates 12 Residence Inn hotels owned by the Company.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"1996 Offering" means the follow-on public offering of Common Shares of the
Company, which was completed in October 1996.
"Offering" means the offering of Common Shares hereby.
"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 9.8% of the number of outstanding Preferred
Shares of any series.
"Partnership" means, collectively, Innkeepers USA Limited Partnership, a
limited partnership organized under the laws of the Commonwealth of Virginia,
and, unless the context otherwise indicates, its Subsidiary Partnerships.
"Percentage Leases" means, collectively, the operating leases between the
Lessees and the Company pursuant to which the Lessees lease the Hotels from the
Company.
"Percentage Rent" means rent based on percentages of room revenue from the
Hotels payable by the Lessees pursuant to the Percentage Leases.
"Preferred Units" means the preferred units of limited partnership interest
in the Partnership issued in connection with the Company's acquisition of
certain Hotels.
"REIT" means real estate investment trust, as defined in Section 856 of the
Code.
"Representatives" means Lehman Brothers Inc., Montgomery Securities, Bear,
Stearns & Co. Inc., Alex. Brown & Sons Incorporated, EVEREN Securities, Inc. and
Salomon Brothers Inc.
"Rent" means the rent payable under the Percentage Leases.
S-43
<PAGE> 45
"RevPAR" means revenue per available room for an applicable period,
calculated by dividing room revenue by available rooms.
"Right of First Refusal" means the right of first refusal granted to the
Company to acquire certain Summerfield Suites hotels developed by Summerfield in
the future.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary Partnerships" means the limited partnership subsidiaries that
hold or will hold title to certain of the Hotels.
"Summerfield" means Summerfield Hotel Corporation.
"Summerfield Acquisition Hotels" means the six Summerfield Suites hotels,
two Sierra Suites hotels and one Sunrise Suites hotel, which the Company
acquired as of June 20, 1997.
"Summerfield Lessee" means Summerfield Suites Lease Company, L.P., an
affiliate of Summerfield that leases the Summerfield Acquisition Hotels from the
Company.
"Summerfield Manager" means Summerfield Suites Management Company, L.P., an
affiliate of Summerfield that manages the Summerfield Acquisition Hotels.
"Summerfield Management Agreements" means the management agreements between
the Summerfield Lessee and the Summerfield Manager pursuant to which the
Summerfield Manager manages the Summerfield Acquisition Hotels.
"Summerfield Percentage Leases" means the Percentage Leases for the
Summerfield Acquisition Hotels.
"Summerfield Redemption Shares" means the Common Shares issuable upon the
redemption of the Summerfield Units.
"Summerfield Units" means the Units issued in connection with the Company's
purchase of the Summerfield Acquisition Hotels.
"Term Loans" means the $30 million term financing (the "First Term Loan")
and $42 million term financing (the "Second Term Loan") obtained by the Company.
"Trustee" means a member of the Company's Board of Trustees.
"Underwriters" means the Underwriters named in this Prospectus Supplement.
"Units" means common units of limited partnership interest in the
Partnership.
S-44
<PAGE> 46
EXHIBIT A
INFORMATION CONCERNING THE HOTELS
<TABLE>
<CAPTION>
PERCENTAGE RENT
CALCULATION(1) YEAR ENDED
--------------------------- DECEMBER 31, 1996
1996 1996 -----------------------
GUEST YEAR YEAR BASE BREAK FIRST SECOND ROOM PRO FORMA
HOTEL/LOCATION ROOMS OPENED ACQUIRED RENT(2) POINT(3) TIER TIER REVENUE RENT(4)
- -------------- ----- ------ -------- ----------- ---------- ----- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMERFIELD ACQUISITION
HOTELS
Upscale Extended-Stay
Summerfield Suites
Belmont, CA(5)(6) 132(13) 1995 1997 $ 2,546,000 $2,121,000 30.00% 68.00% $4,172,886 $2,546,000
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------
HOTEL/LOCATION 1994 1995 1996 1996 1997
- -------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
SUMMERFIELD ACQUISITION
HOTELS
Upscale Extended-Stay
Summerfield Suites
Belmont, CA(5)(6) Occupancy N/A N/A 76.90% 60.30% 82.10%
ADR N/A N/A $111.42 $109.22 $123.38
RevPAS N/A N/A $ 85.70 $ 65.82 $101.28
Summerfield Suites
El Segundo, CA(5)(7) 122(13) 1995 1997 1,725,000 2,229,000 30.00% 68.00% 3,553,548 1,725,000
Summerfield Suites
West Hollywood, CA(8) 109 1993 1997 1,811,000 2,382,000 30.00% 68.00% 3,710,418 1,811,000
Summerfield Suites
Mount Laurel, NJ(5)(9) 116(13) 1996 1997 1,540,000 2,518,000 30.00% 68.00% 952,649 1,540,000
Summerfield Suites
Addison, TX(5)(10) 132(13) 1996 1997 1,848,000 2,512,000 30.00% 68.00% 2,296,728 1,848,000
Summerfield Suites
Irving (Las Colinas),
TX(5)(11) 148(13) 1996 1997 2,422,000 2,514,000 30.00% 68.00% 2,913,304 2,422,000
Sunrise Suites
Eatontown (Tinton Falls),
NJ(12) 96 1993 1997 738,000 2,333,000 30.00% 68.00% 2,039,381 738,000
Mid-Priced Extended-Stay
Sierra Suites
Phoenix (Camelback), AZ 113 1997 1997 576,080 897,000 30.00% 70.00% 0 576,080
Sierra Suites
Atlanta (Cumberland), GA 89 1996 1997 401,760 759,000 30.00% 70.00% 637,713 401,760
----- ----------- ---------- ----------
Subtotal for Summerfield
Acquisition Hotels 1,057 13,607,840 20,276,627 13,607,840
----- ----------- ---------- ----------
<CAPTION>
Summerfield Suites
El Segundo, CA(5)(7) Occupancy N/A 59.00% 81.00% 80.70% 78.30%
ADR N/A $ 95.37 $ 97.58 $ 95.52 $104.69
RevPAS N/A $ 56.28 $ 79.05 $ 77.08 $ 81.95
Summerfield Suites
West Hollywood, CA(8) Occupancy 71.6% 76.40% 83.20% 80.90% 85.60%
ADR $94.46 $102.71 $108.73 $105.26 $117.91
RevPAS $67.59 $ 78.47 $ 90.49 $ 85.14 $100.89
Summerfield Suites
Mount Laurel, NJ(5)(9) Occupancy N/A N/A 55.80% N/A 73.40%
ADR N/A N/A $ 94.74 N/A $100.56
RevPAS N/A N/A $ 52.90 N/A $ 73.78
Summerfield Suites
Addison, TX(5)(10) Occupancy N/A N/A 50.40% 15.00% 77.90%
ADR N/A N/A $102.00 $115.35 $100.65
RevPAS N/A N/A $ 51.38 $ 17.31 $ 78.38
Summerfield Suites
Irving (Las Colinas),
TX(5)(11) Occupancy N/A N/A 58.30% N/A 73.40%
ADR N/A N/A $108.80 N/A $110.09
RevPAS N/A N/A $ 63.45 N/A $ 80.79
Sunrise Suites
Eatontown (Tinton Falls),
NJ(12) Occupancy 58.50% 67.10% 69.00% 54.50% 63.80%
ADR $70.17 $ 76.62 $ 83.44 $ 76.02 $ 79.43
RevPAS $41.07 $ 51.38 $ 57.54 $ 41.41 $ 50.66
Mid-Priced Extended-Stay
Sierra Suites
Phoenix (Camelback), AZ Occupancy N/A N/A N/A N/A N/A
ADR N/A N/A N/A N/A N/A
RevPAS N/A N/A N/A N/A N/A
Sierra Suites
Atlanta (Cumberland), GA Occupancy N/A N/A N/A N/A N/A
ADR N/A N/A N/A N/A N/A
RevPAS N/A N/A N/A N/A N/A
Subtotal for Summerfield
Acquisition Hotels
</TABLE>
Notes on subsequent page.
A-1
<PAGE> 47
INFORMATION CONCERNING THE HOTELS -- (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE RENT CALCULATION(1) YEAR ENDED
------------------------------ DECEMBER 31, 1996
1996 1996 ------------------------
GUEST YEAR YEAR BASE BREAK FIRST SECOND ROOM PRO FORMA
HOTEL/LOCATION ROOMS OPENED ACQUIRED RENT(2) POINT(3) TIER TIER REVENUE RENT(4)
- -------------- ----- ------ -------- ----------- ---------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Upscale Extended-Stay
Residence Inn
Fremont, CA 80 1985 1995 $ 410,000 $1,500,000 30.00% 68.00% $2,610,672 $1,205,257
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -----------------
HOTEL/LOCATION 1994 1995 1996 1996 1997
- -------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Upscale Extended-Stay
Residence Inn
Fremont, CA Occupancy 86.90% 87.70% 86.30% 87.30% 84.80%
ADR $ 75.28 $ 84.05 $103.33 $ 96.82 $114.53
RevPAR $ 65.38 $ 73.70 $ 89.16 $ 84.49 $ 97.16
Residence Inn
Mountain View (Palo Alto),
CA 112 1985 1995 1,207,000 1,200,000 30.00% 68.00% 4,560,006 2,644,804
Residence Inn
San Jose, CA 80 1986 1995 520,000 1,500,000 30.00% 68.00% 2,826,378 1,351,937
Residence Inn
San Mateo, CA 159 1985 1996 1,427,000 2,450,000 30.00% 68.00% 5,766,122 2,969,606
Residence Inn
Silicon Valley I, CA 231 1983 1996 2,154,000 2,450,000 30.00% 68.00% 7,750,956 4,319,292
Residence Inn
Silicon Valley II, CA 247 1985 1996 2,244,000 2,700,000 30.00% 68.00% 8,297,916 4,594,149
Residence Inn
Denver (Downtown), CO 156 1982 1996 684,000 2,750,000 30.00% 68.00% 4,082,792 1,694,848
Residence Inn
Denver (South), CO 128 1981 1995 734,000 1,800,000 30.00% 68.00% 3,588,216 1,756,987
Residence Inn
Windsor, CT 96 1986 1995 459,000 1,800,000 30.00% 68.00% 2,537,697 1,041,634
Residence Inn
Atlanta (Downtown), GA 160 1996 1996 1,260,000 3,100,000 30.00% 68.00% 374,711 1,260,413
Residence Inn
Mountain View (Palo Alto),
CA Occupancy 89.00% 91.70% 92.50% 94.40% 90.70%
ADR $104.47 $109.87 $120.20 $116.10 $135.25
RevPAR $ 92.99 $100.70 $111.24 $109.55 $122.68
Residence Inn
San Jose, CA Occupancy 88.60% 93.40% 93.70% 93.80% 93.50%
ADR $ 84.68 $ 89.22 $103.09 $ 97.04 $118.58
RevPAR $ 74.99 $ 83.32 $ 96.54 $ 90.98 $110.88
Residence Inn
San Mateo, CA Occupancy 90.50% 91.90% 92.50% 94.00% 93.20%
ADR $ 90.46 $ 94.47 $105.74 $ 97.86 $109.08
RevPAR $ 81.90 $ 86.79 $ 97.78 $ 91.97 $111.01
Residence Inn
Silicon Valley I, CA Occupancy 79.80% 86.10% 91.10% 91.40% 90.30%
ADR $ 83.36 $ 88.17 $ 99.37 $ 97.19 $120.86
RevPAR $ 66.48 $ 75.89 $ 90.55 $ 88.84 $109.15
Residence Inn
Silicon Valley II, CA Occupancy 81.80% 89.50% 90.80% 91.80% 92.20%
ADR $ 80.44 $ 86.09 $ 99.90 $ 95.30 $122.79
RevPAR $ 65.83 $ 77.02 $ 90.71 $ 87.47 $113.21
Residence Inn
Denver (Downtown), CO Occupancy 90.30% 85.30% 85.80% 82.80% 89.80%
ADR $ 67.97 $ 74.50 $ 81.59 $ 76.59 $ 84.12
RevPAR $ 61.40 $ 63.57 $ 70.00 $ 63.40 $ 75.53
Residence Inn
Denver (South), CO Occupancy 89.10% 88.20% 91.30% 91.30% 87.70%
ADR $ 74.38 $ 80.08 $ 84.41 $ 81.45 $ 88.85
RevPAR $ 66.27 $ 70.60 $ 77.05 $ 74.33 $ 77.93
Residence Inn
Windsor, CT Occupancy 79.50% 84.8% 81.70% 81.40% 73.10%
ADR $ 74.75 $ 82.56 $ 88.36 $ 84.26 $ 90.91
RevPAR $ 59.45 $ 70.04 $ 72.23 $ 68.61 $ 66.41
Residence Inn
Atlanta (Downtown), GA Occupancy N/A N/A N/A N/A 67.90%
ADR N/A N/A N/A N/A $ 94.12
RevPAR N/A N/A N/A N/A $ 63.92
</TABLE>
Notes on subsequent page.
A-2
<PAGE> 48
INFORMATION CONCERNING THE HOTELS -- (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE RENT CALCULATION(1) YEAR ENDED
------------------------------ DECEMBER 31, 1996
1996 1996 -----------------------
GUEST YEAR YEAR BASE BREAK FIRST SECOND ROOM PRO FORMA
HOTEL/LOCATION ROOMS OPENED ACQUIRED RENT(2) POINT(3) TIER TIER REVENUE RENT(4)
- -------------- ----- ------ -------- ----------- ---------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Residence Inn
Wichita East, KS 64 1981 1996 $ 287,000 $1,175,000 30.00% 68.00% $1,517,180 $ 575,419
Residence Inn
Portland, ME 78 1996 1996 430,000 1,200,000 30.00% 68.00% 273,037 466,531
Residence Inn
East Lansing, MI 60 1984 1996 290,000 950,000 30.00% 68.00% 1,399,648 582,867
Residence Inn
Grand Rapids, MI 96 1984 1996 509,000 1,350,000 30.00% 68.00% 2,130,877 924,779
Residence Inn
Troy (Central), MI 152 1986 1995 931,000 1,900,000 30.00% 68.00% 4,197,727 2,132,454
Residence Inn
Troy (Southeast), MI 96 1985 1995 494,000 1,400,000 30.00% 68.00% 2,529,590 1,188,121
Residence Inn
Eden Prairie, MN 126 1985 1997 787,500 1,934,000 30.00% 68.00% 3,509,550 1,651,574
Residence Inn
Cherry Hill, NJ 96 1989 1996 774,000 1,700,000 30.00% 68.00% 2,880,256 1,311,784
Residence Inn
Binghamton, NY 72 1987 1994 455,000 1,207,900 32.00% 70.00% 1,848,112 823,022
Residence Inn
Harrisburg, PA 80 1988 1996 554,000 1,380,000 30.00% 68.00% 2,096,009 900,245
Residence Inn
Addison, TX 150 1996 1997 882,000 1,800,000 30.00% 68.00% 2,482,095 1,003,825
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------
HOTEL/LOCATION 1994 1995 1996 1996 1997
- -------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Residence Inn
Wichita East, KS Occupancy 82.70% 82.00% 81.30% 82.00% 80.30%
ADR $75.07 $ 76.13 $ 79.26 $ 77.38 $ 77.52
RevPAR $62.11 $ 62.45 $ 64.42 $ 63.45 $ 62.24
Residence Inn
Portland, ME Occupancy N/A N/A 68.40% N/A 85.70%
ADR N/A N/A $ 74.99 N/A $ 69.85
RevPAR N/A N/A $ 51.30 N/A $ 59.83
Residence Inn
East Lansing, MI Occupancy 84.00% 85.70% 84.90% 82.00% 77.90%
ADR $68.21 $ 70.30 $ 74.04 $ 76.42 $ 76.70
RevPAR $57.31 $ 60.27 $ 62.83 $ 62.69 $ 59.72
Residence Inn
Grand Rapids, MI Occupancy 85.30% 83.90% 83.90% 85.90% 83.60%
ADR $66.93 $ 70.19 $ 71.45 $ 68.34 $ 68.61
RevPAR $57.06 $ 58.88 $ 59.94 $ 58.71 $ 57.35
Residence Inn
Troy (Central), MI Occupancy 89.10% 90.20% 93.20% 91.00% 92.50%
ADR $72.22 $ 77.13 $ 80.96 $ 80.23 $ 89.91
RevPAR $64.36 $ 69.57 $ 75.45 $ 72.97 $ 83.17
Residence Inn
Troy (Southeast), MI Occupancy 85.80% 91.60% 85.40% 82.40% 85.30%
ADR $69.39 $ 72.48 $ 83.59 $ 79.13 $ 86.57
RevPAR $59.54 $ 66.42 $ 71.37 $ 65.22 $ 73.82
Residence Inn
Eden Prairie, MN Occupancy 83.80% 87.30% 79.80% 62.40% 61.20%
ADR $79.80 $ 83.96 $ 87.51 $ 74.34 $ 73.96
RevPAR $66.90 $ 73.30 $ 69.87 $ 46.38 $ 45.27
Residence Inn
Cherry Hill, NJ Occupancy 92.10% 88.80% 89.20% 88.00% 79.80%
ADR $83.96 $ 87.94 $ 91.97 $ 88.62 $ 91.85
RevPAR $77.37 $ 78.10 $ 82.08 $ 78.00 $ 73.26
Residence Inn
Binghamton, NY Occupancy 81.00% 82.20% 83.10% 78.50% 90.00%
ADR $83.87 $ 84.68 $ 84.39 $ 82.08 $ 81.23
RevPAR $67.97 $ 69.64 $ 70.14 $ 64.45 $ 73.07
Residence Inn
Harrisburg, PA Occupancy 88.70% 80.80% 84.50% 80.20% 73.00%
ADR $82.59 $ 84.43 $ 84.50 $ 81.61 $ 83.21
RevPAR $73.25 $ 68.18 $ 71.44 $ 65.47 $ 60.78
Residence Inn
Addison, TX Occupancy N/A N/A 79.30% N/A 78.50%
ADR N/A N/A $ 84.55 N/A $ 90.82
RevPAR N/A N/A $ 67.03 N/A $ 73.31
</TABLE>
Notes on subsequent page.
A-3
<PAGE> 49
INFORMATION CONCERNING THE HOTELS -- (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE RENT CALCULATION(1) YEAR ENDED
------------------------------ DECEMBER 31, 1996
1996 1996 --------------------------
GUEST YEAR YEAR BASE BREAK FIRST SECOND PRO FORMA
HOTEL/LOCATION ROOMS OPENED ACQUIRED RENT(2) POINT(3) TIER TIER REVENUE RENT(4)
- -------------- ----- ------ -------- ----------- ----------- ------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Residence Inn
Arlington, TX 114 1995 1997 $ 627,830 $1,663,000 30.00% 68.00% $ 3,109,920 $ 1,482,806
Residence Inn
Richmond, VA 80 1986 1995 447,000 1,325,000 30.00% 68.00% 2,112,155 932,765
Mid-Priced
Hampton Inn
Naples, FL 107 1990 1994 410,000 1,336,400 33.50% 70.00% 1,867,333 806,968
Hampton Inn
Tallahassee, FL 93 1993 1994 350,000 825,000 30.00% 70.00% 1,674,381 833,690
Hampton Inn
West Palm Beach, FL 136 1986 1994 304,000 1,619,100 31.00% 68.00% 1,844,848 640,223
Hampton Inn
Norcross, GA 150 1996 1996 665,000 1,500,000 30.00% 68.00% 403,483 665,245
Hampton Inn
Lombard (Chicago), IL 128 1987 1997 560,000 1,310,914 30.00% 68.00% 1,956,136 832,025
Hampton Inn
Schaumburg (Chicago), IL 128 1986 1997 371,000 1,086,830 30.00% 68.00% 2,208,840 1,089,016
Hampton Inn
Westchester (Chicago), IL 112 1988 1997 406,000 1,001,814 30.00% 68.00% 2,084,476 1,036,754
Hampton Inn
Germantown, MD 176 1987 1995 490,000 1,500,000 32.00% 69.50% 2,213,605 961,677
Hampton Inn
Woburn, MA 100 1981 1996 210,000 1,350,000 30.00% 68.00% 1,094,988 331,627
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------
HOTEL/LOCATION 1994 1995 1996 1996 1997
- -------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Residence Inn
Arlington, TX Occupancy N/A 73.70% 87.10% 79.20% 93.40%
ADR N/A $ 84.80 $ 84.29 $ 77.85 $ 85.04
RevPAR N/A $ 62.48 $ 73.42 $ 61.70 $ 79.47
Residence Inn
Richmond, VA Occupancy 84.90% 83.90% 88.50% 84.60% 87.20%
ADR $76.94 $ 78.49 $ 81.53 $ 79.36 $ 88.23
RevPAR $65.30 $ 65.83 $ 72.15 $ 67.14 $ 76.92
Mid-Priced
Hampton Inn
Naples, FL Occupancy 74.10% 69.10% 71.00% 92.10% 88.60%
ADR $59.78 $ 65.79 $ 66.38 $ 93.35 $ 97.37
RevPAR $44.29 $ 45.48 $ 47.12 $ 85.94 $ 86.23
Hampton Inn
Tallahassee, FL Occupancy 84.50% 86.10% 81.80% 86.00% 83.80%
ADR $49.99 $ 56.19 $ 60.12 $ 57.51 $ 64.24
RevPAR $42.27 $ 48.41 $ 49.19 $ 49.46 $ 53.84
Hampton Inn
West Palm Beach, FL Occupancy 71.30% 70.60% 68.20% 89.40% 85.00%
ADR $52.24 $ 54.41 $ 54.76 $ 68.44 $ 75.96
RevPAR $37.25 $ 38.39 $ 37.35 $ 61.16 $ 64.59
Hampton Inn
Norcross, GA Occupancy N/A N/A 38.60% N/A 53.00%
ADR N/A N/A $ 65.45 N/A $ 64.75
RevPAR N/A N/A $ 25.29 N/A $ 34.30
Hampton Inn
Lombard (Chicago), IL Occupancy 65.30% 66.90% 66.00% 51.40% 50.90%
ADR $53.37 $ 57.24 $ 63.44 $ 60.56 $ 64.72
RevPAR $34.87 $ 38.30 $ 41.85 $ 31.14 $ 32.94
Hampton Inn
Schaumburg (Chicago), IL Occupancy 73.70% 71.40% 70.80% 57.30% 63.10%
ADR $55.20 $ 62.26 $ 66.11 $ 65.32 $ 68.00
RevPAR $40.66 $ 44.47 $ 46.81 $ 37.40 $ 42.89
Hampton Inn
Westchester (Chicago), IL Occupancy 76.50% 75.00% 73.00% 59.50% 63.60%
ADR $56.50 $ 63.02 $ 70.03 $ 68.16 $ 70.62
RevPAR $43.21 $ 47.24 $ 51.11 $ 40.54 $ 44.94
Hampton Inn
Germantown, MD Occupancy 43.60% 38.90% 54.70% 46.20% 41.00%
ADR $59.78 $ 63.23 $ 62.54 $ 57.80 $ 66.80
RevPAR $26.08 $ 24.59 $ 34.21 $ 26.71 $ 27.38
Hampton Inn
Woburn, MA Occupancy 67.00% 69.60% 73.70% 53.90% N/A
ADR $52.02 $ 55.82 $ 57.66 $ 54.25 N/A
RevPAR $34.88 $ 38.84 $ 42.49 $ 29.26 N/A
</TABLE>
Notes on subsequent page.
A-4
<PAGE> 50
INFORMATION CONCERNING THE HOTELS -- (CONTINUED)
<TABLE>
<CAPTION>
PERCENTAGE RENT YEAR ENDED
CALCULATION(1) DECEMBER 31, 1996
--------------------------- --------------------------
GUEST YEAR YEAR BASE BREAK FIRST SECOND ROOM PRO FORMA
HOTEL/LOCATION ROOMS OPENED ACQUIRED RENT(2) POINT(3) TIER TIER REVENUE RENT(4)
- -------------- ----- ------ -------- ----------- ---------- ----- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Hampton Inn
Albany/Latham, NY 126 1990 1994 $ 662,000 $1,207,900 35.00% 70.00% $ 2,027,917 $ 986,043
Hampton Inn
Islandia (Long Island), NY 121 1988 1994 473,000 1,516,300 31.75% 70.00% 2,588,294 1,217,098
Hampton Inn
Willow Grove
(Philadelphia), PA 150 1991 1994 735,000 1,372,380 31.45% 70.00% 3,245,418 1,729,311
Comfort Inn
Allentown, PA 127 1990 1995 497,000 $1,050,000 36.50% 70.00% 1,912,963 978,396
Holiday Inn Express
Lexington, MA 164 1971 1996 500,000 1,950,000 27.00% 68.00% 2,634,889 1,017,496
Sheraton Inn
Fort Lauderdale, FL 139 1988 1994 359,000 1,413,500 31.00% 68.00% 2,445,697 1,126,808
----- ----------- ------------ -----------
Subtotal for Current Hotels 4,670 25,559,330 102,684,890 51,067,496
----- ----------- ------------ -----------
Consolidated Total for
Hotels 5,727 $39,167,170 $122,961,517 $64,675,336
===== =========== ============ ===========
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- -----------------
HOTEL/LOCATION 1994 1995 1996 1996 1997
- -------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CURRENT HOTELS
Hampton Inn
Albany/Latham, NY Occupancy 73.30% 67.70% 72.30% 64.60% 61.50%
ADR $61.96 $ 65.15 $ 61.85 $ 60.69 $ 63.35
RevPAR $45.40 $ 44.08 $ 44.73 $ 39.23 $ 38.99
Hampton Inn
Islandia (Long Island), NY Occupancy 74.30% 75.00% 75.80% 61.60% 67.60%
ADR $69.74 $ 74.60 $ 76.49 $ 75.04 $ 75.86
RevPAR $51.84 $ 55.92 $ 57.99 $ 46.24 $ 51.32
Hampton Inn
Willow Grove
(Philadelphia), PA Occupancy 77.40% 77.60% 82.00% 83.10% 77.50%
ADR $65.51 $ 70.31 $ 72.19 $ 69.22 $ 78.59
RevPAR $50.68 $ 54.59 $ 59.21 $ 57.53 $ 60.88
Comfort Inn
Allentown, PA Occupancy 77.70% 73.00% 74.90% 60.20% 67.90%
ADR $53.17 $ 55.88 $ 56.70 $ 55.11 $ 56.73
RevPAR $41.32 $ 40.81 $ 42.47 $ 33.17 $ 38.51
Holiday Inn Express
Lexington, MA Occupancy 55.20% 62.50% 67.20% 43.60% 36.00%
ADR $53.65 $ 60.37 $ 64.41 $ 57.72 $ 60.28
RevPAR $29.62 $ 37.73 $ 43.29 $ 25.15 $ 21.70
Sheraton Inn
Fort Lauderdale, FL Occupancy 72.10% 64.80% 84.00% 89.90% 90.10%
ADR $54.74 $ 62.65 $ 57.13 $ 71.94 $ 74.21
RevPAR $39.44 $ 40.60 $ 47.99 $ 64.69 $ 66.88
Subtotal for Current Hotels 77.70% 77.30% 78.40% 74.90% 76.60%
Consolidated Total for
Hotels $71.06 $ 76.58 $ 83.55 81.67 91.67
$55.21 $ 59.22 $ 65.47 $ 61.17 $ 70.21
</TABLE>
- ---------------
(1) Percentage Rent is an amount equal to the first tier percentage of all room
revenues up to the Break Point plus an amount equal to the second tier
percentage of all room revenues in excess of the Break Point.
(2) Represents annualized Base Rent for the remainder of 1997. Increased by the
last year's CPI increase each year beginning in 2000, except that Base Rent
for the two Sierra Suites hotels shall be increased by the last year's CPI
increase each year beginning in 1998.
(3) Increased by the last year's CPI increase each year beginning in 1998.
(4) Pro Forma Rent represents Rent due from the Lessees to the Company
calculated by applying the Rent provisions of the Percentage Leases to the
historical revenue of the Hotels. The Pro Forma Rent for the Summerfield
Acquisition Hotels and certain other Hotels, which had no substantive
operations for the periods presented, represent Base Rent as set forth in
the applicable Percentage Leases.
(5) The Rent payable for these five hotels shall be aggregated, as described
hereafter. If the Rent payable at any, but less than all, of such hotels
exceeds the aggregate amount of Base Rent payable for such hotels, such
excess shall be credited to the negative difference (if any) between the
aggregate amount of Percentage Rent payable for the remainder of such
hotels and the aggregate amount of Base Rent payable for such remaining
hotels.
(6) Base Rent for this Hotel is $2,706,000 for 1998 and $1,734,400 for 1999 and
thereafter, subject to annual CPI adjustment as noted in (2) above.
(7) Base Rent for this Hotel is $1,894,000 for 1998 and $1,203,360 for 1999 and
thereafter, subject to annual CPI adjustment as noted in (2) above.
(8) Base Rent for this Hotel is $1,933,000 for 1998 and $1,228,640 for 1999 and
thereafter, subject to annual CPI adjustment as noted in (2) above.
(9) Base Rent for this Hotel is $1,649,000 for 1998 and $1,043,840 for 1999 and
thereafter, subject to annual CPI adjustment as noted in (2) above.
(10) Base Rent for this Hotel is $1,974,000 for 1998 and $1,205,840 for 1999 and
thereafter, subject to annual CPI adjustment as noted in (2) above.
(11) Base Rent for this Hotel is $2,579,000 for 1998 and $1,609,360 for 1999 and
thereafter, subject to annual CPI adjustment as noted in (2) above.
(12) Base Rent for this Hotel is $800,000 for 1998 and $482,880 for 1999 and
thereafter, subject to annual CPI adjustment.
(13) The guest room amount shown represents the total number of one-bedroom and
two-bedroom suites at the hotel. These hotels contain a total of 298
two-bedroom suites.
A-5
<PAGE> 51
PROSPECTUS
$250,000,000
[INN KEEPERS USA LOGO]
Innkeepers USA Trust (the "Company"), a self-administered Maryland real
estate investment trust, intends to issue from time to time its (i) Preferred
Shares of beneficial interest, $0.01 par value per share ("Preferred Shares"),
(ii) Common Shares of beneficial interest, $0.01 par value per share ("Common
Shares") and (iii) warrants to purchase Preferred Shares or Common Shares
("Warrants"), having an aggregate initial public offering price not to exceed
$250,000,000, on terms to be determined at the time of sale. The Preferred
Shares, the Common Shares and the Warrants offered hereby (collectively, the
"Offered Securities") may be offered, separately or as units with other Offered
Securities, in separate series, in amounts, at prices and on terms to be
determined at the time of sale and to be set forth in a supplement to this
Prospectus (a "Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Preferred
Shares, the series designation and number of shares, the dividend, liquidation,
redemption, conversion, voting and other rights and the initial public offering
price; (ii) in the case of Common Shares, the number of shares and initial
public offering price; (iii) in the case of Warrants, the number and terms
thereof, the description and the number of securities issuable upon their
exercise, the exercise price, the terms of the offering and sale thereof and,
where applicable, the duration and detachability thereof; and (iv) in the case
of all Offered Securities, whether such Offered Securities will be offered
separately or as a unit with other Offered Securities. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, concerning certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered thereby.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any designated agents or any underwriters are involved in the sale of Offered
Securities, they will be identified and their compensation will be described in
the applicable Prospectus Supplement. See "Plan of Distribution." No Offered
Securities may be sold without delivery of the applicable Prospectus Supplement
describing such Offered Securities and the method and terms of the offering
thereof.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Date of This Prospectus is April 11, 1997.
<PAGE> 52
IN CONNECTION WITH AN OFFERING OF SECURITIES, THE UNDERWRITERS, IF ANY, FOR
SUCH OFFERING MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICES OF SUCH SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE 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 THE 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.
AVAILABLE INFORMATION
The Company is subject to the informational 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 with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York,
New York 10048, and can also be inspected and copied at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed
fees.
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed by
the Company with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules of the Commission. For further information, reference
is made to the Registration Statement.
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 Financial Statements of the DeBoer Hotels included in the Company's
Registration Statement on Form S-3 (No. 333-12809) dated September 27, 1996.
3. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996;
4. The Company's Current Reports on Form 8-K filed with the Commission on
(a) February 21, 1996, (b) May 23, 1996 as amended on Form 8-K/A on July 17,
1996, (c) November 12, 1996 and (d) November 22, 1996;
ii
<PAGE> 53
5. The description of the Common Shares of the Company included in the
Company's registration statement on Form 8-A, dated September 19, 1996;
6. Financial statements of the Liberty High Income Plus Limited Partnership
(referred to as the "Liberty Hotels", seven of the Current Hotels purchased by
the Company in October 1995) included in the Company's 8-K/A, dated November 30,
1995;
7. Financial statements of the Fisher Initial Hotels included in the
Company's Form S-11 Registration Statement (File No. 33-95622); and
8. All other documents files 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
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 (561) 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.
iii
<PAGE> 54
THE COMPANY
The Company is a self-administered Maryland REIT which owns equity
interests in 33 hotels with an aggregate of 4,038 rooms in fifteen states (the
"Hotels") through Innkeepers USA Limited Partnership and its subsidiary
partnerships (collectively, the "Partnership") each of which is owned 99% by
Innkeepers USA Limited Partnership and 1% by the Company or its wholly-owned
subsidiaries. Innkeepers Financial Corporation, a wholly-owned subsidiary of the
Company (the "General Partner"), owns an approximately 81.9% interest in
Innkeepers USA Limited Partnership (the "Partnership") and is the sole general
partner of the Partnership.
The Company's executive offices are located at 306 Royal Poinciana Way,
Palm Beach, Florida 33480, and its telephone number is (561) 835-1800.
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of Offered
Securities to the Partnership in exchange for additional units of general
partnership interest. Unless otherwise set forth in the applicable Prospectus
Supplement, the net proceeds from the sale of any Offered Securities will be
used by the Company and the Partnership for general corporate purposes, which
may include repayment of indebtedness, making improvements to properties and the
acquisition of additional properties.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the Company's consolidated ratios of
earnings to fixed charges for the periods presented.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 30, 1994 NINE MONTHS NINE MONTHS
(INCEPTION) THROUGH YEAR ENDED ENDED ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Ratios of Earnings to Fixed
Charges.................... 3.01 2.59 2.48 2.82
</TABLE>
The consolidated ratio of earnings to fixed charges was computed by
dividing earnings by fixed charges. To date, the Company has not issued any
Preferred Shares; therefore, the ratio of earnings to combined fixed charges and
preferred share dividends and the ratio of earnings to fixed charges are the
same. For purposes of computing the ratio, earnings have been calculated by
adding fixed charges to income before minority interest. Fixed charges consist
of interest expense and amortization of loan origination fees.
Prior to the completion of the Company's initial public offering ("IPO") on
September 30, 1994, and intent to qualify as a REIT, the Company's predecessor
entities operated in a manner so as to minimize net taxable income and were
financed with debt. Consequently, the Company's predecessor entities had net
losses for the years ended December 31, 1991, 1992 and 1993 and net income for
the nine months ended September 30, 1994.
The computation of the ratio of earnings to fixed charges for such periods
indicates that earnings were inadequate to cover fixed charges by approximately
$2.0 million, $1.2 million, $.5 million for the years ended December 31, 1991,
1992, and 1993, respectively. The ratio of earnings to fixed charges for the
nine months ended September 30, 1994 was 1.35. The completion of the IPO on
September 30, 1994, permitted the Company to reduce indebtedness, resulting in
an improved ratio of earnings to fixed charges commencing with the period from
September 30, 1994, to December 31, 1994.
1
<PAGE> 55
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
up to 100,000,000 Common Shares, and 20,000,000 Preferred Shares. At December
31, 1996, there were 22,322,498 Common Shares outstanding and no Preferred
Shares outstanding.
As a Maryland real estate investment trust, the Company is subject to
various provisions of the Maryland General Corporation Law (the "MGCL") and
Title 8, as amended from time to time, of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Maryland REIT Law"). Both the
Maryland REIT Law and the Company's Declaration of Trust provide that no
shareholder of the Company will be personally liable for any obligation of the
Company solely as a result of his status as a shareholder of the Company. The
Company's Bylaws further provide that the Company shall indemnify each
shareholder against any claim or liability to which the shareholder may become
subject by reason of his being or having been a shareholder or former
shareholder and that the Company shall pay or reimburse each shareholder or
former shareholder for all legal and other expenses reasonably incurred by him
in connection with any such claim or liability. In addition, it is the Company's
policy to include a clause in its contracts which provides that shareholders
assume no personal liability for obligations entered into on behalf of the
Company. However, with respect to tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes and certain statutory
liability, the shareholders may, in some jurisdictions, be personally liable to
the extent that such claims are not satisfied by the Company. Inasmuch as the
Company carries public liability insurance which it considers adequate, any risk
of personal liability to shareholders is limited to situations in which the
Company's assets plus its insurance coverage would be insufficient to satisfy
the claims against the Company and its shareholders.
The following information with respect to the Common Shares and Preferred
Shares is subject to the detailed provisions of the Company's Amended and
Restated Declaration of Trust (the "Declaration of Trust" and Bylaws (the
"Bylaws"). These statements do not purport to be complete or to give full effect
to the provisions of statutory or common law, and are subject to and are
qualified in their entirety by reference to, the terms of the Declaration of
Trust and Bylaws, which are filed as exhibits to the Registration Statement.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust (as defined below), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board of Trustees of the Company out of assets legally available
therefor and to share ratably in the assets of the Company legally available for
distribution to its shareholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company intends to pay quarterly dividends to
its shareholders.
Each outstanding Common Share entitles the holder to one vote on all
matters submitted to a vote of shareholders, including the election of trustees,
and, except as otherwise required by law or except as provided with respect to
any other class or series of shares of beneficial interest, the holders of such
Common Shares possess the exclusive voting power. There is no cumulative voting
in the election of trustees, which means that the holders of a majority of the
outstanding Common Shares can elect all of the trustees then standing for
election and the holders of the remaining shares of beneficial interest, if any,
will not be able to elect any trustees.
Holders of Common Shares have no conversion, sinking fund, redemption
rights or any preemptive rights to subscribe for any securities of the Company.
Common Shares have equal dividend, distribution, liquidation and other
rights, and have no preference, exchange or, except as expressly required by the
Maryland REIT Law, appraisal rights.
2
<PAGE> 56
Pursuant to the Maryland REIT Law, a real estate investment trust generally
cannot dissolve, amend its declaration of trust or merge, unless approved by the
affirmative vote of shareholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all the votes entitled to be cast on the matter) is set forth in the
real estate investment trust's declaration of trust. The Company's Declaration
of Trust provides for approval by a majority of all the votes entitled to be
cast on the matter in all situations permitting or requiring action by the
shareholders except with respect to: (a) the disqualification of the Company as
a real estate investment trust or revocation of its election to be taxed as a
real estate investment trust (which requires the affirmative vote of two-thirds
of the number of Common Shares entitled to vote on such matter at a meeting of
the shareholders of the Company); (b) the election of trustees (which requires a
plurality of all the votes cast at a meeting of shareholders of the Company at
which a quorum is present); (c) the removal of trustees (which requires the
affirmative vote of the holders of two-thirds of the outstanding voting shares
of the Company); (d) the amendment or repeal of the Independent Trustee
provision in the Declaration of Trust (which requires the affirmative vote of
two-thirds of the outstanding shares entitled to vote on the matter); (e) the
amendment of the Declaration of Trust by shareholders (which requires the
affirmative vote of a majority of votes entitled to be cast on the matter,
except under certain circumstances specified in the Declaration of Trust which
require the affirmative vote of two- thirds of all the votes entitled to be cast
on the matter); and (f) the termination of the Company (which requires the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter). A declaration of trust may permit the trustees by a two-thirds vote to
amend the declaration of trust from time to time to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"), or the Maryland REIT Law without the affirmative vote or written
consent of the shareholders. The Company's Declaration of Trust permits such
action by the Board of Trustees.
The Transfer Agent for the Common Shares is Harris Trust and Savings Bank.
The Common Shares are traded on the NYSE under the symbol "KPA." The Company
will apply to the NYSE to list the additional Common Shares to be sold pursuant
to any Prospectus Supplement, and the Company anticipates that such shares will
be so listed.
PREFERRED SHARES
Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Trustees. Prior to issuance of shares of each series,
the Board is required by the Maryland REIT Law and the Company's Declaration of
Trust to set for each such series, subject to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
series. The Board could authorize the issuance of Preferred Shares with terms
and conditions that could have the effect of delaying, deferring or preventing a
takeover or other transaction which holders of some, or a majority, of the
Common Shares might believe to be in their best interests or in which holders of
some, or a majority, of the Common Shares might receive a premium for their
Common Shares over the then market price of such Common Shares.
The Preferred Shares will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Shares.
Reference is made to the Prospectus Supplement relating to the particular series
of Preferred Shares offered thereby for specific terms, including: (i) the title
and liquidation preference per share of such Preferred Shares and the number of
shares offered; (ii) the price at which such series will be issued; (iii) the
dividend rate (or method of calculation), the dates on which dividends shall be
payable and the dates from which dividends shall commence to accumulate; (iv)
any redemption or sinking fund provisions of such series; (v) any conversion
provisions of such series; and (vi) any additional dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions of such series.
The Preferred Shares will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of Preferred Shares, each series will rank on a parity as to dividends
and distributions in the event of a liquidation with each other series of
Preferred Shares and, in all cases, will be senior to the Common Shares.
3
<PAGE> 57
Dividend Rights. Holders of Preferred Shares of each series will be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Shares. Such rate may be fixed or variable or both and may
be cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any
Preferred Shares are outstanding, no dividends will be declared or paid or any
distributions be made on the Common Shares, other than a dividend payable in
Common Shares, unless the accrued dividends on each series of Preferred Shares
have been fully paid or declared and set apart for payment and the Company shall
have set apart all amounts, if any, required to be set apart for all sinking
funds, if any, for each series of Preferred Shares.
If the applicable Prospectus Supplement so provides, when dividends are not
paid in full upon any series of Preferred Shares and any other series of
Preferred Shares ranking on a parity as to dividends with such series of
Preferred Shares, all dividends declared upon such series of Preferred Shares
and any other series of Preferred Shares ranking on a parity as to dividends
will be declared pro rata so that the amount of dividends declared per share on
such series of Preferred Shares and such other series will in all cases bear to
each other the same ratio that accrued dividends per share on such series of
Preferred Shares and such other series bear to each other.
Each series of Preferred Shares will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of Preferred Shares may
be entitled to dividends at different dividend rates or based upon different
methods of determination. Except as provided in the applicable Prospectus
Supplement, no series of Preferred Shares will be entitled to participate in the
earnings or assets of the Company.
Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Shares will be entitled to receive out of the assets of the
Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to such
series, which may include accrued dividends, if such liquidation, dissolution or
winding up is involuntary or may equal the current redemption price per share
(otherwise than for the sinking fund, if any provided for such series) provided
for such series set forth in such Prospectus Supplement, if such liquidation,
dissolution or winding up is voluntary, and on such preferential basis as is set
forth in such Prospectus Supplement. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to Preferred Shares of any series and any other shares of beneficial
interest of the Company ranking as to any such distribution on a parity with
such series of Preferred Shares are not paid in full, the holders of Preferred
Shares of such series and of such other shares will share ratably in any such
distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled or on such other basis as is set
forth in the applicable Prospectus Supplement. The rights, if any, of the
holders of any series of Preferred Shares to participate in the assets of the
Company remaining after the holders of other series of Preferred Shares have
been paid their respective specified liquidation preferences upon any
liquidation, dissolution or winding up of the Company will be described in the
Prospectus Supplement relating to such series.
Redemption. A series of Preferred Shares may be redeemable, in whole or in
part, at the option of the Company, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times, the
redemption prices and for the types of consideration set forth in the Prospectus
Supplement relating to such series. The Prospectus Supplement relating to a
series of Preferred Shares which is subject to mandatory redemption shall
specify the number of shares of such series that shall be redeemed by the
Company in each year commencing after a date to be specified, at a redemption
price per share to be specified together with an amount equal to any accrued and
unpaid dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Shares, the Company deposits with a designated bank funds sufficient
to redeem such Preferred Shares, then from and after such deposit, all shares
called for redemption will no longer be outstanding for any purpose, other than
the right to receive the redemption price and the right to convert such shares
into other classes of stock of the Company. The
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redemption price will be stated in the Prospectus Supplement relating to a
particular series of Preferred Shares.
Except as indicated in the applicable Prospectus Supplement, the Preferred
Shares are not subject to any mandatory redemption at the option of the holder.
Sinking Fund. The Prospectus Supplement for any series of Preferred Shares
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
Conversion Rights. The Prospectus Supplement for any series of Preferred
Shares will state the terms, if any, on which shares of that series are
convertible into Common Shares or another series of Preferred Shares. The
Preferred Shares will have no preemptive rights.
Voting Rights. Except as indicated in the Prospectus Supplement relating
to a particular series of Preferred Shares, or except as expressly required by
Maryland law, a holder of Preferred Shares will not be entitled to vote. Except
as indicated in the Prospectus Supplement relating to a particular series of
Preferred Shares, in the event the Company issues full shares of any series of
Preferred Shares, each such share will be entitled to one vote on matters on
which holders of such series of Preferred Shares are entitled to vote.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for a series of Preferred Shares will be selected by the
Company and be described in the applicable Prospectus Supplement. The registrar
for shares of Preferred Shares will send notices to shareholders of any meetings
at which holders of Preferred Shares have the right to vote on any matter.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Company's Declaration of Trust authorizes the Trustees to classify or
reclassify any unissued Common Shares or Preferred Shares, subject to any
ownership limitations, by setting or changing the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of redemption.
RESTRICTIONS ON TRANSFER OF SHARES OF BENEFICIAL INTEREST
For the Company to qualify as a REIT under the Code, shares of beneficial
interest in the Company must be held by a minimum of 100 persons for at least
335 days in each taxable year subsequent to 1994 or during a proportionate part
of a shorter taxable year. In addition, at all times during the second half of
each taxable year subsequent to 1994, no more than 50% in value of the shares of
beneficial interest of the Company may be owned, directly or indirectly and by
applying certain constructive ownership rules, by five or fewer individuals (the
"5/50 Rule"). Because the Board of Trustees believes it is essential for the
Company to continue to qualify as a REIT, the Declaration of Trust restricts the
acquisition of Common and Preferred Shares (the "Ownership Limitation").
The Ownership Limitation provides that, subject to certain exceptions
specified in the Declaration of Trust, no shareholder may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% of the
outstanding Common Shares or more than 9.8% of any other class of outstanding
shares of beneficial interest. 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.
If any shareholder purports to transfer shares to a person and the
transfer, if effective, would result in (i) a person owning shares, directly or
constructively, in excess of the Ownership Limitation or (ii) the Company
failing to qualify as a REIT, the purported transfer shall 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."
Furthermore, 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
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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.
DESCRIPTION OF WARRANTS
The Company may issue Warrants for the purchase of Preferred Shares or
Common Shares. Warrants may be issued independently or together with any other
Offered Securities and may be attached to or separate from such securities. Each
series of Warrants will be issued under a separate warrant agreement (each a
"Warrant Agreement") to be entered into between the Company and a warrant agent
("Warrant Agent"). The Warrant Agent will act solely as an agent of the Company
in connection with the Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of Warrants. The following sets forth certain general terms
and provisions of the Warrants offered hereby. Further terms of the Warrants and
the applicable Warrant Agreement will be set forth in the applicable Prospectus
Supplement. If Warrants are issued, copies of the forms of Warrant Agreement and
the certificate evidencing the Warrants will, prior to such issuance, be
incorporated by reference in the Registration Statement of which this Prospectus
is a part, and the following summary is qualified in its entirety by reference
to such documents.
The Prospectus Supplement will describe the following terms, where
applicable, of Warrants in respect of which this Prospectus is being delivered:
(a) the title of such Warrants;
(b) the aggregate number of such Warrants;
(c) the price or prices at which such Warrants will be issued;
(d) the designation, aggregate principal amount and terms of the
securities purchasable upon exercise of such Warrants;
(e) the designation and terms of the Offered Securities with which
such Warrants are issued and the number of such Warrants issued with each
such security;
(f) if applicable, the date on and after which such Warrants and the
related securities will be separately transferable;
(g) the price at which the securities purchasable upon exercise of
such Warrants may be purchased;
(h) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire;
(i) the minimum or maximum amount of such Warrants which may be
exercised at any one time;
(j) information with respect to book-entry procedures, if any;
(k) a discussion of material Federal income tax considerations; and
(l) any other terms of such Warrants, including terms, procedures and
limitations relating to the exchange and exercise of such Warrants.
PLAN OF DISTRIBUTION
The Company may sell Offered Securities in or outside the United States to
or through underwriters or may sell Offered Securities to investors directly or
through designated agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
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Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices, or at
negotiated prices. The Company also may, from time to time, authorize
underwriters acting as agents to offer and sell the Offered Securities upon the
terms and conditions set forth in any Prospectus Supplement. Underwriters may
sell Offered Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions (which may be
changed from time to time) from the underwriters and/or from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them from the
Company or from purchasers of Offered Securities and any profit realized by them
on resale of the Offered Securities may be deemed to be underwriting discounts
and commissions under the Securities Act. Underwriters, dealers and agents may
be entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts (the "Contracts") providing for payment and delivery on the
date or dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the principal amount of Offered Securities sold
pursuant to Contracts shall not be less nor more than, the respective amounts
stated in such Prospectus Supplement. Institutions with which Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Offered Securities covered by its
Contract shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
the Company shall have sold to such underwriters the total principal amount of
the Offered Securities less the principal amount thereof covered by Contracts. A
commission indicated in the Prospectus Supplement will be paid to agents and
underwriters soliciting purchases of Offered Securities pursuant to Contracts
accepted by the Company. Agents and underwriters shall have no responsibility in
respect of the delivery or performance of Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with, and perform services for, the Company in the
ordinary course of business.
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.
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 are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Internal Revenue Service (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.
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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 elected to be taxed as a REIT under sections 856 through 860 of
the Code, effective for its short taxable year ended 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.
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 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
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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 twelve 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 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 its
subsidiary partnerships (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
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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."
Pursuant to percentage leases (the "Percentage Leases"), several lessees
(in the aggregate, "the Lessee") lease from the Partnership and the Subsidiary
Partnerships the land, buildings, improvements, furnishings and equipment
comprising each Hotel for a period ranging from ten (10) years to thirteen (13)
years. The Percentage Leases provide that the Lessee is obligated to pay to the
Partnership or the applicable Subsidiary Partnership (i) the greater of base
rent ("Base Rent") or percentage rent ("Percentage Rent" and collectively, the
"Rents"), and (ii) certain other additional charges (the "Additional Charges").
The Percentage Rent is calculated by multiplying fixed percentages by room
revenues for each of the 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.
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
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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.
The Company believes that the Percentage Leases will be treated as true
leases for federal income tax purposes because: (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, the cost of certain furniture, fixtures and
equipment, and certain capital expenditures), (v) the Lessee benefits from any
savings in the 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.
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 test 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 a lease of the real
property comprising a Hotel must not be greater than 15% of the total 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 one recently-acquired Hotel,
the average adjusted basis of the personal property in such Hotels is greater
than 15% of the average adjusted bases of both the real and personal property
comprising such Hotel. As a consequence, a portion of the revenues derived under
the Percentage Lease applicable to such Hotel (the portion attributable to the
personal property) will not be considered "rents from real property" unless the
average adjusted basis of that hotel's personal property is less than 15% of the
average adjusted bases of both the real and personal property at such hotel. The
amount of any disqualified income under such Percentage Lease, 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 partially or wholly in exchange for Units, the initial adjusted basis
of the personal property in such Hotel was less than 15% of the initial adjusted
bases of both the real and personal property comprising such Hotel. The Company
obtained appraisals of the personal property at each Hotel that the Partnership
acquired partially or wholly in exchange for cash indicating that the appraised
value of the
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personal property at such hotel was 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, the Partnership, or a Subsidiary 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 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 Hotels,
which in turn potentially could cause the Company to fail to satisfy the 75% or
95% 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 a percentage or 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 in reality is
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. Jeffrey Fisher, who is the majority shareholder in the Lessee, may
acquire Common Shares or Preferred Shares by exercising their Redemption Rights.
The Partnership Agreement, however, provides that a redeeming Limited Partner
will receive cash, rather than Common or Preferred Shares, at the election of
the Company or if the acquisition of Common Shares or Preferred 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, the Partnership's, or
the Subsidiary 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 or Preferred 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, the Partnership's, or a
Subsidiary 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 or Preferred Shares, no absolute assurance can be
given that such transfers or other events of which
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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.
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.
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 the 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
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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 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 qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. However, gross income from such
foreclosure property will qualify for purposes of 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 for purposes of 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 for purposes of 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
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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 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.
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 test requirements 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 the
acquisition of one or more nonqualifying assets (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 avoid corporate income taxation of the earnings
that it distributes, 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
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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 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
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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 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. 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 whose income is from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (iv) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust. 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.
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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 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 gain or ordinary income 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 indefinitely by individuals. 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 and are
proposed to be effective for distributions made after December 31, 1997. See
"Federal Income Tax Considerations -- Taxation of Non-U.S. Shareholders."
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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, 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
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<PAGE> 73
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.
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. trade or 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.
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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.
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 entity will be classified as a
partnership rather than as a corporation for federal income tax purposes if the
entity (i) is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the "Check-the-Box
Regulations") and (ii) is not a "publicly traded" partnership. Pursuant to the
Check-the-Box Regulations, an unincorporated entity with at least two members
may elect to be classified either as an association or as a partnership. If such
an entity fails to make an election, it generally will be treated as a
partnership for federal income tax purposes. The federal income tax
classification of an entity that was in existence prior to January 1, 1997, such
as the Hotel Partnerships, will be respected for all periods prior to January 1,
1997 if (i) the entity had a reasonable basis for its claimed classification,
(ii) the entity and all members of the entity recognized the federal tax
consequences of any changes in the entity's classification within the 60 months
prior to January 1, 1997, and (iii) neither the entity nor any member of the
entity was notified in writing on or before May 8, 1996 that the classification
of the entity was under examination. 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 has 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
flow-through entity 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.
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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<PAGE> 75
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. To the extent that a
Hotel Partnership has acquired Hotels for cash, the Hotel Partnership's initial
basis in such Hotels for federal income tax purposes generally is equal to the
purchase price paid by the Hotel Partnership. The Hotel Partnerships 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
use MACRS for furnishings and equipment. Under MACRS, the Hotel Partnerships
generally 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 use ADS for
buildings and improvements. Under ADS, the Hotel Partnerships generally
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 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
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 are 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 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 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. Such prohibited
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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.
LEGAL OPINIONS
The validity of the Offered Securities will be passed upon for the Company
by Hunton & Williams, Richmond, Virginia.
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 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 incorporated by reference in this Registration Statement. Such financial
statements and financial statement schedule are 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.
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======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS, NOR DO THEY CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.............. S-1
Risk Factors............................... S-9
Use of Proceeds............................ S-13
Distribution Policy and Price Range of
Common Shares............................ S-13
Capitalization............................. S-14
Selected Financial Information............. S-15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... S-19
The Company................................ S-24
Strategic Relationship with Summerfield.... S-24
Business Strategy.......................... S-26
The Lodging Industry....................... S-29
The Upscale Extended-Stay Segment.......... S-30
The Hotels................................. S-31
Management................................. S-37
Certain Federal Income Tax
Considerations........................... S-38
Underwriting............................... S-39
Legal Matters.............................. S-41
Experts.................................... S-41
Glossary................................... S-42
Exhibit A.................................. A-1
PROSPECTUS
Available Information...................... ii
Incorporation of Certain Documents by
Reference................................ ii
The Company................................ 1
Use of Proceeds............................ 1
Ratio of Earnings to Combined Fixed
Charges.................................. 1
Description of Shares of Beneficial
Interest................................. 2
Restrictions on Transfer of Shares of
Beneficial Interest...................... 5
Description of Warrants.................... 6
Plan of Distribution....................... 6
Federal Income Tax Considerations.......... 7
Legal Opinions............................. 24
Experts.................................... 24
</TABLE>
======================================================
======================================================
9,500,000 SHARES
[INN KEEPERS USA LOGO]
COMMON SHARES
OF BENEFICIAL INTEREST
---------------------------
PROSPECTUS SUPPLEMENT
JULY 24, 1997
---------------------------
LEHMAN BROTHERS
MONTGOMERY SECURITIES
BEAR, STEARNS & CO. INC.
ALEX. BROWN & SONS
INCORPORATED
EVEREN SECURITIES, INC.
SALOMON BROTHERS INC
======================================================
