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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
April 8, 1996 (March 22, 1996)
HOSPITALITY PROPERTIES TRUST
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(Exact name of registrant as specified in its charter)
Maryland 1-11527 04-3262075
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(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
400 Centre Street
Newton, Massachusetts 02158
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(Address of principal executive offices, including zip code)
(617) 964-8389
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(Registrant's telephone number, including area code)
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Item 2. Acquisition or Disposition of Assets.
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Introduction. As previously announced, Hospitality Properties Trust
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(the "Company") entered into agreements (collectively, the "Purchase
Agreements") in February and March, 1996 to acquire (i) 11 Wyndham Garden(R)
hotels from Garden Hotel Associates Limited Partnership, an affiliate of Wyndham
Hotel Company, Ltd. (together with its proposed successor-in-interest, Wyndham
Hotel Corporation, "Wyndham"), for approximately $135.3 million, (ii) 18
Residence Inn by Marriott(R) hotels from HMH Properties, Inc., a subsidiary of
Host Marriott Corporation ("Host"), for approximately $172.2 million and (iii)
16 additional Courtyard by Marriott(R) hotels from HMH Properties, Inc. for
approximately $176.4 million (collectively, the "Additional Hotels"). The
purchase prices were arrived at through arms length negotiations.
Prior to entering into the Purchase Agreements, the Company owned 37
Courtyard by Marriott(R) hotels (the "Initial Hotels" and, collectively with
the Additional Hotels, the "Hotels"), which it had acquired from HMH Properties,
Inc. or other subsidiaries of Host in 1995 for approximately $329.0 million.
Pursuant to the applicable Purchase Agreements, the Company on March 22,
1996 acquired eight of the Additional Hotels, consisting of five Residence Inn
by Marriott(R) hotels and three Courtyard by Marriott(R) hotels, and on
April 4, 1996 acquired all remaining Residence Inn by Marriott(R) hotels
included in the Additional Hotels and 11 of the 13 remaining Courtyard by
Marriott(R) hotels included in the Additional Hotels. The aggregate purchase
prices for such Residence Inn by Marriott(R) Hotels were approximately $172.2
million, and the aggregate purchase prices for such 14 of the 16 Courtyard by
Marriott(R) Hotels were approximately $154.1 million. The purchase prices
were funded with the proceeds of borrowings under the Company's $200 million
line of credit with DLJ Mortgage Capital, Inc. and with a portion of the
proceeds of the Company's public offering of 13 million additional common shares
of beneficial interest, $.01 par value per share, which was consummated on April
4, 1996 at a price to the public of $26 5/8 per share.
Unless otherwise indicated, the following information contained in this
Report is presented as if, and assumes that, all of the Additional Hotels have
been acquired. The Company is proceeding under the applicable Purchase
Agreements to acquire and intends to acquire the 11 Wyndham Garden(R) hotels
and the two remaining Courtyard by Marriott(R) hotels. However, the purchase
of such Additional Hotels is subject to the satisfaction of a number of
conditions, certain of which unless satisfied could result in one or more of
such Additional Hotels not being acquired. If the Company is unable for any
reason to purchase any one or more of the 11 Wyndham Garden(R) Hotels, it may
unable to purchase any of such Additional Hotels and may be unable to recover
the amounts expended by it in connection with such acquisition. Any inability
to complete the purchase of substantially all of the remaining Additional
Hotels, or to complete the acquisition of the remaining Additional Hotels in a
timely manner, could have a material adverse affect on the Company and the
Company's cash available for distribution per share, and could cause the level
of the Company's dividends to shareholders to decline. Readers are cautioned
that forward looking statements such as those set forth above in this paragraph
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may
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differ materially from those contained in the forward looking statement as a
result of various factors, certain of which are identified above.
The Hotels. Upon completion of the acquisition of the Additional Hotels,
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the Company will have purchased 82 Hotels located in 26 states for approximately
$813 million. The following chart summarizes the location of such Hotels:
<TABLE>
<CAPTION>
State Number of Rooms Number of Hotels
- ----------------- --------------- ----------------
<S> <C> <C>
Arizona 1,164 8
California 1,470 10
Delaware 152 1
Florida 449 3
Georgia 978 7
Illinois 514 3
Indiana 149 1
Iowa 108 1
Maryland 406 3
Massachusetts 1,072 8
Michigan 281 2
Minnesota 358 2
Missouri 298 2
New Jersey 416 3
New Mexico 112 1
New York 403 3
North Carolina 534 4
Ohio 106 1
Pennsylvania 567 4
Rhode Island 148 1
South Carolina 108 1
Tennessee 399 3
Texas 405 3
Virginia 462 3
Washington 522 3
Wisconsin 147 1
------ --
Total: 11,728 82
====== ==
</TABLE>
Under the Company's leases and the applicable management agreements, the
Hotels will operate as Wyndham Garden(R) hotels, Residence Inn by
Marriott(R) hotels or Courtyard by Marriott(R) hotels, as the case may be.
Wyndham Garden(R) hotels are mid-size, full service hotels located
primarily near suburban business centers and airports which are designed to
attract business travelers and small business groups in suburban markets. Each
hotel contains 140 to 250 rooms and approximately
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1,500 to 5,000 square feet of meeting space. The amenities and services
provided at these hotels are designed to meet the needs of the upscale business
traveler. Amenities and services in each room include desks large enough to
accommodate personal computers, longer phone cords, high wattage light bulbs for
reading, room service and access to 24-hour telecopy and mail/package service.
The meeting facilities at Wyndham Garden(R) hotels generally can accommodate
groups of between 10 and 200 people and include a flexible meeting room design,
exterior views, additional phone lines and audiovisual equipment. Wyndham
Garden(R) hotels also feature a lobby lounge, most of which have a fireplace,
a library typically overlooking a landscaped garden and a swimming pool. In
addition, many Wyndham Garden(R) hotels contain a whirlpool and an exercise
facility. Unlike many other mid-priced hotels, each Wyndham Garden(R) hotel
contains a cafe restaurant that serves a full breakfast, lunch and dinner menu.
According to Wyndham, as of December 31, 1995, 38 Wyndham Garden(R) hotels
were open and operating in 19 states. The Company believes that the Wyndham
Garden(R) brand is one of the leading brands in the full service suburban
segment of the United States lodging industry.
Residence Inn by Marriott(R) hotels are designed to attract business,
governmental and family travelers who stay more than five consecutive nights.
Residence Inn by Marriott(R) hotels generally have between 80 to 130 studios
and two-bedroom suites. Most Residence Inn by Marriott(R) hotels are designed
as a cluster of residential style buildings with landscaped walkways, courtyards
and recreational areas. Residence Inn by Marriott(R) hotels do not have
restaurants. All offer complimentary continental breakfast and most provide a
complimentary evening hospitality hour. In addition, each suite contains a
fully equipped kitchen and many have wood burning fireplaces. Most Residence
Inn by Marriott(R) hotels also contain swimming pools, exercise rooms,
business centers and guest laundries. According to Marriott International, Inc.
("Marriott"), as of December 31, 1995, 196 Residence Inn by Marriott(R) hotels
were open and operating in 42 states. The Company believes that the Residence
Inn by Marriott(R) brand is the leading brand in the extended stay segment of
the United States lodging industry.
Courtyard by Marriott(R) hotels are designed to attract both business and
leisure travelers. A typical Courtyard by Marriott(R) hotel has 145 guest
rooms. The guest rooms are larger than those in most other moderately priced
hotels and predominately offer king sized beds. Most Courtyard by Marriott(R)
hotels are situated on well landscaped grounds and typically are built around a
courtyard containing a patio, pool and socializing area that may be glass
enclosed depending upon location. Most of these hotels have lounges or lobbies,
meeting rooms, an exercise room, a small laundry room available to guests and a
restaurant or coffee shop. Generally, the guest rooms are similar in size and
furnishings to guest rooms in full service Marriott(R) hotels. In addition,
many of the same amenities as would be available in full service Marriott(R)
hotels are available in Courtyard by Marriott(R) hotels, except that
restaurants may be open only for breakfast buffets or serve limited menus, room
service is generally not available and meeting and function rooms are limited in
size and number. According to Marriott, as of December 31, 1995, 253 Courtyard
by Marriott(R) hotels were open and operating nationally. The Company
believes that the Courtyard by Marriott(R) brand is a leading brand in the
limited service segment of the United States hotel industry.
Lessees, Managers, Leases and Management Agreements. As a real estate
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investment trust (REIT), the Company may not operate or manage its Hotels. All
82 Hotels owned by the
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Company will be leased to hotel operating companies and managed by hotel
management companies. The 11 Wyndham Garden(R) Hotels will be leased to a
special purpose entity affiliated with Wyndham ("Wyndham I") and managed under
one or more management agreements by Wyndham or a Wyndham subsidiary ("Wyndham
II"). The 18 Residence Inn by Marriott(R) Hotels are leased to a special
purpose subsidiary of Host ("Host I") and managed by a subsidiary of Marriott
("Marriott I"). The 53 Courtyard by Marriott(R) Hotels (including the Initial
Hotels) are or will be leased to another special purpose subsidiary of Host
("Host II") and managed by another subsidiary of Marriott ("Marriott II"). Such
leases are referred to below as the "Leases," and the agreements for such
management are referred to below as the "Management Agreements".
Wyndham Garden(R) Hotels. Under terms of the applicable Purchase
Agreement and related agreements, each of the 11 Wyndham Garden(R) Hotels upon
their acquisition by the Company will be leased pursuant to separate Leases to
Wyndham I, a limited purpose subsidiary of Wyndham formed to lease such Hotels.
The Purchase Agreement for these Hotels requires that Wyndham I engage Wyndham
or Wyndham II to manage these Hotels. The terms of any such Management Agreement
or Agreements are within the discretion of Wyndham I, but the applicable Leases
will require that all management fees be subordinated to rent due to the
Company, that such Management Agreements be terminable by the Company in the
event of a termination of the Lease affecting the same Hotel and that the
designation of these Hotels as Wyndham Garden(R) hotels may not be changed
without the Company's approval. Neither Wyndham nor Wyndham II are liable for
obligations due to the Company under the Wyndham Garden(R) Leases.
Under terms of the applicable Purchase Agreement and related agreements,
the parties have agreed that the principal features of the Company's 11 Wyndham
Garden(R) Leases and any Management Agreements for such Hotels will be as
follows:
. Each of the Company's Wyndham Garden(R) Hotels is the subject of a
separate Lease. However, in the event any of these Leases is defaulted, the
Company may declare all of these Leases to be in default.
. The initial term of all of these Leases expires in approximately 17 years
on December 31, 2012.
. At the end of the initial Lease term, Wyndham I may renew these Leases for
four consecutive 12 year terms. Renewal options may be exercised only on an
all or none basis for all 11 Wyndham Garden(R) Hotels owned by the
Company.
. The Wyndham Garden(R) Leases require minimum rent payments aggregating
$13.6 million per year.
. In addition to minimum rents, the Wyndham Garden(R) Leases require
percentage rents equal to 8% of Total Hotel Sales (as defined below) in
excess of Total Hotel Sales in 1996. "Total Hotel Sales" includes gross
revenues from room rentals, food and beverage
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sales and other services provided at these Hotels. Percentage rents are
calculated on a combined basis for all 11 Wyndham Garden(R) Hotels and
are payable starting in 1997.
. The Wyndham Garden(R) Leases all require that 5% of Total Hotel Sales be
escrowed by Wyndham I periodically to fund a reserve for refurbishments and
renovations to these Hotels (an "FF&E Reserve"). Funds in this FF&E Reserve
are pooled for all 11 of the Company's Wyndham Garden(R) Hotels and
generally may be withdrawn only for capitalized improvements approved by
the Company. During the Lease term, funds in the FF&E Reserve and personal
property purchased with these funds will be the property of Wyndham I. At
the end of the Lease term any funds remaining in this escrow account and
any property purchased with funds from this account remaining at these
Hotels must be transferred to the Company. Based upon 1995 Total Hotel
Sales, the FF&E Reserve required for these Wyndham Garden(R) Hotels is
estimated to aggregate approximately $2.8 million per year or $1,460 per
room per year.
. Under certain circumstances, the Company may be required to fund major
repairs to the 11 Wyndham Garden(R) Hotels, in which event base rents
will be increased by a minimum of 10% of the amount funded.
. A security deposit equal to a full year's base rent, $13.6 million, will be
retained by the Company as security for Wyndham I's obligations under the
Wyndham Garden(R) Leases. Provided that Wyndham I does not default under
any of these Leases, the Company must repay the security deposit to Wyndham
I at the expiration of the Leases, including renewal terms. No interest is
required to be paid by the Company on the security deposit, and it will not
be escrowed.
. The Wyndham Garden(R) Leases are net leases requiring Wyndham I to pay
all operating expenses, including taxes and insurance and any applicable
ground rent.
. During the Lease term and so long as the applicable Leases are not in
default, Wyndham I will have rights of first refusal, in certain
circumstances, on sales of the 11 Wyndham Garden(R) Hotels.
. All fees payable under the Management Agreement between Wyndham I and
Wyndham or Wyndham II are subordinated to rents due to the Company, and
these Management Agreements may be canceled by the Company in the event the
Leases affecting the concerned Hotel or Hotels are then in default.
Similarly, all charges which may be payable by Wyndham I to Wyndham or its
affiliates are subordinated to the obligation of Wyndham I to pay rents to
the Company.
Residence Inn by Marriott(R) Hotels. Host I is a limited purpose
subsidiary of Host which leases the Company's 18 Residence Inn by Marriott(R)
Hotels. Marriott I is a subsidiary of Marriott. None of Host, Marriott or
Marriott I are liable for obligations due to the Company from Host I under the
Residence Inn by Marriott(R) Leases.
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The principal features of the Company's 18 Residence Inn by Marriott(R)
Leases and Management Agreements are as follows:
. Each of the Company's Residence Inn by Marriott(R) Hotels is the subject
of a separate Lease. However, in the event any of these Leases is
defaulted, the Company may declare all of these Leases to be in default.
. The initial term of all of these Leases expires in approximately 15 years
on December 31, 2010.
. At the end of the initial Lease term, Host I may renew these Leases for one
10 year and two consecutive 15 year renewal terms. Renewal options may be
exercised only on an all or none basis for all 18 Residence Inn by
Marriott(R) Hotels owned by the Company.
. The Residence Inn by Marriott(R) Leases require minimum rent payments
aggregating $17.2 million per year.
. In addition to minimum rents, the Residence Inn by Marriott(R) Leases
require percentage rents equal to 7.5% of Total Hotel Sales in excess of
Total Hotel Sales in 1996. Percentage rents are calculated on a combined
basis for all 18 Residence Inn by Marriott(R) Hotels and are payable
starting in 1997.
. Both the Leases and Management Agreements for the Company's 18 Residence
Inn by Marriott(R) Hotels require that 5% of Total Hotel Sales be
escrowed periodically to fund refurbishments and renovations to these
Hotels. Funds in this FF&E Reserve are pooled for all 18 Residence Inn by
Marriott(R) Hotels and generally may be withdrawn only for capitalized
improvements. Funds in the FF&E Reserve and property purchased with those
funds are the property of the Company and payments into the FF&E Reserve
are recorded by the Company under generally accepted accounting principles
as rents. Based upon 1995 Total Hotel Sales, the FF&E Reserve required for
the Company's 18 Residence Inn by Marriott(R) Hotels is estimated to
aggregate approximately $3.1 million per year, or $1,422 per suite per
year.
. Under certain circumstances, the Company may be required to fund major
repairs to the 18 Residence Inn by Marriott(R) Hotels, in which event
base rents will be increased by 10% of the amount funded.
. A security deposit equal to a full year's base rent, $17.2 million, will be
retained by the Company as security for Host I's obligations under the
Residence Inn by Marriott(R) Leases. Provided that Host I does not
default under any of these Leases, the Company must repay the security
deposit to Host I at the expiration of the Leases, including renewal terms.
No interest will be paid by the Company on the security deposit, and it
will not be escrowed.
. The Residence Inn by Marriott(R) Leases are net leases requiring Host I
to pay all operating expenses, including taxes and insurance and any
applicable ground rent. Under
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the Management Agreements for the 18 Residence Inn by Marriott(R) Hotels,
substantially all of Host I's operating responsibilities have been
delegated to Marriott I.
. The Management Agreements may be canceled by Host I (with the consent of
the Company) on a hotel by hotel basis if specified performance levels are
not achieved by Marriott I. Similarly, in the event that the Leases for
individual Residence Inn by Marriott(R) Hotels were terminated, the
Company or the successor lessee would be able to cancel the corresponding
Management Agreements on a hotel by hotel basis if specified performance
levels are not achieved.
. The Management Agreements for the Company's 18 Residence Inn by
Marriott(R) Hotels are not cross defaulted with each other nor with the
Leases for these Hotels. Accordingly, if one or more Management Agreements
were defaulted and terminated, Host I and the Company will be able to
continue the affiliation with Marriott and use the Residence Inn by
Marriott(R) brand name and chain services under the remaining agreements.
Also, if the Leases for these Hotels were defaulted and terminated, the
Company and any successor lessee will be able to continue the affiliation
with Marriott and the Residence Inn by Marriott(R) brand name and chain
services under the existing Management Agreements.
. The Residence Inn by Marriott(R) Management Agreements expire on December
31, 2020. Thereafter, they may be renewed by Marriott I for two consecutive
15 year terms.
. Borrowings in respect of each of the Courtyard by Marriott(R) Hotels are
limited in accordance with a formula set forth in the applicable Management
Agreements to no more than 70% of the allocable purchase price of each
Hotel in the case of a borrowing secured by a single Hotel, or 60% of the
aggregate allocable purchase prices of these Hotels in the case of a
borrowing secured by two or more of these Hotels on a combined basis.
. Management fees payable to Marriott I for operation of the 18 Residence Inn
by Marriott(R) Hotels are subordinated to minimum rents due to the
Company. All related company charges payable by Host I to Host or
affiliates of Host are likewise subordinated to rents due to the Company.
Courtyard by Marriott(R) Hotels. Host II is a limited purpose subsidiary
of Host which leases or will lease the Company's 53 Courtyard by Marriott(R)
Hotels. Marriott II is a subsidiary of Marriott. None of Host, Marriott or
Marriott II are liable for obligations due to the Company from Host II under the
Courtyard by Marriott(R) Leases.
The principal features of the Company's Leases and Management Agreements in
respect of the 53 Courtyard by Marriott(R) are or, in accordance with the
applicable Purchase Agreement, will be as follows:
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. Each of the Company's 53 Courtyard by Marriott(R) Hotels is the subject
of a separate Lease. However, in the event any of these Leases is
defaulted, the Company may declare all of these Leases to be in default.
. The initial term of all of these Leases expires in approximately 17 years
on December 31, 2012.
. At the end of the initial Lease term, Host II may renew these Leases for
three consecutive 12 year renewal terms. Renewal options may be exercised
only on an all or none basis for all 53 Courtyard by Marriott(R) Hotels
owned by the Company.
. The Courtyard by Marriott(R) Leases require minimum rent payments
aggregating $50.5 million per year.
. In addition to minimum rents, the Courtyard by Marriott(R) Leases require
percentage rents equal to 5% of Total Hotel Sales in excess of Total Hotel
Sales in 1994 (for Initial Hotels) and 1995 (for Additional Hotels).
Percentage rents are calculated on a combined basis for all 53 Courtyard by
Marriott(R) Hotels.
. Both the Leases and Management Agreements for the Company's 53 Courtyard by
Marriott(R) Hotels require that 5% of Total Hotel Sales be escrowed
periodically to fund refurbishments and renovations to these Hotels. Funds
in this FF&E Reserve are pooled for all 53 Courtyard by Marriott(R)
Hotels and generally may be withdrawn only for capitalized improvements.
Funds in the FF&E Reserve and property purchased with those funds are the
property of the Company and payments into this FF&E Reserve are recorded by
the Company under generally accepted accounting principles as rents. Based
upon 1995 Total Hotel Sales, the FF&E Reserve required for these 53
Courtyard by Marriott(R) Hotels is estimated to aggregate approximately
$9.2 million per year or $1,209 per room per year.
. Under certain circumstances, the Company may be required to fund major
repairs to the 53 Courtyard by Marriott(R) Hotels, in which event base
rents will be increased by 10% of the amount funded.
. A security deposit equal to a full year's base rent, $50.5 million, will be
retained by the Company as security for Host II's obligations under the
Leases. Provided that Host II does not default under any of the Leases, the
Company must repay the security deposit to Host II at the expiration of the
Leases, including renewal terms. No interest will be paid by the Company on
the security deposit, and it will not be escrowed.
. The Courtyard by Marriott(R) Leases are net leases requiring Host II to
pay all operating expenses, including taxes and insurance and any
applicable ground rent. Under the Management Agreements, substantially all
of Host II's operating responsibilities have been delegated to Marriott II.
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. The Management Agreements may be canceled by Host II (with the consent of
the Company) on a hotel by hotel basis if specified performance levels are
not achieved by Marriott II. Similarly, in the event that the Leases for
individual Courtyard by Marriott(R) Hotels were terminated, the Company
or the successor lessee would be able to cancel the corresponding
Management Agreements on a hotel by hotel basis if specified performance
levels are not achieved.
. The Management Agreements for the Company's 53 Courtyard by Marriott(R)
Hotels are not cross defaulted with each other nor with the Leases for
these Hotels. Accordingly, if one or more Management Agreements were
defaulted and terminated, Host II and the Company will be able to continue
the affiliation with Marriott and use the Courtyard by Marriott(R) brand
name and chain services under the remaining agreements. Also, if the Leases
for these Hotels were defaulted and terminated, the Company and any
successor lessee will be able to continue the affiliation with Marriott and
use the Courtyard by Marriott(R) brand name and chain services under
existing Management Agreements.
. The Courtyard by Marriott(R) Management Agreements expire on December 31,
2012. Thereafter, they may be renewed by Marriott II for three consecutive
12 year terms.
. Borrowings in respect of each of the Courtyard by Marriott(R) Hotels are
limited in accordance with a formula set forth in the applicable Management
Agreements to no more than 70% of the allocable purchase price of each
Hotel in the case of a borrowing secured by a single Hotel, or 60% of the
aggregate allocable purchase prices of these Hotels in the case of a
borrowing secured by two or more of these Hotels on a combined basis.
. Management fees payable to Marriott II for operation of the 53 Courtyard by
Marriott(R) Hotels are subordinated to minimum rents due to the Company.
All related company charges payable by Host II to Host or affiliates of
Host are likewise subordinated to rents due to the Company.
Casualty, Condemnation, etc. The Leases for the Hotels provide that, in
---------------------------
the event any Hotel is damaged by fire, explosion or other casualty as a result
of which such Hotel cannot be operated in the good faith judgment of the
applicable lessee or manager on a commercially practicable basis for its
permitted use and it cannot reasonably be expected to be restored within
specified periods following such damage, either the Company or such lessee may
terminate the applicable Lease. If either (i) the damage is not extensive
enough to give rise to an option to terminate a Lease or (ii) neither the
Company nor the lessee elects to terminate the Lease, the lessee is obligated
promptly to repair and replace the improvements to the extent of available
insurance proceeds. During any period of reconstruction or repair of any Hotel,
the lessee is required to operate its businesses at such Hotel to the extent
practicable, without abatement of rent. In the event that there are inadequate
insurance proceeds to pay for the cost of restoration and the lessee elects not
to fund the deficiency, the Company may, at its option, finance the shortfall
for all such repairs, and base rent under the applicable Lease will increase by
a minimum of 10% per annum of the amount financed.
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In the event that any Hotel or any substantial portion thereof is taken or
condemned or sold by the Company in lieu thereof, the applicable Lease will
terminate, and any related award is to be paid to the Company or the applicable
lessee or manager, as appropriate. In the event only a part of any Hotel is
taken or condemned but such Hotel or the part remaining can still be used for
its prior purpose, the applicable Lease will not terminate and the lessee is
required to repair and restore the remaining improvements, provided the cost of
such repair and restoration does not exceed the amount of the related award. If
the cost of such repair exceeds such amount and the lessee is unwilling to pay
the amount of such deficiency, the lessee may request that the Company fund the
amount of the deficiency, in which event base rent increases by a minimum of 10%
per annum of the amount so funded. If neither party elects to fund the
deficiencies, either party may terminate the affected Lease.
The ground leases for 10 of the Hotels contain provisions relating to the
obligation of the Company to maintain insurance, restore the premises following
a casualty or a taking and apply in a specified manner proceeds received by the
Company in connection with a casualty or a taking, all of which obligations are
required to be performed by the applicable lessee pursuant to the Leases of such
Hotels. In instances where a material casualty has occurred prior to the last
five years of a ground lease, however, the Company may be obligated under
certain ground leases to restore the property although the lessee has terminated
the applicable Lease as a result of a casualty and regardless of whether the
proceeds received are adequate to effect restoration. In addition, in certain
limited circumstances the lenders holding mortgages on the land underlying
certain of such ground leased Hotels may have the right to require that
insurance proceeds or condemnation awards be applied to repayment of debt
secured by such mortgage.
Ground Leases. The right to occupy the land underlying 10 of the Hotels
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were or will be acquired by an assignment of leasehold interest under long term
ground leases. The ground lessors are unrelated to the sellers of the Hotels
and the Company.
Rent payable under the 10 ground leases is the responsibility of the
Company's lessees under the applicable Leases and is generally calculated as a
percentage of Hotel revenues. Eight of the 10 ground leases require minimum
annual rent ranging from approximately $90,000 to $502,900 per year. If a
Lessee does not perform the obligations under a ground lease or elects not to
renew any ground lease, the Company must perform such obligations under the
ground lease or renew such ground lease in order to protect its investments in
the affected Hotel. Any pledge of the Company's interests in a ground lease may
also require the consent of the applicable ground lessor and its lenders.
If a ground lease terminates, the Lease with respect to the Hotel on such
ground-leased land will also terminate. The remaining terms of all the ground
leases (including renewal terms) are in excess of 45 years, and expire between
2039 and 2077. Accordingly, Leases for six Hotels may terminate by reason of
termination of ground leases up to a maximum of nine years prior to the
expiration of their final renewal terms if the Company is unable to acquire the
underlying property or extend the applicable ground leases.
Purchase Agreements. Under the Purchase Agreements for the Additional
-------------------
Hotels which have not been acquired by the Company, the respective sellers are
entitled to receive the
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purchase price in cash (net of applicable security deposits) in exchange for
title to such Additional Hotels. The purchase of each such Additional Hotel is
contingent upon the satisfactory completion of the Company's due diligence
investigation and other conditions.
Each of the Purchase Agreements contains representations with respect to
the Additional Hotels which are typical in commercial real estate acquisitions,
including, among other things, that: (i) the properties and the use and
operation thereof do not violate applicable laws, (ii) the sellers have not
placed any hazardous substances on the properties and (iii) applicable
Management Agreements (except in the case of the Wyndham Garden(R) Hotels) and
ground leases are in full force and effect. Such representations and warranties
survive the acquisition for a period ending one year after closing. In
addition, each seller has agreed to indemnify and hold the Company harmless from
and against losses that may arise as a result of the breach of these
representations. Pursuant to the Purchase Agreement for the 16 Courtyard by
Marriott(R) Additional Hotels and separate Agreements to Lease between the
Company and the respective lessees of the other Additional Hotels, the lessees
agreed to enter into Leases upon the Company's acquisition of the respective
Additional Hotels.
In connection with the purchase of the Initial Hotels, the Company acquired
a right of first offer expiring August 31, 2002 with respect to substantially
all of the interests of Host or its subsidiaries in Courtyard by Marriott(R)
and Residence Inn by Marriott(R) hotels. In connection with the purchase of
34 Additional Hotels from Host, the Company paid Host $2.5 million to extend the
effective period of this right of first offer until December 31, 2010.
Item 5. Other Events.
------------
See the information set forth in Item 2 of this Form.
Item 7. Financial Statements and Exhibits.
----------------------------------
(a) Financial statements of businesses acquired.
--------------------------------------------
See Index to Financial Statements on page F-1.
(b) Pro forma financial information.
--------------------------------
See Index to Financial Statements on page F-1.
(c) Exhibits
--------
None.
12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
HOSPITALITY PROPERTIES TRUST FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-3
Unaudited Pro Forma Balance Sheet as of December 31, 1995............. F-4
Unaudited Pro Forma Statement of Income for the year ended December
31, 1995............................................................. F-5
Notes to Pro Forma Financial Statements............................... F-6
HMH HPT RESIDENCE INN, INC. (HOST I) FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-9
Unaudited Pro Forma Balance Sheet as of December 29, 1995............. F-10
Unaudited Pro Forma Statement of Income for the fiscal year ended De-
cember 29, 1995...................................................... F-11
Notes to Pro Forma Financial Statements............................... F-12
Report of Independent Public Accountants.............................. F-14
Balance Sheet as of February 21, 1996................................. F-15
Notes to Balance Sheet................................................ F-16
RESIDENCE INN HOTELS COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-17
Combined Statements of Revenues and Expenses Excluding Income Taxes
for the fiscal years ended December 31, 1993, December 30, 1994 and
December 29, 1995.................................................... F-18
Combined Statements of Assets, Liabilities and Net Investment and Ad-
vances as of December 30, 1994 and December 29, 1995................. F-19
Combined Statements of Cash Flows for the fiscal years ended December
31, 1993, December 30, 1994 and December 29, 1995.................... F-20
Notes to Combined Financial Statements................................ F-21
HMH HPT COURTYARD, INC. (HOST II) FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-28
Unaudited Pro Forma Balance Sheet as of December 29, 1995............. F-29
Unaudited Pro Forma Statement of Income for the fiscal year ended De-
cember 29, 1995...................................................... F-30
Notes to Pro Forma Financial Statements............................... F-31
Report of Independent Public Accountants.............................. F-33
Balance Sheet as of December 29, 1995................................. F-34
Statement of Income for the period March 24, 1995 (inception) to De-
cember 29, 1995...................................................... F-35
Statement of Shareholder's Equity for the period March 24, 1995 (in-
ception) to December 29, 1995........................................ F-36
Statement of Cash Flows for the period March 24, 1995 (inception) to
December 29, 1995.................................................... F-37
Notes to Financial Statements......................................... F-38
COURTYARD HOTELS COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-43
Combined Statements of Revenues and Expenses Excluding Income Taxes
for the fiscal years ended December 31, 1993, December 30, 1994 and
December 29, 1995.................................................... F-44
Combined Statements of Assets, Liabilities and Net Investment and Ad-
vances as of December 30, 1994 and December 29, 1995................. F-45
Combined Statements of Cash Flows for the fiscal years ended December
31, 1993, December 30, 1994 and December 29, 1995.................... F-56
Notes to Combined Financial Statements................................ F-47
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
WYNDHAM I FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-55
Unaudited Pro Forma Balance Sheet as of December 31, 1995............. F-56
Unaudited Pro Forma Statement of Income for the year ended December
31, 1995............................................................. F-57
Notes to Pro Forma Financial Statements............................... F-58
GARDEN HOTEL ASSOCIATES L.P. FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-59
Balance Sheet as of December 31, 1994 and 1995........................ F-60
Statements of Income for the years ended December 31, 1993, December
31, 1994 and December 31, 1995....................................... F-61
Statement of Changes in Partners' Capital for the years ended December
31, 1993, December 31, 1994 and December 31, 1995.................... F-62
Statements of Cash Flows for the years ended December 31, 1993, Decem-
ber 31, 1994 and December 31, 1995................................... F-63
Notes to Financial Statements......................................... F-64
</TABLE>
F-2
<PAGE>
HOSPITALITY PROPERTIES TRUST
PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1995 AND
PRO FORMA STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
As described in footnotes (J) and (K), the following unaudited pro forma
data are presented as if: (i) the Company's formation transactions, primarily
the acquisition of the Initial Hotels and the Company's initial public
offering of Shares; (ii) the related offering of Shares (the "Offering"); (iii)
the acquisition of all Additional Hotels; (iv) the commencement of the Leases
relating to the Additional Hotels; and (v) certain other transactions described
in the notes to these pro forma financial statements have been consummated as of
the date or for the period presented. The pro forma information is based in part
upon the historical financial statements of the Company, the Courtyard Hotels,
the Residence Inn Hotels and Garden Hotel Associates L.P. (the Wyndham Hotels)
and should be read in conjunction with all of the financial statements and notes
thereto included in this form. In the opinion of management, all adjustments
necessary to reflect the effects of the transactions discussed above have been
reflected in the pro forma data.
The following unaudited pro forma data is not necessarily indicative of what
the actual financial position or results of operations for the Company would
have been as of the date or for the period indicated, nor does it purport to
represent the financial position or results of operations of the Company for
future periods.
F-3
<PAGE>
HOSPITALITY PROPERTIES TRUST
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
----------------------------------------
HISTORICAL (A) PRO FORMA PRO FORMA
(37 HOTELS) ADJUSTMENTS (82 HOTELS)
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Real estate properties, at cost
Land................................. $ 62,311 $ 91,516 $153,827
Buildings and improvements........... 270,261 396,934 667,195
-------- -------- --------
332,572 488,450(B) 821,022
Less accumulated depreciation........ 5,820 -- 5,820
-------- -------- --------
326,752 488,450 815,202
Cash and cash equivalents.............. 2,135 -- 2,135
Rent receivable........................ 322 -- 322
FF&E reserve (restricted cash)......... 5,342 5,500(C) 10,842
Other assets, net...................... 4,396 1,205(D) 5,601
-------- -------- --------
$338,947 $495,155 $834,102
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings............................. $ -- $120,515(E) $120,515
Security deposits...................... 32,900 48,460(F) 81,360
Dividend payable....................... 6,930 -- 6,930
Due to affiliate....................... 770 -- 770
Accounts payable and accrued expenses.. 396 -- 396
Shareholders' equity:
Preferred shares of beneficial
interest, no par value, 100,000,000
shares authorized, none issued...... -- -- --
Common shares of beneficial interest
$.01 par value, 100,000,000 shares
authorized, 12,600,900 shares issued
and outstanding (25,600,900 shares
on a pro forma basis)............... 126 130(G) 256
Additional paid in capital........... 297,962 326,050(H) 624,012
Cumulative net income................ 11,349 -- 11,349
Dividends (paid or declared)......... (11,486) -- (11,486)
-------- -------- --------
Total shareholders' equity......... 297,951 326,180 624,131
-------- -------- --------
$338,947 $495,155 $834,102
======== ======== ========
</TABLE>
See notes to pro forma financial statements.
F-4
<PAGE>
HOSPITALITY PROPERTIES TRUST
PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
FEBRUARY 7, 1995 YEAR ENDED YEAR ENDED
(INCEPTION) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1995 1995
1995 (I) (37 HOTELS) (J) (82 HOTELS) (K)
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Base rent................... $ 19,206 $ 32,900(L) $81,360(L)
Percentage rent............. 325 408(M) 408(M)
FF&E reserve income......... 4,037 6,424(N) 12,295(N)
Interest income............. 74 144 315
-------- -------- -------
Total revenues............ 23,642 39,876 94,378
Expenses:
Interest expense............ 5,039 -- 9,145(O)
Depreciation and amortiza-
tion....................... 5,844 9,229(P) 23,809(P)
General and administrative.. 1,410 2,616(Q) 5,039(Q)
-------- -------- -------
Total expenses............ 12,293 11,845 37,993
-------- -------- -------
Net income.................... $ 11,349 $ 28,031 $56,385
======== ======== =======
Other data:
Cash Available for Distribu-
tion (R)................... $ 13,156 $ 30,836 $68,126
Cash provided by operating
activities (S)............. 14,140 31,820 69,110
Cash used in investing ac-
tivities (S)............... 303,652 303,652 749,142
Cash provided by financing
activities (S)............. 291,647 268,481 685,371
Weighted average Shares out-
standing................... 4,515 12,601 25,601
Per share data:
Net income (T).............. $ 2.51 $ 2.22 $ 2.20
Cash Available for Distribu-
tion (T)................... 2.91 2.45 2.66
</TABLE>
See notes to pro forma financial statements.
F-5
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(A) Represents the historical balance sheet of the Company as of December
31, 1995.
(B) Represents the proposed purchase of the 45 Additional Hotels as follows:
<TABLE>
<CAPTION>
11 WYNDHAM 18 RESIDENCE INN 16 COURTYARD
GARDEN(R) HOTELS BY MARRIOTT(R) HOTELS BY MARRIOTT(R) HOTELS TOTAL
<S> <C> <C> <C> <C>
Cash purchase price..... $121,720 $155,000 $158,760 $435,480
Purchase price withheld
as security deposit.... 13,600 17,220 17,640 48,460
Estimated closing costs. 1,460 300 250 2,010
Option cost capitalized
to real estate......... -- 1,250 1,250 2,500
-------- -------- -------- --------
$136,780 $173,770 $177,900 $488,450
======== ======== ======== ========
</TABLE>
(C) Represents the proposed purchase price of existing FF&E Reserve escrow
account balances for the 45 Additional Hotels.
(D) Represents financing fee of 1% of pro forma borrowings by the Company on
the Line of Credit.
(E) Represents proposed borrowings on the Company's Line of Credit.
(F) Represents Security Deposits equal to one year's base rent for Leases
for the 45 Additional Hotels.
(G) Represents the par value ($0.01) of 13,000,000 Shares expected to be
issued in this Offering.
(H) Represents the following:
<TABLE>
<S> <C>
Gross proceeds from the Offering................................ $346,125
Estimated expenses of the Offering.............................. (19,945)
Par value of Shares offered..................................... (130)
--------
$326,050
========
</TABLE>
(I) Represents the historical operating results of the Company for the
period February 7, 1995 (inception), to December 31, 1995.
(J) Represents the pro forma operating results of the Company assuming the
Company's formation transactions, primarily the acquisition and leasing of the
37 Initial Hotels and the Company's initial public offering of Shares, had
been consummated as of January 1, 1995.
(K) Represents the pro forma operating results of the Company assuming the
Company's formation transactions, primarily the acquisition and leasing of the
37 Initial Hotels, the Company's initial public offering of Shares, the
proposed acquisition and leasing of the 45 Additional Hotels and the proposed
Offering, had been consummated as of January 1, 1995.
F-6
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(L) Represents base rent per the Leases, as follows:
<TABLE>
<S> <C>
Initial Courtyard Hotels............................................. $32,900
-------
Additional Hotels:
Courtyard Hotels.................................................... 17,640
Wyndham Hotels...................................................... 13,600
Residence Inn Hotels................................................ 17,220
-------
48,460
-------
Total, the Hotels................................................ $81,360
=======
</TABLE>
(M) Represents 5% of revenue increases over 1994 base year levels for the
Initial Hotels.
(N) Represents amounts paid as rent into an HPT controlled FF&E escrow
account for use on capitalizable hotel expenditures for repairs, refurbishment
and renovations. Escrowed amounts represent 5% of Total Hotel Sales each year.
<TABLE>
<S> <C>
Initial Courtyard Hotels............................................. $ 6,424
-------
Additional Hotels:
Courtyard Hotels.................................................... 2,775
Residence Inn Hotels................................................ 3,096
-------
5,871
-------
Total, the Hotels................................................ $12,295
=======
</TABLE>
The FF&E Reserve for the renovation and refurbishment of the 11 Wyndham
Garden(R) Hotels remains the property of Wyndham I during the Lease terms. At
the end of the Lease terms for the 11 Wyndham Garden(R) Hotels, any remaining
funds in such FF&E Reserve would be paid to the Company. Under GAAP the FF&E
Reserve for the Leases relating to the 11 Wyndham Garden(R) Hotels is not
recorded as an expense by the Lessee or income by the Company.
(O) Represents interest at LIBOR plus 150 basis points (an average of
approximately 7.4% during 1995) on the pro forma $120,515 drawn on the Line of
Credit in connection with the proposed acquisition of the Additional Hotels
and amortization of related financing fees. The pro forma impact on interest
expense of a 1/8% change in LIBOR is approximately $150.6.
(P) Represents the full year effect of the purchase of the Initial Hotels
and Additional Hotels on depreciation expense.
<TABLE>
<S> <C>
Initial Courtyard Hotels............................................. $ 9,229
-------
Additional Hotels:
Courtyard Hotels.................................................... 5,310
Wyndham Hotels...................................................... 4,083
Residence Inn Hotels................................................ 5,187
-------
14,580
-------
Total, the Hotels................................................ $23,809
=======
</TABLE>
F-7
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(Q) Represents estimated expenses of the Company related to advisory fees,
state and local taxes, legal, accounting and investor relations as detailed
below.
<TABLE>
<S> <C>
Initial Courtyard Hotels:
Advisory fee....................................................... $2,163
Other expenses..................................................... 453
------
Total............................................................ $2,616
------
Additional Hotels (Advisory fees):
Courtyard Hotels................................................... $ 882
Wyndham Hotels..................................................... 680
Residence Inn Hotels............................................... 861
------
2,423
------
Total, the Hotels................................................ $5,039
======
Advisory fees........................................................ $4,586
State and local taxes.............................................. 140
Independent trustees fees.......................................... 98
Legal fees......................................................... 40
Accounting fees.................................................... 100
Investor relations................................................. 75
------
Total, the Hotels................................................ $5,039
======
</TABLE>
No incentive advisory fees were payable in 1995.
(R) The Company bases its dividend primarily on Cash Available for
Distribution, which it defines as net income from operations, plus
depreciation and amortization and less Company income reserved for renovations
and refurbishment (i.e., the FF&E Reserves) and adjusted for nonrecurring
items, if any. Cash available for distribution may not necessarily equal cash
provided by operating activities under GAAP, as the cash flow of the Company
is affected by other factors not included in the calculation of cash available
for distribution, including changes in working capital.
(S) Amounts are computed on a pro forma basis in accordance with GAAP,
except that cash provided by operating activities excludes the effect on cash
resulting from changes in current assets and current liabilities. The Company
does not believe that these excluded items are material to net cash provided
by operating activities.
(T) From inception on February 7, 1995, until completion of its initial
public offering on August 22, 1995, the Company was a 100% owned subsidiary of
HRP. It was initially capitalized with $1.0 million of equity and $163.3
million of debt. The debt was provided by HRP at its cost which was lower than
the market rates which the Company would have paid on a stand alone basis.
Accordingly, the Company does not believe that net income, net income per
share, Cash Available for Distribution and Cash Available for Distribution per
Share while it was a wholly owned subsidiary are comparable to periods
subsequent to such offering.
F-8
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
PRO FORMA BALANCE SHEET AS OF DECEMBER 29, 1995 AND
PRO FORMA STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1995
The following unaudited pro forma balance sheet gives effect to (i) the
formation of Host I; (ii) the transfer of certain assets to Host I related to
the acquisition of the 18 Residence Inn by Marriott(R) Hotels by the Company
and (iii) the commencement of the related Leases between Host I and the
Company as though such transactions occurred on December 29, 1995. The
following unaudited pro forma statement of income gives effect at January 1,
1995 to: (i) the acquisition of the 18 Residence Inn by Marriott(R) Hotels by
the Company; and (ii) the commencement of the related Leases. The pro forma
information is based in part upon the historical statements of revenues and
expenses excluding income taxes of the 18 Residence Inn by Marriott(R) Hotels
and should be read in conjunction with all of the financial statements and
notes thereto included in this Prospectus. In the opinion of management, all
adjustments necessary to reflect the effects of the transactions discussed
above have been reflected in the pro forma data.
The following unaudited pro forma data is not necessarily indicative of what
the actual financial position or results of operations for Host I would have
been as of the date or for the period indicated, nor does it purport to
represent the financial position or results of operations of Host I for future
periods.
F-9
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1995
----------------------------------------
PRO FORMA
HISTORICAL (A) ADJUSTMENTS PRO FORMA
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Advances to Marriott International,
Inc.................................. $ -- $ 2,230(C) $ 2,230
Due from Marriott International, Inc.. -- 204(C) 204
Security deposit...................... -- 17,220(C)(D) 17,220
Cash.................................. -- 1(B) 1
----- -------
$ -- $19,655
===== =======
LIABILITIES AND
SHAREHOLDER'S EQUITY
Accrued expenses...................... $ -- $ 560(C) $ 560
Deferred gain......................... -- 12,747(C) 12,747
Shareholder's equity:
Common stock........................ -- -- --
Additional paid-in capital.......... -- 6,348(B)(C) 6,348
----- -------
$ -- $19,655
===== =======
</TABLE>
See notes to pro forma financial statements.
F-10
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 29, 1995
-------------------------------------------------
RESIDENCE INN
HOST I HOTELS PRO FORMA PRO
HISTORICAL (E) HISTORICAL (F) ADJUSTMENTS FORMA
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Hotel Sales (G)....... $ -- $61,934 $ -- $61,934
===== ======= ======== =======
Revenues (H)................ $ -- $33,166 $ -- $33,166
----- ------- -------- -------
Expenses:
Rent and unsubordinated ex-
penses:
Base rent (I)............. -- -- 17,220 17,220
FF&E contribution expense
(J)...................... -- -- 3,097 3,097
Other expenses (K)........ -- 6,110 -- 6,110
----- ------- -------- -------
-- 6,110 20,317 26,427
----- ------- -------- -------
Revenues in excess of rent
and unsubordinated
expenses................... -- 27,056 (20,317) 6,739
----- ------- -------- -------
Subordinated expenses:
Percentage rent (L)...... -- -- -- --
Base management fee (M).. -- -- 1,239 1,239
Incentive management fee
(N)..................... -- 2,817 -- 2,817
Amortization of deferred
gain (O)................ -- -- (850) (850)
Corporate expenses (P)... -- -- 1,231 1,231
Writedown of property to
net realizable
value (Q)............... -- 3,899 (3,899) --
Depreciation and
amortization (R)........ -- 6,814 (6,814) --
----- ------- -------- -------
-- 13,530 (9,093) 4,437
----- ------- -------- -------
Income before taxes......... -- 13,526 (11,224) 2,302
Provision for income taxes
(S)........................ -- -- (944) 944
----- ------- -------- -------
Net income.............. $ -- $13,526 $(12,168) $ 1,358
===== ======= ======== =======
</TABLE>
See notes to pro forma financial statements.
F-11
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(A) Represents the historical balance sheet of Host I as of December 29, 1995.
(B) Reflects the effects of the formation of Host I as if the formation had
occurred on December 29, 1995. Host I was incorporated in Delaware on
February 21, 1996, as a wholly-owned indirect subsidiary of Host Marriott
Corporation. On February 21, 1996, Host I issued 100 shares of no par
common stock for $1,000 to its parent and sole shareholder, a wholly-
owned, indirect subsidiary of Host Marriott Corporation.
(C) Reflects the effects of the operating assets that are expected to be
contributed to Host I by its affiliates as a result of the consummation of
the sale of the 18 Residence Inn by Marriott(R) Hotels to the Company and
the commencement of the related Leases between Host I and the Company and
the deferred gain arising from the sale/leaseback transaction between Host
I and the Company. The deferred gain represents the excess of the sales
price of the hotels over the net book value of the hotels and related
transaction costs. The deferred gain will be amortized over the initial
terms (approximately 15 years) of the Leases.
(D) Represents Security Deposit required under Leases for the 18 Residence Inn
by Marriott(R) Hotels.
(E) Reflects the historical operating results of Host I.
(F) Reflects the combined historical operating results of the 18 Residence Inn
by Marriott(R) Hotels for the fiscal year ended December 29, 1995.
(G) Total Hotel Sales represents all revenues and receipts of every kind
derived from guests or other customers related to Marriott's operation of
the 18 Residence Inn by Marriott(R) Hotels and is presented for the
purpose of providing supplemental information regarding the gross sales
volume of the 18 Residence Inn by Marriott(R) Hotels. See notes to
combined financial statements of the Residence Inn Hotels.
(H) Revenues represents house profit from the 18 Residence Inn by Marriott(R)
Hotels. House profit represents Total Hotel Sales less property level
expenses excluding depreciation and amortization, Residence Inn by
Marriott(R) system fee, property taxes, management fees, ground rent and
insurance.
(I) Represents the base rent to be paid by Host I to the Company under the
Leases. The Leases require Host I to pay an aggregate minimum annual base
rent of $17,220,000, a pro rata portion of which is due and payable in
advance on the first day of thirteen predetermined accounting periods per
year.
(J) Represents 5% of Total Hotel Sales which the Leases require Host I to
deposit into a Company cash account (the FF&E Reserve) to be available for
the cost of replacements and renovations at the 18 Residence Inn by
Marriott(R) Hotels.
(K) Represents system fee, ground rent and other expenses for which Host I
will remain obligated under the Leases.
(L) Under the terms of the Leases, Host I is to pay percentage rent equal to
7.5% of the excess of Total Hotel Sales over 1996 Total Hotel Sales and,
as such, there is no percentage rent on a pro forma basis for the fiscal
year ended December 29, 1995.
(M) Under the terms of the Management Agreements, Marriott is to be paid base
fees of 2% of Total Hotel Sales. On a historical basis, pursuant to the
terms of certain financial arrangements between Host Marriott Corporation
and Marriott International, Inc., and their respective affiliates, base
fees were waived by Marriott International, Inc. in return for Host
Marriott Corporation's agreement to pay certain other fees upon the sale
of or certain refinancings of such facilities (see Notes 4 and 5 to the
combined financial statements of the Residence Inn Hotels).
F-12
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(N) Under the terms of the Management Agreements, Marriott is to be paid 50%
of available cash flow, as defined, as an incentive management fee.
Available cash flow is defined as revenues, less base management fees,
Residence Inn by Marriott(R) system fee, real and personal property taxes,
insurance, ground rent and a priority amount equal to $17,220,000.
(O) Amortization of deferred gain represents adjustments to rent expense to
record the effects of the sale/leaseback transaction between Host I and
the Company. Amortization is straight-line over the initial term of the
Leases (approximately 15 years).
(P) Represents Host Marriott Corporation general and administrative expenses
to be allocated to Host I.
(Q) Host I has no ownership interest (other than as a lessee) in the real
estate related to the 18 Residence Inn by Marriott(R) Hotels and, as such,
there is no expense related to the write-down of property on a pro forma
basis.
(R) Host I has no ownership interest (other than as a lessee) in the real
estate related to the 18 Residence Inn by Marriott(R) Hotels and, as such,
there is no depreciation expense on a pro forma basis.
(S) Adjustment to reflect the impact of federal and state income taxes related
to the pro forma results of operations of Host I, at statutory rates. The
historical amounts exclude an income tax provision, as described in Note 1
to the combined financial statements of the Residence Inn Hotels.
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMH HPT Residence Inn, Inc.:
We have audited the accompanying balance sheet of HMH HPT Residence Inn,
Inc. (a Delaware corporation, "Host I") as of February 21, 1996. This balance
sheet is the responsibility of the Host I's management. Our responsibility is
to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of HMH HPT Residence Inn, Inc., as
of February 21, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.,
February 23, 1996
F-14
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
AS OF FEBRUARY 21, 1996
-----------------------
<S> <C>
Cash................................................... $1,000
======
STOCKHOLDER'S EQUITY
Common Stock, no par value, 100 shares authorized, is-
sued and outstanding.................................. $ --
Additional paid-in capital............................. 1,000
------
$1,000
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-15
<PAGE>
HMH HPT RESIDENCE INN, INC. (HOST I)
NOTES TO BALANCE SHEET
AS OF FEBRUARY 21, 1996
NOTE 1. ORGANIZATION
HMH HPT Residence Inn, Inc. ("Host I") was incorporated in Delaware on
February 21, 1996 as a wholly-owned indirect subsidiary of Host Marriott
Corporation. On February 21, 1996, Host I issued 100 shares of no par common
stock to its parent and sole shareholder, a wholly-owned, indirect subsidiary
of Host Marriott Corporation.
NOTE 2. FORMATION AND OPERATIONS
On February 1, 1996, Hospitality Properties Trust ("HPT") entered into a
letter of intent to acquire 18 Residence Inn by Marriott(R) Hotels (the
"Residence Inn Hotels") for approximately $172.2 million from affiliates of
Host Marriott. Host I was formed for among other things the purpose of leasing
the Residence Inn Hotels from HPT. The Residence Inn Hotels are currently
subject to management agreements (the "Management Agreements") between Host
Marriott and Marriott International, Inc. ("Marriott"). In conjunction with
the acquisition of the Residence Inn Hotels by HPT, the Management Agreements
will be assigned to HPT and the Residence Inn Hotels will be managed by a
subsidiary of Marriott pursuant to the Management Agreements.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Residence Inn Hotels (as defined in Note 1):
We have audited the accompanying combined statements of assets, liabilities
and net investment and advances of the Residence Inn Hotels, as defined in
Note 1, as of December 29, 1995 and December 30, 1994, and the related
combined statements of revenues and expenses excluding income taxes and cash
flows for each of the three fiscal years in the period ended December 29,
1995. These financial statements are the responsibility of the Host Marriott
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the registration statement on Form S-11 of
Hospitality Properties Trust) as described in Note 1 and are not intended to
be a complete presentation of the Residence Inn Hotels' assets, liabilities
and net investment and advances, revenues and expenses or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and net investment and
advances of the Residence Inn Hotels as of December 29, 1995 and December 30,
1994, and their revenues and expenses excluding income taxes, and their cash
flows for each of the three fiscal years in the period ended December 29,
1995, in conformity with generally accepted accounting principles.
As explained in Note 3 to the combined financial statements, in 1993 the
Residence Inn Hotels changed their method of accounting for assets held for
sale.
Arthur Andersen LLP
Washington, D.C.,
February 23, 1996
F-17
<PAGE>
RESIDENCE INN HOTELS
COMBINED STATEMENTS OF REVENUES AND EXPENSES EXCLUDING INCOME TAXES
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994
AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Total Hotel Sales (Note 1)........................... $ 53,582 $57,357 $61,934
======== ======= =======
Revenues (Note 1).................................... $ 27,144 $29,816 $33,166
Expenses:
Depreciation and amortization...................... 6,735 6,821 6,814
Residence Inn system fee........................... 2,129 2,294 2,477
Property taxes..................................... 2,845 3,120 3,015
Incentive management fee........................... -- 1,358 2,817
Writedown of property to net realizable value...... -- -- 3,899
Other.............................................. 988 656 618
-------- ------- -------
Total expenses................................... 12,697 14,249 19,640
-------- ------- -------
Revenues over expenses excluding income taxes before
cumulative effect of change in accounting principle. 14,447 15,567 13,526
Cumulative effect of change in accounting for assets
held for sale....................................... (16,500) -- --
-------- ------- -------
Revenues (under) over expenses excluding income
taxes............................................... $ (2,053) $15,567 $13,526
======== ======= =======
Unaudited pro forma data:
Pro forma income tax expense (benefit)............. $ (821) $ 6,382 $ 5,546
======== ======= =======
Pro forma net income (loss) after taxes............ $ (1,232) $ 9,185 $ 7,980
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-18
<PAGE>
RESIDENCE INN HOTELS
COMBINED STATEMENTS OF ASSETS, LIABILITIES
AND NET INVESTMENT AND ADVANCES
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 30, DECEMBER 29,
1994 1995
-------------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $165,192 $156,665
Due from Marriott International....................... -- 204
Advances to Marriott International.................... 2,230 2,230
-------- --------
$167,422 $159,099
======== ========
LIABILITIES AND NET INVESTMENT AND ADVANCES
Accrued expenses...................................... $ 397 $ 560
Due to Marriott International......................... 1,237 --
Net investment and advances........................... 165,788 158,539
-------- --------
$167,422 $159,099
======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-19
<PAGE>
RESIDENCE INN HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994
AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Revenues (under) over expenses excluding income
taxes......................................... $ (2,053) $ 15,567 $ 13,526
Noncash items:
Depreciation and amortization................ 6,735 6,821 6,814
Cumulative effect of change in accounting for
assets held for sale........................ 16,500 -- --
Writedown of property to net realizable
value....................................... -- -- 3,899
Changes in operating accounts:
Due from Marriott International.............. -- -- (204)
Due to Marriott International................ 37 1,200 (1,237)
Advances to Marriott International........... (2,230) -- --
Accrued expenses............................. 177 5 163
-------- -------- --------
Cash provided by operations.................... 19,166 23,593 22,961
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment.......... (449) (913) (2,186)
-------- -------- --------
Cash flows from financing activities:
Changes in net investment and advances....... (18,717) (22,680) (20,775)
-------- -------- --------
Increase (decrease) in cash and cash equivalents. -- -- --
Cash and cash equivalents at beginning of year... -- -- --
-------- -------- --------
Cash and cash equivalents at end of year......... $ -- $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-20
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Hospitality Properties Trust (the "Company") is a Maryland real estate
investment trust which was established to acquire, own and lease hotel
properties. The Company completed its initial public offering in August 1995
and operates as a real estate investment trust under the Internal Revenue
Code. The Company plans to issue additional shares in a secondary public
offering (the "Proposed Offering") in connection with the planned acquisition
of certain hotel properties.
BASIS OF PRESENTATION
Host Marriott Corporation ("Host Marriott") or a subsidiary thereof
designed, constructed or acquired certain Residence Inn by Marriott Hotels,
including the 18 properties listed below (collectively, the "Residence Inn
Hotels" and, individually, the "Hotel" or "Hotels").
<TABLE>
<S> <C> <C>
Flagstaff, AZ Chicago, IL Syracuse, NY
Scottsdale, AZ Annapolis, MD Columbus, OH
Tempe, AZ Boston, MA Willow Grove, PA
Fountain Valley, CA Warren, MI Nashville, TN
Rancho Bernardo, CA Durham, NC Dallas Northpark, TX
Atlanta, GA Albuquerque, NM Dallas Market Center, TX
</TABLE>
All of the Hotels are included in the accompanying financial statements for
all periods presented.
The Residence Inn Hotels are expected to be acquired by the Company from a
subsidiary of Host Marriott for approximately $172.2 million with a portion of
the proceeds of the Proposed Offering. All of the Hotels are expected to be
leased by the Company to a subsidiary ("Host I") of Host Marriott, and managed
by a subsidiary ("Marriott" or the "Manager") of Marriott International, Inc.
The management agreements (the "Management Agreements") described in Note 4
between Host Marriott and Marriott related to the Hotels will be assigned to
the Company.
The Hotels include the buildings, improvements and equipment for each of the
Hotels and, the land on which 17 of the Hotels are located and the leasehold
interest in the land under one of the Hotels. Assets and liabilities of the
Hotels have been stated at Host Marriott's historical cost basis.
The accompanying combined financial statements have been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of the Company. The Residence Inn Hotels, for the periods presented, were a
lesser component of Host Marriott, and historically operated as an integral
part of Host Marriott. Host Marriott has not historically allocated or charged
individual units for interest on net advances and no such expenses are
reflected in the accompanying combined financial statements. The accompanying
combined financial statements also include no provision or assets or
liabilities related to Federal or state income taxes because the Residence Inn
Hotels did not pay income taxes and Host Marriott does not allocate or charge
these expenses to its individual units. Accordingly, the accompanying combined
financial statements are not intended to be a complete presentation of the
Residence Inn Hotels' assets, liabilities and net investment and advances,
revenues and expenses or cash flows.
There are no allocations of interest, taxes, overhead, general and
administrative or other corporate costs made by Host Marriott to the Hotels.
Changes in net investment and advances represent the combined revenues
F-21
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
and expenses excluding income taxes of the Hotels adjusted for cash
transferred between Host Marriott and the Hotels.
An analysis of the activity in this balance for the three fiscal years ended
December 29, 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance January 2, 1993.................................... $193,671
Revenues under expenses excluding income taxes........... (2,053)
Net cash transferred to Host Marriott................... (18,717)
--------
Balance December 31, 1993.................................. 172,901
Revenues over expenses excluding income taxes............ 15,567
Net cash transferred to Host Marriott................... (22,680)
--------
Balance December 30, 1994.................................. 165,788
Revenues over expenses excluding income taxes............ 13,526
Net cash transferred to Host Marriott................... (20,775)
--------
Balance December 29, 1995.................................. $158,539
========
</TABLE>
The average net investment and advances for fiscal years 1993, 1994 and 1995
was approximately $170 million, $158 million, $152 million, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HOTEL SALES AND REVENUES
Total Hotel Sales ("Total Hotel Sales") represents all revenues and receipts
of every kind derived from guests or other customers related to Marriott's
operation of the Residence Inn Hotels. Total Hotel Sales are presented in the
accompanying combined statements of revenues and expenses excluding income
taxes for the purpose of providing supplemental information regarding the
gross sales volume of the Residence Inn Hotels which will be used for purposes
of calculating percentage rent and the FF&E Reserve (as defined below) under
the Leases with Host I and the Management Agreements, respectively. As owner
and lessor of the Hotels, the Company will have no interest in the sales or
operating results of the Residence Inn Hotels.
F-22
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
Revenues in the accompanying combined statements of revenues and expenses
excluding income taxes represent house profit from the Residence Inn Hotels.
House profit represents Total Hotel Sales less property level expenses
excluding depreciation and amortization, system fees, real and personal
property taxes, ground rent, insurance and management fees. The system fees
(included in other expenses) and management fees presented on the accompanying
combining statements of revenues and expenses excluding income taxes and the
expenses detailed below represent all the costs incurred directly, allocated
or charged by the Manager (as defined below) to the Residence Inn Hotels. The
detail of Total Hotel Sales and a reconciliation to revenue follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Hotel sales:
Rooms............................................. $50,089 $54,006 $58,422
Other............................................. 3,493 3,351 3,512
------- ------- -------
Total Hotel Sales............................... 53,582 57,357 61,934
------- ------- -------
Expenses:
Departmental direct costs--Rooms (A).............. 9,768 10,486 11,414
Other operating departments (B)................... 1,248 1,293 1,322
General and administrative (C).................... 4,884 4,964 5,236
Utilities (D)..................................... 2,620 2,716 2,803
Repairs, maintenance and accidents (E)............ 3,198 3,365 3,033
Marketing and sales (F)........................... 3,513 3,548 3,721
Chain services (G)................................ 1,207 1,169 1,239
------- ------- -------
Total expenses.................................. 26,438 27,541 28,768
------- ------- -------
Revenues (House Profit)............................. $27,144 $29,816 $33,166
======= ======= =======
</TABLE>
(A) Includes expenses for linen, cleaning supplies, laundry, guest supplies,
reservations costs, travel agents commissions, walked guest expenses and
wages, benefits and bonuses for employees of the rooms department.
(B) Includes expenses related to operating the telephone department.
(C) Includes management and hourly wages, benefits and bonus, credit and
collection expenses, employee relations, guest relations, bad debt
expenses, office supplies and miscellaneous other expenses.
(D) Includes electricity, gas and water at the properties.
(E) Includes cost of repairs and maintenance and the cost of accidents at the
properties.
(F) Includes management and hourly wages, benefits and bonuses, promotional
expense and local advertising.
(G) Includes charges from the Manager for Chain Services as allowable under
the Management Agreements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
On October 8, 1993 (the "Distribution Date"), Marriott Corporation's
operations were divided into two separate companies: Host Marriott Corporation
and Marriott International, Inc. On December 29, 1995, Host Marriott
Corporation's operations were divided into two separate companies: Host
Marriott Corporation and Host Marriott Services Corporation.
F-23
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
FISCAL YEAR
The Residence Inn Hotels' fiscal year ends on the Friday nearest to December
31. The fiscal year is divided into 13 accounting periods of four weeks each.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, including interest and real
estate taxes incurred during development and construction. Replacements and
improvements are capitalized.
Depreciation is computed using the straight line method over the estimated
useful lives of the assets, generally 40 years for buildings and improvements
and 3 to 10 years for furniture and equipment.
In cases where management is holding for sale particular lodging properties,
Host Marriott assesses impairment based on whether the net realizable value
(estimated sales price less costs of disposal) of each individual property to
be sold is less than the net book value. A lodging property is considered to
be held for sale when Host Marriott has made the decision to dispose of the
property. Otherwise, Host Marriott assesses impairment of its real estate
properties based on whether it is probable that undiscounted future cash flows
from each individual property will be less than its net book value.
CASH AND CASH EQUIVALENTS
The Residence Inn Hotels consider all highly liquid investments with a
maturity of three months or less at date of purchase to be cash equivalents.
Cash and cash equivalents generated by the Hotels is transferred to Host
Marriott. Operating expenses, capital expenditures and other cash requirements
of the Residence Inn Hotels are paid by Host Marriott and charged directly to
the Hotels.
NEW STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Residence Inn Hotels adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the fiscal year ended December 29,
1995. The adoption of SFAS No. 121 had no material effect on the Residence Inn
Hotels' financial statements.
UNAUDITED PRO FORMA DATA
The accompanying combined statements of revenues and expenses excluding
income taxes present unaudited pro forma income taxes for each period
presented based upon the combined effective Federal and state tax rates of 40%
for fiscal 1993, and 41% for fiscal years 1994 and 1995.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1994 1995
<S> <C> <C>
Land and land improvements......................... $ 39,965 $ 39,965
Buildings and leasehold improvements............... 122,895 119,423
Furniture and equipment............................ 23,791 24,983
Construction in progress........................... 427 993
-------- --------
187,078 185,364
Less--accumulated depreciation..................... 21,886 28,699
-------- --------
Property and equipment, net........................ $165,192 $156,665
======== ========
</TABLE>
F-24
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
Most hotels developed by Host Marriott since the early 1980s were reported
as assets held for sale prior to 1992. In early 1992, Host Marriott decided it
was no longer appropriate to view sales of lodging properties, subject to
operating agreements, as a primary means of long-term financing. Accordingly,
Host Marriott discontinued classification of these properties as assets held
for sale.
Following discussions with the Staff of the Securities and Exchange
Commission, in the second quarter of 1993, Host Marriott changed its method of
determining net realizable value of assets held for sale. Host Marriott
previously determined net realizable value of such assets on an aggregate
basis, in the case of Residence Inns. Beginning in the second fiscal quarter
of 1993 and thereafter, under Host Marriott's new accounting policy, net
realizable value of all assets held for sale is determined on a property-by-
property basis. The cumulative pre-tax effect of this change on periods prior
to the second quarter of 1993 of $16.5 million is reflected as a cumulative
effect of a change in accounting for assets held for sale in the accompanying
combined statement of revenues and expenses, excluding income taxes, for the
fiscal year ended December 31, 1993. In 1995, Host Marriott adjusted, in
accordance with its accounting policy, the carrying values of three properties
included in the Residence Inn Hotels by approximately $3.9 million to reflect
such properties' net realizable value based on sales price. The reduction in
the annual depreciation charge as a result of these changes was approximately
$299,000 and $97,000, respectively.
NOTE 4. MANAGEMENT AGREEMENTS
Subsequent to the Distribution Date, the Manager operates the Hotels
pursuant to the long-term Management Agreements with initial terms expiring in
2013. The Manager has the option to extend the agreements on one or more
Hotels for up to three 10-year terms. The Management Agreements provide for a
Residence Inn system fee equal to 4% of total revenues. In addition, the
Manager is reimbursed for each Hotel's pro rata share of the actual costs and
expenses incurred in providing certain services ("Chain Services") on a
central or regional basis to all hotels operated by the Manager. As franchisor
of the Residence Inn by Marriott system, the Manager maintains a marketing
fund to pay the costs associated with certain system-wide advertising,
promotional, and public relations materials and programs and the operation of
a toll-free reservation system. Each Hotel contributes 2.5% of suite revenues
to the marketing fund. These arrangements regarding system Fees, Chain
Services and marketing fund contributions existed prior to the Distribution
Date and as such, for fiscal years 1993, 1994 and 1995, the Residence Inn
Hotels paid a Residence Inn system fee of $2,128,861, $2,294,287 and
$2,477,335, reimbursed the Manager for $1,206,622, $1,169,007 and $1,238,668
of Chain Services and contributed $1,252,232, $1,350,144 and $1,460,538 to the
marketing fund, respectively.
In addition, the Manager is entitled to an incentive management fee equal to
50% of available cash flow, not to exceed 20% of operating profit, as defined.
No incentive management fees were earned or paid for the period from the
Distribution Date through December 31, 1993. For the fiscal years ended
December 30, 1994, and 1995, incentive management fees of $1,358,360 and
$2,817,305, respectively, were earned by the Manager.
The Management Agreements provide for a base management fee of 2% of the
Hotel's total revenue. In a separate agreement between the Manager and Host
Marriott, the base management fee through the year 2000 was replaced by a
bonus management incentive fee equal to 2% of the Hotels total revenues,
payable only upon sale of the Hotels. Therefore, no bonus management incentive
fee has been reflected in the accompanying combined statements of revenues and
expenses excluding income taxes. As of December 29, 1995, $1,381,000 of bonus
management incentive fees would be payable to the Manager upon sale or certain
financing, as defined, of the Hotels.
Host Marriott is required to provide the Manager with working capital to
meet the operating needs of the Hotels. Marriott as the manager converts cash
advanced by the Parent into other forms of working capital
F-25
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
consisting primarily of operating cash, inventories, and trade receivables and
payables which are maintained and controlled by Marriott. The individual
components of working capital controlled by the Manager are reflected as
advances to Marriott International in the accompanying combined statements of
assets, liabilities and net investment and advances (see Note 1). As of
December 29, 1995, $2,230,000 has been advanced to the Manager for working
capital.
The Management Agreements provided for the establishment of a property
improvement fund (the "FF&E Reserve") for the Hotels. Contributions to the
FF&E Reserve are 5% of Total Hotel Sales, beginning on the Distribution Date.
Contributions to the FF&E Reserve from the Distribution Date through December
31, 1993 were $584,000, and for the fiscal years ended December 30, 1994 and
December 29, 1995, were $2,868,000 and $3,097,000, respectively.
During 1994, the Management Agreements were amended and $2,538,000,
representing the entire then remaining balance of the FF&E Reserve, was
returned to Host Marriott. It was also agreed that future contributions (until
the time of sale of any of the Residence Inn Hotels) would be retained by Host
Marriott and advanced to the Residence Inn Hotels at such time as improvements
are made to the properties. Such amounts have been included in the change in
net investment and advances in the accompanying combined statements of cash
flows.
NOTE 5. CONSOLIDATION AGREEMENT
The Hotels are subject to the terms of a consolidation agreement
("Consolidation Agreement") between Host Marriott and Marriott International,
Inc. pursuant to which (i) incentive fees payable under the Management
Agreements are determined on a consolidated basis for all lodging facilities
of the same type and (ii) base fees payable under the Management Agreements
are waived in return for payment upon the sale or certain refinancings of such
facilities and as such, no base management fees expense (equal to 2% of Total
Hotel Sales) is reflected in the accompanying combined statements of revenues
and expenses excluding income taxes.
After the sale of any of the Hotels, the Consolidation Agreement is no
longer applicable to the Hotels and as such, base fees equal to 2% of Total
Hotel Sales is payable under the Management Agreements after the sale of the
Hotels.
NOTE 6. LEASES
Future minimum annual rental commitments for all non-cancelable leases
entered into by Host Marriott, or by Marriott on behalf of Host Marriott,
including the ground leases described below, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
(IN THOUSANDS)
<S> <C>
1996....................................................... $ 515
1997....................................................... 431
1998....................................................... 394
1999....................................................... 282
2000....................................................... 109
Thereafter................................................. 1,980
------
Total minimum lease payments............................... $3,711
======
</TABLE>
F-26
<PAGE>
RESIDENCE INN HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
The Residence Inn Hotels lease the land under the Syracuse, New York, Hotel
under a ground lease agreement with an initial term expiring in the year 2022,
and 2 ten year renewal options thereafter. Ground rent expense has been
included in other operating costs and expenses in the accompanying combined
statements of revenues and expenses excluding income taxes. The ground rent is
calculated as follows: (i) during the first ten years of the ground lease, the
greater of $90,000 per annum or 3% of Total Hotel Sales; and (ii) thereafter,
the greater of $120,000 per annum or 3% of Total Hotel Sales.
F-27
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
PRO FORMA BALANCE SHEET AS OF DECEMBER 29, 1995 AND
PRO FORMA STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1995
The following unaudited pro forma balance sheet gives effect to the transfer
of certain assets to Host II related to the acquisition of the Courtyard
Hotels by the Company and the commencement of the related Leases between Host
II and the Company as though such transactions occurred on December 29, 1995.
The following unaudited pro forma statement of income gives effect at January
1, 1995 to: (i) the acquisition of the Courtyard by Marriott(R) Hotels by the
Company; and (ii) the commencement of the related Leases. The pro forma
information is based in part upon the historical statements of revenues and
expenses excluding income taxes of the Courtyard by Marriott(R) Hotels and
should be read in conjunction with all of the financial statements and notes
thereto included in this Prospectus. In the opinion of management, all
adjustments necessary to reflect the effects of the transactions discussed
above have been reflected in the pro forma data.
The following unaudited pro forma data is not necessarily indicative of what
the actual financial position or results of operations for Host II would have
been as of the date or for the period indicated, nor does it purport to
represent the financial position or results of operations of Host II for
future periods.
F-28
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 29, 1995
-----------------------------------------
PRO FORMA
HISTORICAL (A) ADJUSTMENTS PRO FORMA
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Advances to Marriott International,
Inc. ............................... $ 3,984 $ 1,494 (B) $ 5,478
Due from Marriott International,
Inc................................. 2,218 940 (B) 3,158
Security deposit..................... 32,900 17,640 (B)(C) 50,540
------- -------
$39,102 $59,176
======= =======
LIABILITIES AND
SHAREHOLDER'S EQUITY
Accrued expenses..................... $ 45 $ 158 (B) $ 203
Percentage rent payable.............. 141 -- 141
Deferred gain........................ 12,908 27,978 40,886
Due to Host Marriott Corporation..... 1,322 -- 1,322
Shareholder's equity:
Common stock....................... -- -- --
Additional paid-in capital......... 25,406 (8,062) 17,344
Retained deficit................... (720) -- (720)
------- -------
$39,102 $59,176
======= =======
</TABLE>
See notes to pro forma financial statements.
F-29
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 29, 1995
------------------------------------------
COURTYARD
HOST II HOTELS
HISTORICAL HISTORICAL PRO FORMA PRO
(D) (E) ADJUSTMENTS FORMA
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Hotel Sales (F).............. $76,192 $107,772 $ -- $183,964
======= ======== ======== ========
Revenues (G)....................... $37,813 $ 53,209 $ -- $ 91,022
------- -------- -------- --------
Expenses:
Rent and unsubordinated expenses:
Base rent (H)................... 19,108 -- 31,432 50,540
FF&E contribution expense (I)... 3,810 -- 5,388 9,198
Other expenses (J).............. 5,859 8,139 -- 13,998
------- -------- -------- --------
28,777 8,139 36,820 73,736
------- -------- -------- --------
Revenues in excess of rent and
unsubordinated expenses........ 9,036 45,070 (36,820) 17,286
------- -------- -------- --------
Subordinated expenses:
Percentage rent (K).............. 271 -- 137 408
Base management fee (L).......... 1,524 -- 2,155 3,679
Incentive management fee (M)..... 3,632 2,590 -- 6,222
Amortization of deferred gain
(N)............................. (675) -- (2,370) (3,045)
Corporate expenses (O)........... 1,059 -- 2,536 3,595
Writedown of property to net re-
alizable value (P).............. -- 8,819 (8,819) --
Depreciation and amortization
(Q)............................. -- 12,284 (12,284) --
------- -------- -------- --------
5,811 23,693 (18,645) 10,859
------- -------- -------- --------
Income before taxes................ 3,225 21,377 (18,175) 6,427
------- -------- -------- --------
Provision for income taxes (R)..... 1,322 -- (1,313) 2,635
------- -------- -------- --------
Net income......................... $ 1,903 $ 21,377 $(19,488) $ 3,792
======= ======== ======== ========
</TABLE>
See notes to pro forma financial statements.
F-30
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(A) Represents the historical balance sheet of Host II as of December 29,
1995.
(B) Reflects the effects of the assets and liabilities that are expected to be
contributed to Host II by its affiliates as a result of the consummation
of the sale of the 16 additional Courtyard by Marriott(R) Hotels to the
Company and the commencement of the related Leases between Host II and the
Company and the deferred gain arising from the sale/leaseback transaction
between Host II and the Company. The deferred gain represents the excess
of the sales price of the hotels over the net book value of the hotels and
related transaction costs. The deferred gain will be amortized over the
initial terms (approximately 17 years) of the Leases.
(C) Represents Security Deposit required under Leases for the 16 additional
Courtyard by Marriott(R) Hotels.
(D) Reflects the historical operating results of Host II for the period March
24, 1995 (inception) through December 29, 1995.
(E) Reflects the combined historical operating results of the 37 Initial
Courtyard by Marriott(R) Hotels for periods prior to their acquisition by
the Company and the combined historical operating results of the 16
additional Courtyard by Marriott(R) Hotels for the fiscal year ended
December 29, 1995.
(F) Total Hotel Sales represents all revenues and receipts of every kind
derived from guests or other customers related to Marriott II's operation
of the 53 Courtyard by Marriott(R) Hotels and is presented for the purpose
of providing supplemental information regarding the gross sales volume of
the 53 Courtyard by Marriott(R) Hotels. See notes to historical combined
financial statements of the Courtyard Hotels.
(G) Revenues represents house profit from the 53 Courtyard by Marriott(R)
Hotels. House profit represents Total Hotel Sales less property level
expenses excluding depreciation and amortization, Courtyard by Marriott(R)
system fee, property taxes, management fees, ground rent and insurance.
(H) Represents the base rent to be paid by Host II to the Company under the
Leases. The Leases require Host II to pay an aggregate minimum annual base
rent of $50,540,000, a pro rata portion of which is due and payable in
advance on the first day of thirteen predetermined accounting periods per
year.
(I) Represents 5% of Total Hotel Sales which the Leases require Host II to
deposit into a Company cash account (the FF&E Reserve) to be available for
the cost of replacements and renovations at the 53 Courtyard by
Marriott(R) Hotels.
(J) Represents Courtyard by Marriott(R) system fee, ground rent and other
expenses for which Host II will remain obligated under the Leases.
(K) Represents percentage rent to be paid by Host II to the Company under the
Leases. Percentage rent under the Leases is equal to 5% of the excess of
Total Hotel Sales over 1994 Total Hotel Sales for the 37 Initial Courtyard
by Marriott(R) Hotels and 5% of the excess of Total Hotel Sales over 1995
Total Hotel Sales for the 16 additional Courtyard by Marriott(R) Hotels.
(L) Under the terms of the Management Agreements, Marriott is to be paid base
fees of 2% of Total Hotel Sales. On an historical basis, pursuant to the
terms of certain financial arrangements between Host Marriott Corporation
and Marriott International, Inc. and their respective affiliates, base
fees were waived by Marriott International, Inc. in return for Host
Marriott Corporation's agreement to pay certain other fees upon the sale
of or certain refinancings of such facilities (see Note 4 and Note 5 to
the Combined Financial Statements of the Courtyard Hotels).
(M) Under the terms of the Management Agreements, Marriott is to be paid 50%
of available cash flow, as defined, as an incentive management fee.
Available cash flow is defined as Revenues, less base management fees,
Courtyard by Marriott(R) system fee, real and personal property taxes,
insurance, ground rent and a priority amount equal to $50,540,000.
F-31
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO PRO FORMA FINANCIAL STATEMENTS--(CONTINUED)
(N) Amortization of deferred gain represents adjustments to rent expense to
record the effects of the sale/leaseback transaction between Host II and
the Company. Amortization is straight-line over the initial term of the
Lease (17 years).
(O) Represents Host Marriott Corporation general and administrative expenses
allocated to Host II. See Note 1 to the financial statements of Host II.
(P) Host II has no ownership interest (other than as lessee) in the real
estate related to the 53 Courtyard by Marriott(R) Hotels and, as such,
there is no expense related to the writedown of property on a pro forma
basis.
(Q) Host II has no ownership interest (other than as a lessee) in the real
estate related to the 53 Courtyard by Marriott(R) Hotels and, as such,
there is no depreciation expense on a pro forma basis.
(R) Adjustment to reflect the impact of federal and state income taxes related
to the pro forma results of operations of Host II, at statutory rates. The
historical amounts exclude an income tax provision, as described in Note 1
to the combined financial statements of Courtyard Hotels.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMH HPT Courtyard, Inc.:
We have audited the accompanying balance sheet of HMH HPT Courtyard, Inc. (a
Delaware corporation, "Host II") as of December 29, 1995, and the related
statements of income, shareholder's equity and cash flows for the period March
24, 1995 (inception) through December 29, 1995. These financial statements are
the responsibility of Host II's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HMH HPT Courtyard, Inc.,
as of December 29, 1995, and the results of its operations and its cash flows
for the period March 24 (inception) through December 29, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.,
February 23, 1996
F-33
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 29, 1995
-----------------
(IN THOUSANDS)
<S> <C>
ASSETS
Advances to manager.......................................... $ 3,984
Due from Marriott International, Inc......................... 2,218
Security deposit............................................. 32,900
-------
Total assets............................................. $39,102
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued expenses............................................. $ 45
Percentage rent payable...................................... 141
Deferred gain................................................ 12,908
Due to Host Marriott Corporation............................. 1,322
-------
Total liabilities........................................ 14,416
Shareholder's equity:
Common Stock, no par value, 100 shares authorized, issued
and outstanding........................................... --
Additional paid-in capital................................. 25,406
Retained deficit........................................... (720)
-------
Total liabilities and shareholder's equity............... $39,102
=======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-34
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
MARCH 24, 1995
(INCEPTION) THROUGH
DECEMBER 29, 1995
-------------------
(IN THOUSANDS)
<S> <C>
Total Hotel Sales (Note 1).................................. $76,192
=======
Revenues (Note 1)........................................... $37,813
-------
Expenses:
Base rent................................................. 19,108
Percentage rent........................................... 271
FF&E contribution expense................................. 3,810
Base management fee....................................... 1,524
Incentive management fee.................................. 3,632
Other expenses............................................ 5,859
-------
Total expenses.......................................... 34,204
-------
Amortization of deferred gain............................... 675
Corporate expenses.......................................... (1,059)
-------
Income before taxes......................................... 3,225
Provision for income taxes.................................. (1,322)
-------
Net income.................................................. $ 1,903
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
STATEMENT OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 24, 1995 (INCEPTION)
THROUGH DECEMBER 29, 1995
--------------------------
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL DEFICIT
(IN THOUSANDS)
<S> <C> <C> <C>
Initial capitalization.............................. $ -- $21,451 $ --
Capital contribution................................ -- 3,955 --
Cash transferred to Host Marriott Corporation....... -- -- (2,623)
Net income.......................................... -- -- 1,903
----- ------- -------
Balance, December 29, 1995.......................... $ -- $25,406 $ (720)
===== ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-36
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 24, 1995
(INCEPTION) THROUGH
DECEMBER 29, 1995
-------------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net income............................................... $ 1,903
Adjustments to reconcile net income to cash provided by
operating activities:
Amortization of deferred gain.......................... (675)
Changes in operating accounts:
Decrease in prepaid rent............................... 2,531
(Increase) in due from Marriott International, Inc..... (2,218)
Increase in percentage rent payable.................... 141
(Decrease) in accrued expenses......................... (381)
Increase in due to Host Marriott Corporation........... 1,322
-------
Cash provided by operations.......................... 2,623
-------
Cash flows from financing activities:
Cash transferred to Host Marriott Corporation.............. (2,623)
-------
Increase in cash and cash equivalents...................... --
Cash and cash equivalents at beginning of period........... --
-------
Cash and cash equivalents at end of period................. $ --
=======
Supplemental information, non-cash activity--
Balances transferred to Host II by Parent upon
commencement of leases related to 37 Courtyard by
Marriott hotels--
Advances to manager.................................... 3,984
Prepaid rent........................................... 2,531
Other assets........................................... 32,900
Accrued expenses....................................... (426)
Deferred gain.......................................... (13,583)
-------
Net capital contributed by Parent...................... $25,406
=======
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 29, 1995
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND INITIAL CAPITALIZATION
HMH HPT Courtyard, Inc. ("Host II") was incorporated in Delaware on February
7, 1995 as a wholly-owned indirect subsidiary of Host Marriott Corporation
("Host Marriott"). On February 2, 1995, Host II issued 100 shares of no par
common stock to its parent and sole shareholder ("Parent"), a wholly-owned,
indirect subsidiary of Host Marriott. Host II had no operations prior to March
24, 1995 (the "Commencement Date" or "Inception"). As a result, the
accompanying statements of income, cash flows and shareholder's equity present
activity of Host II from the Commencement Date through December 29, 1995.
On the Commencement Date, affiliates of Host Marriott (the "Sellers") sold
21 Courtyard by Marriott hotel properties to Hospitality Properties Trust
("HPT"), a wholly-owned subsidiary of Health and Retirement Properties Trust.
On August 22, 1995, HPT acquired an additional 16 Courtyard by Marriott hotel
properties from the Sellers, increasing the total properties sold to 37
Courtyards by Marriott (the "Hotels"). The Sellers contributed to Host II its
assets and liabilities related to the operations of such properties, including
working capital advances to the hotel manager, prepaid rent under leasing
arrangements (the "Leases") and rights to other assets as described in Note 3.
Such assets have been accounted for at the Parent's carryover basis.
FISCAL YEAR
Host II operates on a fiscal year which ends on the Friday closest to
December 31. The fiscal year is divided into thirteen accounting periods of
four weeks each.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HOTEL SALES AND REVENUES
Total Hotel Sales ("Hotel Sales") represents all revenues and receipts of
every kind derived from guests or other customers related to Marriott
International Inc.'s, the manager of the hotels (the "Manager"), operation of
the Hotels. Total Hotel Sales are presented in the accompanying statement of
income for the purpose of providing supplemental information regarding the
gross sales volume of the Hotels which is used for purposes of calculating
Percentage Rent (as defined below) and the FF&E Reserve under the Leases and
Management Agreements (as defined below), respectively (See Note 2). As owner
and lessor of the Hotels, HPT has no interest in the sales and operating
results of the Hotels.
Revenues in the accompanying statement of income represent house profit from
the Hotels because Host II has delegated substantially all of the operating
decisions relating to the generation of house profit from the Hotels to the
Manager. House profit reflects the net revenues flowing to Host II as lessee
and represents total hotel sales less property level expenses excluding
depreciation and amortization, system fees, real and personal property taxes,
ground rent, insurance and management fees. The system fees (included in other
expenses) and management fees presented on the accompanying statement of
income and the expenses detailed below represent all the costs incurred
directly, allocated or charged by the Manager to the Hotels.
F-38
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 29, 1995
The following table presents the detail of house profit for the period from
March 24, 1995 (Inception) to December 29, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Hotel Sales:
Rooms.......................................................... $66,968
Food and beverage.............................................. 6,225
Other.......................................................... 2,999
-------
Total Hotel Sales............................................ 76,192
-------
Expenses:
Departmental direct costs--
Rooms (A)...................................................... 14,713
Food and beverage (B).......................................... 5,044
Other operating departments (C)................................ 827
General and administrative (D)................................. 7,768
Utilities (E).................................................. 2,955
Repairs, maintenance and accidents (F)......................... 2,899
Marketing and sales (G)........................................ 1,121
Chain services (H)............................................. 3,052
-------
Total expenses............................................... 38,379
-------
Revenues (House Profit).......................................... $37,813
=======
</TABLE>
- ---------------------
(A) Includes expenses for linen, cleaning supplies, laundry, guest supplies,
reservations costs, travel agents' commissions, walked guest expenses and
wages, benefits and bonuses for employees of the rooms department.
(B) Includes costs of food and beverages sold, china, glass, silver, paper,
and cleaning supplies and wages, benefits and bonuses for employees of the
food and beverage department.
(C) Includes expenses related to operating the telephone department.
(D) Includes management and hourly wages, benefits and bonuses, credit and
collection expenses, employee relations, guest relations, bad debt
expenses, office supplies and miscellaneous other expenses.
(E) Includes electricity, gas and water at the properties.
(F) Includes cost of repairs and maintenance and the cost of accidents at the
properties.
(G) Includes management and hourly wages, benefits and bonuses, promotional
expense and local advertising.
(H) Includes charges from the Manager for Chain Services as allowable under
the Management Agreements.
CORPORATE EXPENSES
As a wholly owned indirect subsidiary of Host Marriott, Host II shares
certain general and administrative functions with Host Marriott and its other
subsidiaries. The functions generally include accounting, data processing,
payroll, human resources, legal and other administrative services. The
expenses related to these functions are generally allocated between Host
Marriott and its subsidiaries based on gross sales. From the period March 24,
1995 (Inception) through December 29, 1995, corporate expenses allocated to
Host II totaled $1,059,000.
F-39
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 29, 1995
NOTE 2. COMMITMENTS AND CONTINGENCIES:
THE LEASES
On the Commencement Date, Host II entered into leases for 21 Courtyard by
Marriott properties. On August 22, 1995, Host II entered into leases for an
additional 16 Courtyard by Marriott properties (collectively, the "Leases").
The initial term of the Leases expires at the end of fiscal 2006.
Thereafter, the Leases automatically renew for one seven-year term and three
consecutive ten-year terms, unless Host II properly notifies HPT in accordance
with the Leases.
The Leases require Host II to pay rents equal to aggregate minimum annual
rent of $32,900,000 ("Base Rent"), and percentage rent equal to 5% of the
excess of Total Hotel Sales, as defined, over 1994 Total Hotel Sales
("Percentage Rent"). A pro rata portion of Base Rent is due and payable in
advance on the first day of thirteen predetermined accounting periods.
Percentage Rent is due and payable quarterly in arrears.
The Leases also require Host II to make payments when due on behalf of HPT
for real estate taxes and other taxes, assessments and similar charges arising
from or related to the Hotels and their operation, utilities, premiums on
required insurance coverage, rents due under ground and equipment leases and
all amounts due under the terms of the Management Agreements described below.
Host II is also required to provide the Manager with working capital to meet
the operating needs of the Hotels. The Sellers had previously made such
advances related to the Hotels in the amount of $3,984,000 and transferred
their interest in such amounts to Host II on the Commencement Date.
The Leases require Host II to escrow, or cause the Manager to escrow, an
amount equal to 5% of the annual Total Hotel Sales into an HPT-owned reserve
(the "FF&E Reserve"), which amount shall be available for the cost of required
replacements and renovation. Any requirements for funds in excess of amounts
in the FF&E Reserve shall be provided by HPT ("HPT Fundings") at the request
of Host II. In the event of HPT Fundings, Base Rent shall be adjusted upward
by an amount equal to 10% of HPT Fundings.
The Leases require Host II to maintain a minimum net worth, as defined,
equal to one year's base rent. For purposes of this covenant, the deferred
gain is excluded from the calculation of net worth.
MANAGEMENT AGREEMENTS
As part of the sale of the Hotels, the Sellers' rights and obligations under
management agreements (the "Management Agreements") with the Manager, with an
initial term expiring in 2013, were transferred to HPT, and the Manager has
the option to extend the Management Agreement on all of the Hotels for up to
three 10-year terms.
The Management Agreements provide that the Manager be paid a system fee
equal to 3% of Hotel Sales, a base management fee of 2% of Hotel Sales ("Base
Management Fee") and an incentive management fee equal to 50% of available
cash flow, not to exceed 20% of operating profit, as defined ("Incentive
Management Fee"). In addition, the Manager is reimbursed for each Hotel's pro
rata share of the actual costs and expenses incurred in providing certain
services on a central or regional basis to all Courtyard by Marriott hotels
operated by the Manager.
Base Rent is to be paid prior to payment of Base Management Fees and
Incentive Management Fees. To the extent Base Management Fees are so deferred,
they must be paid in future periods. If available cash flow is insufficient to
pay Incentive Management Fees, no Incentive Management Fees are earned by the
Manager.
F-40
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 29, 1995
NOTE 3. SECURITY DEPOSIT
Pursuant to the terms of the agreement for the sale of the Hotels, HPT held
$32,900,000 as a security deposit for the obligations of Host II under the
Leases (the "Security Deposit"). The Security Deposit is due upon termination
of the Leases, including renewal terms.
NOTE 4. INCOME TAXES
Host II and Host Marriott are members of a consolidated group for federal
income tax purposes and have agreed that Host II will not be responsible for
any tax liability associated with the Security Deposit and, accordingly, no
such deferred tax liability has been reflected in the accompanying balance
sheet.
The components of Host II's effective income tax rate follow:
<TABLE>
<S> <C>
Statutory Federal tax rate............... 35%
State income tax, net of Federal tax ben-
efit.................................... 6
---
41%
===
</TABLE>
There is no difference between the basis of assets and liabilities for
income tax and financial reporting purposes other than for the Security
Deposit.
NOTE 5. OPERATING LEASE COMMITMENTS
As of December 29, 1995, future minimum annual rental commitments for the
Leases on the Hotels and other non-cancelable leases entered into by Host II,
or by the Manager on behalf of Host II, including the ground leases described
below, are as follows (in thousands):
<TABLE>
<CAPTION>
OTHER
LEASES OPERATING
FISCAL YEAR (SEE NOTE 2) LEASES
<S> <C> <C>
1996.................................................. $ 32,900 $1,506
1997.................................................. 32,900 1,220
1998.................................................. 32,900 929
1999.................................................. 32,900 335
2000.................................................. 32,900 132
Thereafter............................................ 197,400 2,750
-------- ------
Total minimum lease payments.......................... $361,900 $6,872
======== ======
</TABLE>
The land under five of the Hotels is leased from third parties. The ground
leases have remaining terms (including all renewal options) expiring between
the years 2039 and 2067. The ground leases provide for rent based on specific
percentages of certain sales categories subject to minimum amounts. The
minimum rentals are adjusted at various anniversary dates throughout the lease
terms, as defined in the agreements.
NOTE 6. SUBSEQUENT EVENT (UNAUDITED)
On February 1, 1996, HPT entered into a letter of intent to acquire 16
additional Courtyard by Marriott hotels from the Sellers for approximately
$176.4 million. It is expected that subsequent to the acquisition, the hotels
will be leased to Host II through December 31, 2012 under terms substantially
similar to the existing leases between HPT and Host II. Annual Base Rent
payable by Host II will be increased by approximately $17,640,000.
F-41
<PAGE>
HMH HPT COURTYARD, INC. (HOST II)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 29, 1995
Also in February 1996, the existing leases between HPT and Host II were
amended to among other things, extend the lease terms through December 2012.
Each of the 16 properties to be acquired, as with the 37 currently owned by
HPT are subject to management agreements with the Manager. It is expected that
all management agreements will be amended in conjunction with the transaction
to, among other things extend the agreement terms through December 31, 2015,
and to require exercise of renewal options and calculation of FF&E Reserve and
Base and Incentive Management Fees on a consolidated basis for all Courtyard
by Marriott hotels owned by HPT.
While the transaction is expected to be completed by June 30, 1996, no
assurance can be given as to the actual timing or that it will be completed.
The accompanying notes are an integral part of this statement.
F-42
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Courtyard Hotels (as defined in Note 1):
We have audited the accompanying combined statements of assets, liabilities
and net investment and advances of the Courtyard Hotels, as defined in Note l,
as of December 29, 1995 and December 30, 1994 and the related combined
statements of revenues and expenses excluding income taxes, and cash flows for
each of the three fiscal years in the period ended December 29, 1995. These
financial statements are the responsibility of Host Marriott Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the registration statement on Form S-11 of
Hospitality Properties Trust) as described in Note 1 and are not intended to
be a complete presentation of the Courtyard Hotels' assets, liabilities and
net investment and advances, revenues and expenses or cash flows.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets, liabilities and net investment and
advances of the Courtyard Hotels as of December 29, 1995 and December 30,
1994, and their revenues and expenses excluding income taxes, and their cash
flows for each of the three fiscal years in the period ended December 29,
1995, in conformity with generally accepted accounting principles.
As explained in Note 3 to the combined financial statements, in 1993 the
Courtyard Hotels changed their method of accounting for assets held for sale.
Arthur Andersen LLP
Washington, D.C.,
February 23, 1996
F-43
<PAGE>
COURTYARD HOTELS
COMBINED STATEMENTS OF REVENUES AND EXPENSES EXCLUDING INCOME TAXES
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994
AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Total Hotel Sales (Note 1)......................... $164,612 $173,811 $107,772
======== ======== ========
Revenues (Note 1).................................. $ 72,936 $ 83,161 $ 53,209
Expenses:
Depreciation and amortization.................... 18,393 20,100 12,284
Courtyard system fee............................. 4,939 5,214 3,233
Property taxes................................... 7,103 6,316 4,074
Incentive management fee......................... -- 2,825 2,590
Writedown of property to net realizable value.... -- -- 8,819
Other............................................ 2,886 3,010 832
-------- -------- --------
Total expenses................................. 33,321 37,465 31,832
-------- -------- --------
Revenues over expenses excluding income taxes
before cumulative effect of change in accounting
principle......................................... 39,615 45,696 21,377
Cumulative effect of change in accounting for
assets held for sale.............................. (17,800) -- --
-------- -------- --------
Revenues over expenses excluding income taxes...... $ 21,815 $ 45,696 $ 21,377
======== ======== ========
Unaudited pro forma data:
Pro forma income tax expense..................... $ 8,726 $ 18,736 $ 8,765
-------- -------- --------
Pro forma net income after taxes................. $ 13,089 $ 26,960 $ 12,612
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-44
<PAGE>
COURTYARD HOTELS
COMBINED STATEMENTS OF ASSETS, LIABILITIES
AND NET INVESTMENT AND ADVANCES
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 30, DECEMBER 29,
1994 1995
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Property and equipment, net........................... $470,302 $145,676
Due from Marriott International....................... 1,277 940
Advances to Marriott International.................... 5,152 1,494
-------- --------
$476,731 $148,110
======== ========
LIABILITIES AND NET INVESTMENT AND ADVANCES
Accrued expenses...................................... $ 766 $ 158
Net investment and advances........................... 475,965 147,952
-------- --------
$476,731 $148,110
======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-45
<PAGE>
COURTYARD HOTELS
COMBINED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1993, DECEMBER 30, 1994
AND DECEMBER 29, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Revenues over expenses excluding income taxes... $ 21,815 $ 45,696 $ 21,377
Noncash items:
Depreciation and amortization.................. 18,393 20,100 12,284
Writedown of property to net realizable value.. -- -- 8,819
Cumulative effect of change in accounting for
assets held for sale.......................... 17,800 -- --
Changes in operating accounts:
Due from Marriott International............... (333) (944) 337
Advances to Marriott International............ (5,152) -- 3,658
Accrued expenses.............................. 777 (352) (608)
-------- -------- --------
Cash provided by operations.................. 53,300 64,500 45,867
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment............. (1,594) (4,771) (8,177)
Change in property improvement fund............. (697) 697 --
-------- -------- --------
Cash used in investing activities............ (2,291) (4,074) (8,177)
-------- -------- --------
Cash flows from financing activities:
Changes in net investment and advances.......... (51,009) (60,426) (37,690)
-------- -------- --------
Increase (decrease) in cash and cash equivalents. -- -- --
Cash and cash equivalents at beginning of year... -- -- --
-------- -------- --------
Cash and cash equivalents at end of year......... $ -- $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-46
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
Hospitality Properties Trust (the "Company") is a Maryland real estate
investment trust which was established to acquire, own and lease hotel
properties. The Company completed its initial public offering (the "Initial
Offering") in August 1995 and operates as a real estate investment trust under
the Internal Revenue Service Code. The Company plans to issue additional
shares in a secondary public offering (the "Proposed Offering") in connection
with the planned acquisition of certain hotel properties.
BASIS OF PRESENTATION
Host Marriott Corporation ("Host Marriott") or a subsidiary thereof
designed, constructed or acquired certain Courtyard by Marriott Hotels,
including 37 properties acquired by the Company in 1995 (the "Initial Hotels")
and 16 hotels expected to be acquired by the Company from a subsidiary of Host
Marriott, listed below (collectively, the "Courtyard Hotels" and,
individually, the "Hotel" or "Hotels").
<TABLE>
<CAPTION>
INITIAL HOTELS
- --------------------------------------------------------------------------------------
GROUP A HOTELS GROUP B HOTELS GROUP C HOTELS
<S> <C> <C>
Phoenix, AZ Camarillo, CA Laguna Hills, CA
Scottsdale, AZ Huntington Beach/Fountain Valley, CA Torrance, CA
Atlanta Airport North,
GA Los Angeles Airport, CA Jacksonville, FL
Atlanta-Cumberland
Center, GA San Jose Airport, CA Miami Lakes, FL
Atlanta-Jimmy Carter
Blvd., GA Wilmington, DE Arlington Heights, IL
Atlanta-Midtown, GA Boca Raton, FL Quad Cities, IA
Indianapolis, IN Macon, GA Greenbelt, MD
Danvers, MA Columbia, MD Hanover, NJ
Foxborough, MA Norwood, MA Tinton Falls, NJ
Lowell, MA Woburn, MA Fishkill, NY
Milford, MA Kansas City Airport, MO Syracuse, NY
Stoughton, MA Charlotte-University Research Park, NC Pittsburgh, PA
Detroit/Auburn Hills, MI Fayetteville, NC Willow Grove, PA
Minneapolis/Eden
Prairie, MN Chattanooga, TN Middletown, RI
South Kansas City, MO Dallas-Northpark, TX Arlington/Rosslyn, VA
Mahwah, NJ Milwaukee/Brookfield, WI Williamsburg, VA
Raleigh/Durham Airport,
NC
Philadelphia Airport, PA
Spartanburg, SC
Fairfax, VA
Bellevue, WA
</TABLE>
All of the Courtyard Hotels are included in the accompanying combined
financial statements for all periods presented except: (i) information for 16
Initial Hotels (Group B) is excluded for the period between August 22, 1995
and December 29, 1995, and (ii) information for 21 Courtyard Hotels (Group A)
is excluded for the period between March 25, 1995 and December 29, 1995. Note
7 presents the Courtyards Hotels on a pro forma basis as if the properties
were retained by Host Marriott during the fiscal year ended December 29, 1995.
The Group A Hotels were acquired by the Company on March 24, 1995 for
approximately $179.4 million from affiliates of Host Marriott. As a result, as
of March 24, 1995, the ownership of the Group A Hotel assets are reflected in
the financial statements of the Company and the results of operations of the
Group A Hotels are
F-47
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
reflected in the financial statements of a subsidiary (HMH HPT Courtyard,
Inc.) ("Host II") of Host Marriott. The accompanying combined financial
statements include the results of operations, financial position and cash
flows of the Group A Hotels through March 24, 1995. Substantially all of the
funding for this acquisition was provided to the Company by HRP as a demand
loan. The Group B Hotels were acquired by the Company on August 23, 1995 from
a subsidiary of Host Marriott for approximately $149.6 million with a portion
of the proceeds of the Initial Offering. As a result, as of August 23, 1995,
the ownership of the Group B Hotels' assets are reflected in the financial
statements of the Company and the results of operations of the Group B Hotels
are reflected in the financial statements of Host II. The accompanying
combined financial statements include the results of operations, financial
position and cash flows of the Group B Hotels through August 22, 1995. All of
the Courtyard Hotels have been leased by the Company to Host II, and are
managed by a subsidiary ("Marriott" or the "Manager") of Marriott
International, Inc. The management agreements (the "Management Agreements")
described in Note 4 between Host Marriott and Marriott related to the Hotels
have been assigned to the Company.
The Group C Hotels are expected to be acquired by the Company from a
subsidiary of Host Marriott for approximately $176.4 million with a portion of
the proceeds of the Proposed Offering. The Group C Hotels are expected to be
leased to Host II and managed by Marriott. The Management Agreements described
in Note 4 between Host Marriott and Marriott related to the Group C Hotels
will be assigned to the Company.
The Courtyard Hotels include the buildings, improvements and equipment for
each of the Hotels, the land on which 45 of the Hotels are located and the
leasehold interest in the land under eight of the Hotels. Assets and
liabilities of the Courtyard Hotels have been stated at Host Marriott's
historical cost basis.
The accompanying combined financial statements have been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of the Company. The Courtyard Hotels, for the periods presented, were a lesser
component of Host Marriott, and historically operated as an integral part of
Host Marriott. Host Marriott has not historically allocated or charged
individual units for interest on net advances and no such expenses are
reflected in the accompanying combined financial statements. The accompanying
combined financial statements also include no provision or assets or
liabilities related to federal or state income taxes because the Courtyard
Hotels did not pay income taxes and Host Marriott does not allocate or charge
these expenses to its individual units. Accordingly, the accompanying combined
financial statements are not intended to be a complete presentation of the
Courtyard Hotels' assets, liabilities and net investment and advances,
revenues and expenses or cash flows.
There are no allocations of interest, taxes, overhead, general
administrative or other corporate costs made by Host Marriott to the Courtyard
Hotels. Changes in net investment and advances represent the revenues and
expenses excluding income taxes of the Courtyard Hotels adjusted for cash
transferred between Host Marriott and the Courtyard Hotels and, for the fiscal
year ended December 29, 1995, the effects of the transfer of net assets
related to the sale of the Group A and Group B Hotels to the Company.
F-48
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
An analysis of the activity in this balance for each of the three fiscal
years in the period ended December 29, 1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance January 1, 1993...................................... $519,889
Revenues over expenses excluding income taxes.............. 21,815
Net cash transferred to Host Marriott...................... (51,009)
--------
Balance December 31, 1993.................................... 490,695
Revenues over expenses excluding income taxes.............. 45,696
Net cash transferred to Host Marriott...................... (60,426)
--------
Balance December 30, 1994.................................... 475,965
Revenues over expenses excluding income taxes.............. 21,377
Net cash transferred to Host Marriott...................... (37,690)
--------
Transfer of net assets related to the sale of the Group A
and Group B Hotels........................................ (311,700)
--------
Balance December 29, 1995.................................... $147,952
========
</TABLE>
The average net investment and advances for each of the fiscal years 1993,
1994 and 1995 was approximately $505 million, $483 million and $312 million,
respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HOTEL SALES AND REVENUES
Total Hotel Sales ("Total Hotel Sales") represents all revenues and receipts
of every kind derived from guests or other customers related to Marriott's
operation of the Courtyard Hotels. Total Hotel Sales are presented in the
accompanying combined statements of revenues and expenses excluding income
taxes for the purpose of providing supplemental information regarding the
gross sales volume of the Courtyard Hotels which is used for purposes of
calculating percentage rent and the FF&E Reserve (as defined below) under the
Leases with Host II and the Management Agreements, respectively. As owner and
lessor of the Courtyard Hotels, the Company has no interest in the sales or
operating results of the Courtyard Hotels.
F-49
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
Revenues in the accompanying combined statements of revenues and expenses
excluding income taxes represent house profit from the Courtyard Hotels. House
profit represents Total Hotel Sales less property level expenses excluding
depreciation and amortization, system fees (included in other expenses), real
and personal property taxes, ground rent, insurance and management fees. The
system fees and management fees presented on the accompanying combined
statements of revenues and expenses excluding income taxes detailed below
represent all the costs incurred directly, allocated or charged by the Manager
(as defined below) to the Courtyard Hotels. The detail of Total Hotel Sales
and a reconciliation to revenue follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
Hotel sales:
Rooms.......................................... $139,710 $150,122 $ 94,572
Food and beverage.............................. 18,523 16,672 9,115
Other.......................................... 6,379 7,017 4,085
-------- -------- --------
Total Hotel Sales............................ 164,612 173,811 107,772
-------- -------- --------
Expenses:
Departmental direct costs--
Rooms (A)...................................... 31,341 32,776 20,258
Food and beverage (B).......................... 14,433 13,197 7,392
Other operating departments (C)................ 2,127 2,127 1,197
General and administrative (D)................. 17,629 17,525 11,057
Utilities (E).................................. 7,879 7,700 4,605
Repairs, maintenance and accidents (F)......... 7,839 7,319 4,467
Marketing and sales (G)........................ 3,514 3,305 1,688
Chain services (H)............................. 6,914 6,701 3,899
-------- -------- --------
Total expenses............................... 91,676 90,650 54,563
-------- -------- --------
Revenues (House Profit).......................... $ 72,936 $ 83,161 $ 53,209
======== ======== ========
</TABLE>
- ---------------------
(A) Includes expenses for linen, cleaning supplies, laundry, guest supplies,
reservations costs, travel agents commissions, walked guest expenses and
wages, benefits and bonuses for employees of the rooms department.
(B) Includes costs of food and beverages sold, china, glass, silver, paper,
and cleaning supplies and wages, benefits and bonuses for employees of the
food and beverage department.
(C) Includes expenses related to operating the telephone department.
(D) Includes management and hourly wages, benefits and bonuses, credit and
collection expenses, employee relations, guest relations, bad debt
expenses, office supplies and miscellaneous other expenses.
(E) Includes electricity, gas and water at the properties.
(F) Includes cost of repairs and maintenance and the cost of accidents at the
properties.
(G) Includes management and hourly wages, benefits and bonuses, promotional
expense and local advertising.
(H)Includes charges from the Manager for Chain Services as allowable under the
Management Agreements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
On October 8, 1993 (the "Distribution Date"), Marriott Corporation's
operations were divided into two separate companies: Host Marriott Corporation
and Marriott International, Inc. On December 29, 1995, Host
F-50
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
Marriott Corporation's operations were divided into two separate companies:
Host Marriott Corporation ("Host Marriott") and Host Marriott Services
Corporation.
FISCAL YEAR
The Courtyard Hotel's fiscal year ends on the Friday nearest to December 31.
The fiscal year is divided into 13 accounting periods of four weeks each.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, including interest and real
estate taxes incurred during development and construction. Replacements and
improvements are capitalized.
Depreciation is computed using the straight line method over the estimated
useful lives of the assets, generally 40 years for buildings and improvements
and 3 to 10 years for furniture and equipment.
In cases where management is holding for sale particular lodging properties,
Host Marriott assesses impairment based on whether the net realizable value
(estimated sales price less costs of disposal) of each individual property to
be sold is less than the net book value. A lodging property is considered to
be held for sale when Host Marriott has made the decision to dispose of the
property. Otherwise, Host Marriott assesses impairment of its real estate
properties based on whether it is probable that undiscounted future cash flows
from each individual property will be less than its net book value.
AMORTIZATION--PRE-OPENING COSTS
Costs of an operating nature incurred prior to opening of the Hotels are
deferred and amortized over twelve months. Amortization expense was $94,000 in
1993. Pre-opening costs were fully amortized in 1993.
CASH AND CASH EQUIVALENTS
The Courtyard Hotels consider all highly liquid investments with a maturity
of three months or less at date of purchase to be cash equivalents. Cash and
cash equivalents generated by the Hotels is transferred to Host Marriott.
Operating expenses, capital expenditures and other cash requirements of the
Courtyard Hotels are paid by Host Marriott and charged directly to the
Courtyard Hotels.
NEW STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
The Courtyard Hotels adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" during the fiscal year ended December 29,
1995. The adoption of SFAS No. 121 had no material effect on the Courtyard
Hotels' financial statements.
UNAUDITED PRO FORMA DATA
The accompanying combined statements of revenues and expenses excluding
income taxes present unaudited pro forma income taxes for each period
presented based upon the effective combined Federal and state tax rates of 40%
for fiscal year 1993 and 41% for fiscal years 1994 and 1995.
F-51
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 29,
1994 1995
<S> <C> <C>
Land and land improvements......................... $104,118 $ 34,200
Buildings and leasehold improvements............... 375,497 118,446
Furniture and equipment............................ 70,626 22,371
Construction in progress........................... 666 1,256
-------- --------
550,907 176,273
Less--accumulated depreciation..................... 80,605 30,597
-------- --------
Property and equipment, net........................ $470,302 $145,676
======== ========
</TABLE>
Most hotels developed by Host Marriott since the early 1980s were reported
as assets held for sale prior to 1992. In early 1992, Host Marriott decided it
was no longer appropriate to view sales of lodging properties, subject to
operating agreements, as a primary means of long-term financing. Accordingly,
Host Marriott discontinued classification of these properties as assets held
for sale.
Following discussions with the Staff of the Securities and Exchange
Commission, in the second quarter of 1993, Host Marriott changed its method of
determining net realizable value of assets held for sale. Host Marriott
previously determined net realizable value of such assets on an aggregate
basis, in the case of Courtyard by Marriott hotels. Beginning in the second
fiscal quarter of 1993 and thereafter, under Host Marriott's new accounting
policy, net realizable value of all assets held for sale is determined on a
property-by-property basis. The cumulative pre-tax effect of this change on
periods prior to the second quarter of 1993 of $17.8 million is reflected as a
cumulative effect of a change in accounting for assets held for sale in the
accompanying combined statement of revenues and expenses excluding income
taxes for the fiscal year ended December 31, 1993. In 1995, Host Marriott
adjusted, in accordance with its accounting policy, the carrying value of 3
properties included in the Courtyard Hotels by approximately $8.8 million to
reflect such properties' net realizable value based on sales price. The
reductions in the annual depreciation charge as a result of the accounting
change and the write-down were approximately $445,000 and $220,000,
respectively.
NOTE 4. MANAGEMENT AGREEMENTS
Subsequent to the Distribution Date, the Manager operates the Courtyard
Hotels pursuant to long-term management agreements with initial terms expiring
in 2013. The Manager has the option to extend the agreements on one or more
Hotels for up to 3 consecutive 10 year terms. The Management Agreements
provided for a Courtyard by Marriott system fee equal to 3% of Total Hotel
Sales. In addition, Marriott is reimbursed for each Hotel's pro rata share of
the actual costs and expenses incurred in providing certain services ("Chain
Services") on a central or regional basis to all hotels operated by Marriott.
These arrangements regarding the Courtyard by Marriott system fee and Chain
Services existed prior to the Distribution Date and as such, for fiscal years
1993, 1994 and 1995, the Courtyard Hotels paid a Courtyard by Marriott system
fee of $4,939,000, $5,214,000 and $3,233,000, respectively and reimbursed
Marriott for $6,914,000, $6,701,000 and $3,899,000, respectively, of Chain
Services.
In addition, Marriott is entitled to an incentive management fee equal to
50% of available cash flow, not to exceed 20% of operating profit, as defined,
calculated on a combined basis for all Courtyard by Marriott hotels owned by
Host Marriott. Available cash flow is defined as revenues less base management
fees, Courtyard by Marriott system fee, property taxes, other expenses and a
stated annual priority amount. Incentive management
F-52
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
fees were not earned by Marriott from the Distribution Date through December
31, 1993, due to the fact that there was no available cash flow, as defined.
The incentive management fees earned by Marriott of $2,825,000 and $2,590,000
for fiscal years 1994 and 1995, respectively, have been allocated to the
Courtyard Hotels in the accompanying combined financial statements based on
Total Hotel Sales.
The Management Agreements provided that Marriott was to be entitled to a
base fee equal to 2% of Total Hotel Sales. However, this fee has been waived
as more fully described in Note 5, below.
Host Marriott is required to provide Marriott with working capital to meet
the operating needs of the Hotels. Marriott as the manager converts cash
advanced by Host Marriott into other forms of working capital consisting
primarily of operating cash, inventories, and trade receivables and payables
which are maintained and controlled by Marriott. The individual components of
working capital controlled by Marriott are not reflected in the accompanying
combined statements of assets, liabilities and net investment and advances
(see Note 1). As of December 30, 1994 and December 29, 1995, $5,152,000 and
$1,494,000, respectively, has been advanced to Marriott for working capital.
The Management Agreements provided for the establishment of a property
improvement fund (the "FF&E Reserve") for the Hotels. Contributions to the
FF&E Reserve are 5% of Total Hotel Sales, beginning on the Distribution Date.
Contributions to the FF&E Management Agreements provided for the establishment
of a property improvement fund (the "FF&E Reserve") for the Hotels.
Contributions to the FF&E Reserve are 5% of Total Hotel Sales, beginning on
the Distribution Date. Contributions to the FF&E Reserve from the Distribution
Date through December 31, 1993 were $2,403,000, and for the fiscal years ended
December 30, 1994 and December 29, 1995 were $8,894,000 and $5,389,000,
respectively.
During 1994, the Management Agreements were amended to return the remaining
balance of the FF&E Reserve to Host Marriott. It was agreed that future
contributions (until the time of sale of any of the Courtyard Hotels) would be
retained by Host Marriott and advanced to the Courtyard Hotels at such time as
improvements are made to the properties. Such amounts have been included in
the change in net investment and advances in the accompanying combined
statements of cash flows.
NOTE 5. CONSOLIDATION AGREEMENT
The Courtyard Hotels are subject to the terms of a consolidation agreement
("Consolidation Agreement") between Host Marriott and Marriott International,
Inc. pursuant to which (i) incentive fees payable under the Management
Agreements are determined on a consolidated basis for all lodging facilities
of the same type and (ii) base fees payable under the Management Agreements
are waived in return for payment upon the sale of or certain refinancings of
such facilities and as such, no base management fees expense (equal to 2% of
Total Hotel Sales) is reflected in the accompanying combined statements of
revenues and expenses excluding income taxes.
After the sale of any of the Courtyard Hotels, the Consolidation Agreement
is no longer applicable to the Courtyard Hotels and as such, base fees equal
to 2% of Total Hotel Sales is payable under the Management Agreements after
the sale of the Courtyard Hotels.
F-53
<PAGE>
COURTYARD HOTELS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
AS OF DECEMBER 30, 1994 AND DECEMBER 29, 1995
NOTE 6. LEASES
As of December 29, 1995, future minimum annual rental commitments for all
noncancelable leases entered into by Host Marriott, or by Marriott on behalf
of Host Marriott, including the ground leases related to the Group C hotels
described below, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
<S> <C>
1996...................................................... $ 476
1997...................................................... 407
1998...................................................... 351
1999...................................................... 350
2000...................................................... 142
Thereafter................................................ 2,340
--------
Total minimum lease payments........................... $ 4,066
========
The Courtyard Hotels lease the land under three of the Group A Hotels, two of
the Group B Hotels and three of the Group C Hotels under ground lease
agreements with third parties. The ground leases have remaining terms
(including all renewal options) expiring between the years 2039 and 2067. The
ground leases provide for rent based on specific percentages of certain sales
categories subject to minimum amounts. The percentages are adjusted at various
anniversary dates throughout the lease terms, as defined in the agreements.
NOTE 7. PRO FORMA RESULTS OF OPERATIONS
As discussed in Note 1, the Group A Hotels and Group B Hotels were acquired
by the Company on March 24, 1995 and August 22, 1995, respectively. The Group C
Hotel assets are expected to be acquired by the Company in 1996. Assuming that
such transactions were consummated as of January 1, 1995, the pro forma
condensed results of operations of the Hotels are set forth below:
<CAPTION>
YEAR ENDED
DECEMBER 29, 1995
(IN THOUSANDS)
<S> <C>
Total hotel sales.......................................... $183,964
========
Revenues................................................... $ 91,022
Depreciation expense....................................... 18,128
Other expenses............................................. 29,039
--------
Revenues over expenses excluding income taxes.............. 43,855
Pro forma income tax expense (Note 2)...................... 17,981
--------
Pro forma net income after tax............................. $ 25,874
========
</TABLE>
F-54
<PAGE>
WYNDHAM I
PRO FORMA BALANCE SHEET AND
PRO FORMA STATEMENT OF INCOME AS OF AND
FOR THE YEAR ENDED DECEMBER 31, 1995
The following unaudited pro forma balance sheet gives effect to (i) the
formation of Wyndham I; (ii) the transfer of certain assets and liabilities to
Wyndham I related to the acquisition of 11 Wyndham Garden(R) Hotels by the
Company and (iii) the commencement of the related Leases between Wyndham I and
the Company as though such transactions occurred on December 31, 1995. The
following unaudited pro forma statement of income gives effect at January 1,
1995 to: (i) the acquisition of the 11 Wyndham Garden(R) Hotels by the
Company; and (ii) the commencement of the related Leases. The pro forma
information is based in part upon the historical financial statements of a
predecessor limited partnership, Garden Hotel Associates Ltd. Partnership
("GHALP") and should be read in conjunction with all of the financial
statements and notes thereto included in this Prospectus. In the opinion of
management, all adjustments necessary to reflect the effects of the
transactions discussed above have been reflected in the pro forma data.
The following unaudited pro forma data is not necessarily indicative of what
the actual financial position or results of operations for Wyndham I would
have been as of the date or for the period indicated, nor does it purport to
represent the financial position or results of operations of Wyndham I for
future periods.
F-55
<PAGE>
WYNDHAM I
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-------------------------------------
PRO FORMA WYNDHAM I
HISTORICAL(A) ADJUSTMENTS PRO FORMA
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
FF&E Reserves............................. -- 1,167(B) 1,167
Security deposit.......................... -- 13,600(B) 13,600
---- -------- --------
Total assets.............................. $-- $ 14,767 $ 14,767
==== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Common stock.............................. -- 1(B) 1
Paid in capital........................... -- 14,766(B) 14,766
---- -------- --------
Total stockholders' equity................ -- 14,767 14,767
---- -------- --------
Total liabilities and stockholders'
equity................................... $-- $ 14,767 $ 14,767
==== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE>
WYNDHAM I
PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
GARDEN HOTEL
ASSOCIATES LTD.
PARTNERSHIP PRO FORMA WYNDHAM I
HISTORICAL (C) ADJUSTMENTS PRO FORMA
(UNAUDITED, IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................ $56,642 $ -- $56,642
Department expenses..................... 19,622 -- 19,622
Undistributed expenses.................. 13,632 -- 13,632
------- ------- -------
Gross operating profit................ 23,388 -- 23,388
Base rent............................... -- 13,600 (D) 13,600
Percentage rent......................... -- -- (E) --
Depreciation and amortization........... 5,059 (5,059)(F) --
Other (G)............................... 2,655 -- 2,655
Base & incentive management fee (H)..... 3,317 (183) 3,134
------- ------- -------
Operating income...................... 12,357 (8,358) 3,999
Interest income......................... 334 (334) --
Interest expense........................ (7,145) 7,145 --
------- ------- -------
Income before income taxes............ 5,547 (1,548) 3,999
Provision for income taxes (I).......... -- (1,580) (1,580)
------- ------- -------
Net income............................ $ 5,547 $(3,127) $ 2,419
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-57
<PAGE>
WYNDHAM I
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(A) Wyndham I was not formed as of December 31, 1995.
(B) Reflects the effects of the assets that are expected to be contributed to
Wyndham I by its affiliates as a result of the sale of the 11 Wyndham
Garden(R) Hotels to the Company.
(C) Reflects the combined historical operating results of the 11 Wyndham
Garden(R) Hotels for the year ended December 31, 1995.
(D) Represents the base rent to be paid by Wyndham I to the Company under the
Leases. The Leases require Wyndham I to pay an aggregate minimum annual
base rent of $13,600,000 a pro rata portion of which is due and payable in
advance on the first day of each month.
(E) Under the terms of the Leases, Wyndham I is to pay percentage rent equal
to 8% of the excess of Total Hotel Sales over 1996 Total Hotel Sales and,
as such, there is no percentage rent on a pro forma basis for the year
ended December 31, 1995.
(F) Wyndham I has no ownership interest (other than as a lessee) in the real
estate related to these 11 Wyndham Garden(R) Hotels and, as such, there is
no depreciation expense on a pro forma basis.
(G) Represents ground rent and other expenses for which Wyndham I will remain
obligated under the Leases.
(H) Under the terms of the Management Agreements, Wyndham II is to be paid
base fees of 5% of Revenues and incentive fees equal to approximately 20%
of adjusted net operating income (as defined in the applicable Management
Agreements).
(I) Adjustment to reflect the impact of federal and state income taxes related
to the pro forma results of operations of Wyndham I, at an effective
income tax rate of approximately 39.5%, assuming Wyndham I's change in tax
status to a corporation.
F-58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Garden Hotel Associates L.P.
We have audited the accompanying balance sheets of Garden Hotel Associates
L.P. as of December 31, 1994 and 1995 and the related statements of income,
changes in partners' capital, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Garden Hotel Associates
L.P. as of December 31, 1994 and 1995, and its results of operations and its
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Dallas, Texas
February 27, 1996
F-59
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 5,398,475 $ 5,632,647
Accounts receivable, less allowance of $19,000 in
1994 and $31,000 in 1995.......................... 1,276,316 1,248,115
Due from affiliate................................. -- 155,009
Inventories........................................ 199,543 189,658
Prepaid expenses................................... 151,322 149,415
------------ ------------
Total current assets............................. 7,025,656 7,374,844
Property and equipment, net.......................... 105,947,174 103,797,560
Other assets, net of accumulated amortization of
$4,338,000 and $4,175,000 in 1994 and 1995,
respectively........................................ 1,919,689 1,342,372
------------ ------------
Total assets..................................... $114,892,519 $112,514,776
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses.............. $ 3,935,116 $ 4,087,035
Due to Operator.................................... 357,940 475,200
Advance deposits................................... 79,734 486,967
------------ ------------
Total current liabilities........................ 4,372,790 5,049,202
Long-term debt....................................... 93,000,000 93,000,000
------------ ------------
Total liabilities................................ 97,372,790 98,049,202
Commitments and contingencies
Partners' capital.................................... 17,519,729 14,465,574
------------ ------------
Total liabilities and partners' capital.......... $114,892,519 $112,514,776
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-60
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Revenues:
Rooms.................................... $33,181,540 $37,024,696 $42,310,485
Food and beverage........................ 9,610,737 11,035,165 11,532,474
Operating departments.................... 2,398,859 2,666,340 2,798,687
----------- ----------- -----------
45,191,136 50,726,201 56,641,646
----------- ----------- -----------
Operating costs and expenses:
Departmental expenses:
Rooms.................................. 8,137,637 8,787,104 10,088,389
Food and beverage...................... 7,111,756 7,868,263 8,304,422
Operating departments.................. 1,249,043 1,224,981 1,228,868
Operating expenses:
Administrative and general............. 4,750,200 4,940,904 5,102,092
Management fees........................ 2,414,658 2,888,211 3,317,170
Sales and marketing.................... 3,278,057 3,816,964 3,953,177
Property operating costs............... 4,035,318 4,206,628 4,576,842
Property insurance, rent and taxes..... 2,085,483 2,310,649 2,450,743
Depreciation and amortization.......... 4,808,530 4,955,340 5,058,767
Other.................................. 217,441 175,619 204,026
----------- ----------- -----------
Total operating costs and expenses... 38,088,123 41,174,663 44,284,496
----------- ----------- -----------
Operating income..................... 7,103,013 9,551,538 12,357,150
Interest income.......................... 108,293 190,621 334,467
Interest expense......................... (4,613,594) (5,617,689) (7,144,673)
----------- ----------- -----------
Net income........................... $ 2,597,712 $ 4,124,470 $ 5,546,944
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<S> <C>
Balance at January 1, 1993......................................... $25,516,448
Distributions.................................................... (8,752,000)
Net Income....................................................... 2,597,712
-----------
Balance at December 31, 1993....................................... 19,362,160
Contributions.................................................... 498,000
Distributions.................................................... (6,464,901)
Net Income....................................................... 4,124,470
-----------
Balance at December 31, 1994....................................... 17,519,729
Distributions.................................................... (8,601,099)
Net Income....................................................... 5,546,944
-----------
Balance at December 31, 1995....................................... $14,465,574
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 2,597,712 $ 4,124,470 $ 5,546,944
Adjustments to reconcile net income to
net cash provided by operating
activities:
Amortization of interest rate
contracts............................ 39,732 134,127 134,127
Depreciation and amortization......... 4,808,530 4,955,340 5,058,767
Provision for bad debt................ 98,269 25,170 47,119
Changes to operating assets and
liabilities:
Accounts receivable................... 572,269 (211,458) (18,919)
Due from affiliate.................... -- -- (155,009)
Inventories........................... (17,074) 11,961 9,885
Prepaid expenses...................... (2,851) 13,508 1,907
Other assets.......................... (198,260) (36,567) (118,424)
Accounts payable and accrued expenses. 550,318 (44,672) 151,919
Due to Operator....................... (444,488) 202,839 117,260
Advance deposits...................... 41,208 (4,579) 407,233
----------- ----------- -----------
Net cash provided by operating
activities......................... 8,045,365 9,170,139 11,182,809
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment..... (1,280,571) (1,663,612) (2,347,538)
Proceeds from land sale................ 17,057 -- --
----------- ----------- -----------
Net cash used in investing
activities......................... (1,263,514) (1,663,612) (2,347,538)
----------- ----------- -----------
Cash flows from financing activites:
Other.................................. (498,000) -- --
Partners' contributed capital.......... -- 498,000 --
Partners' capital distributions........ (8,752,000) (6,464,901) (8,601,099)
Proceeds from long-term debt........... 3,000,000 -- --
----------- ----------- -----------
Net cash used in financing
activities......................... (6,250,000) (5,966,901) (8,601,099)
----------- ----------- -----------
Increase in cash and cash equivalents... 531,851 1,539,626 234,172
Cash and cash equivalents at beginning
of year................................ 3,326,998 3,858,849 5,398,475
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 3,858,849 $ 5,398,475 $ 5,632,647
=========== =========== ===========
Supplemental disclosure of cash flow
Information:
Cash paid during the year for
interest............................. $ 4,568,403 $ 5,292,070 $ 6,977,768
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Garden Hotel Associates LP (the "Partnership") was formed May 11, 1990, for
the purpose of acquiring, owning and operating eleven Wyndham Garden Hotels
throughout the United States of which three are located in or near Phoenix,
Arizona.
The partners contributed $36,000,000 upon formation of the Partnership. The
general partner is required to and the limited partner may, at its discretion,
make additional contributions necessary to fund operating deficits as defined
in the Partnership agreement. Profits and losses are allocated to the partners
in accordance with the Partnership agreement.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, all highly liquid debt instruments
with original maturities of three months or less are considered to be cash
equivalents.
Designated cash totaling $816,858 and $605,250 as of December 31, 1994 and
1995, respectively, consists of amounts designated for repairs and replacement
of property and equipment.
The Partnership maintains cash and cash equivalents in accounts with various
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation.
INVENTORIES
Inventories consist of food, beverages, china, linen, glassware, silverware,
uniforms, and supplies and are stated at cost, which approximates market, with
cost determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Buildings are carried at cost and depreciated over forty years using the
straight-line method. Furniture and equipment are recorded at cost and
depreciated using the straight-line method over the estimated useful lives,
which range from three to seven years. Normal repairs and maintenance are
charged to expense as incurred.
In 1995, the Partnership adopted Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of." Impairment losses are recognized in operating income as
they are determined.
The Partnership periodically reviews its property and equipment to determine
if its carrying cost will be recovered from future operating cash flows. In
cases when the Partnership does not expect to recover its carrying cost, the
Partnership recognizes an impairment loss. No such losses have been recognized
to date.
F-64
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
OTHER ASSETS
Other assets consist primarily of deferred finance costs totaling
approximately $1,387,243 and $819,759 at December 31, 1994 and 1995,
respectively, and are stated at net cost. Amortization of loan costs is
computed using the effective yield method over the lives of the related loans.
The remaining balance consists primarily of security deposits totaling
approximately $404,189 and $522,613 at December 31, 1994 and 1995,
respectively, and are stated at cost.
Preopening costs, which are classified as other assets, are recorded at cost
and amortized over twelve months using the straight-line method. Fully
amortized preopening expenses of $859,256 were written off in 1995.
INCOME TAXES
The Partnership is not a taxable entity and the results of its operations
are included in the tax returns of the partners. The Partnership's tax returns
and the amount of allocable income or loss are subject to examination by
federal and state taxing authorities. If such examinations result in changes
to income or loss, the tax liability of the partners could be charged
accordingly.
REVENUE RECOGNITION
Room, food and beverage, telephone and other revenues are recognized when
earned.
SELF-INSURANCE
The Partnership is self insured for various levels of general liability,
workers' compensation and employee medical coverages. Accrued expenses include
the estimated cost from unpaid incurred claims.
INTEREST RATE CONTRACTS
The Partnership enters into interest rate contracts to manage its exposure
to interest rate volatility. These contracts have been interest rate caps,
where the Partnership pays a lump-sum for the right to receive future payments
should interest rates exceed an agreed upon rate. The Partnership is exposed
to credit loss in the event of nonperformance by the counterparties to its
interest rate contracts. The Partnership does not anticipate nonperformance by
the counterparties. The Partnership accounts for interest rate cap contracts
by amortizing the up-front premium to interest expense over the life of the
contract.
ADVERTISING COSTS
The Partnership participates in various advertising and marketing programs
with a related party. All costs are expensed in the period incurred. The
Partnership recognized advertising expenses of $1,003,589, $1,198,335 and
$1,148,385 for the years ended December 31, 1993, 1994 and 1995, respectively.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform with
the current year presentation.
F-65
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
<S> <C> <C>
Land.............................................. $ 17,428,111 $ 17,428,111
Buildings......................................... 91,467,248 91,467,248
Furniture, fixtures and equipment................. 15,493,480 17,841,018
------------ ------------
124,388,839 126,736,377
Less accumulated depreciation..................... 18,441,665 22,938,817
------------ ------------
$105,947,174 $103,797,560
============ ============
</TABLE>
4. MANAGEMENT AGREEMENT AND RELATED PARTY TRANSACTIONS
On May 21, 1990, the Partnership and Wyndham Hotel Company, Ltd. (the
"Operator"), a related party, entered into a management agreement which
provides for a base management fee and chain services fee equal to 5% of gross
revenues plus an incentive fee equal to 15% of total operating cash flow. Due
to Operator includes management fees and other expenses payable to the
Operator. As provided for in the management agreement, cash in excess of
amounts required for on-site operations is held in a central account in the
name of the Operator.
The Partnership receives sales and marketing, centralized reservations,
accounting and other support services from affiliates which are reimbursed as
an adjustment to management fees in the normal course of business.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
<S> <C> <C>
Accounts payable...................................... $1,003,836 $ 977,184
Taxes................................................. 1,051,706 1,061,058
Payroll and related costs............................. 1,100,642 1,176,514
Accrued interest...................................... 563,862 596,640
Other................................................. 215,070 275,639
---------- ----------
$3,935,116 $4,087,035
========== ==========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
<S> <C> <C>
Acquisition loan..................................... $90,000,000 $90,000,000
Revolver loan........................................ 3,000,000 3,000,000
----------- -----------
$93,000,000 $93,000,000
=========== ===========
</TABLE>
The Acquisition and Revolver loans are payable to an affiliate. During 1993,
two interest rate caps were purchased for $498,000 which fixed $60,000,000 of
the acquisition loan balance at a 6% interest rate effective
F-66
<PAGE>
GARDEN HOTEL ASSOCIATES LP
(A TEXAS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
September 30, 1994 for the remainder of the loan. The remaining balances of
these loans bear interest at various rates which ranged from 4.63% to 6.5%,
4.5% to 9% and 7.1% to 7.9% during the years ended December 31, 1993, 1994 and
1995, respectively. Interest only is payable for both the Acquisition and
Revolver loans until maturity at May 21, 1997, when the principal is due.
The Partnership's debt is collateralized principally by property and
equipment.
7. EMPLOYEE BENEFIT PLANS
The Partnership participates in a 401(k) retirement savings plans. Employees
who are over 21 years of age and have completed one year of service are
eligible to participate in the plan. The Partnership matches employee
contributions up to 4% of an employee's salary. The Partnership expensed
$31,628, $44,185, and $77,075 for the years ended December 31, 1993, 1994 and
1995, respectively, related to the plan.
The Partnership participates in a self-insured group health plan through a
Voluntary Employee Benefit Association ("VEBA") for its employees. This plan
is funded to the limits provided in the Internal Revenue Code, and liabilities
have been recorded for unpaid claims. Aggregate and stop loss insurance exists
at amounts which limit exposure to the partnerships. The Partnership has
recognized expenses under the plan of $419,817, $443,277 and $511,643 for the
years ended December 31, 1993, 1994 and 1995, respectively.
8. FAIR VALUE
The Partnership has estimated the fair value of its financial instruments at
December 31, 1995 as required by Statement of Financial Accounting Standards
No. 107. The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are reasonable estimates of
their fair values. The carrying values of variable and fixed rate debt are
reasonable estimates of their fair values.
9. COMMITMENTS AND CONTINGENCIES
The Partnership has entered into a land lease for one of the Partnership's
hotels. Future minimum rental payments of $160,000 per year are required under
the operating lease. The lease which expires March 2052 includes a renewal
option of 25 years and contingent lease payments which are based on a
percentage of the hotel's gross income. The related renewal rental expense was
$160,000 for the years ended 1993, 1994 and 1995, and contingent rental
expense was $75,333, $112,464 and $153,862 for the years ended December 31,
1993, 1994 and 1995, respectively.
The Partnership is subject to environmental regulations related to the
ownership of real estate (hotels). As part of due diligence procedures, the
Partnership has conducted Phase I environmental assessments on each property
prior to acquisition. The cost of complying with the environmental regulations
was not material to the Partnership's statements of income for any of the
years in the three-year period ended December 31, 1995. The Partnership is not
aware of any environmental condition on any of its properties which is likely
to have a material adverse effect on the Partnership's financial statements.
10. SUBSEQUENT EVENT
It is the intent of an affiliated entity to acquire a 70% ownership interest
in the Partnership. The acquiring entity and the Operator are affiliated
through common ownership. In addition, a letter of intent has been entered
into with a third party real estate investment trust ("REIT"). This
transaction will result in a sale/leaseback that provides for the sale of all
eleven hotels containing 1,940 rooms for $135,320,000 to the REIT and eleven
long-term operating leases back to the Operator. Each lease has an initial
term of seventeen years and four optional twelve-year extensions exercisable
at the Operator's option for all hotels. Annual minimum base rents aggregate
$13,600,000 plus a contingent rent payment is required based on a percentage
of excess revenue over base year revenues. The leases will require the
Operator to pay substantially all expenses associated with the operation of
the leased hotels, real estate taxes and insurance.
F-67
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOSPITALITY PROPERTIES TRUST
(Registrant)
By: /s/ John G. Murray
-----------------------------------------
John G. Murray, President and
Chief Operating Officer
Date: April 8, 1996
