<PAGE>
PROSPECTUS
APRIL 1, 1996
13,000,000 SHARES
HOSPITALITY PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST
Hospitality Properties Trust ("HPT" or the "Company") is a real estate
investment trust (a "REIT") which owns hotels and leases them to independent
hotel operating companies. Upon completion of pending acquisitions, HPT will
own 82 Hotels with 11,728 rooms or suites located in 26 states. On April 1,
1996, the last reported sale price for the Company's Common Shares of
Beneficial Interest (the "Shares") on the New York Stock Exchange ("NYSE") was
$26 5/8.
All of the Shares offered hereby (this "Offering") are being offered by the
Company. Upon completion of this Offering, Health and Retirement Properties
Trust ("HRP"), a NYSE listed REIT, will own approximately 16%, HRPT Advisors,
Inc. ("Advisors"), the investment advisor to both HPT and HRP, will own
approximately 1% and public Shareholders will own approximately 83% of the
outstanding Shares.
An investment in the Shares offered hereby is not an investment in HRP,
Advisors or in any tenant or manager of the Company's Hotels or their
affiliates, including Wyndham Hotel Corporation, Host Marriott Corporation or
Marriott International, Inc.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $26.625 $1.36 $25.265
Total (3)............................. $346,125,000 $17,680,000 $328,445,000
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses estimated at $2,265,000, which will be paid by
the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 1,950,000 additional Shares at the Price to the Public
less Underwriting Discounts and Commissions, solely to cover
overallotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions and Proceeds
to the Company will be $398,043,750, $20,332,000 and $377,711,750
respectively. See "Underwriting."
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including their right to reject orders in
whole or in part. It is expected that delivery of the share certificates will
be made in New York, New York on or about April 4, 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
<PAGE>
H O S P I T A L I T Y P R O P E R T I E S T R U S T
[THE PROSPECTUS CONTAINS PHOTOGRAPHS OF THE FOLLOWING COMPANY HOTELS:]
[PHOTO OF WYNDHAM GARDEN(R)--BLOOMINGTON, MINNESOTA APPEARS HERE]
[PHOTO OF RESIDENCE INN BY MARRIOTT(R)--WESTBOROUGH, MASSACHUSETTS APPEARS HERE]
[PHOTO OF COURTYARD BY MARRIOTT(R)--BELLEVUE, WASHINGTON APPEARS HERE]
--------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PROSPECTUS SUMMARY......................................................... 1
The Company.............................................................. 1
The Offering............................................................. 3
Risk Factors............................................................. 4
Summary Selected and Pro Forma Financial and Operating Data.............. 5
RISK FACTORS............................................................... 7
THE COMPANY................................................................ 12
DISTRIBUTION POLICY........................................................ 13
PRICE RANGE OF SHARES...................................................... 15
USE OF PROCEEDS............................................................ 15
CAPITALIZATION............................................................. 16
SELECTED AND PRO FORMA FINANCIAL AND OPERATING DATA........................ 17
Hospitality Properties Trust............................................. 17
Wyndham I................................................................ 19
Host I................................................................... 20
Host II.................................................................. 21
Rent Coverage Analysis................................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 23
Overview................................................................. 23
The Company: Historical and Pro Forma Results of Operations.............. 23
The Hotels............................................................... 24
Liquidity and Capital Resources.......................................... 25
Seasonality.............................................................. 27
Inflation................................................................ 27
BUSINESS................................................................... 28
The Hotels............................................................... 29
Lessees, Managers, Leases and Management Agreements...................... 41
Purchase Agreements...................................................... 45
Competition.............................................................. 46
Environmental Matters.................................................... 46
Regulatory Matters....................................................... 47
Ground Leases............................................................ 48
Mortgages................................................................ 48
Damage, Destruction or Condemnation...................................... 48
Legal Proceedings........................................................ 49
MANAGEMENT................................................................. 50
Trustees and Executive Officers.......................................... 50
Committees of the Board of Trustees...................................... 51
Compensation of Trustees and Officers.................................... 51
Employees................................................................ 51
Incentive Share Award Plan............................................... 51
Trustees' and Officers' Indemnification.................................. 52
Advisors and the Advisory Agreement...................................... 52
Certain Transactions..................................................... 54
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 55
Investment Policies...................................................... 55
Disposition Policies..................................................... 56
Financing Policies....................................................... 56
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Conflict of Interest Policies............................................ 57
Policies with Respect to Other Activities................................ 57
DESCRIPTION OF THE SHARES.................................................. 57
General.................................................................. 57
Common Shares............................................................ 58
Preferred Shares......................................................... 58
Transfer Agent........................................................... 58
SUMMARY OF THE DECLARATION OF TRUST........................................ 58
Trustees................................................................. 58
Liability of Trustees.................................................... 59
Limitation of Liability; Shareholder Liability........................... 59
Duration and Termination................................................. 60
Prohibited Investments and Activities.................................... 60
Transactions with Affiliates, Trustees, Employees, Officers or Agents.... 60
Restrictions on Transfer................................................. 60
Shareholder Proposals.................................................... 62
Business Combinations.................................................... 62
Control Share Acquisitions............................................... 62
Amendment; Meetings...................................................... 62
Antitakeover Provisions.................................................. 63
PRINCIPAL SHAREHOLDERS..................................................... 64
SHARES ELIGIBLE FOR FUTURE SALE............................................ 65
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 65
Taxation of the Company.................................................. 66
Taxation of Shareholders................................................. 72
Other Tax Considerations................................................. 73
CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF SHARES.... 74
Federal Estate Tax....................................................... 75
Backup Withholding and Information Reporting Requirements................ 75
Other Tax Consequences................................................... 76
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS................ 76
General Fiduciary Obligations............................................ 76
Prohibited Transactions.................................................. 76
Special Fiduciary and Prohibited Transactions Considerations............. 77
UNDERWRITING............................................................... 79
EXPERTS.................................................................... 80
LEGAL MATTERS.............................................................. 81
ADDITIONAL INFORMATION..................................................... 81
GLOSSARY................................................................... 82
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
(iii)
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. In this Prospectus, the 37 hotels acquired by the Company
in 1995 are referred to as the "Initial Hotels," the 45 additional hotels
acquired or to be acquired by the Company are referred to as the "Additional
Hotels," and the Initial Hotels and the Additional Hotels are collectively
referred to as the "Hotels." References in this Prospectus to the "Company"
includes consolidated subsidiaries. Other capitalized terms used in this
Prospectus without definition have the meanings specified in the Glossary.
Unless otherwise indicated, the information contained in this Prospectus
assumes that (i) the Underwriters' overallotment option is not exercised and
(ii) all the Additional Hotels have been acquired and the new and amended
Leases and Management Agreements for the Hotels have become effective. An
investment in the Shares offered hereby is not an investment in (i) Wyndham
Hotel Company, Ltd., its proposed successor-in-interest, Wyndham Hotel
Corporation (together, "Wyndham"), Host Marriott Corporation ("Host"), Marriott
International, Inc. ("Marriott") or any of their affiliates acting as Lessees
or Managers of Hotels owned by the Company or (ii) Health and Retirement
Properties Trust ("HRP") or HRPT Advisors, Inc. ("Advisors").
THE COMPANY
The Company is a REIT formed to acquire, own and lease hotels to unaffiliated
tenants. The Company acquired 37 Courtyard by Marriott(R) Hotels in 1995. Upon
completion of the acquisition of the 45 Additional Hotels, the Company will own
82 Hotels with 11,728 rooms or suites located in 26 states, purchased for
approximately $813 million. The acquisitions enhance the diversity of the
Company's portfolio in terms of geography, brand and type of hotel. Following
the completion of the acquisitions and the consummation of this Offering, the
Company's pro forma Cash Available for Distribution will increase from $2.45
per Share to $2.66 per Share.
[The Prospectus contains a pie chart with the three captions shown below each
indicating the pie wedge with percentages as follows: 11 Wyndham Garden(R)
Hotels--16.6%; 18 Residence Inn by Marriott(R) Hotels--21.2%; and 53 Courtyard
by Marriott(R) Hotels--62.2%.]
11 Wyndham Garden(R) Hotels
Full Service
$135.3 million/1,940 rooms
18 Residence Inn by Marriott(R) Hotels 53 Courtyard by Marriott(R) Hotels
Extended Stay Limited Service
$172.2 million/2,178 suites $505.4 million/7,610 rooms
DISTRIBUTIONS
Since its initial public offering in August 1995, the Company has paid
regular quarterly dividends at the rate of $0.55 per Share per quarter, or
$2.20 per Share per year. On March 9, 1996, the Company's regular quarterly
dividend was increased to $0.58 per Share per quarter, or $2.32 per Share per
year. The next quarterly dividend of $0.58 per Share for the calendar quarter
ending March 31, 1996, will be paid on or about May 21, 1996 to Shareholders of
record on April 19, 1996. Purchasers of Shares in this Offering who continue to
hold their Shares on April 19, 1996 will receive this next quarterly dividend.
[The Prospectus contains a horizontal bar chart
showing the following information;
the bottom of the chart will have a scale from $0 to $3]
Dividend rate per Share per year [$2.32]
Pro forma Cash Available for [$2.45] 94.7%
Distribution per Share per year payout
Pro forma Cash Available for [$2.66] 87.2%
Distribution per Share per payout
year, as adjusted for pending
acquisitions and this Offering
1
<PAGE>
GROWTH STRATEGY
The Company's principal growth strategy is to expand its investments in
hotels and to set minimum rents which produce income in excess of the Company's
cost of raising capital. Most other public hotel REITs seek to control the
operations of hotels in which they invest by leasing their properties to
affiliated tenants. The Company seeks to provide capital to unaffiliated hotel
operators who wish to divest their properties while remaining in the hotel
business as tenants. The Company believes that this difference in operating
philosophy affords it a competitive advantage over other hotel REITs in finding
high quality hotel investment opportunities on attractive terms. In addition,
the Company's internal growth strategy is to participate through percentage
rents in increases in Total Hotel Sales (including gross revenues from room
rentals, food and beverage sales and other services) at the Company's Hotels.
LEASES
As a REIT, the Company may not operate or manage its Hotels. All 82 Hotels
owned by the Company will be leased to hotel operating companies and managed by
hotel management companies. The Company believes that the Leases which it has
negotiated provide strong rent coverages and credit characteristics and that
the FF&E Reserves, which exceed industry averages, will be adequate to maintain
the competitive appearances of its Hotels. The 11 Wyndham Garden(R) Hotels will
be leased to a special purpose entity ("Wyndham I") and managed by Wyndham or a
Wyndham subsidiary ("Wyndham II"). The 18 Residence Inn by Marriott(R) Hotels
will be 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 will be leased to another special purpose subsidiary of Host ("Host II")
and managed by another subsidiary of Marriott ("Marriott II"). The following
table summarizes certain important features of the Company's Leases.
<TABLE>
<CAPTION>
11 WYNDHAM 18 RESIDENCE INN BY 53 COURTYARD
GARDEN(R) HOTELS MARRIOTT(R) HOTELS BY MARRIOTT(R) HOTELS ALL 82 HOTELS
---------------- ------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Tenant.................. Wyndham I Host I Host II 3 tenants
Minimum annual rents.... $13.6 million $17.2 million $50.5 million $81.4 million
Percentage rents........ 8.0% of amounts 7.5% of amounts 5.0% of amounts in --
in excess of in excess of excess of 1994 Total
1996 Total 1996 Total Hotel Sales (37 Hotels)
Hotel Sales Hotel Sales and 1995 Total
Hotel Sales (16 Hotels)
Initial Lease term
expirations............ 2012 2010 2012 --
Renewal options......... All or none All or none All or none --
4 for 12 years 1 for 10 years; 3 for 12 years
2 for 15 years
Security Deposits....... $13.6 million $17.2 million $50.5 million $81.4 million
Cross defaults.......... Yes Yes Yes --
Management fees......... Subordinated Subordinated Subordinated --
Estimated renovation and
refurbishment escrow
("FF&E Reserve") based
upon 5% of 1995 Total $1,290/room or
Hotel Sales............ $1,460/room $1,422/suite $1,209/room suite
Pro forma rent coverage
(1995 Hotel operating
results after FF&E
Reserves and before
subordinated management
fees and charges)...... 1.32 x 1.39 x 1.34 x 1.35 x
</TABLE>
2
<PAGE>
THE HOTELS
The average age of the Company's 82 Hotels is under six years. The Company
believes that the locations, appearances, designs and operating systems of the
Hotels have contributed to operating performance in recent years in excess of
United States hotel industry averages. Revenue per available room ("REVPAR") at
the Company's 82 Hotels increased by 8.2% and 8.7% in 1994 and 1995,
respectively, exceeding REVPAR growth in the United States hotel industry of
7.3% and 6.2% in comparable periods. The following tables set forth the Total
Hotel Sales, occupancies and REVPAR of the Hotels as compared with all United
States hotels as reported by Smith Travel Research in Lodging Outlook.
<TABLE>
<CAPTION>
TOTAL HOTEL SALES
-----------------------------------
1993 1994 1995
(IN THOUSANDS)
<S> <C> <C> <C>
11 Wyndham Garden(R)....................... $ 45,191 $ 50,726 $ 56,642
18 Residence Inn by Marriott(R)............ 53,582 57,357 61,934
53 Courtyard by Marriott(R)................ 164,612 173,811 183,964
82 HPT Hotels.............................. 263,385 281,894 302,540
All U.S. hotels(1)......................... 45,500,000 48,800,000 52,700,000
<CAPTION>
OCCUPANCIES
-----------------------------------
1993 1994 1995
<S> <C> <C> <C>
11 Wyndham Garden(R)....................... 73.0% 75.1% 77.5%
18 Residence Inn by Marriott(R)............ 84.5 85.6 86.6
53 Courtyard by Marriott(R)................ 79.7 80.3 80.3
82 HPT Hotels.............................. 79.5 80.4 81.0
All U.S. hotels............................ 63.1 64.7 65.5
<CAPTION>
REVPAR
-----------------------------------
1993 1994 1995
<S> <C> <C> <C>
11 Wyndham Garden(R)....................... $46.76 $52.34 $59.77
18 Residence Inn by Marriott(R)............ 63.18 68.12 73.69
53 Courtyard by Marriott(R)................ 50.49 54.23 58.32
82 HPT Hotels.............................. 52.23 56.50 61.41
All U.S. hotels............................ 38.71 41.55 44.14
</TABLE>
- --------------------
(1) All U.S. hotel sales represent room sales only, and are affected by
increases of hotel room supply of 1.4% and 1.7% in 1994 and 1995,
respectively.
THE OFFERING
<TABLE>
<C> <S>
Shares to be offered............... 13,000,000 Shares
Shares to be outstanding after this
Offering.......................... 25,600,900 Shares
Use of proceeds.................... To fund a portion of the acquisition cost
of the Additional Hotels or to repay
indebtedness incurred to purchase
Additional Hotels. In the event that the
Company is unable to acquire a substantial
number of the Additional Hotels, a portion
of the proceeds may be used to acquire
other hotels. Any proceeds held by the
Company pending such use will be invested
in investment grade short term securities.
NYSE symbol........................ HPT
</TABLE>
3
<PAGE>
RISK FACTORS
An investment in the Shares involves various risks and investors should
consider carefully the matters discussed under "Risk Factors." These risks
include, among others:
. Pending Acquisitions May Not Close. The Company acquired eight Additional
Hotels on March 22, 1996. The acquisition of the remaining Additional
Hotels may not close or may not close in a timely manner. If a
significant portion of the pending acquisitions do not close, a portion
of the proceeds from this Offering will not have any specific designated
use, and the Company may be unable to recover some or all of the amounts
expended by it in connection with the pending acquisitions. If any of
these events occur, the Company's Cash Available for Distribution per
Share and the level of dividends paid to Shareholders may decline.
. Dependence on Limited Number of Lessees. As owner and lessor, the Company
is entitled only to receive base and percentage rents under the leases
for the Hotels (the "Leases"). In order to generate cash sufficient to
make distributions to Shareholders, the Company will rely on timely
receipt of rents from Wyndham I, Host I and Host II (collectively, the
"Lessees"). The failure or delay by the Lessees in making rent payments
could adversely affect the ability of the Company to make distributions
to Shareholders.
. Dependence on Limited Number of Managers. The Company and the Lessees
will rely on Wyndham II, Marriott I and Marriott II (collectively, the
"Managers") to manage the Hotels pursuant to management agreements for
the Hotels (the "Management Agreements"). The failure of the Managers to
manage the Hotels properly could have a material adverse effect on the
ability of the Lessees to pay rents to the Company.
. Substantial Dependence on Brand Names. The Wyndham Garden(R), Residence
Inn by Marriott(R) and Courtyard by Marriott(R) brand names are not owned
by the Company, and any degradation or adverse market developments
relating to these brand names could adversely affect the results of
operations of the related Hotels and the ability of the applicable Lessee
to pay rents.
. Inability to Operate Hotels. As a REIT, the Company is restricted in its
ability to operate hotels. The Company will rely on the Lessees and the
Managers and any additional lessees and managers of future hotels to
operate its hotels.
. Limited Operating History. The Company has only a limited operating
history and has owned hotels for approximately one year.
. Dependence on Key Personnel. The Company is an advised REIT and is highly
dependent on the efforts of Advisors and the Company's Managing Trustees
and officers, all of whom have extensive experience managing a REIT but
only limited experience in the hotel industry.
. Conflicts of Interest. Advisors acts as the financial advisor and
provides management services to the Company and HRP and also has other
business interests. Advisors is owned by Messrs. Barry M. Portnoy and
Gerard M. Martin. Messrs. Portnoy and Martin are each Managing Trustees
of the Company, Managing Trustees of HRP and Directors of Advisors. Under
the terms of the Advisory Agreement, the fees payable to Advisors will
increase as a result of the Company's purchase of the Additional Hotels
and future hotels. These relationships present actual or potential
conflicts of interest which could result in decisions that do not fully
represent the interests of the Company.
. Risk of Leverage. The organizational documents of the Company do not
limit the amount of debt the Company may incur. The Company could become
highly leveraged, which could adversely affect the ability of the Company
to make distributions to Shareholders.
. Security Deposits. The Company does not escrow the Security Deposits it
retains under the Leases. Accordingly, in the event of Lease defaults,
these funds may not be available to make distributions to Shareholders.
4
<PAGE>
SUMMARY SELECTED AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth summary selected financial and operating data
on an historical and a pro forma basis for the Company for the year ended
December 31, 1995. The pro forma data for the 37 Hotels are unaudited and
presented as if the Company's formation transactions, primarily the acquisition
and leasing of the Initial Hotels and the Company's initial public offering of
Shares, and certain other transactions described in the notes to the pro forma
financial statements included elsewhere in this Prospectus have been
consummated for the period presented. The pro forma data for the 82 Hotels are
unaudited and are presented as if: (i) the Company's formation transactions,
primarily the acquisition and leasing of the Initial Hotels and the Company's
initial public offering of Shares; (ii) the acquisition and leasing of the
Additional Hotels; (iii) this Offering and the application of the proceeds
thereof; and (iv) certain other transactions described in the notes to the pro
forma financial statements included elsewhere in this Prospectus have been
consummated as of the date or for the period presented. The pro forma data are
not necessarily indicative of what the actual financial position or results of
operations would have been, nor do they purport to represent the financial
position or results of operations for future periods. The following summary
selected and pro forma financial and operating data should be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this Prospectus.
HOSPITALITY PROPERTIES TRUST
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- -----------------------
FEBRUARY 7, 1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31, 1995
DECEMBER 31, -----------------------
1995(1) (37 HOTELS) (82 HOTELS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Revenues:
Base rent.......................... $ 19,206 $ 32,900 $ 81,360
Percentage rent(2)................. 325 408 408
FF&E Reserve income................ 4,037 6,424 12,295
Interest income.................... 74 144 315
-------- -------- --------
Total revenues.................... 23,642 39,876 94,378
Expenses:
Interest expense................... 5,039 -- 9,145
Depreciation and amortization...... 5,844 9,229 23,809
General and administrative......... 1,410 2,616 5,039
-------- -------- --------
Total expenses.................... 12,293 11,845 37,993
-------- -------- --------
Net income.......................... $ 11,349 $ 28,031 $ 56,385
======== ======== ========
Net income per Share................ $ 2.51 $ 2.22 $ 2.20
Weighted average Shares outstanding. 4,515 12,601 25,601
BALANCE SHEET DATA (AS OF DECEMBER
31, 1995):
Real estate properties, net......... $326,752 $815,202
Total assets........................ 338,947 834,102
Total debt.......................... -- 120,515
Shareholders' equity................ 297,951 624,131
OTHER DATA:
Cash Available for Distribution(3).. $ 13,156 $ 30,836 $ 68,126
Cash provided by operating
activities(4)...................... 14,140 31,820 69,110
Cash used in investing
activities(4)...................... 303,652 303,652 749,142
Cash provided by financing
activities(4)...................... 291,647 268,481 685,371
Cash Available for Distribution per
Share.............................. $ 2.91 $ 2.45 $ 2.66
</TABLE>
5
<PAGE>
- --------------------
(1) 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 rates which were lower
than the market rates which the Company would have paid on a stand alone
basis. Accordingly, the Company does not believe that its results of
operations while it was a wholly owned subsidiary are comparable to
subsequent periods.
(2) Percentage rents for the 11 Wyndham Garden(R) Hotels and the 18 Residence
Inn by Marriot(R) Hotels commence in 1997. Percentage rent for the 16
Courtyard by Marriott(R) Hotels included in the Additional Hotels commences
in 1996.
(3) Some REITs use funds from operations ("FFO"), representing net income
(computed in accordance with GAAP), adjusted for non-recurring items,
before real estate depreciation and amortization, as a measure of financial
performance. Because of the impact of FF&E Reserves on the Company's
calculation of FFO, which results from the fact that the FF&E Reserves from
the Residence Inn by Marriott(R) and Courtyard by Marriott(R) Leases are
included in FFO (and escrowed by the Company) but the FF&E Reserve from the
Wyndham Garden(R) Leases is not included in FFO (since it is escrowed by
the Lessee), the Company does not believe FFO represents a meaningful
measure of its performance or offers a meaningful basis for comparison of
its performance with that of other public hotel REITs. Instead, the Company
believes that the best measure of its financial performance is 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
non-recurring items, if any. Moreover, the Company believes that Cash
Available for Distribution provides a meaningful basis for comparison of
the Company's performance with the performance of other public hotel REITs
provided that appropriate amounts are reserved for renovations and
refurbishment in all cases.
(4) 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.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION IN
CONJUNCTION WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE
PURCHASING SHARES IN THIS OFFERING.
THIS PROSPECTUS CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND
INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE
COMPANY, ITS TRUSTEES OR ITS OFFICERS WITH RESPECT TO (I) THE DECLARATION OR
PAYMENTS OF DIVIDENDS, (II) THE FINALIZATION OF THE TERMS OF, OR THE
CONSUMMATION OF, THE ACQUISITIONS DESCRIBED IN THIS PROSPECTUS, (III) THE
LEASING, MANAGEMENT OR OPERATION OF HOTELS TO BE ACQUIRED, (IV) THE ADEQUACY
OF RESERVES FOR RENOVATION AND REFURBISHMENT, (V) OTHER POTENTIAL ACQUISITIONS
BY THE COMPANY, (VI) THE USE OF THE PROCEEDS OF THIS OFFERING, (VII) THE
COMPANY'S FINANCING PLANS, (VIII) THE POLICIES OF THE COMPANY REGARDING
INVESTMENTS, DISPOSITIONS, FINANCINGS, CONFLICTS OF INTEREST OR OTHER MATTERS,
(IX) THE COMPANY'S QUALIFICATION AND CONTINUED QUALIFICATION AS A REIT OR (X)
TRENDS AFFECTING THE COMPANY'S OR ANY HOTEL'S FINANCIAL CONDITION OR RESULTS
OF OPERATIONS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD
LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS
AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN
THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE
ACCOMPANYING INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING WITHOUT
LIMITATION THE INFORMATION SET FORTH BELOW AND THE INFORMATION UNDER THE
HEADINGS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES" AND
"FEDERAL INCOME TAX CONSIDERATIONS," IDENTIFIES IMPORTANT FACTORS THAT COULD
CAUSE SUCH DIFFERENCES.
Pending Acquisitions May Not Close. The Company acquired eight of the
Additional Hotels on March 22, 1996 and has agreements to acquire the
remaining Additional Hotels. However, the purchase of the remaining Additional
Hotels is subject to the satisfaction of a number of conditions, certain of
which unless satisfied could result in one or more of the Additional Hotels
not being acquired. If such conditions are not satisfied with respect to a
number of the Additional Hotels in a group, the Company may be unable to
purchase the remaining Additional Hotels of the same group. If the Company is
unable for any reason to complete the purchase of substantially all of the
remaining Additional Hotels, the Company may be unable to recover some or all
of the amounts expended by it in connection with the acquisitions. 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 effect upon the
Company and the Company's Cash Available for Distribution per Share, and could
cause the level of dividends paid to Shareholders to decline.
Dependence on Limited Number of Lessees. In order to generate cash
sufficient to make distributions to Shareholders, the Company will rely on
timely receipt of rents from the Lessees. The failure or delay by the Lessees
in paying rents could adversely affect the ability of the Company to make
distributions to Shareholders. In the event of a default under a Lease, the
Company may relet or sell the applicable Hotel and seek recovery of damages
from the applicable Lessee. Each Lessee, however, is a limited purpose entity
formed for the purpose of leasing certain of the Hotels, and there can be no
assurance that the Company will be able to recover damages from a Lessee under
such circumstances. See "Business--Lessees, Managers, Leases and Management
Agreements."
Dependence on Limited Number of Managers. The Company and the Lessees will
rely on the Managers to manage the Hotels properly. The failure by the
Managers to manage the Hotels properly could have a material adverse effect on
the ability of the Lessees to pay rents. See "Business--Lessees, Managers,
Leases and Management Agreements."
Substantial Dependence on Brand Names. The Wyndham Garden(R), Residence Inn
by Marriott(R) and Courtyard by Marriott(R) brand names are not owned by the
Company and any degradation or adverse market
7
<PAGE>
developments relating to these brand names could adversely affect the results
of operations of the related Hotels and the ability of the applicable Lessee
to pay rents.
Inability to Operate Hotels. As a REIT, the Company is restricted in its
ability to operate hotels. As a result, the Company will be unable to make and
implement strategic business decisions with respect to its Hotels, even if
such decisions were in the best interests of the Company. In addition, the
Company will be subject to the risk that, upon termination of a Lease, the
Lease may not be renewed, the affected Hotel may not be relet or the terms of
renewal or reletting may be less favorable than the previous Lease terms. All
Leases to a particular Lessee have all or none renewal provisions which may
make it more likely that such Leases will be renewed, but if, for any reason,
the Leases are not renewed, the adverse consequences to the Company may be
more severe as a result of the all or none renewal feature. Although Advisors
may be able directly to provide for the operation of hotels for up to two
years in certain circumstances, as a result of restrictions imposed on the
Company as a REIT, the Company would likely not be able to operate directly
any hotel without thereby failing to qualify as a REIT for federal income tax
purposes. If the Company were unable promptly to enter into a new lease to
replace a terminated Lease or if the rental rates upon a renewal or reletting
were significantly lower than expected due to market conditions or other
factors, then the Company's ability to make distributions to Shareholders
could be adversely affected. See "Federal Income Tax Considerations--Taxation
of the Company."
Limited Operating History. The Company has only a limited operating history
and has owned hotels for approximately one year. Accordingly, the Company will
be subject to all risks generally associated with a new business.
Dependence on Key Personnel. The Company is an advised REIT and is highly
dependent on the efforts of Advisors and the Company's Managing Trustees and
officers, all of whom have extensive experience managing a REIT but only
limited experience in the hotel industry. The loss of their services could
have a material adverse effect on the Company. See "Management."
Conflicts of Interest. Advisors acts as the financial advisor and provides
management services to the Company and HRP and also has other business
interests. Advisors will not be able to devote all of its business time and
resources to the Company and conflicts could arise with respect to the
allocation of its time and resources. The terms of the Advisory Agreement were
not determined by arms' length negotiation. Messrs. Portnoy and Martin are
each Managing Trustees of the Company, Managing Trustees of HRP and Directors
and 50% shareholders of Advisors. Mr. Portnoy is a partner in the firm of
Sullivan & Worcester LLP, which acts as counsel to the Company, HRP, Advisors
and affiliates of each of the foregoing. To address the foregoing actual or
potential conflicts of interest and competing time demands, the Declaration
provides that a majority of the Company's Trustees will be Independent
Trustees. Certain officers of Advisors devote substantially all of their
business time to the Company. In addition, pursuant to the Advisory Agreement,
Advisors and Messrs. Portnoy and Martin have agreed not to provide advisory
services to, or serve as directors or officers of, any other REIT which is
principally engaged in the business of ownership of hotels or to make
competitive direct investments in hotels without, in each case, the consent of
the Independent Trustees. Also, Advisors and Messrs. Portnoy and Martin will
be required by applicable law to act in accordance with their fiduciary
responsibilities to the Company. Under the terms of the Advisory Agreement,
the fees payable to Advisors will increase as a result of the Company's
purchase of the Additional Hotels and future hotels. See "Policies with
Respect to Certain Activities--Conflict of Interest Policies."
Risks of Leverage. The organizational documents of the Company do not limit
the level of debt the Company may incur. The Company could become highly
leveraged, which could adversely affect the ability of the Company to make
distributions to Shareholders and increase the risk of default under its
indebtedness. After application of the proceeds of the Offering, the Company
expects to have outstanding secured indebtedness of approximately $120.5
million under its Line of Credit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--The Company" and "Business--Mortgages."
8
<PAGE>
Security Deposits. The Security Deposits retained by the Company as security
for the Lessees' obligations under the Leases, totaling $81.4 million, will
not be escrowed. The Security Deposits will be repayable by the Company to the
Lessees upon the expiration of the Leases, including renewal terms. The
Company will record any reductions to Security Deposits resulting from failure
by a Lessee to pay rent as non-cash income to the Company. Accordingly, funds
represented by the Security Deposits may not be available to the Company when
they are required to be repaid to the Lessees or to satisfy a Lessee's rent
obligations in the event of a default.
Certain Risks of Recent Acquisitions. Although they were determined by arms'
length negotiation between the Company and the respective sellers, the
purchase prices paid by the Company for the Hotels may not accurately reflect
the market value of those assets. The sellers of the Hotels have made certain
representations to the Company with respect to the Hotels and have agreed to
indemnify the Company against losses resulting from breaches of such
representations. However, the purchase agreements do not require the sellers
to maintain a minimum level of net worth. As a result, there can be no
assurance that the Company would be able to obtain recoveries if an
indemnifiable event were to occur. As is customary in comparable real estate
transactions, the Company will obtain title insurance against losses from
certain defects in title relating to the Hotels. If there were a title defect,
however, there could be no assurance that the Company would be able to obtain
recoveries under these policies or that any recoveries could be invested to
provide comparable levels of return.
Ground Leases. Rights to use the land underlying 10 Hotels are held by
assignments of the leasehold interests under long term ground leases. Under
the Leases for these Hotels, the Lessees are required to pay all rents due and
comply with all other obligations under the ground leases. The terms of the
ground leases, including renewal terms, expire between 2039 and 2077. If a
ground lease terminates, the Lease with respect to the applicable Hotel will
also terminate. Accordingly, Leases for six Hotels may terminate by reason of
termination of a ground lease 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. If a Lessee
does not perform the obligations under or elects not to renew any ground
lease, the Company must perform such obligations or renew such ground lease in
order to protect its investment 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. The ground leases generally require
the Company to restore the premises following a casualty or taking and to
apply in a specified manner any proceeds received in connection therewith. The
Company may have to restore the premises if a material casualty occurs, even
if the applicable Lessee has terminated its Lease by reason of such casualty,
without regard to the sufficiency of proceeds available to the Company to
effect such restoration.
Tax Risks. The Company operates so as to qualify as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). The Company has not
requested, and does not expect to request, a ruling from the Internal Revenue
Service (the "Service") regarding its status as a REIT. Qualification as a
REIT involves the application of technical and complex provisions of the Code
for which there are only limited judicial or administrative interpretations.
The determination of various factual matters and circumstances not entirely
within the Company's control (including termination of a Lease) may affect its
ability to qualify as a REIT, and maintenance of such qualification imposes
certain operating requirements on the Company. In addition, no assurance can
be given that legislation, regulations, administrative interpretations or
court decisions will not significantly change the rules applicable to the
Company with respect to its qualification as a REIT or the federal income tax
consequences of such qualification. If the Company were to fail to qualify as
a REIT in any taxable year, such failure could have a material adverse effect
on the Company and its Shareholders. Also, it is possible that future
economic, market, legal, tax or other considerations may cause the Board of
Trustees, with the consent of two thirds of the Shareholders, to revoke the
REIT election. See "Summary of the Declaration of Trust" and "Federal Income
Tax Considerations."
Concentration of Ownership and Ownership Limitation. Upon completion of this
Offering, HRP will own approximately 15.6% and Advisors will own approximately
1.0% of the outstanding Shares. Accordingly, HRP alone, and HRP and Advisors
collectively, will have significant influence over the Company. Such influence
may result in Company decisions which may not fully serve the best interests
of all Shareholders. The Declaration
9
<PAGE>
prohibits ownership of more than 9.8% of the Shares by any Shareholder or
affiliated group of Shareholders, except HRP, Advisors and certain other
entities (the "Ownership Limitation"). The Ownership Limitation may (i) have
the effect of precluding acquisition of control of the Company by a third
party without the consent of the Board of Trustees, even if a change in
control were in the interests of Shareholders, and (ii) limit the opportunity
for Shareholders to receive a premium for their Shares that might otherwise
exist if an investor were attempting to assemble a block of Shares in excess
of 9.8% of the outstanding Shares or otherwise to effect a change in control
of the Company. A transfer of Shares to a person who, as a result of the
transfer, violates the Ownership Limitation may be void under some
circumstances. The Company's Declaration and Bylaws each also contain
provisions that may make it difficult to acquire control of the Company by
means of a tender offer, an open market purchase, a proxy fight or otherwise,
if such acquisition is not approved by the Company's Board of Trustees. See
"Principal Shareholders" and "Summary of the Declaration of Trust."
Increases in Interest Rates. The annual yield from distributions by the
Company on the Shares likely will influence the market price of the Shares.
Accordingly, increases in market interest rates, which may result in higher
yields on other financial instruments, could adversely affect the market price
of the Shares. In addition, increases in market interest rates could adversely
affect the Company's ability to finance additional hotel investments at
positive spreads between its cost of funds and rent yields.
Insurance. Each of the Leases specifies that comprehensive insurance is to
be maintained, at the expense of the Lessee (except to the extent maintained
by a Manager pursuant to a Management Agreement), including liability and
commercial property insurance of the types and amounts customarily obtained by
owners of comparable hotel properties. In the event of a substantial insured
casualty or loss, the proceeds of insurance maintained by Lessees (or Managers
in certain circumstances) may not be sufficient to pay the full current market
value or current replacement cost of the insured Hotel. In such event, unless
the Lessee elects to fund the amount of the deficiency in order to prevent
termination of the applicable Lease, the Company may be required to advance
funds to finance the deficiency. Also, there are certain types of losses, such
as earthquakes, hurricanes, floods and other acts of God, that may not be
insurable or insurable on economically viable terms. See "Business--Damage,
Destruction or Condemnation."
Hotel Operating Risks. The Company's results of operations will be affected
by factors such as changes in general economic conditions, the level of demand
for guest rooms and related services at the Hotels, cyclical overbuilding in
the hotel industry, the ability of the Lessees to maintain and increase gross
revenues at the Hotels and other factors relating to the operation of the
Hotels. Other operating factors include: (i) the highly competitive nature of
the hotel industry; (ii) changes in regional and local population and
disposable income composition; (iii) the recurring need for renovations,
refurbishment and improvements of the Hotels; (iv) restrictive changes in
zoning and similar land use laws, or in health, safety and environmental laws;
(v) changes in the characteristics of the locales in which the Hotels are
located by reason of relocation of nearby attractions, academic institutions
or businesses; (vi) the cost and availability of property and liability
insurance; (vii) seasonality; (viii) changes or cancellations in local
tourist, athletic or cultural events; (ix) changes in travel patterns which
may be affected by increases in transportation costs or gasoline prices,
changes in airline schedules and fares, strikes, weather patterns or
relocation or construction of highways; and (x) inflationary pressures which
could increase operating expenses of the Hotels above expected levels.
Continuing expenditures must be made for modernizing, refurbishing and
maintaining the Hotels. If necessary expenditures exceed the amounts available
in the applicable FF&E Reserves, the applicable Lessees or Managers fail to
otherwise make such expenditures or the Company fails to make such
expenditures (with consequential increases in base rent), the value of, and
operating revenues from, the applicable Hotels may diminish. In addition, the
Hotels compete with existing hotel facilities in their markets as well as
future hotels that may be developed in those markets. Subject to certain
limitations in the Leases and Management Agreements, the Lessees or the
Managers could operate hotels in direct competition with the Company's Hotels.
See "Business--Competition."
Certain Risks of Acquisition Strategy. The Company competes for hotel
acquisition and financing opportunities with entities which may have
substantially greater financial resources than the Company, including, without
limitation, other publicly owned REITs, banks, insurance companies, pension
plans and public and
10
<PAGE>
private partnerships. These entities may be able to accept more risk than the
Company can prudently manage, including risks with respect to the
creditworthiness of a hotel operator. Such competition may reduce the number
of suitable hotel acquisition or financing opportunities offered to the
Company and increase the bargaining power of property owners seeking to sell
or finance their properties. See "Business--Competition." In addition, the
REIT requirement that the Company distribute 95% of its net taxable income
will limit its ability to rely upon rents to finance acquisitions. As a
result, if debt or equity financing were not available on acceptable terms,
further acquisitions may be curtailed and the Company's ability to increase
distributions to Shareholders may be adversely affected. In addition, all
future hotel investments entail the general risk that investments may not
perform in accordance with expectations.
Americans with Disabilities Act. The public accommodations provisions of the
Americans with Disabilities Act of 1990, as amended ("ADA"), impose
obligations on hotel owners to make reasonable accommodations to patrons who
have physical, mental or other disabilities, including removal of
architectural and communication barriers in many circumstances. The Lessees
will generally be obligated to remedy any ADA compliance matters at their
respective Hotels, but if they fail to do so, the Company may become obligated
to incur material expenses for ADA compliance. See "Business--Regulatory
Matters."
Environmental Matters. Under various environmental laws, the Company, as an
owner of hotel property, may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under, in or emanating from such property
or other liabilities arising under environmental laws. Based on Phase I
environmental reports (which may not reveal all potential environmental
liabilities), the Company is aware of certain environmental issues affecting
the Hotels; however, the Company does not believe that these issues will have
a material adverse effect on the Company's business or results of operations.
In addition, the Company cannot predict whether modifications of existing laws
or regulations or the adoption of new laws or regulations or changes in the
known conditions of the Hotels may have a material adverse effect on the
Company's business or results of operations in the future. See "Business--
Environmental Matters."
General Real Estate Investment Risks. The Company's investments will be
subject to other risks generally incident to the ownership of real property.
The Hotels may be adversely affected by various factors, including: adverse
changes in national economic conditions, local market conditions, interest
rates, real estate tax rates and other operating expenses, zoning and land use
laws, other governmental rules and policies, and the availability, cost and
terms of borrowings; competition; the ongoing need for capital improvements;
civil unrest, acts of war, acts of God, including earthquakes, hurricanes and
other natural disasters (which may result in uninsured losses); and other
factors which are beyond the control of the Company. See "Business--Damage,
Destruction or Condemnation." In addition, real estate investments are
relatively illiquid, and the ability of the Company to vary its portfolio in
response to changes in economic or other conditions will be limited.
11
<PAGE>
THE COMPANY
The Company was formed in February 1995 as a subsidiary of HRP, which is in
the primary business of owning and leasing retirement living centers and
nursing homes. In March 1995, the Company acquired 21 Courtyard by Marriott(R)
Hotels for approximately $179.4 million. In August 1995, the Company completed
an initial public offering of 8,325,000 Shares at an initial public offering
price of $25.00 per Share, raising gross proceeds of $208.1 million which were
principally used to repay indebtedness due to HRP and to acquire an additional
16 Courtyard by Marriott(R) Hotels for approximately $149.6 million. In
February and March 1996, the Company entered into agreements to acquire 11
Wyndham Garden(R) Hotels for approximately $135.3 million, 18 Residence Inn by
Marriott(R) Hotels for approximately $172.2 million and an additional 16
Courtyard by Marriott(R) Hotels for approximately $176.4 million. On March 22,
1996, the Company acquired five of such Residence Inn by Marriott(R) Hotels
and three of such Courtyard by Marriott(R) Hotels for an aggregate purchase
price of $91.6 million.
The Company and HRP are managed by Advisors. In connection with the
formation of the Company and its initial public offering, HRP invested $100
million in the Company in exchange for 4,000,000 Shares at a price of $25.00
per Share, and Advisors invested $6.25 million in the Company in exchange for
250,000 Shares at a price of $25.00 per Share.
The Company's strategy for increasing Cash Available for Distribution per
Share is to provide capital to unaffiliated hotel operators who wish to divest
their properties while remaining in the hotel business as tenants. Most other
public hotel REITs seek to control the operations of hotels in which they
invest by leasing those properties to affiliated tenants. The Company believes
the Leases which it has negotiated provide strong rent coverages and credit
characteristics. To achieve its objectives, the Company seeks to operate as
follows: maintain a strong capital base of Shareholders' equity; invest in
high quality properties operated by unaffiliated hotel operating companies;
use moderate debt leverage to fund additional investments which increase Cash
Available for Distribution per Share because of positive spreads between the
Company's cost of investment capital and rent yields; design leases which
require minimum rents and provide an opportunity to participate in a
percentage of increases in gross revenues at the Company's hotels; when market
conditions permit, refinance debt with additional equity or long term debt;
and pursue diversification so that the Company's Cash Available for
Distribution is received from diverse properties and operators.
As a REIT, the Company may not operate hotels. The Company has entered or
will enter into the Leases and the Management Agreements for operation of its
Hotels. The Company's Leases require the Lessees to pay all operating
expenses, including taxes and insurance and to pay to the Company minimum
rents plus percentage rents based upon increases in gross revenues at the
Hotels. The base and percentage rent levels vary depending upon market
conditions, the quality of the Hotels being leased and the credit quality of
the Lessees. The Company's Leases require the Lessees to post Security
Deposits in amounts equal to one year of base rent and to set aside 5% of
gross sales as a FF&E Reserve to fund renovations and refurbishment of the
Hotels. The Company believes that the FF&E Reserves exceed industry averages
for similar properties and will be adequate to maintain the competitive
appearances of the Hotels. The Company's Leases of multiple Hotels with a
single Lessee are also subject to cross-default provisions, and Lease renewals
of Hotels leased to a single Lessee are permitted only on an all or none
basis.
The Company is organized as a Maryland real estate investment trust. The
Company's principal place of business is 400 Centre Street, Newton,
Massachusetts 02158 and its telephone number is (617) 964-8389.
12
<PAGE>
DISTRIBUTION POLICY
Since its initial public offering in August 1995, the Company has paid
regular quarterly dividends at the rate of $0.55 per Share per quarter, or
$2.20 per Share per year. On March 9, 1996, the Company's regular quarterly
dividend was raised to $0.58 per Share per quarter or $2.32 per Share per
year. The next quarterly dividend of $0.58 per Share for the calendar quarter
ended March 31, 1996, will be paid on or about May 21, 1996 to Shareholders of
record on April 19, 1996. Purchasers of Shares in this Offering who continue
to hold their Shares on April 19, 1996 will receive this next quarterly
dividend.
The Company established its current dividend rate based upon its pro forma
estimate of Cash Available for Distribution per Share for the year ended
December 31, 1995, assuming that the Company's initial public offering, this
Offering and the acquisition and leasing of the Initial Hotels and the
Additional Hotels had all occurred on January 1, 1995, as set forth in the
following table:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C>
Base rent--Initial Hotels................................ $32,900
Base rent--Additional Hotels............................. 48,460
Percentage rent--Initial Hotels.......................... 408
Percentage rent--Additional Hotels (1)................... --
FF&E Reserve (2)......................................... 12,295
Interest income (3)...................................... 315
-------
Total revenue............................................ 94,378
Operating expenses (4)................................... 37,993
-------
Net income............................................... 56,385
Deduct FF&E Reserve...................................... 12,295
Add back depreciation and amortization................... 24,036
-------
Cash Available for Distribution (5)...................... $68,126
=======
Shares outstanding as of December 31, 1995 (in thou-
sands).................................................. 12,601
Shares offered in this Offering (in thousands)........... 13,000
-------
Total Shares outstanding (in thousands).................. 25,601
=======
Cash Available for Distribution per Share................ $ 2.66
Current dividend rate per Share.......................... $ 2.32
Cash Available for Distribution payout ratio............. 87.2%
</TABLE>
- ---------------------
(1) Percentage rent for the 11 Wyndham Garden(R) Hotels and the 18 Residence
Inn by Marriott(R) Hotels commences in 1997. Percentage rent for the 16
Courtyard by Marriott(R) Hotels included in the Additional Hotels
commences in 1996.
(2) FF&E Reserves for all of the Company's Hotels are calculated as 5% of
Total Hotel Sales. The FF&E Reserves for the 18 Residence Inn by
Marriott(R) Hotels and the 53 Courtyard by Marriott(R) Hotels are paid to
the Company and placed in escrow for renovation and refurbishment. Under
GAAP these payments are recorded as expenses by the Lessees and income by
the Company. The FF&E Reserves 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 expenses by the Lessee or
income by the Company.
(3) Represents interest income on $7,412 pro forma cash balances at an average
interest rate of 4.25% per annum. Actual interest income for the period
February 7, 1995 (inception) to December 31, 1995 was $74.
(4) Operating expenses include depreciation of $23,809, interest expense of
$9,145 (including amortization of deferred financing costs of $227) and
general, administrative and advisory expenses of $5,039. See the Company's
pro forma financial statements and notes thereto included elsewhere in
this Prospectus.
13
<PAGE>
(5) Some REITs use FFO as a measure of financial performance. Because of the
impact of FF&E Reserves under the Company's Leases on the Company's
calculation of FFO, which results from the fact that the FF&E Reserves
from the Residence Inn by Marriott(R) and Courtyard by Marriott(R) Leases
are included in FFO but the FF&E Reserve from the Wyndham Garden(R) Leases
is not included in FFO, the Company does not believe FFO represents a
meaningful measure of its performance or offers a meaningful basis for
comparison of its performance with that of other public hotel REITs.
Instead, the Company believes that the best measure of its financial
performance is 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 non-recurring items, if any. Moreover, the
Company believes that Cash Available for Distribution provides a
meaningful basis for comparison of the Company's performance with the
performance of other public hotel REITs provided that appropriate amounts
are reserved for renovations and refurbishment in all cases.
14
<PAGE>
PRICE RANGE OF SHARES
The Shares began trading on the NYSE on August 15, 1995, under the symbol
"HPT". On April 1, 1996, the last reported sale price per Share on the NYSE
was $26 5/8. As of March 12, 1996, the Company had 284 Shareholders of record
and believes that it had approximately 12,000 beneficial owners of Shares. The
following table sets forth the quarterly high and low closing sales prices per
Share on the NYSE (as reported on the composite tape) during the periods
indicated.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
HIGH LOW
<S> <C> <C>
1995:
Third quarter (since August 15, 1995)........................ $26 7/8 $24 5/8
Fourth quarter............................................... 26 3/4 24 3/4
1996:
First quarter ............................................... $27 3/4 $25 5/8
</TABLE>
USE OF PROCEEDS
The net proceeds to the Company from this Offering are expected to be
approximately $326.2 million (or $375.4 million if the Underwriters'
overallotment option is exercised in full). The Company currently expects to
fund the acquisitions of the Additional Hotels with the net proceeds of this
Offering and overallotment proceeds, if any, and borrowings under its credit
facilities. All such borrowings will be at a floating interest rate based on
LIBOR, which, as of March 29, 1996, would have been approximately 6.97% per
annum. In the event that the Company is unable to acquire a substantial number
of the Additional Hotels, a portion of the proceeds of this Offering may be
used to acquire other hotels. Any proceeds held by the Company pending the use
described above will be invested in investment grade short term securities.
For information about the Company's credit facilities available to fund the
acquisition of the Additional Hotels, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--The Company."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995, as adjusted to give effect to the purchase of the
Additional Hotels and this Offering and the application of the proceeds
thereof at the offering price of $26 5/8 per Share and assuming no exercise of
the Underwriters' overallotment option.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Borrowings(1)....................................... $ -- $ 120,515
Shareholders' equity:
Common Shares of Beneficial Interest, par value
$0.01 per Share; 100,000,000 authorized,
12,600,900 issued and 25,600,900 as adjusted..... 126 256
Additional paid in capital........................ 297,962 624,012
Cumulative net income............................. 11,349 11,349
Dividends (paid or declared)...................... (11,486) (11,486)
----------- -----------
Total Shareholders' equity........................ 297,951 624,131
----------- -----------
Total capitalization................................ $ 297,951 $ 744,646
=========== ===========
</TABLE>
- ---------------------
(1) Borrowings exclude obligations to refund the Security Deposits upon
expiration of the Leases. See Note 3 of Notes to the Financial Statements
of the Company. If the Underwriters' overallotment option is exercised in
full, the Company expects to use the proceeds to reduce its outstanding
borrowings to approximately $71.2 million, and in such event Total
Shareholders' equity would increase to $673.4 million.
16
<PAGE>
SELECTED AND PRO FORMA FINANCIAL AND OPERATING DATA
HOSPITALITY PROPERTIES TRUST
The following table sets forth selected financial and operating data on an
historical and a pro forma basis for the Company for the year ended December
31, 1995. The pro forma data for the 37 Hotels are unaudited and presented as
if the Company's formation transactions, primarily the acquisition and leasing
of the Initial Hotels and the Company's initial public offering of Shares, and
certain other transactions described in the notes to the pro forma financial
statements included elsewhere in this Prospectus have been consummated for the
period presented. The pro forma data for the 82 Hotels are unaudited and are
presented as if: (i) the Company's formation transactions, primarily the
acquisition and leasing of the Initial Hotels and the Company's initial public
offering of Shares; (ii) the acquisition and leasing of the Additional Hotels;
(iii) this Offering and the application of the proceeds thereof; and (iv)
certain other transactions described in the notes to the pro forma financial
statements included elsewhere in this Prospectus have been consummated as of
the date or for the period presented. The pro forma data are not necessarily
indicative of what the actual financial position or results of operations
would have been, nor do they purport to represent the financial position or
results of operations for future periods. The following selected and pro forma
financial and operating data should be read in conjunction with the financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------- -----------------------
FEBRUARY 7, 1995 YEAR ENDED
(INCEPTION) TO DECEMBER 31, 1995
DECEMBER 31, -----------------------
1995(1) (37 HOTELS) (82 HOTELS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Revenues:
Base rent.......................... $ 19,206 $ 32,900 $ 81,360
Percentage rent(2)................. 325 408 408
FF&E Reserve income................ 4,037 6,424 12,295
Interest income.................... 74 144 315
-------- -------- --------
Total revenues................. 23,642 39,876 94,378
Expenses:
Interest expense................... 5,039 -- 9,145
Depreciation and amortization...... 5,844 9,229 23,809
General and administrative......... 1,410 2,616 5,039
-------- -------- --------
Total expenses................. 12,293 11,845 37,993
-------- -------- --------
Net income........................... $ 11,349 $ 28,031 $ 56,385
======== ======== ========
Net income per Share................. $ 2.51 $ 2.22 $ 2.20
Weighted average Shares outstanding.. 4,515 12,601 25,601
BALANCE SHEET DATA (AS OF DECEMBER
31, 1995):
Real estate properties, net........ $326,752 $815,202
Total assets....................... 338,947 834,102
Total debt......................... -- 120,515
Shareholders' equity............... 297,951 624,131
OTHER DATA:
Cash Available for Distribution(3). $ 13,156 $ 30,836 $ 68,126
Cash provided by operating
activities(4)..................... 14,140 31,820 69,110
Cash used in investing
activities(4)..................... 303,652 303,652 749,142
Cash provided by financing
activities(4)..................... 291,647 268,481 685,371
Cash Available for Distribution per
Share............................. $ 2.91 $ 2.45 $ 2.66
</TABLE>
17
<PAGE>
- ---------------------
(1) 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 rates which were lower
than the market rates which the Company would have paid on a stand alone
basis. Accordingly, the Company does not believe that its results of
operations while it was a wholly owned subsidiary are comparable to
subsequent periods.
(2) Percentage rents for the 11 Wyndham Garden(R) Hotels and the 18 Residence
Inn by Marriott(R) Hotels commence in 1997. Percentage rent for the 16
Courtyard by Marriott(R) Hotels included in the Additional Hotels
commences in 1996.
(3) Some REITs use FFO as a measure of financial performance. Because of the
impact of FF&E Reserves on the Company's calculation of FFO, which results
from the fact that the FF&E Reserves from the Residence Inn by Marriott(R)
and Courtyard by Marriott(R) Leases are included in FFO (and escrowed by
the Company) but the FF&E Reserve from the Wyndham Garden(R) Leases is not
included in FFO (since it is escrowed by the Lessee), the Company does not
believe FFO represents a meaningful measure of its performance or offers a
meaningful basis for comparison of its performance with that of other
public hotel REITs. Instead, the Company believes that the best measure of
its financial performance is 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 non-recurring items, if any. Moreover,
the Company believes that Cash Available for Distribution provides a
meaningful basis for comparison of the Company's performance with the
performance of other public hotel REITs provided that appropriate amounts
are reserved for renovations and refurbishment in all cases.
(4) 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.
18
<PAGE>
WYNDHAM I
The following table sets forth selected financial and operating data of the
partnership owning the 11 Wyndham Garden(R) Hotels for the years 1993, 1994
and 1995 which have been derived from audited financial statements included
elsewhere in this Prospectus. The historical financial and operating data for
years 1991 and 1992 have been derived from the unaudited financial statements
of the partnership owning the 11 Wyndham Garden(R) Hotels. In the opinion of
the Company, the financial and operating data derived from the unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein and are set forth on a basis consistent with the
audited periods. The following table also sets forth selected financial and
operating data on a pro forma basis for Wyndham I for the year ended December
31, 1995. The pro forma data are unaudited and are presented as if the
acquisition and leasing of these 11 Wyndham Garden(R) Hotels by the Company
and certain other transactions described in the notes to pro forma financial
statements included elsewhere in this Prospectus have been consummated as of
January 1, 1995. The pro forma data are not necessarily indicative of what the
actual results of operations would have been for the period indicated, nor do
they purport to represent the results of operations for future periods. The
following selected financial and operating data should be read in conjunction
with the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
GARDEN HOTEL ASSOCIATES LP/WYNDHAM I
--------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------
HISTORICAL PRO FORMA
---------------------------------------- ---------
1991 1992 1993 1994 1995 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of hotels, end of
period................... 11 11 11 11 11 11
OPERATING DATA:
Revenues.................. $35,854 $41,557 $45,191 $50,726 $56,642 $56,642
Operating expenses........ 23,149 26,421 28,562 30,845 33,254 33,254
Depreciation and amortiza-
tion..................... 4,963 4,825 4,809 4,955 5,059 --
Interest expense.......... 7,511 5,406 4,614 5,618 7,145 --
Base rent................. -- -- -- -- -- 13,600
Base and incentive manage-
ment fee(1).............. 1,793 2,078 2,415 2,888 3,317 3,134
Other..................... 2,592 2,462 2,193 2,296 2,320 2,655
------- ------- ------- ------- ------- -------
Net income (loss) before
income taxes............. $(4,154) $ 365 $ 2,598 $ 4,124 $ 5,547 $ 3,999
Provision for income tax-
es....................... -- -- -- -- -- 1,580
------- ------- ------- ------- ------- -------
Net income (loss)......... $(4,154) $ 365 $ 2,598 $ 4,124 $ 5,547 $ 2,419
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1) Management fees and related company charges payable by Wyndham I to
Wyndham or its affiliates are subordinated to the payment of rents to the
Company.
19
<PAGE>
HOST I
The following table sets forth selected combined financial and operating
data of the 18 Residence Inn by Marriott(R) Hotels for the fiscal years 1993,
1994 and 1995 which have been derived from audited financial statements
included elsewhere in this Prospectus. The historical financial and operating
data for fiscal years 1991 and 1992 have been derived from the unaudited
financial statements of these 18 Residence Inn by Marriott(R) Hotels. In the
opinion of the Company, the financial and operating data derived from the
unaudited financial statements include all adjustments necessary to present
fairly the information set forth therein and are set forth on a basis
consistent with the audited periods. The following table also sets forth
selected combined financial and operating data on a pro forma basis for Host I
for the fiscal year ended December 29, 1995. The pro forma data are unaudited
and are presented as if the acquisition and leasing of these 18 Residence Inn
by Marriott(R) Hotels by the Company and certain other transactions described
in the notes to pro forma financial statements included elsewhere in this
Prospectus have been consummated as of January 1, 1995. The pro forma data are
not necessarily indicative of what the actual results of operations would have
been for the period indicated, nor do they purport to represent the results of
operations for future periods. The following selected financial and operating
data should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMBINED RESIDENCE INN HOTELS/HOST I
---------------------------------------------------
FISCAL YEARS
---------------------------------------------------
HISTORICAL PRO FORMA
----------------------------------------- ---------
1991 1992 1993 1994 1995 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of hotels, end
of period............. 17 18 18 18 18 18
Total Hotel Sales(1)... $31,752 $47,119 $ 53,582 $57,357 $61,934 $61,934
OPERATING DATA:
Revenues............... $15,593 $23,900 $ 27,144 $29,816 $33,166 $33,166
Expenses:
Depreciation and
amortization........ 6,828 9,908 6,735 6,821 6,814 --
Base rent............ -- -- -- -- -- 17,220
Percentage rent...... -- -- -- -- -- --
FF&E contribution
expense............. -- -- -- -- -- 3,097
Base management
fee(2).............. -- -- -- -- -- 1,239
Incentive management
fee(2).............. -- -- -- 1,358 2,817 2,817
Other hotel expenses. 4,412 6,451 5,962 6,070 6,110 6,110
Other, net(3)........ -- -- -- -- 3,899 381
------- ------- -------- ------- ------- -------
Revenues over expenses
excluding income
taxes before
cumulative effect of
change in accounting
principle............. 4,353 7,541 14,447 15,567 13,526 2,302
Cumulative effect of
change in accounting
for assets
held for sale......... -- -- (16,500) -- -- --
------- ------- -------- ------- ------- -------
Revenues over (under)
expenses excluding
income taxes.......... $ 4,353 $ 7,541 $ (2,053) $15,567 $13,526 $ 2,302
======= ======= ======== ======= ======= =======
Pro forma income tax
expense (benefit)..... 1,741 3,016 (821) 6,382 5,546 944
------- ------- -------- ------- ------- -------
Pro forma net income
(loss) after taxes.... $ 2,612 $ 4,525 $ (1,232) $ 9,185 $ 7,980 $ 1,358
======= ======= ======== ======= ======= =======
</TABLE>
- ---------------------
(1) Total Hotel Sales are presented for the purpose of providing supplemental
information regarding the gross sales volume of the Hotels described above
which is used for purposes of calculating percentage rent and the FF&E
Reserve under the related Leases and Management Agreements, respectively.
As owner and lessor of such Hotels, the Company has no interest in sales
and operations of such Hotels, other than its right to receive base and
percentage rents.
(2) The obligations of Host I to pay base and incentive management fees to
Marriott I and related company charges to Host or affiliates of Host are
subordinated to the payment of rents to the Company. Base management fees
are equal to 2% of Total Hotel Sales, and incentive management fees are
equal to 50% of Available Cash Flow (after payment of rent), as defined in
the applicable Management Agreements. See notes to combined financial
statements of Residence Inn Hotels.
(3) Other, net for historical fiscal year 1995 includes a $3,899 charge
related to the writedown of certain properties to their net realizable
value.
20
<PAGE>
HOST II
The following table sets forth selected combined financial and operating
data of the 53 Courtyard by Marriott(R) Hotels for the fiscal years 1993, 1994
and 1995 which have been derived from audited financial statements included
elsewhere in this Prospectus. The historical financial and operating data for
the fiscal years 1991 and 1992 have been derived from the unaudited financial
statements of these 53 Courtyard by Marriott(R) Hotels. In the opinion of
management, the financial and operating data derived from the unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein and are set forth on a basis consistent with the
audited periods. The following table also sets forth selected combined
financial and operating data on a pro forma basis for Host II for the fiscal
year ended December 29, 1995. The pro forma data are unaudited and are
presented as if the acquisition of and leasing of these 53 Courtyard by
Marriott(R) Hotels by the Company and certain other transactions described in
the notes to the pro forma financial statements included elsewhere in this
Prospectus have been consummated as of January 1, 1995. The pro forma data are
not necessarily indicative of what the actual results of operations would have
been for the period indicated, nor do they purport to represent the results of
operations for future periods. The following selected financial and operating
data should be read in conjunction with the financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
COMBINED COURTYARD HOTELS/HOST II
-------------------------------------------------------
FISCAL YEARS
-------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------------------------- ---------
1991 1992 1993 1994 1995 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of hotels, end
of period............. 51 53 53 53 53 53
Total Hotel Sales(1)... $112,558 $151,925 $164,612 $173,811 $183,964 $183,964
OPERATING DATA:
Revenues............... $ 50,319 $ 65,060 $ 72,936 $ 83,161 $ 91,022 $ 91,022
Expenses:
Depreciation and
amortization.......... 20,254 22,319 18,393 20,100 18,128 --
Base rent.............. -- -- -- -- -- 50,540
Percentage rent........ -- -- -- -- -- 408
FF&E contribution
expense............... -- -- -- -- -- 9,198
Base management fee(2). -- -- -- -- -- 3,679
Incentive management
fee (2)............... -- -- -- 2,825 6,222 6,222
Other hotel expenses... 9,631 13,875 14,928 14,540 13,998 13,998
Other, net(3).......... -- -- -- -- 8,819 550
-------- -------- -------- -------- -------- --------
Revenues over expenses
excluding income taxes
before cumulative
effect of change in
accounting principle.. 20,434 28,866 39,615 45,696 43,855 6,427
Cumulative effect of
change in accounting
for assets
held for sale......... -- -- (17,800) -- -- --
-------- -------- -------- -------- -------- --------
Revenues over expenses
excluding income
taxes................. $ 20,434 $ 28,866 $ 21,815 $ 45,696 $ 43,855 $ 6,427
======== ======== ======== ======== ======== ========
Pro forma income tax
expense............... 8,174 11,546 8,726 18,736 17,981 2,635
-------- -------- -------- -------- -------- --------
Pro forma net income
after taxes........... $ 12,260 $ 17,320 $ 13,089 $ 26,960 $ 25,874 $ 3,792
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------------
(1) Total Hotel Sales are presented for the purpose of providing supplemental
information regarding the gross sales volume of the Hotels described above
which is used for purposes of calculating percentage rent and the FF&E
Reserve under the related Leases and Management Agreements, respectively.
As owner and lessor of such Hotels, the Company has no interest in sales
and operations of such Hotels, other than its right to receive the base
and percentage rents.
(2) The obligations of Host II to pay base and incentive management fees to
Marriott II and related company charges to Host or affiliates of Host are
subordinated to the payment of rents to the Company. Base management fees
are equal to 2% of Total Hotel Sales, and incentive management fees are
equal to 50% of Available Cash Flow (after payment of rent), as defined in
the applicable Management Agreements. See notes to combined financial
statements of Courtyard Hotels.
(3) Other, net for historical fiscal year 1995 includes a $8,819 charge
related to the writedown of certain properties to their net realizable
value.
21
<PAGE>
RENT COVERAGE ANALYSIS
The following table shows the calculation of base rent coverage on a pro
forma basis for the 1995 fiscal year of the Lessees of the Company's Hotels.
See the Lessees' pro forma financial statements and related notes contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
18 RESIDENCE
11 WYNDHAM INN BY 53 COURTYARD
GARDEN(R) MARRIOTT(R) BY MARRIOTT(R)
HOTELS HOTELS HOTELS ALL 82 HOTELS
----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tenant.................... Wyndham I Host I Host II 3 tenants
Gross operating
profit/Revenues.......... $23,388 $33,166 $91,022 $147,576
Less unsubordinated ex-
penses:
Hotel expenses.......... 2,655 6,110 13,998 22,763
FF&E Reserve(1)......... 2,832 3,097 9,198 15,127
-------
------- ------- ---------
Gross operating profit/Net
revenues
available for rent..... 17,901 23,959 67,826 109,686
Base rent................. 13,600 17,220 50,540 81,360
------ ------- ------- ---------
Rent coverage............. $ 4,301 $ 6,739 $17,286 $ 28,326
======= ======= ======= =========
Coverage ratio............ 1.32x 1.39x 1.34x 1.35x
</TABLE>
- ---------------------
(1) FF&E Reserves for all of the Company's Hotels are calculated at 5% of
Total Hotel Sales. The FF&E Reserves for the 18 Residence Inn by
Marriott(R) Hotels and the 53 Courtyard by Marriott(R) Hotels are paid to
the Company and placed in escrow for renovation and refurbishment. Under
GAAP these payments are recorded as expenses by these Lessees and income
by the Company. 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.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was organized on February 7, 1995 and commenced operations on
March 24, 1995 with the acquisition of the first 21 of the 37 Initial Hotels.
The Company completed its initial public offering of Shares and acquired the
16 remaining Initial Hotels on August 22, 1995. Since it has been recently
formed and has limited historical financial data, the Company believes it is
meaningful to an understanding of its present and ongoing operations to
discuss the Company's pro forma results of operations as well as its own
historical results of operations and the historical results of operation of
its Hotels.
The following discussion should be read in conjunction with "Selected and
Pro Forma Financial and Operating Data," and the historical and pro forma
financial statements and the notes thereto included elsewhere in this
Prospectus. Pro forma results and percentage relationships set forth in the
"Selected and Pro Forma Financial and Operating Data" and in such financial
statements may not be indicative of the future operations of the Company or
the Hotels.
THE COMPANY: HISTORICAL AND PRO FORMA RESULTS OF OPERATIONS
FEBRUARY 7, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
Total revenues for the period from February 7, 1995 (inception) through
December 31, 1995 were $23.6 million, which included base and percentage rent
of $19.5 million and FF&E Reserve income of $4.0 million. Total expenses for
the period were $12.3 million, including interest expense and depreciation and
amortization of $5.0 million and $5.8 million, respectively. Net income for
the period was $11.3 million ($2.51 per Share) and Cash Available for
Distribution for the period was $13.2 million ($2.91 per Share), based in both
cases on average outstanding Shares for the period of 4,515,000.
From inception until completion of its initial public offering on August 22,
1995, the Company was a 100% owned subsidiary of HRP and was initially
capitalized with $1 million of equity and $163.3 million of debt. The debt was
provided by HRP at rates which were lower than the market rates which the
Company would have paid on a stand alone basis. Accordingly, the Company does
not believe that its results of operations while it was a wholly owned
subsidiary of HRP are comparable to subsequent periods.
PRO FORMA YEAR ENDED DECEMBER 31, 1995
The pro forma results of operations for the 37 Initial Hotels assumes that
the Company's formation transactions, the initial public offering of Shares
and the acquisition and leasing of the 37 Initial Hotels and certain related
transactions all occurred on January 1, 1995, and demonstrates the Company's
rate of operations since becoming a separate public company. On this pro forma
basis, total revenues would have been $39.9 million (principally base and
percentage rents of $33.3 million and FF&E Reserve income of $6.4 million).
Total expenses would have been $11.8 million (including depreciation and
amortization of $9.2 million and general and administrative expenses of $2.6
million). Net income would have been $28.0 million or $2.22 per Share, and
Cash Available for Distribution would have been $30.8 million or $2.45 per
Share, based in both cases upon 12,600,900 Shares outstanding.
The pro forma results of operations for the 82 Hotels assumes that the
Company's formation transactions, the initial public offering of Shares, the
acquisition and leasing of both the 37 Initial Hotels and the 45 Additional
Hotels, this Offering and the use of proceeds therefrom, and certain related
transactions all occurred on January 1, 1995, and demonstrates the Company's
expected rate of operations immediately following the completion of this
Offering and the acquisition of the Additional Hotels. On this pro forma
basis, total revenues would have been $94.4 million (including base and
percentage rents of $81.8 million and FF&E Reserve income of $12.3 million).
Total expenses would have been $38.0 million (including depreciation and
amortization of $23.8 million and general and administrative expenses of $5.0
million). Net income would have been $56.4 million or $2.20 per Share, and
Cash Available for Distribution would have been $68.1 million or $2.66 per
Share, based in both cases upon 25,600,900 Shares outstanding.
23
<PAGE>
THE HOTELS
1995 COMPARED TO 1994
11 Wyndham Garden(R) Hotels. Total revenues for the year ended December 31,
1995 were $56.6 million, a $5.9 million or 11.7% increase over the year ended
December 31, 1994. The increase was attributable to a $7.42 increase in
average daily room rate ("ADR") to $77.16 and an increase in occupancy of 2.4
percentage points to 77.5%, as compared to 1994. Gross operating profit for
1995 was $23.4 million, a $3.5 million or 17.6% increase over 1994. The
increases were principally attributable to improvements in ADR and occupancy
reflecting Wyndham's continued focus to yield a higher percentage of corporate
rate business, continued cost control and improved industry fundamentals
generally. Net income for 1995 was $5.5 million, a $1.4 million or 34.5%
increase over 1994. The increase was largely the result of ADR and occupancy
gains.
18 Residence Inn by Marriott(R) Hotels. Total Hotel Sales for the fiscal
year ended December 29, 1995 were $61.9 million, a $4.6 million or 8.0%
increase over the fiscal year ended December 30, 1994. The increase was
principally attributable to a $5.49 increase in ADR to $85.07 and an increase
in occupancy of 1.0 percentage point to 86.6%, as compared to 1994. Revenues
(Total Hotel Sales less hotel level expenses) for 1995 were $33.2 million, a
$3.4 million or 11.2% increase over 1994. The increase was attributable to
improvements in ADR and occupancy, as well as continued focus on cost control
evidenced by an increase in revenues as a percentage of Total Hotel Sales to
53.6% from 52.0% in 1994. Revenues over expenses excluding income taxes were
$13.5 million in 1995, a $2.0 million decrease compared to 1994. The decrease
resulted from a $3.9 million pretax writedown of certain properties to their
net realizable value.
53 Courtyard by Marriott(R) Hotels. Total Hotel Sales for the fiscal year
ended December 29, 1995 were $184.0 million, a $10.2 million or 5.8% increase
over the fiscal year ended December 30, 1994. The increase was attributable to
a $5.11 increase in ADR to $72.61 and stable occupancy of 80.3% in 1995, as
compared to 1994. Revenues (Total Hotel Sales less hotel level expenses) for
1995 were $91.0 million, a $7.9 million or 9.5% increase over 1994. The
increase was principally attributable to improvement in ADR, programs to
improve weekend stays and cost containment programs including redefined
staffing patterns and improved use of central purchasing and supply
efficiencies. Revenues over expenses excluding income taxes were $43.9 million
in 1995, a $1.8 million decrease compared to 1994. The decrease resulted from
an $8.8 million pretax writedown of certain properties to their net realizable
values.
1994 COMPARED TO 1993
11 Wyndham Garden(R) Hotels. Total revenues for the year ended December 31,
1994 were $50.7 million, a $5.5 million or 12.2% increase over the year ended
December 31, 1993. The increase was attributable to a $5.68 increase in ADR to
$69.74 and an increase in occupancy of 2.1 percentage points to 75.1%, as
compared to 1993. Gross operating profit for 1994 was $19.9 million, a $3.3
million or 19.6% increase over 1993. Net income for 1994 was $4.1 million, a
$1.5 million or 58.8% increase over 1993. The increases in gross operating
profit and net income were primarily attributable to the 8.8% increase in ADR
and occupancy improvements.
18 Residence Inn by Marriott(R) Hotels. Total Hotel Sales for the fiscal
year ended December 30, 1994 were $57.4 million, a $3.8 million or 7.0%
increase over the fiscal year ended December 31, 1993. The increase was
principally attributable to a $4.81 increase in ADR to $79.58 and an increase
in occupancy of 1.1 percentage points to 85.6%, as compared to 1993. Revenues
(Total Hotel Sales less hotel level expenses) for 1994 were $29.8 million, a
$2.7 million or 9.8% increase over 1993. The improvement was attributable to
increases in ADR and occupancy, as well as improved operating efficiencies
reflected in an increase in revenues as a percentage of Total Hotel Sales to
52.0% from 50.7% in 1993. Revenues over expenses excluding income taxes before
cumulative effect of change in accounting principle was $15.6 million in 1994,
a $1.1 million increase over 1993.
53 Courtyard by Marriott(R) Hotels. Total Hotel Sales for the fiscal year
ended December 30, 1994 were $173.8 million, a $9.2 million or 5.6% increase
over the fiscal year ended December 31, 1993. The increase was
24
<PAGE>
attributable to a $4.18 increase in ADR and an increase in occupancy of 0.6
percentage points to 80.3%, as compared to 1993. Revenues (Total Hotel Sales
less hotel level expenses) for 1994 were $83.2 million, a $10.2 million or
14.0% increase over 1993. The increase was principally attributable to the
improvement in ADR. Revenues over expenses excluding income taxes before
cumulative effect of change in accounting principle was $45.7 million in 1994,
a $6.1 million increase over 1993.
Following discussions with the Securities and Exchange Commission, in the
second quarter of 1993, Host changed its method of determining the net
realizable value of its assets held for sale. Host previously determined the
net realizable value of such assets on an aggregate basis in the case of
Residence Inn by Marriott(R) Hotels and Courtyard by Marriott(R) Hotels.
Beginning in the second quarter of 1993, under Host's new accounting policy,
the net realizable value of all assets held for sale is determined on a
property by property basis. The cumulative pretax effect of this change in
accounting policy on periods prior to the second quarter of 1993 was $16.5
million for the 18 Residence Inn by Marriott(R) Hotels and $17.8 million for
the 53 Courtyard by Marriott(R) Hotels, respectively. This change in
accounting policy was accounted for as a cumulative effect of change in
accounting principle for assets held for sale.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company's primary source of cash to fund its dividends and day to day
operations is the base and percentage rents it receives. Base rents are paid
monthly in advance and percentage rents are paid either monthly or quarterly
in arrears. This flow of funds from rents has historically been sufficient for
the Company to pay dividends and meet day to day operating expenses.
In order to fund acquisitions and to accommodate occasional cash needs which
may result from timing differences between the receipt of rents and the need
to pay dividends or operating expenses, the Company has entered into a line of
credit arrangement (the "Line of Credit") with DLJ Mortgage Capital, Inc.
("DLJMC"). The Line of Credit is for up to $200 million, of which up to $20
million is available for general business purposes. Drawings under the Line of
Credit are secured by first mortgage liens on certain of the Hotels. Funds may
be drawn, repaid and redrawn until maturity, and no principal repayment is due
until maturity. The Line of Credit matures on December 31, 1998; however, upon
the request of the Company and subject to certain terms and conditions, DLJMC
has the right (but not the obligation) to convert amounts outstanding at
maturity, if any, into an amortizing mortgage loan due on December 31, 2008.
Interest on borrowings under the Line of Credit are payable until maturity at
a spread above one month LIBOR; and interest during the extended term, if any,
will be set at market rates at the time the loan is extended. As of March 22,
1996, $115.7 million was drawn under the Line of Credit and was principally
used to fund deposits for certain of the Additional Hotels and the purchase
price for the Additional Hotels acquired by the Company on such date.
The Company has entered into agreements to acquire the Additional Hotels for
approximately $484 million, pursuant to which it acquired eight of the
Additional Hotels on March 22, 1996. The net funding required to accomplish
these acquisitions after taking into account the hold back Security Deposits
and related expenditures and expenses will be approximately $445 million. In
order to enhance the ability of the Company to acquire the Additional Hotels,
the Company and DLJMC have entered into an agreement to expand the funding
availability under the Line of Credit by up to an additional $250 million (the
"Expanded Credit Facility"). The Expanded Credit Facility will have the same
rate of interest as the Line of Credit. Borrowings under the Expanded Credit
Facility will be unsecured, except that the Company is required to provide
collateral for any such borrowings outstanding after December 31, 1996. The
Expanded Credit Facility matures on March 31, 1997. In the event that amounts
drawn under the Expanded Credit Facility are not repaid at maturity, DLJMC has
the right to require that the Company enter into a securitized mortgage
transaction by which these obligations may be publicly sold.
25
<PAGE>
The Company expects to use the net proceeds of this Offering and borrowings
under the Line of Credit to fund the acquisition of the Additional Hotels.
Upon completion of this Offering and the acquisition of the Additional Hotels,
the Company expects to have $120.5 million outstanding under the Line of
Credit. After completion of this Offering, the Company intends to explore
alternatives to repay amounts then outstanding under the Line of Credit. Such
alternatives will include incurring long term debt. Although the Company has
not received any commitments for long term debt financing to repay the Line of
Credit, the Company believes that its improved financial position resulting
from the acquisition of the Additional Hotels and the consummation of this
Offering will enable it to complete such long term debt financing during 1996.
The Company believes it will in the future have access to various types of
financing, including debt or equity securities offerings, with which to
finance its continued operations and future acquisitions.
THE LESSEES
Wyndham I. Wyndham I is a limited purpose entity which has been organized to
lease and operate the 11 Wyndham Garden(R) Hotels owned by the Company. Upon
completion of this Offering, Wyndham I is expected to have a net worth
(excluding deferred gains resulting from the sale and lease of these Hotels)
of approximately $14.8 million, which is expected to consist principally of a
$13.6 million Security Deposit held by the Company. Wyndham I is expected to
fund its cash needs, including payments of base rents and percentage rents (if
any), with cash generated from operations at the 11 Wyndham Garden(R) Hotels.
In 1995, the predecessor partnership owning these 11 Hotels generated cash
from (used by) operating, investing and financing activities of $11.2 million,
$(2.3) million and $(8.6) million, respectively. On a pro forma basis, Wyndham
I's 1995 income before income taxes, rents due to the Company and subordinated
management fees and charges, and after deduction of FF&E Reserves required
under the Leases, exceeded base rents due to the Company by $4.3 million, or
coverage of 1.32 times the rents due to the Company. Although the Company
believes that Wyndham I will have adequate funds to meet its short term
liquidity requirements, decreases in revenues at these Hotels may adversely
affect Wyndham I's ability to pay rents to the Company.
Host I. Host I is a limited purpose entity which has been organized to lease
and operate the 18 Residence Inn by Marriott(R) Hotels owned by the Company.
Upon completion of this Offering, Host I is expected to have a net worth
(excluding deferred gains resulting from the sale and lease of these Hotels)
of approximately $19.1 million which is expected to consist primarily of the
$17.2 million Security Deposit held by the Company. Host I is expected to fund
its cash needs, including payments of base rents and percentage rents (if
any), with cash generated from operations at the 18 Residence Inn by
Marriott(R) Hotels. In 1995, these 18 Hotels generated cash from (used by)
operating, investing and financing activities of $23.0 million, $(2.2) million
and $(20.8) million, respectively. On a pro forma basis, Host I's 1995 income
before income taxes, rents due to the Company and subordinated management fees
and charges and after deduction of FF&E Reserves required under the Leases,
exceeded base rents due to the Company by $6.7 million, or coverage of 1.39
times the rents due to the Company. Although the Company believes that Host I
will have adequate funds to meet its short term liquidity requirements,
decreases in revenues at these Hotels may adversely affect Host I's ability to
pay rents to the Company.
Host II. Host II is a limited purpose entity which was organized to lease
and operate the Initial Hotels. Upon the completion of the Company's
acquisition of the additional 16 Courtyard by Marriott(R) Hotels, Host II will
also lease these Hotels. Upon completion of this Offering, Host II is expected
to have a net worth (excluding deferred gains resulting from sale and lease of
these Hotels) of approximately $57.5 million, which is expected to consist
primarily of the $50.5 million Security Deposit held by the Company. Since the
acquisition of the Initial Hotels, Host II has funded its cash needs,
including payments of base rents and percentage rents, with cash generated
from operations at the Initial Hotels. Upon the acquisition of the additional
16 Courtyard by Marriott(R) Hotels, Host II is expected to continue to fund
its cash needs, including monthly payments of base rents and percentage rents
(if any), with cash generated from operations at the 53 Courtyard by
Marriott(R) Hotels. On a pro forma basis, Host II's 1995 income before income
taxes, rents due to the Company and subordinated management fees and charges
and after deduction of FF&E Reserves required under the Leases exceeded base
rents due to the Company by $17.3 million, or coverage of 1.34 times the rents
due to the Company.
26
<PAGE>
Although the Company believes that Host II will have adequate funds to meet
its short term liquidity requirements, decreases in revenues at these 53
Courtyard by Marriott(R) Hotels may adversely affect Host II's ability to pay
rents to the Company.
SEASONALITY
The Hotels have historically experienced seasonal differences typical of the
hotel industry with higher revenues in the second and third quarters of
calendar years compared with the first and fourth quarters. This seasonality
is not expected to cause fluctuations in the Company's rental income because
the Company believes that the revenues generated by its Hotels will be
sufficient for the Lessees to pay rents on a regular basis notwithstanding
seasonal fluctuations.
INFLATION
The Company believes that inflation should not have a material adverse
effect on the Company. Although increases in the rate of inflation may tend to
increase interest rates which the Company may be required to pay for borrowed
funds, the Company has a policy of obtaining interest rate caps in appropriate
circumstances to protect it from interest rate increases. In addition, the
Company's Leases provide for the payment of percentage rent to the Company
based on increases in Total Hotel Sales, and such rent should increase with
inflation.
27
<PAGE>
BUSINESS
The Company's principal growth strategy is to expand its investments in
hotels and to set minimum rents which produce income in excess of the
Company's cost of raising capital. Most other public hotel REITs seek to
control the operations of hotels in which they invest by leasing their
properties to affiliated tenants. The Company seeks to provide capital to
unaffiliated hotel operators who wish to divest their properties while
remaining in the hotel business as tenants. The Company believes that this
difference in operating philosophy affords it a competitive advantage over
other hotel REITs in finding high quality investment opportunities on
attractive terms. In addition, the Company's internal growth strategy is to
participate through percentage rents in increases in Total Hotel Sales
(including gross revenues from room rentals, food and beverage sales and other
services) at the Company's Hotels.
Upon completion of the acquisition of the Additional Hotels, the Company
will have purchased 82 Hotels located in 26 states for approximately $813
million.
LOCATION OF HPT HOTELS
[The Prospectus contains a map of the continental United States with the states
listed below shaded, and the location of the Company's 11 Wyndham Garden(R)
Hotels identified by a star, the location of the Company's 18 Residence Inn by
Marriott(R) Hotels identified by a diamond; and the location of the Company's
53 Courtyard by Marriott(R) Hotels indicated by a square.]
<TABLE>
<CAPTION>
Number Number Number Number
of Rooms of Hotels of Rooms of Hotels
-------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Arizona 1,164 8 New Mexico 112 1
California 1,470 10 New York 403 3
Delaware 152 1 North Carolina 534 4
Florida 449 3 Ohio 106 1
Georgia 978 7 Pennsylvania 567 4
Illinois 514 3 Rhode Island 148 1
Indiana 149 1 South Carolina 108 1
Iowa 108 1 Tennessee 399 3
Maryland 406 3 Texas 405 3
Massachusetts 1,072 8 Virginia 462 3
Michigan 281 2 Washington 522 3
Minnesota 358 2 Wisconsin 147 1
Missouri 298 2 ------ --
New Jersey 416 3 Total 11,728 82
</TABLE>
28
<PAGE>
THE HOTELS
WYNDHAM GARDEN(R) HOTELS
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 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.
The following charts set forth the occupancy, ADR and REVPAR for the past
three years of the Company's 11 Wyndham Garden(R) Hotels as compared to those
averages for all United States hotels as reported by Smith Travel Research in
Lodging Outlook.
[The Prospectus contains three bar charts
showing the following information]
Average Occupancy
<TABLE>
<CAPTION>
All US Hotels Wyndham Garden(R)
<S> <C> <C>
1993 63.1% 73.0%
1994 64.7% 75.1%
1995 65.5% 77.5%
</TABLE>
Average Daily Room Rates
<TABLE>
<CAPTION>
All US Hotels Wyndham Garden(R)
<S> <C> <C>
1993 $61.30 $64.06
1994 $64.24 $69.74
1995 $67.34 $77.16
</TABLE>
Revenue Per Available Room
<TABLE>
<CAPTION>
All US Hotels Wyndham Garden(R)
<S> <C> <C>
1993 $38.71 $46.76
1994 $41.55 $52.34
1995 $44.14 $59.77
</TABLE>
29
<PAGE>
The table below presents certain information provided to the Company by
Wyndham about the size, age, and location of the Company's 11 Wyndham Garden(R)
Hotels.
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
ARIZONA
Chandler................ 159 10/87 Firebird International Intel, Rodgers/Adflax,
Raceway (1), Arizona State Allied Signal, ADP, Avnet,
University (12), Airport (12), Alcoa, Gould
Harrah's Casino (15), 3
Championship Golf Courses (5),
Factory Outlet Stores (20),
Spring Training Stadiums (7)
North Phoenix........... 166 1/88 MetroCenter Shopping Mall (3), Honeywell, Bull, AG
Arrowhead Mall (5), Phoenix Communications, Cox Cable,
Airport (10), Arizona Factory American Express Travel,
Shops (16), American Graduate Farmers Insurance
School of International
Management (6), Downtown
Phoenix (20), Old Town
Scottsdale (23), America West
Arena (21)
Phoenix Airport......... 210 10/89 Phoenix Airport (1), Phoenix Motorola, Allied Signal,
Convention Center (5), America Cutter,
West Arena (5), Central JC Penney, Norstan, AT&T,
Scottsdale (8), Arizona State Xerox
University (5), Phoenix Zoo
(2)
CALIFORNIA
North San Diego......... 180 4/89 La Jolla (8), Del Mar (6), Sea AT&T, Intuit, Motorola,
World (10), San Diego Zoo Nortel, Applied Digital,
(10), San Diego International Access, General
Airport (15) Instruments, Jostens,
Mycogen, Nokia, Brooktree,
Qualcom, Comstream
Sunnyvale............... 180 8/87 San Jose Airport (7), Great AT&T, Allied Signal,
America (2), San Jose Arena Boeing, Lockheed, Intel,
(10), Shoreline Amphitheater IBM, Eastman Kodak, MCI,
(2), San Jose State University Texas Instruments, Toshiba,
(10), Santa Clara University TRW, Digital Equipment,
(10) 3Com, CISCO Systems,
Synopsys
GEORGIA
Atlanta-Perimeter
Center................. 143 4/87 Perimeter Mall (2), Atlanta AT&T, Dun & Bradstreet,
History Center (5), Cobb Ford, GTE, Stratus, Unisys,
Galleria Center (5), Fernbank UPS, Xerox
Science Center (10), Georgia
World Congress Center (12),
CNN Center/Omni Coliseum (12),
Georgia Dome (12), Martin
Luther King Center (12), World
of Coca-Cola (13), Fulton
County Stadium (14), Zoo
Atlanta (15), Stone Mountain
Park (15), Six Flags (20)
ILLINOIS
Naperville-Chicago Area. 143 9/86 O'Hare Airport (18), Midway Amoco, AT&T, Bechtel,
Airport (20), Cantony War Hewlett-Packard, Budget,
Museum (8), Hollywood Casino Travelers, Allied Van
(15), Morton Arboretum (7), Lines, Wheelabrator
Naperville Riverwalk (3),
Naper Settlement (4), North
Central College (3), Wheaton
College (4), Paramount Arts
Center (15)
MINNESOTA
Bloomington/Minneapolis. 209 9/88 Mall of America (5), Dairy Queen, Seagate,
Minneapolis/St. Paul Honeywell, Sprint,
International Airport (7), Diversified
Mystic Lake Casino (15), Pharmaceuticals/Smith Kline
Minneapolis Convention Center Beecham, National Car
(12), Valley Fair Amusement Rental, Norwest Bank, AT&T,
Park (10), Science Museum Nash Finch, Toro, ADP,
(25), University of Minnesota Jostens, Silicon Graphics,
(15), State Theater (15) National Semiconductor
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
TENNESSEE
Nashville.............. 180 12/87 Nashville International CNA Insurance, Square D
Airport (1 1/2), Opryland (7), Company, Bridgestone/
Downtown Nashville (12), The Firestone, UPS, Thomas
Hermitage (9), Music Row (12), Nelson
Country Music Hall of Fame
(12), Vanderbilt
University/Medical Center
(12), Nashville Convention
Center (12), Grand Ole
Opry/Theme Park (7), Country
Music Television (CMT) (7),
The Nashville Network (TNN)
(7)
WASHINGTON
Bothell................ 166 6/89 Chateau St. Michelle Winery Motorola, Microsoft, GTE,
(5), Kenmore Air Harbor (6), Alliant/Honeywell, Siemens,
Bellevue (10), Airport (25) Allstate Insurance
Sea-Tac Airport........ 204 8/88 Sea-Tac Airport (adjacent), Boeing, Lockheed/Martin,
Seattle Kingdome (11), McDonnell Douglas, Mitre,
University of Washington (15), Northrup, UPS, GTE, IBM,
Downtown Seattle (15), Emerald (all of these businesses
Downs (10) are within 15 miles)
</TABLE>
31
<PAGE>
RESIDENCE INN BY MARRIOTT(R) HOTELS
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, 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.
The following charts set forth the occupancy, ADR and REVPAR for the past
three years of the Company's 18 Residence Inn by Marriott(R) Hotels as
compared to those averages for all United States hotels as reported by Smith
Travel Research in Lodging Outlook.
[The Prospectus contains three bar charts
containing the following information]
<TABLE>
<CAPTION>
Average Occupancy
All US Hotels Residence Inn by Mariott(R)
<S> <C> <C>
1993 63.1% 84.5%
1994 64.7% 85.6%
1995 65.5% 86.6%
</TABLE>
<TABLE>
<CAPTION>
Average Daily Room Rates
All US Hotels Residence Inn by Marriott(R)
<S> <C> <C>
1993 $61.30 $74.77
1994 $64.24 $79.58
1995 $67.34 $85.07
</TABLE>
<TABLE>
<CAPTION>
Revenue Per Available Room
All US Hotels Residence Inn by Marriott(R)
<S> <C> <C>
1993 $38.71 $63.18
1994 $41.55 $68.12
1995 $44.14 $73.69
</TABLE>
32
<PAGE>
The table below is derived principally from information published by
Marriott in the Residence Inn by Marriott(R) directory and presents certain
information about the size, age and location of the Company's 18 Residence Inn
by Marriott(R) Hotels.
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS OF THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ --------------------------- --------------------------
<S> <C> <C> <C> <C>
ARIZONA
Flagstaff.............. 102 7/91 Northern Arizona University WL Gore, Ralston Purina, US
(6), Airport (6) West
Scottsdale............. 122 1/91 Sky Harbor Airport (9), Motorola, Dial Corporation,
Scottsdale Gallery District Mayo Clinic
(2), Borgata Shopping Center (
1/2), Camelback Mountain (1),
Heard Museum (10), Frank Lloyd
Wright Museum (12)
Tempe.................. 126 2/91 Sky Harbor Airport (5), Motorola, Allied Signal,
Arizona State University (4), First Interstate Data
Tempe Diablo Stadium (2) Center, Microage
CALIFORNIA
Huntington Beach/
Fountain Valley....... 122 3/91 Mile Square Park & Golf Course Rockwell, Filenet, Nissan,
( 1/2), Disneyland (14), Hyundai, ASICS Tiger, FHP
Knott's Berry Farm (17),
Newport Beach (7), Orange
County Airport (5), Huntington
Beach (5), Pacific
Amphitheater (5), Tustin
Marine Base (9), South Coast
Plaza (5), Orange County
Performing Arts Center (5)
North San Diego/Rancho
Bernardo.............. 123 10/91 San Diego International Sony, Hewlett-Packard,
Airport (21), Downtown San AT&T, U.S. Postal Service,
Diego (23), Wild Animal Park Loral
(10), Temecula/Wine Country
(30), Beaches (15), San Diego
Zoo (15)
GEORGIA
Atlanta/Alphretta...... 103 7/90 Hartsfield Airport (31), Digital Equipment Corp.,
Downtown Atlanta (28), Harry's Digital Communications
Farmers Markets (5), Wills Assoc., AT&T, Siemens,
Park Equestrian Facility (3), Equifax, Nationwide
Lake Lanier (18), North Point Insurance, UPS, Amoco
(3)
ILLINOIS
Chicago-Downtown....... 221 7/91 John Hancock Building (1 American Bar Association,
block), One Magnificent Mile Amoco, IBM, Quaker Oats,
(1 block), Lake Michigan (1 Arthur Andersen, Sears
block), McCormick Place (20 Roebuck
blocks), Rush Street (2
blocks), Wrigley Field (4),
O'Hare Airport (18)
MARYLAND
Annapolis.............. 102 5/91 Annapolis Mall (1), U.S. Naval IIT Research Institute,
Academy (4), Historic Wartsila Diesel
Annapolis (4), Festival Plaza
( 1/2)
MASSACHUSETTS
Westborough............ 109 7/91 Logan Airport (32), Worcester Data General Corp.
Airport (15), Sturbridge
Village (30), Massachusetts
Turnpike (5), Downtown Boston
(38)
MICHIGAN
Warren................. 133 3/90 Detroit Metropolitan Airport General Motors, TRW,
(29), Canada (15), Detroit Zoo General Dynamics, Chrysler,
(9), Pontiac Silverdome (15), Ford
Downtown Detroit (14), City
Airport (6)
NEW MEXICO
Albuquerque............ 112 2/90 Sandia Peak & Tramway (10), AT&T
Old Town (4), Convention
Center (4), Zoo (8),
International Balloons Fiesta
Grounds (8), University of New
Mexico (3), Airport (6)
NEW YORK
Syracuse............... 102 1/91 Syracuse University (6), Martin Marietta, Carrier,
Carrier Dome (6), NY State Chrysler, Bristol-Myers
Fairgrounds (10)
NORTH CAROLINA
Durham-Research
Triangle Park......... 122 3/91 Duke University (7), IBM, Northern Telecom, EPA,
University of NC at Chapel Glaxo, Burroughs Wellcome,
Hill (8), Raleigh/Durham Ericsson, GE Mobile
Airport (8), Downtown Raleigh Communications, Motorola,
(20) Data General
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER OF DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- --------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
OHIO
Columbus/Dublin........ 106 2/92 Metro Center (adjacent), Ashland Chemical,
Muirfield Village Gold Club Pharmacia, CompuServe,
(3), Port Columbus Frigidaire
International Airport (20),
Ohio State University (9),
Downtown Columbus (15)
PENNSYLVANIA
Willow Grove........... 118 12/90 Downtown Philadelphia (15), General Instruments,
Philadelphia International Honeywell, Moore Products,
Airport (20), Philadelphia Prudential, Penn Mutual
Park (8), Willow Grove Naval
Air Station (2), Sesame Place
(15), Fort Washington Expo
Center (5)
TENNESSEE
Nashville/Brentwood.... 110 1/91 Downtown Nashville (8), Bankers Trust, Comdata
Nashville International Holdings Corp., Quorum
Airport (12), Vanderbilt
University/Medical Center
(10), Tennessee State
Fairgrounds (5), Grand Ole
Opry/Theme Park (15), Cool
Springs Galleria (5), Legends
Golf Club (8)
TEXAS
Dallas-Market Center... 142 3/89 Love Field Airport (3), Mobil Oil, Federal Express
Dallas/Fort Worth
International Airport (13),
Texas Stadium (3), World Trade
Center/Info Mart (2 1/2),
Downtown Dallas (5), Six Flags
(15), Medieval Times (2),
Convention Center (5),
Restaurant Row (2 1/2)
Dallas-Northpark....... 103 7/90 Dallas/Fort Worth Texas Instruments, Northern
International Airport (16), Telecom
Love Field Airport (8),
Downtown Dallas (5), Galleria
(6)
</TABLE>
34
<PAGE>
COURTYARD BY MARRIOTT(R) HOTELS
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.
The following charts set forth the occupancy, ADR and REVPAR for the past
three years of the Company's 53 Courtyard by Marriott(R) Hotels as compared to
those averages for all United States hotels as reported by Smith Travel
Research in Lodging Outlook.
[The Prospectus contains three bar charts containing the following information]
Average Occupancy
<TABLE>
<CAPTION>
All US Hotels Courtyard by Marriott(R)
<S> <C> <C>
1993 63.1% 79.7%
1994 64.7% 80.3%
1995 65.5% 80.3%
</TABLE>
Average Daily Room Rates
<TABLE>
<CAPTION>
All US Hotels Courtyard by Marriott(R)
<S> <C> <C>
1993 $61.30 $63.32
1994 $64.24 $67.50
1995 $67.34 $72.61
</TABLE>
Revenue Per Available Room
<TABLE>
<CAPTION>
All US Hotels Courtyard by Marriott(R)
<S> <C> <C>
1993 $38.71 $50.49
1994 $41.55 $54.23
1995 $44.14 $58.32
</TABLE>
35
<PAGE>
The table below is derived principally from information published by
Marriott in the Courtyard by Marriott(R) directory and presents certain
information about the size, age and location the Company's 53 Courtyard by
Marriott(R) Hotels.
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
ARIZONA
Phoenix................ 155 8/90 Downtown Scottsdale (10), Town MCI Communications, Bank of
& Country Mall (adjacent), America, AT&T, American
Phoenix Airport (7), Sun Devil Express, Transamerica, IBM,
Stadium (8), Arizona State US West
University (8), Downtown
Phoenix (6)
Scottsdale............. 124 1/89 Downtown Scottsdale (11), West Mayo Clinic (adjacent)
World (5), Fountain Hills (5)
CALIFORNIA
Camarillo.............. 130 10/90 Oxnard (5), Ventura Mission Unisys, Vitesse, Amgen,
(12), State Beaches (10), Siemens Solar, Technicolor,
Getty Museum (20), Six Flags 3M Company, Teledyne, Blue
Magic Mountain (45), Ronald Cross
Reagan Presidential Library
(15)
Huntington
Beach/Fountain
Valley................ 150 3/91 Orange County Airport (6), McDonnell Douglas, Safeco
Orange County Fairgrounds (4), Insurance, Rockwell,
Pacific Amphitheater (4), Hyundai, ASICS Tiger
Huntington Beach (3)
Laguna Hills-Irvine
Spectrum.............. 137 10/90 Orange County Airport (9), Mazda, Abbott Laboratories,
Laguna Beach (7), Mission San Parker Hannifin, Toshiba,
Juan Capistrano (10), US Unisys, Canon, Loral
Marine Station El Toro (3), US
Olympic Swim Stadium (5),
Laguna Hills Mall (1 1/2)
Los Angeles Airport.... 146 3/87 Los Angeles Airport (1), Chevron, AT&T, Xerox, TRW,
Universal Studios (18), Mattel, GTE
Disneyland (28), Hollywood
(15), Marina del Rey (5), UCLA
(10)
San Jose Airport....... 151 1/91 San Jose Airport ( 1/2), San IBM, FMC Corp., Ford
Jose Convention Center (3 Aerospace, General
1/2), San Jose State Electric, Hewlett-Packard,
University (4), Great America Kodak, Digital, Novell,
(5), Santa Clara University AT&T
(2), San Jose Arena (3)
Torrance-South Bay..... 151 11/90 Los Angeles Airport (10), Toyota, Honda, Nissan, NEC,
Redondo Beach (5), Long Beach Allied Signal, Mobil Oil
(12), Los Angeles Harbor/San
Pedro (10), Downtown Los
Angeles (10), Dodger Stadium
(12), Knott's Berry Farm (19),
Disneyland (23), Great Western
Forum (8), LA Coliseum (8),
Southbay Galleria (3),
Universal Studios (12)
DELAWARE
Wilmington............. 152 1/91 Christiana Mall ( 1/2), Flight Safety International
University of Delaware (5),
Delaware Park Race Track (2),
Winterthur Museum & Garden
(15), Longwood Garden (20),
Historic New Castle (5),
Hagley Museum (7), Brandywine
Valley Museum (12)
FLORIDA
Boca Raton............. 152 4/92 Palm Beach Airport (22), Ft. IBM, Sony, WR Grace,
Lauderdale Airport (25), Unisys, Office Depot
Florida Atlantic University (
1/2), Lynn University ( 1/2)
Jacksonville/Mayo
Clinic & Beaches Area. 146 10/87 Mayo Clinic (adjacent), American Heritage Life
Beaches (3), Airport (30),
Ponte Vedra/Sawgrass (4),
St. Augustine (30), Downtown
Jacksonville (15), Jaxport
(20)
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
Miami Lakes Area....... 151 9/90 Miami International Airport Northern Telecom, Coulter
(9), Opa Locka Airport (3), Corporation, Palmetto
Miami Lakes Industrial Park General Hospital, C.D.
(2), Palmetto Lakes Industrial Medical, Telectronics
Park (2), Miami Lakes Golf
Course ( 1/2), Country Club of
Miami (2), Westland Mall (4),
Joe Robbie Stadium (5)
GEORGIA
Atlanta Airport North.. 152 8/90 Fulton County Stadium (6), Ford, Pratt & Whitney,
Hartsfield Airport (1), Six General Electric, Delta Air
Flags (13) Lines
Atlanta-Cumberland
Center................ 182 3/89 Downtown Atlanta (10), IBM, AT&T, Sprint, UPS,
Hartsfield Airport (20), Six Worldspan
Flags (12), Stone Mountain
Park (20)
Atlanta-Jimmy Carter
Blvd.................. 122 5/88 Mountain Park (7), Malibu AT&T, UPS, American
Grand Prix (3), Delta Express, Lanier, GM, BASF,
Peachtree Airport (5), Whirlpool
Gwinnett Airport (8)
Atlanta-Midtown........ 168 7/91 Olympic Village and Olympic BellSouth, AT&T
Venues ( 1/2), Woodruff Art
Center ( 1/2), Georgia World
Congress Center (2), Fox
Theatre ( 1/2), Atlanta
Stadium (4), Georgia Dome (2),
Georgia Tech (2)
Macon.................. 108 5/91 Macon Airport (15), Warner- Georgia Farm Bureaus, Brown
Robbins Air Force Base (20), and Williamson, YKK, Geico,
Mercer University (8), GE Capital
Wesleyan College (4)
ILLINOIS
Arlington Heights
North................. 150 5/90 Woodfield Mall and Theatres Motorola, Honeywell,
(7), Long Grove Village (5), Federal Express, UARCO,
Arlington Race Track (4), American Honda
O'Hare Airport (15), Downtown
Chicago (40)
INDIANA
Indianapolis........... 149 3/90 Downtown Indianapolis (12), Charles Schwab, AT&T, Delta
Indianapolis Airport (17), Peerless, GTE, Hewlett-
Indianapolis Zoo (15), Packard, Integrated
Children's Museum (10), Butler Information Services,
University (7), Indianapolis MacMillan Publishing, NCR
Motor Speedway (17), Indiana
State Fairgrounds (7)
IOWA
Quad Cities............ 108 12/90 Moline Regional Airport (13), Montgomery Elevator, Rock
Riverboat Casinos (5), Wacky Island Arsenal
Waters (8), John Deere
Historical Tour (10), Museums
(3), Quad City Downs Race
Track (15)
MARYLAND
Columbia............... 152 7/91 Dobbin Center (1/10), General Physics, S-3
Merriweather Post Pavilion Technologies Sun Micro
(4), Baltimore-Washington Systems, AT&T, Baxter
International Airport (12), Health Care
Baltimore Inner Harbor (15),
Oriole Park at Camden Yards
(15), National Aquarium (15)
Greenbelt.............. 152 6/91 Downtown Washington, D.C. National Agriculture
(20), USAir Arena (10), Wild Research Center, Litton
World (12), University of America, Digital, Hughes,
Maryland (3), NASA/Goddard Bendix, Lockheed, Cellular
Space Center (2), Washington One, Computer Sciences
National Airport (20), Corp.
Baltimore-Washington
International Airport (25)
MASSACHUSETTS
Danvers................ 121 3/90 Fenway Park (18), Logan General Electric, NYNEX,
Airport (18), Downtown Boston Eaton
(15), Historic Salem (3)
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
Foxborough............. 149 6/89 Foxboro Stadium (5), Great Texas Instruments, Forbes,
Woods Performing Arts Center Codex
(3), Logan Airport (35),
Downtown Boston (33), Wheaton
College (5), Plymouth
Plantation (25)
Lowell................. 121 3/90 Downtown Boston (30), Logan Wang, Sun Microsystems,
Airport (30), Hewlett-Packard, Raytheon
Lexington/Concord (15),
University of Massachusetts at
Lowell (3)
Milford................ 152 10/90 Logan Airport (43), Downtown EMC, Dennison, Boston
Boston (43) Digital
Norwood................ 148 9/90 Logan Airport (20), Downtown Analog Devices, LTX
Boston (20), Foxboro Stadium Corporation, Microcom,
(10), Great Woods Performing Polaroid, GM, Ciba Corning,
Arts Center (15) Merck
Stoughton.............. 152 10/90 Logan Airport (18), Stonehill Reebok International
College (7), Downtown Boston
(16), Fenway Park (17),
Foxboro Stadium (20), Great
Woods Performing Arts Center
(20)
Woburn................. 120 3/90 Logan Airport (12), Downtown Hewlett-Packard, Alpha
Boston (12), Cambridge (12) Industries
MICHIGAN
Detroit/Auburn Hills... 148 10/89 Pontiac Silverdome ( 1/2), The Chrysler, ITT Automotive,
Palace of Auburn Hills (3), General Motors, Volkswagen
Oakland University (2)
MINNESOTA
Minneapolis/Eden
Prairie............... 149 2/89 Minneapolis/St. Paul Best Buy, General Electric,
International Airport (11), Super Value, Rosemount, MTS
Metrodome/Downtown Minneapolis Systems
(12), Met Center (8),
Minnesota Zoo (15), Mystic
Lake Casino (15)
MISSOURI
Kansas City Airport.... 149 9/90 Kansas City Airport (4), Farmland Foods, Worldspan,
Downtown Kansas City (10), Midland
Truman Sports Complex (25),
American Royal/Kemper Arena
(10)
South Kansas City...... 149 9/90 Kansas City Airport (42), Sprint, Marion Merrell Dow,
Downtown Kansas City (20), Yellow Freight, John Deere,
Truman Sports Complex (10), Allied Signal
Worlds of Fund (15)
NEW JERSEY
Hanover................ 149 7/91 Historic Morristown (5), Sandoz, Bellcore, Allied
Livingston Mall (6), Short Signal, Exxon, Warner
Hills Mall (10), Newark Lambert, Nabisco,
International Airport (28), Prudential, AT&T, Suburban
Amtrak Train Station (12), Propane
New York City (17)
Mahwah................. 146 4/91 Meadowlands (20), New York Sharp Electronics, UPS,
City (33) Phillips, IBM, Jaguar,
Meldisco
Tinton Falls........... 121 6/90 Newark International Airport Fort Monmouth, Prudential,
(30), Great Adventure Theme Bell Labs, Hughes Aircraft,
Park (20), Atlantic Ocean & Roberts Pharmaceutical
Beaches (5), New York City
(50), Atlantic City (50),
Monmouth Park Race Track (2)
NEW YORK
Fishkill............... 152 6/91 Cold Spring (10), West Point IBM, Texaco
Military Academy (15), Vassar
College (12), Stewart Airport
(10), F.D.R. Historical Site
(16), Vanderbilt Historical
Site (17), Danbury, CT (25),
Marist College (13), Stewart
International Airport (15)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
Syracuse............... 149 9/88 Hancock International Airport Carrier Corporation, Martin
(7), Burnett Park Zoo (12), Marietta, Crouse-Hinds
Everson Museum (8), Shopping Company, Bristol-Myers
Town Dewitt Mall (5), Syracuse
University (6), Carousel Mall
(6), Great Northern Mall (11)
NORTH CAROLINA
Charlotte-University
Research Park......... 152 8/90 Charlotte Motor Speedway (4), IBM, Allstate Insurance,
University of NC at Charlotte Phillip Morris, Southern
(1), University Place ( 1/4), Bell
Downtown Charlotte (7),
Airport (10), Blockbuster
Pavillion (4)
Fayetteville........... 108 1/91 Cape Fear Regional Theatre Fort Bragg
(5), Museum of Art (6), Market
House (2)
Raleigh/Durham Airport. 152 11/90 Research Triangle Park (1), IBM, Northern Telecom, SAS
Raleigh/Durham Airport (1), Institute, GTE
Downtown Raleigh (15),
NC State (15), Duke University
(15), University of NC at
Chapel Hill (18)
PENNSYLVANIA
Philadelphia Airport... 152 12/91 Downtown Philadelphia (10), Boeing, UPS, Penn Navy Yard
Philadelphia International
Airport (1), Veterans Stadium
(4), Spectrum Arena (4), Penns
Landing (8), Civic Center
(15), University of
Pennsylvania (11)
Pittsburgh Airport..... 148 8/90 Pittsburgh International Miles Corporation, Calgon,
Airport (7 1/2), Downtown ADP, USAir, Westinghouse
Pittsburgh (15), Convention Corp., Roadway Package
Center & Civic Arena (16), System, Robert Morris
Three Rivers Stadium (15), College, Legent
Star Lake Ampitheatre (21),
Quicksilver Golf Club (12)
Willow Grove........... 149 7/89 Willow Grove Park Mall (1), Prudential, Honeywell,
Downtown Philadelphia (15), Decision Data, McNeil Labs,
New Hope (14), Valley Forge Procter & Gamble
(10), Sesame Place (10),
Franklin Mills (10), Fort
Washington Expo Center (5)
RHODE ISLAND
Newport/Middletown..... 148 9/90 Downtown Newport (3), Historic U.S. Navy Base, General
Mansions (4), Cliffwalk & Dynamics, Hughes, McDonnell
Ocean Drive (4), Hammersmith Douglas, Unisys,
Farm (5), Tennis Hall of Fame Westinghouse, KPMG Peat
(4), Brick Market Place Marwick, Raytheon, AT&T
Shopping (3), Beaches (3),
Golf ( 1/4)
SOUTH CAROLINA
Spartanburg............ 108 6/90 University of SC at Michelin
Spartanburg (1), Greenville-
Spartanburg Airport (17),
Wofford College (3), Converse
College (3), Spartanburg
Auditorium (3)
TENNESSEE
Chattanooga............ 109 4/91 Chattanooga Riverboat (18), Brach's Candy
Ruby Falls (15), Rock City
(18), Metropolitan Airport
(4), Tennessee Aquarium (10)
TEXAS
Dallas-Northpark....... 160 7/90 Dallas/Fort Worth Dr. Pepper, Texas
International Airport (25), Instruments, Prudential
Love Field Airport (7),
Downtown Dallas (5), Southern
Methodist University (3)
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
KEY AREA ATTRACTIONS FOR THE
NUMBER DATE HOTEL/ACADEMIC INSTITUTIONS BUSINESSES WITH FACILITIES
PROPERTY LOCATION OF ROOMS OPENED (DISTANCE IN MILES) WITHIN A FIVE MILE RADIUS
- ----------------- -------- ------ ---------------------------- --------------------------
<S> <C> <C> <C> <C>
VIRGINIA
Arlington/Rosslyn...... 162 2/92 Georgetown (3), Washington, Gannett, Xerox, Bell
D.C. ( 1/5), Georgetown Atlantic, Coopers &
University (3) Lybrand, USA Today
Fairfax................ 149 9/90 Fairfax County Offices (3), AT&T, TRW, Mobil
Washington, D.C. (15), Dulles
Airport (11), National Airport
(18), George Mason University
(4)
Williamsburg........... 151 6/90 Busch Garden (1), Colonial Busch Corporate Center,
Williamsburg (2 1/2), Pottery Ball Metal, Cheatham Annex
Factory (14), Water Country (1 Military Base
1/2), College of William &
Mary (2 1/2)
WASHINGTON
Bellevue............... 152 9/90 Bellevue City Center (4), Microsoft, Allied Signal,
Seattle City Center (8), Digital, Eddie Bauer,
University of Washington (6) Safeco
WISCONSIN
Milwaukee/Brookfield... 147 5/91 Milwaukee County Zoo (5), Digital, Ameritech, Xerox,
Milwaukee County Stadium (12), Prudential
Bradley Center (12), Wisconsin
State Fair (6), Airport (18)
</TABLE>
40
<PAGE>
LESSEES, MANAGERS, LEASES AND MANAGEMENT AGREEMENTS
WYNDHAM GARDEN(R) HOTELS
Wyndham is a leading national hotel company operating hotels under the
Wyndham(R) brand name located in 20 states, the District of Columbia and four
Caribbean islands. Wyndham(R) hotels compete in the upscale segment of the
lodging industry with national hotel chains such as Marriott(R), Hyatt(R) and
Hilton(R). Wyndham offers three full service hotel products under the
Wyndham(R) brand name that are tailored to urban, suburban and select resort
markets. As of March 1, 1996, Wyndham and its affiliated entities owned,
leased, managed or franchised a total of 71 hotels with 18,607 rooms.
Wyndham I is a limited purpose entity that has been organized to lease and
operate the 11 Wyndham Garden(R) Hotels owned by the Company. The Purchase
Agreement for these Hotels requires that Wyndham I engage Wyndham or a Wyndham
subsidiary to manage these Hotels. The terms of any such Management Agreement
are within the discretion of Wyndham I, but the Lease requires that all
management fees be subordinated to rent due to the Company, the Management
Agreements to 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. An investment in the Shares is not an
investment in Wyndham, Wyndham I or Wyndham II.
The principal features of the Company's 11 Wyndham Garden(R) Leases and any
Management Agreements for such Hotels are 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 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 in excess of Total
Hotel Sales in 1996. Total Hotel Sales includes gross revenues from room
rentals, food and beverage 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. Although
recent increases in Total Hotel Sales are not necessarily indicative of
future operating performance, Total Hotel Sales at the Company's 11
Wyndham Garden(R) Hotels were $50.7 million in 1994 and $56.6 million in
1995, an increase of 11.7%.
. The Wyndham Garden(R) Leases all require that 5% of Total Hotel Sales be
escrowed by Wyndham I periodically to fund refurbishments and renovations
to these Hotels. 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 term of
these Leases, 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
term of these Leases 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. The Company believes that the funding
provided through the FF&E Reserve will be adequate to permit these Hotels
to maintain competitive appearances for the foreseeable future. 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.
41
<PAGE>
. 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 term of these Leases 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.
. As owner and lessor of the Wyndham Garden(R) Hotels, the Company has no
interest in the sales and operations of these Hotels other than its
entitlement to base rents and percentage rents. For the year ended
December 31, 1995, Wyndham I's pro forma income before income taxes,
rents due to the Company and subordinated management fees and charges and
after deduction of FF&E Reserves exceeded pro forma base rent due to the
Company by $4.3 million, or coverage of 1.32 times the pro forma base
rent due to the Company.
RESIDENCE INN BY MARRIOTT(R) HOTELS
Host is a leading hotel ownership company that, as of December 30, 1995,
owned 90 lodging properties (including the 34 Additional Hotels to be acquired
by the Company from Host) located throughout the United States and in foreign
countries. Host's lodging properties are generally operated under proprietary
brand names and managed by Marriott. Host also holds interests in various
partnerships that own over 260 additional lodging properties operated by
Marriott. Host's lodging properties span several market segments of the hotel
industry, including full service (primarily Marriott Hotels, Resorts and
Suites(R)), moderately priced (Courtyard by Marriott(R)), extended stay
(Residence Inn by Marriott(R)) and economy (Fairfield Inn by Marriott(R)).
Host I is a limited purpose subsidiary of Host formed to lease the Company's
18 Residence Inn by Marriott(R) Hotels.
Marriott is a leading international hotel management company that, as of
December 30, 1995, operated or franchised 1,036 hotels with approximately
208,500 guest rooms. In addition to operating hotels, Marriott is also a
leading developer and operator of vacation time sharing properties (Marriott
Ownership Resorts(R)) and conference centers (Marriott Conference Centers(R))
throughout the United States. Through its contract service business, Marriott
provides food service and facilities management to more than 3,000 business,
education and health care clients. Marriott also develops and operates
retirement communities offering independent living, assisted living and
skilled nursing care. 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. An
investment in the Shares is not an investment in Host, Marriott, Host I or
Marriott I.
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.
42
<PAGE>
. At the end of the initial 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. Although recent increases in Total Hotel Sales are not
necessarily indicative of future operating performance, Total Hotel Sales
at the Company's 18 Residence Inn by Marriott(R) Hotels were $57.4
million in 1994 and $61.9 million in 1995, an increase of 8.0%.
. 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 GAAP as rents. The Company believes
that the funding provided through the FF&E Reserve will be adequate to
permit these Hotels to maintain competitive appearances for the
foreseeable future. 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 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 cancelled 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 Residence Inn 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.
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. 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.
. As owner and lessor of the Residence Inn by Marriott(R) Hotels, the
Company has no interest in the sales and operations of these Hotels other
than its entitlement to base rents and percentage rents. For the year
ended December 31, 1995, Host I's pro forma income before income taxes,
rents due to the Company and subordinated management fees and charges and
after deduction of FF&E Reserves, exceeded pro forma base rents due to
the Company by $6.7 million, or coverage of 1.39 times the pro forma base
rents due to the Company.
COURTYARD BY MARRIOTT(R) HOTELS
Host II is a limited purpose subsidiary of Host which leases 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. An investment
in the Shares is not an investment in Host, Marriott, Host II or Marriott II.
The principal features of the Company's 53 Courtyard by Marriott(R) Leases
and Management Agreements are as follows:
. 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 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 37 Hotels) and 1995 (for 16 Hotels). Percentage
rents are calculated on a combined basis for all 53 Courtyard by
Marriott(R) Hotels. Although recent increases in Total Hotel Sales are
not necessarily indicative of future operating performance, Total Hotel
Sales at the Company's 53 Courtyard by Marriott(R) Hotels were $173.8
million in 1994 and $184.0 million in 1995, an increase of 5.8%.
. 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 GAAP as rents. The Company believes that the funding
provided through the FF&E Reserve will be adequate to permit these Hotels
to maintain competitive appearances for the foreseeable future. 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 cancelled 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.
. As owner and lessor of the Courtyard by Marriott(R) Hotels, the Company
has no interest in the sales and operations of these Hotels other than
its entitlement to base rents and percentage rents. For the year ended
December 31, 1995, Host II's pro forma income before income taxes, rents
due to the Company and subordinated management fees and charges and after
deduction of FF&E Reserves, exceeded pro forma base rents due to the
Company by $17.3 million, or coverage of 1.34 times the pro forma base
rents due to the Company.
PURCHASE AGREEMENTS
Under the Purchase Agreements for the Additional Hotels (the "Purchase
Agreements"), the respective sellers are entitled to receive the purchase
price in cash (net of applicable Security Deposits) in exchange for title to
the Additional Hotels. The Company currently expects that closings under the
Purchase Agreements for Additional Hotels with an aggregate cash purchase
price in excess of the net proceeds of this Offering will occur prior to or
contemporaneously with the completion of this Offering, and that any remaining
Additional Hotels will be acquired reasonably promptly after completion of
this Offering. The purchase of each Additional Hotel is contingent upon the
satisfactory completion of the Company's due diligence investigation.
Each of the Purchase Agreements contains representations with respect to the
Additional Hotels which are typical in commercial real estate acquisitions
(certain of which are limited to the respective seller's knowledge or are
otherwise limited), including, among other things, that: (i) the properties
and the use and operation thereof do not violate applicable laws, (ii) except
as otherwise disclosed, 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 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
certain events occurring prior to closing. In connection with the Purchase
Agreements, the Company has engaged or prior to the closing will engage in a
due diligence investigation with respect to each Additional Hotel, including
review of title documents, zoning restrictions, surveys, Phase I environmental
reports, engineering reports, historical financial statements and copies of
governmental permits, franchise or license agreements, leases and other
material contracts. The Company will receive an owner's policy of title
insurance for each of the Additional Hotels acquired pursuant to
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the Purchase Agreements. See "Risk Factors--Certain Risks of Recent
Acquisitions." 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
have 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 will pay Host $2.5 million to extend
the effective period of this right of first offer until December 31, 2010.
COMPETITION
The hotel industry is highly competitive. Each of the Hotels is located in
an area that includes other hotels. Increases in the number of hotels in a
particular area could have a material adverse effect on occupancy rates and
ADR of the Hotels located in that area. The Marriott I and Marriott II
Management Agreements restrict the right of Marriott and its affiliates, until
September 25, 1999, to own, build, operate, franchise or manage (i) any other
Courtyard by Marriott(R) hotel within various specified areas around the
Company's Courtyard by Marriott(R) Hotels or (ii) any other Residence Inn by
Marriott(R) hotel within various specified areas around the Company's
Residence Inn by Marriott(R) Hotels. The Wyndham Garden(R) Leases restrict the
right of Wyndham and its affiliates during the term of the Wyndham Garden(R)
Leases to own or franchise any other Wyndham Garden(R) hotel within specified
market areas of any of the Company's Wyndham Garden(R) Hotels. Neither
Marriott nor Wyndham nor any of their respective affiliates are restricted
from operating other branded hotels in the market areas of any of the Hotels,
and after September 25, 1999, Marriott and its affiliates may also compete
with the Courtyard by Marriott(R) Hotels or Residence Inn by Marriott(R)
Hotels by opening, managing or franchising additional hotels under the same
brand name in direct competition with the Company's Hotels. See "Risk
Factors--Hotel Operating Risks."
The Company expects to compete for hotel acquisition and financing
opportunities with entities which may have substantially greater financial
resources than the Company, including, without limitation, other publicly
owned REITs, banks, insurance companies, pension plans and public and private
partnerships. These entities may be able to accept more risk than the Company
can prudently manage, including risks with respect to the creditworthiness of
hotel operators. Such competition may reduce the number of suitable hotel
acquisition or financing opportunities available to the Company and increase
the bargaining power of hotel owners seeking to sell or finance their
properties.
ENVIRONMENTAL MATTERS
Under various environmental laws, a current or previous owner or operator of
real property may be liable for the costs of removal or remediation of
hazardous or toxic substances on, under, in or emanating from such property.
Such laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances,
and the liability under such laws has been interpreted to be strict, meaning
that liability is imposed without regard to fault. Liability under such laws
has also been interpreted to be joint and several, meaning that any current or
previous owner or operator or other responsible party might be liable for the
entire amount of the cleanup and remediation costs for a contaminated site. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the market value of the
property, as well as the owner's ability to sell or lease the property or to
borrow using such property as collateral. Persons who arrange for the disposal
or treatment of hazardous or toxic substances may also be liable for the costs
of removal or remediation of such substances at the disposal or treatment
facility, whether or not such facility is or ever was owned or operated by
such person. In addition, certain environmental laws and common law principles
govern the responsibility for the removal, encapsulation or disturbance of
asbestos containing materials ("ACMs") when these ACMs are in poor condition
or when a
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property with ACMs is undergoing renovation or demolition. Such laws could
also be used to impose liability upon owners or operators of real properties
for release of ACMs into the air that cause personal injury or other damage.
The Company received a Phase I environmental assessment report for each of
the 37 Initial Hotels. The Company has also received draft Phase I
environmental assessment reports for each of the 45 Additional Hotels under
the terms of the Purchase Agreements. The purpose of these reports is to
identify, to the extent reasonably possible and based on reasonably available
information, any existing and potential conditions resulting from hazardous or
toxic substances, including petroleum products and ACMs, at the Hotels. The
scope of the Phase I environmental assessments generally include: (i) a review
of available maps, aerial photographs and past and present uses of the site;
(ii) an inspection of appropriate public records; and (iii) in certain cases,
limited inquiries of governmental agencies having jurisdiction over certain
environmental matters. Each Phase I environmental assessment also includes an
on site visual inspection of the Hotel to assess visual evidence of past or
present on site waste disposal, visible surface contamination, potential
sources of soil and groundwater contamination, above surface and subsurface
storage tanks, visible drums, barrels and other storage containers, current
waste streams and management practices, ACMs and polychlorinated biphenyl
transformers. In addition, as part of the Phase I environmental assessment,
abutting properties and nearby sources of potential contamination are
identified through publicly available information and evaluated for potential
impact on the Hotels, to the extent reasonably possible. In some instances,
the Company has caused additional investigations to be conducted with respect
to certain of the Hotels. Such additional investigations may reveal a
potential environmental condition that may cause certain of the Additional
Hotels not to be acquired or that could have a material adverse effect on the
Company's business or results of operations.
Some of the Hotels are located on or near properties with former or existing
underground or above ground storage tanks used to store petroleum or other
hazardous products, or on which activities involving hazardous substances have
been or currently are being conducted. The Company is aware of contaminated
soil and/or groundwater at several Hotels from former or existing on-site or
nearby service stations, leaking underground storage tanks, or storage drums.
In addition, the Company believes that some of the Hotels may have been
constructed on sites at which fill materials containing hazardous substances
were used and that one of the Hotels was constructed over abandoned oil and
gas wells. The Company is also aware of several Hotels that are located in a
"Superfund" area or an area of regional groundwater contamination. The Company
does not believe that these instances of on-site or regional contamination and
historical or current activities will have a material adverse effect on the
Company's business or results of operations. However, the Company cannot
predict whether modifications of existing laws or regulations, the adoption of
new laws or regulations or changes in conditions at the Hotels may have a
material adverse effect on the Company's business or results of operations in
the future.
Except as described above, the Company is not aware of any environmental
condition with respect to the Hotels that could have a material adverse effect
on the Company's business or results of operations. No assurances can be
given, however, that the Phase I environmental assessments undertaken or
additional investigations to be undertaken with respect to the Hotels have
revealed or will reveal all potential environmental liabilities, that any
prior owner or operator of the real property on which the Hotels are located
did not create any material environmental condition not known to the Company,
or that a material environmental condition does not otherwise exist as to any
one or more of the Hotels.
REGULATORY MATTERS
Hotel properties are subject to various laws, ordinances and regulations,
including regulations relating to restaurants and other food and beverage
operations and recreational facilities such as swimming pools, activity
centers and other common areas. The Company believes that each of its Hotels
has the necessary permits and approvals required to enable the applicable
Lessee and or Manager to operate the Hotels in the manner contemplated by the
Leases and the Management Agreements.
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Under Title III of the ADA, a hotel with more than five rooms for rent is
considered both a "public accommodation" and a "commercial facility." Under
the public accommodations provisions of the ADA, the Company, as owner of the
Hotels will be obligated to make reasonable accommodations to patrons who have
physical, mental or other disabilities. This will include the obligation to
remove architectural and communication barriers at the Hotels when doing so is
"readily achievable" and to ensure that alterations to the Hotels performed
after January 26, 1992 conform to the specific requirements of the ADA
implementing regulations. The Leases require the Lessees to comply with the
ADA. A Lessee will also generally be obligated to remedy any ADA compliance
matters from the applicable FF&E Reserve, its own funds, financing by third
parties or financing provided by the Company (which would increase base rent
under the Leases). See "Risk Factors--Americans With Disabilities Act."
GROUND LEASES
The right to occupy the land underlying 10 of the Hotels were or will be
acquired by an assignment of leasehold interest under long term ground leases.
In each case, the remaining term of the ground lease (including renewal
options) is in excess of 43 years, and the ground lessors are unrelated to the
sellers and the Company.
Rent payable under the 10 ground leases is the responsibility of the
Company's Lessees 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 ground lease terminates,
the Lease with respect to the Hotel on such ground-leased land will also
terminate. 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. See "Risk Factors--Ground Leases."
MORTGAGES
Certain of the Company's Hotels are currently and from time to time may be
made subject to mortgages securing the Line of Credit or the Expanded Credit
Facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--The Company."
DAMAGE, DESTRUCTION OR CONDEMNATION
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 the applicable
Lessee may terminate the Lease. If either (i) the damage is not extensive
enough to give rise to an option to terminate the 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.
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, a Lessee or a
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 Lease will not terminate and the applicable 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
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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 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. 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. See "--Ground Leases."
LEGAL PROCEEDINGS
The Company has a limited operating history and is not currently a party to
any legal proceedings. Under the Purchase Agreements, each of the sellers
represented to the Company that there were no pending condemnation, eminent
domain or other actions, suits or proceedings involving the Additional Hotels,
except for certain real estate taxation disputes, certain matters covered by
insurance maintained by the sellers and certain immaterial matters not covered
by such insurance. Although in the ordinary course of business the Company is
or may become involved in legal proceedings, the Company has a limited
operating history and is not aware of any material pending legal proceeding
affecting any of the Hotels for which it might become liable.
In the ordinary course of their business Advisors and HRP are occasionally
involved in litigation. Early in 1995, HRP commenced a foreclosure action to
enforce indemnities given in connection with the surrender of certain
leaseholds to, and the purchase of certain properties by, HRP in 1992. In May
1995, the defendants in the foreclosure action and parties related to HRP's
former tenants and sellers asserted cross claims against HRP, Advisors,
Messrs. Portnoy and Martin and others, including Sullivan & Worcester, counsel
to HRP, Advisors and the Company. The same cross-claim defendants were served
in late February 1996, in an additional action in a federal court. The cross
claims and separate claims allege, among other things, fraud (including
violations of federal securities laws), conflicts of interest, breach of
fiduciary duties, legal malpractice, civil conspiracy and violations of 18
U.S.C. (S)1962 (RICO) in connection with the leasehold surrenders, the
transactions and indemnities underlying the foreclosure action and certain
related transactions, and that the foreclosure defendants and third party
plaintiffs suffered substantial damages as a result. HRP, Advisors and other
parties to this dispute have sought arbitration of all arbitrable claims
arising from this dispute pursuant to the contract under which the dispute
originated and an arbitration proceeding is now underway. Although the outcome
of this litigation is currently indeterminable, the Company has been advised
that each of the third party defendants believes the claims against it are
without merit and intends to defend and deny the allegations in these cross
claims and separate claims, and that HRP intends to pursue the original
foreclosure action. The Company is not a party to this litigation.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
persons who are Trustees and officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Barry M. Portnoy........... 50 Managing Trustee (term will expire in 1996)
Gerard M. Martin........... 61 Managing Trustee (term will expire in 1997)
John G. Murray............. 35 President, Chief Operating Officer and Secretary
Thomas M. O'Brien.......... 29 Treasurer and Chief Financial Officer
Adam D. Portnoy............ 25 Vice President
John L. Harrington......... 59 Independent Trustee (term will expire in 1996)
William J. Sheehan......... 51 Independent Trustee (term will expire in 1997)
Arthur G. Koumantzelis..... 65 Independent Trustee (term will expire in 1998)
</TABLE>
The following is a biographical summary of the experience of the Trustees
and officers of the Company.
Barry M. Portnoy is a Managing Trustee of the Company. Mr. Portnoy has been
a partner in the law firm of Sullivan & Worcester LLP since 1978. Mr. Portnoy
has been a Managing Trustee of HRP since its organization in 1986. From 1985
until the merger of Greenery Rehabilitation Group, Inc. ("Greenery") into
Horizon Healthcare Corporation ("Horizon") in February 1994 (the
"Horizon/Greenery Merger"), Mr. Portnoy served as a Director of Greenery. Mr.
Portnoy is currently a Director of Horizon and a Director and 50% shareholder
of Advisors. Mr. Portnoy has been actively involved in real estate and real
estate finance activities for approximately 20 years.
Gerard M. Martin is a Managing Trustee of the Company. Mr. Martin is a
private investor in real estate. Mr. Martin has been a Managing Trustee of HRP
since its organization in 1986. From 1985 until the Horizon/Greenery Merger,
Mr. Martin served as the Chief Executive Officer and Chairman of the Board of
Directors of Greenery. Mr. Martin is currently a Director of Horizon and a
Director and 50% shareholder of Advisors. Mr. Martin has been active in the
real estate industry for more than 30 years.
John G. Murray is the President, Chief Operating Officer and Secretary of
the Company. Mr. Murray served in various capacities for HRP and Advisors from
1993 through August 1995. Mr. Murray served as Director of Finance, Business
Analysis and Planning at Fidelity Brokerage Services, Inc. from 1992 to 1993
and as Director of Acquisitions from 1990 through 1991. Prior to 1990, Mr.
Murray was a senior manager at the accounting firm of Arthur Young & Company
(now Ernst & Young LLP). Mr. Murray is a certified public accountant.
Thomas M. O'Brien is the Treasurer and Chief Financial Officer of the
Company. Mr. O'Brien is also a Vice President and employee of Advisors. Prior
to his affiliation with Advisors in March 1996, Mr. O'Brien was employed by
Arthur Andersen LLP for more than five years. Mr. O'Brien is a certified
public accountant.
Adam D. Portnoy is a Vice President of the Company. Mr. Portnoy is also a
Vice President of Advisors and has been employed by Advisors since October
1995. Prior to his employment by Advisors, Mr. Portnoy was employed as Manager
of Strategic Planning for Phase Metrics, Inc. a privately held manufacturer of
computer testing equipment, and as a merchant banking analyst at Donaldson,
Lufkin and Jenrette Securities Corporation. Adam Portnoy is the son of Barry
Portnoy.
John L. Harrington has been the Chief Executive Officer of the Boston Red
Sox Baseball Club for at least five years and is Executive Director and
Trustee of the Yawkey Foundation and a Trustee of the JRY Trust. Mr.
Harrington is also a director of four bank subsidiaries of Fleet Financial
Group, Inc. Mr. Harrington was a Trustee of HRP from 1991 through August 1995.
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William J. Sheehan has been the Chief Financial Officer of Ian Schrager
Hotels, Inc. since May 1995. From 1993 through May 1995, Mr. Sheehan was a
self employed consultant on financial and operating matters to companies in
the hotel industry. From 1982 until 1993 he was employed by Omni Hotels, most
recently as Vice Chairman (1992 to 1993) and President and Chief Executive
Officer (1988 to 1992). Prior to that time, he was a partner at Arthur
Andersen & Co. (now Arthur Andersen LLP). Mr. Sheehan is a certified hotel
administrator, a Fellow of the Educational Institute of the American Hotel and
Motel Association and has been a speaker at various hotel industry
conferences.
Arthur G. Koumantzelis has been Senior Vice President and Chief Financial
Officer of Cumberland Farms, Inc. since July 1990. Cumberland Farms, Inc. is a
private company engaged in the convenience store business in the northeastern
United States and Florida and in the distribution and retail sale of gasoline
in the northeastern United States. Cumberland Farms, Inc. filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in May 1992 and
subsequently emerged from bankruptcy proceedings in December 1993. Mr.
Koumantzelis was a Trustee of HRP from 1992 through August 1995.
The Declaration of Trust provides that a majority of the Board of Trustees
will be composed of Independent Trustees who are not affiliated with the
Advisors nor serve as officers of the Company. Messrs. Harrington, Sheehan and
Koumantzelis are the Company's Independent Trustees.
The Board of Trustees has determined to renominate Messrs. Harrington and
Portnoy, whose terms as Trustees expire in 1996, for additional three year
terms as Trustees at the 1996 annual meeting of Shareholders.
COMMITTEES OF THE BOARD OF TRUSTEES
The Board of Trustees maintains an Audit Committee consisting of the three
Independent Trustees. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants,
considers the appropriateness of audit and nonaudit fees charged and reviews
the adequacy of the Company's internal accounting controls.
The entire Board of Trustees functions as an Executive Compensation
Committee to implement the Company's Incentive Share Award Plan. See "--
Incentive Share Award Plan." A subcommittee of the Executive Compensation
Committee composed of the Independent Trustees reviews the performance of
Advisors under the Advisory Agreement. See "--Advisors and the Advisory
Agreement--Compensation to Advisors."
COMPENSATION OF TRUSTEES AND OFFICERS
The Company pays its Independent Trustees an annual fee of $20,000 plus a
fee of $500 for each meeting attended and reimburses expenses incurred by its
Independent Trustees for attending meetings. Each Independent Trustee received
a grant of 300 Shares after the completion of the Company's initial public
offering and will automatically receive an additional annual grant of 300
Shares at the first meeting of the Board of Trustees following each annual
meeting of Shareholders commencing in 1996. See "--Incentive Share Award
Plan." In addition, the Independent Trustee serving as Chairman of the Audit
Committee, which position rotates annually among the Independent Trustees, is
paid $2,000 per year for such service.
EMPLOYEES
The Company is an advised REIT and has no employees. Services which would
otherwise be provided by employees are provided by Advisors pursuant to the
Advisory Agreement and by the Managing Trustees and officers of the Company.
Although officers of the Company do not receive any cash compensation from the
Company, they may be entitled to incentive share awards under the Company's
Incentive Share Award Plan. See "--Incentive Share Award Plan."
INCENTIVE SHARE AWARD PLAN
The Company has adopted an Incentive Share Award Plan and has reserved
100,000 Shares for grant thereunder to Independent Trustees and officers of,
and consultants (other than Advisors) to, the Company. The
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officers of the Company are employees of Advisors and not of the Company and
therefore receive their salary compensation from Advisors. The Company has
established its Incentive Share Award Plan in order to provide it with a
vehicle with which to foster a continuing identity of interest among the
Company's officers and Independent Trustees and the Company's Shareholders. In
addition, the Incentive Share Award Plan permits the Company to compensate its
officers for the performance of certain duties which fall outside the scope of
services covered by the Advisory Agreement.
The Independent Trustees automatically receive grants of 300 Shares per year
as part of their annual compensation. In granting other incentive share
awards, the Board of Trustees may consider a range of factors, including the
complexity and duration of tasks performed by grantees on behalf of the
Company and the amount and terms of Shares previously granted. The vesting
schedule of each incentive share award is determined at the time of grant. In
the event that an officer who has been granted an incentive share award
resigns during the vesting period of such award, the grantee generally will be
entitled to receive only the number of Shares which will have vested prior to
the date of resignation. No Shares have been granted to date under the
Incentive Share Award Plan other than the initial grant of 300 Shares to each
Independent Trustee.
TRUSTEES' AND OFFICERS' INDEMNIFICATION
The Declaration provides that Trustees, officers, employees and agents of
the Company shall be indemnified by the Company against any losses, judgments,
liabilities, expenses and amounts paid in settlement of any claims asserted
against them by reason of their status, provided that such claims were not the
result of willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. The Company may in the future purchase insurance including
general liability, securities liability, Trustee and officer liability and
other insurance in such amounts and with such carriers as the Company
reasonably deems appropriate in order to support this indemnity.
ADVISORS AND THE ADVISORY AGREEMENT
ADVISORS
Advisors is a Delaware corporation owned by Barry M. Portnoy and Gerard M.
Martin. Advisors' principal place of business is 400 Centre Street, Newton,
Massachusetts and its telephone number is (617) 332-3990. Advisors provides
management services and investment advice to the Company. Advisors also acts
as the investment advisor to HRP and has other business interests. The
Directors of Advisors are Gerard M. Martin, Barry M. Portnoy and David J.
Hegarty. The officers of Advisors are David J. Hegarty, President and
Secretary, John G. Murray, Executive Vice President, John A. Mannix, Vice
President, Thomas M. O'Brien, Vice President, Adam D. Portnoy, Vice President
and Ajay Saini, Treasurer. The following is a biographical summary of the
experience of the Directors and officers of Advisors who are not described
under "Management" above.
David J. Hegarty, age 39, is the President, Chief Operating Officer and
Secretary of HRP and the President and Secretary of Advisors. Mr. Hegarty has
been employed by HRP and Advisors in various capacities since 1987 and prior
to that he was an audit manager with Arthur Young & Company (now Ernst & Young
LLP). Mr. Hegarty is a certified public accountant.
John A. Mannix, age 40, is a Vice President of Advisors. Mr. Mannix has been
employed by Advisors since 1992. Prior to joining Advisors, he was Director of
Property Management for Greenery.
Ajay Saini, age 35, is the Treasurer of HRP and Advisors. Mr. Saini has been
employed by Advisors in various capacities since June 1990 and prior to that
he was a senior accountant at Arthur Young & Company (now Ernst & Young LLP).
Mr. Saini is a certified public accountant.
THE ADVISORY AGREEMENT
Under the Advisory Agreement, Advisors is obligated to use its best efforts
to present to the Company a continuing and suitable investment program
consistent with the investment policies and objectives of the Company. See
"Policies with Respect to Certain Activities--Investment Policies." Subject to
its duty of overall
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management and supervision, the Board of Trustees has delegated to Advisors
the power and duty to, among other things:
(i) serve as the Company's investment advisor, with its obligations to
include providing research and economic and statistical data in connection
with the Company's investments and recommending changes in the Company's
investment policies when appropriate;
(ii) investigate and evaluate investment opportunities and recommend them
to the Trustees;
(iii) manage the Company's short term investments, including the
acquisition and sale of money market instruments in accordance with the
Company's policies;
(iv) administer the day to day operations of the Company;
(v) investigate and select prospective tenants for the Company's hotels
and enter into appropriate leases and other contracts on behalf of the
Company in furtherance of the investment activities of the Company;
(vi) upon request by the Trustees, act as attorney in fact or agent in
acquiring and disposing of investments and funds of the Company and in
handling, prosecuting and settling any claims of the Company;
(vii) upon request by the Trustees, invest and reinvest any money of the
Company;
(viii) obtain for the Company, when appropriate, the services of property
managers or management firms to perform customary property management
services with regard to the real estate properties owned by or in the
possession of the Company, and perform such supervisory or monitoring
services on behalf of the Company with respect to the activities of such
property managers or management firms as would be performed by a prudent
owner;
(ix) obtain for the Company such services as may be required for other
activities relating to the investment portfolio of the Company;
(x) administer such day to day bookkeeping and accounting functions as
are required for the proper management of the assets of the Company and
prepare or cause to be prepared such reports as may be required by any
governmental authority in connection with the ordinary conduct of the
Company's business;
(xi) provide office space, office equipment and the use of accounting or
computing equipment when required, and provide personnel necessary for the
performance of the foregoing services; and
(xii) upon request by the Trustees, make reports thereto of its
performance of the foregoing services to the Company.
In performing its services under the Advisory Agreement, Advisors may
utilize facilities, personnel and support services of various of its
affiliates.
Under the Advisory Agreement, Advisors assumes no responsibility other than
to render the services described therein in good faith and is not responsible
for any action of the Board of Trustees in following or declining to follow
any advice or recommendation of Advisors. In addition, the Company has agreed
to indemnify Advisors, its shareholders, directors, officers, employees and
affiliates against liabilities relating to certain acts or omissions of
Advisors undertaken in good faith.
The initial term of the Advisory Agreement expired on December 31, 1995 and
has been renewed for a term through December 31, 1996. Renewal or extension of
the term the Advisory Agreement is subject to the periodic approval of a
majority of the Independent Trustees. Pursuant to the Advisory Agreement,
Advisors and Messrs. Portnoy and Martin have agreed not to provide advisory
services to, or serve as a director or officer of, any other REIT which is
principally engaged in the business of ownership of hotels or to make
competitive direct investments in hotels, in each case, without the consent of
the Company's Independent Trustees. See "Policies with Respect to Certain
Activities--Conflict of Interest Policies."
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COMPENSATION TO ADVISORS
The Board of Trustees, including a majority of the Independent Trustees,
determines the amount of compensation which the Company contracts to pay to
Advisors and any renewal, extension or amendment of the Advisory Agreement,
based on such factors as it deems appropriate. Such factors may include the
size of the advisory fee in relation to the size, composition, quality and
profitability of the investment portfolio of the Company, the success of
Advisors in generating opportunities that meet the Company's investment
objectives, the quality and extent of services and advice furnished by
Advisors, the rates charged by other investment advisors performing comparable
services and the costs of similar services incurred by other REITs.
The Advisory Agreement currently provides for (i) an annual advisory fee,
payable monthly and reconciled annually, and (ii) an annual incentive fee. The
annual advisory fee is equal to the sum of 0.70% of the daily weighted average
of the total book value of the Company's real estate assets (before reserves
for depreciation or bad debts or other similar non-cash reserves) invested,
directly or indirectly, in equity interests in and loans secured by real
estate and personal property owned in connection with such real estate (the
"Average Invested Capital") up to $250.0 million plus 0.50% of Average
Invested Capital exceeding $250.0 million. The annual incentive fee is
calculated on the basis of annual increases in the amount of Cash Available
for Distribution per Share. No incentive fees were payable for the initial
term of the Advisory Agreement. Starting in 1996 the incentive fee payable to
Advisors is 15% of annual increases in Cash Available for Distribution per
Share times the weighted average number of Shares outstanding in each year,
but in no event more than $0.02 per Share times the weighted average number of
Shares outstanding in each year. Any incentive fee earned by Advisors will be
paid in Shares.
The Advisory Agreement currently in effect between Advisors and HRP is
substantially similar to the Advisory Agreement between Advisors and the
Company. Amounts invested by HRP in the Company, however, are not counted for
purposes of determining the advisory fees payable by HRP to Advisors.
The Company does not have any employees or administrative officers separate
from Advisors. Services which might otherwise be provided by employees are
provided to the Company by employees of Advisors. Similarly, office space is
provided to the Company by Advisors. Although the Company does not have
significant general and administrative operating expenses, in addition to fees
payable to Advisors, the Company is required to pay various other expenses
relating to Advisor's activities, including the costs and expenses of
acquiring, owning and disposing of the Company's real estate interests
(including appraisal, reporting, audit and legal fees), its costs of borrowing
money and its costs of securities listing, transfer, registration and
compliance with reporting requirements. Also, the fees and expenses of the
Company's Independent Trustees are paid by the Company.
CERTAIN TRANSACTIONS
In March 1995, the Company acquired 21 of the Initial Hotels for $179.4
million. Substantially all of the funding for this acquisition, including
start up, closing and option costs, was provided to the Company by HRP as a
demand loan and through the purchase by HRP of 40,000 Shares for $1.0 million
($25.00 per Share). In August 1995 in connection with the Company's initial
public offering, HRP purchased an additional 3,960,000 Shares at $25.00 per
Share by cancelling $99.0 million of the HRP demand loan, and Advisors
purchased directly from the Company 250,000 Shares at $25.00 per Share. In
addition, $64.3 million of cash proceeds of the Company's initial public
offering was used to repay the remaining balance of the HRP demand loan. In
August 1995, Advisors entered into the Advisory Agreement with the Company
under which it earns advisory fees. Messrs. Portnoy and Martin are each
Managing Trustees of the Company, Managing Trustees of HRP and Directors and
50% owners of Advisors. For the period February 7, 1995 (inception) through
December 31, 1995, the advisory fees paid by the Company to Advisors were $1.3
million. See "--Advisors and the Advisory Agreement" and "Risk Factors--
Conflicts of Interest."
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investments, dispositions, financing, conflicts of interest and certain other
activities. These policies have been determined by the Board of Trustees and,
although there is no current intention to do so, these policies may be amended
or revised from time to time at the discretion of the Board of Trustees
without a vote of the Company's Shareholders, except that the Company cannot
change its policy of seeking to maintain its qualification as a REIT nor can
it enter into certain extraordinary transactions (such as a merger or the sale
of all or substantially all of its assets) without the approval of two thirds
of the Shareholders.
INVESTMENT POLICIES
ACQUISITIONS
The Company is committed to pursuing growth through the acquisition of
additional hotels and intends to pursue acquisition opportunities after
completion of this Offering. Generally, the Company prefers to purchase and
lease multiple hotels in one transaction because the Company believes cross
default covenants and all or none renewal rights for multiple hotels enhance
the credit characteristics of its leases and the security of its investments.
In implementing its acquisition strategy, the Company considers a range of
factors relating to proposed hotel purchases including: (i) historical and
projected cash flows; (ii) the competitive market environment and the current
or potential market position of each proposed hotel; (iii) the availability of
a qualified lessee; (iv) the physical condition of the proposed hotel and its
potential for redevelopment or expansion; (v) the estimated replacement cost
and proposed acquisition price of the proposed hotel; (vi) the price segment
in which the proposed hotel is operated; and (vii) the strength of the
particular national hotel organization, if any, with which the proposed hotel
is or may become affiliated. In determining the competitive position of a
prospective hotel, the Company examines the proximity of the proposed hotel to
business, retail, academic and tourist attractions and transportation routes,
the number and characteristics of competitive hotels within the proposed
hotel's market and the existence of any barriers to entry within that market,
including zoning restrictions and financing constraints. While the Company
focuses on the acquisition of moderately priced hotel properties, it also
considers acquisitions in all segments of the hotel industry. The Company
believes that its capital position after completion of this Offering will
enhance its ability to pursue attractive acquisition opportunities.
An important part of the Company's acquisition strategy is to identify and
select qualified and experienced hotel lessees and managers. The Company
intends to continue to select hotels for acquisition which will enhance the
diversity of its portfolio in respect to location, brand name, lessees and
managers. The Company has no policies which would limit the purchase price or
the percentage of its assets which may be invested in any individual hotel or
invested in hotels leased to a single lessee or managed by a single manager or
operated with a single franchise affiliation.
OTHER INVESTMENTS IN REAL ESTATE
Although the Company emphasizes direct wholly owned investments in its
hotels, it may, in its discretion, invest in joint ventures, mortgages and
other real estate interests, consistent with its qualification as a REIT. The
Company may invest in real estate joint ventures if it concludes that by doing
so it may benefit from the participation of coventurers or that the
opportunity of the Company to participate in the investment is contingent on
the use of a joint venture structure. The Company may invest in participating,
convertible or other types of mortgages if it concludes that by doing so it
may benefit from the cash flow or any appreciation in the value of the subject
property. Convertible mortgages are similar to equity participation because
they permit the lender to either participate in increasing revenues from the
property or convert some or all of that mortgage into equity ownership
interests. At all times, the Company intends to make its investments in such a
manner as to be consistent with the requirements of the Code to qualify as a
REIT.
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DISPOSITION POLICIES
The Company has no current intention to dispose of any of its hotels,
although it reserves the right to do so. The Company currently anticipates
that disposition decisions, if any, will be made by the Company based on (but
not limited to) factors such as the following: (i) potential opportunities to
increase revenues and property values by reinvesting sale proceeds; (ii) the
proposed sale prices; (iii) the strategic fit of the hotel with the rest of
the Company's portfolio; (iv) the potential for, or the existence of, any
environmental or regulatory problems; (v) the existence of alternative uses or
needs for capital; and (vi) the maintenance of the Company's qualification as
a REIT. For a description of certain tax consequences arising from disposition
of hotels, see "Federal Income Tax Considerations--Taxation of the Company."
FINANCING POLICIES
The Company has entered into the Line of Credit and the Expanded Credit
Facility which are available to finance the purchase of the Additional Hotels
and other hotel properties. Under such credit facilities the Company may draw
up to $200.0 million on a secured revolving basis to finance the purchase of
the Additional Hotels or other hotels, and may borrow up to an additional
$250.0 million on an initially unsecured, non-revolving basis to finance the
purchase of the Additional Hotels. The Company expects to use the proceeds of
this Offering and to borrow under these credit facilities to finance the
acquisition of the Additional Hotels.
Assuming that (i) all Additional Hotels are acquired by the Company, (ii)
the Company completes this Offering, and (iii) no portion of the Underwriters'
overallotment option is exercised, the aggregate amount remaining outstanding
under the Line of Credit is expected to be $120.5 million. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--The
Company."
The Company currently intends to employ conservative financial policies in
pursuit of its growth strategies. Although there are no limitations in the
Company's organizational documents on the amount of indebtedness it may incur,
the Company currently intends to pursue its growth strategies while
maintaining a capital structure under which its debt will not exceed 50% of
its total market capitalization. The Company may from time to time re-evaluate
and modify its current borrowing policies in light of then current economic
conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors and may
increase or decrease its ratio of debt to total market capitalization
accordingly. See "Risk Factors--Risks of Leverage."
The Board of Trustees of the Company may determine to obtain a replacement
for its current credit facilities or to seek additional capital through
additional equity offerings, debt financings, securitizations, retention of
cash flow (subject to satisfying the Company's distribution requirements under
the REIT rules) or a combination of these methods. To the extent that the
Board of Trustees decides to obtain additional debt financing, the Company may
do so on a secured or unsecured basis. These mortgages may be recourse, non-
recourse or cross collateralized and may contain cross default provisions. The
Company has not established any limit on the number or amount of mortgages
that may be placed on any single property or on its portfolio as a whole. The
Company may also seek to obtain other lines of credit (both secured or
unsecured) or to issue securities senior to the Shares, including preferred
shares of beneficial interest and debt securities (either of which may be
convertible into Shares or be accompanied by warrants to purchase Shares) or
to engage in securitization transactions which may involve a sale or other
conveyance of the Company's Hotels to subsidiaries or to unaffiliated special
purpose entities. The Company may also finance acquisitions through an
exchange of properties or through the issuance of additional Shares or other
securities. The proceeds from any financings by the Company may be used to pay
distributions, to provide working capital, to refinance existing indebtedness
or to finance acquisitions and expansions of existing or new properties.
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CONFLICT OF INTEREST POLICIES
The Declaration requires that a majority of the Company's Trustees be
comprised of Independent Trustees. In addition, the Company has adopted
certain policies designed to eliminate or minimize potential conflicts of
interest, as described below. However, there can be no assurance that these
policies always will be successful in eliminating the influences of such
conflicts, and if they are not successful, decisions could be made that might
not fully serve the interests of all Shareholders.
Advisors acts as the investment advisor to the Company and HRP and also has
other business interests. Advisors will not be able to devote all of its
business time and resources to the Company and conflicts could arise with
respect to the allocation of its business time and resources. Although HRP has
stated that it has no current intention to purchase or finance any additional
hotel properties, a conflict could develop should HRP change its investment
policies and determine to increase its investments in hotel properties.
Messrs. Portnoy and Martin are Managing Trustees of HRP, Managing Trustees of
the Company and each is a Director and 50% shareholder of Advisors. Mr.
Portnoy is a partner in the firm of Sullivan & Worcester LLP, which acts as
counsel to the Company, HRP, Advisors and affiliates of each of the foregoing.
The Company has taken certain measures to address the foregoing potential
conflicts of interest and competing time demands. Certain employees of
Advisors have undertaken to devote substantially all of their business time to
the Company. Pursuant to the Advisory Agreement, Advisors and Messrs. Portnoy
and Martin have agreed not to provide advisory services to, or serve as
directors or officers of, any other REIT which is principally engaged in the
business of ownership of hotel properties or to make competitive direct
investments in hotel facilities, in each case, without the consent of the
Independent Trustees. Also, Advisors and Messrs. Portnoy and Martin are
generally required by applicable law to act in accordance with their fiduciary
responsibilities to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
currently intend: (i) to invest in the securities of other issuers for the
purpose of exercising control over such issuer; (ii) to underwrite securities
of other issuers; or (iii) to trade actively in loans or other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
repurchase or otherwise reacquire Shares or any other securities it may issue
and may engage in such activities in the future. The Board of Trustees has no
current intention of causing the Company to repurchase any of the Shares and
any such action would be taken only in conformity with applicable federal and
state laws and the requirements for qualifying as a REIT under the Code and
the Treasury Regulations. Although it may do so in the future, the Company has
not issued Shares or any other securities in exchange for property, nor has it
reacquired any of its Shares or any other securities. Also, although it has no
current intention to do so, the Company may make loans to third parties,
including to its officers and joint ventures in which it decides to
participate.
DESCRIPTION OF THE SHARES
GENERAL
The authorized capital stock of the Company consists of 100,000,000 Shares,
$0.01 par value per Share, and 100,000,000 preferred shares of beneficial
interest, without par value (the "Preferred Shares"). Upon the completion of
this Offering, 25,600,900 Shares will be issued and outstanding, and there
will be no Preferred Shares outstanding. Except as otherwise may be determined
by the Trustees with respect to any class or series of Preferred Shares, no
shares of the Company will have preference, conversion, exchange, sinking
fund, redemption or preemptive rights.
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COMMON SHARES
Subject to the provisions described in "Summary of the Declaration of
Trust--Restrictions on Transfer," each outstanding Share entitles the holder
thereof to one vote on all matters voted on by Shareholders, including the
election of Trustees, and there are no cumulative voting rights. All Shares to
be issued will be duly authorized and nonassessable. Distributions will be
made to the holders of Shares if and when declared by the Trustees out of
funds legally available therefor, and all Shares will participate equally in
distributions declared with respect to the Shares. If the Company is
liquidated, each outstanding Share will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company and the rights of holders of any
Preferred Shares.
PREFERRED SHARES
Preferred Shares, if and when issued, will entitle holders to such rights
and be subject to such restrictions as may be established by the Trustees at
the time of issuance.
TRANSFER AGENT
State Street Bank and Trust Company has been appointed as transfer agent and
registrar for the Shares.
SUMMARY OF THE DECLARATION OF TRUST
The following summary of the material provisions of the Declaration does not
purport to be complete, and is qualified in its entirety by reference to the
Declaration and Bylaws, copies of which have been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
TRUSTEES
Under the Declaration, the number of Trustees may be fixed from time to time
by two thirds of the Trustees or by amendment of the Declaration duly adopted
by holders of two thirds of the outstanding Shares entitled to vote thereon,
with a minimum of three and a maximum of seven Trustees. The Declaration
provides that a majority of the Trustees must be Independent Trustees. The
terms of the Trustees are staggered. See "Management." As the Trustees' terms
expire, replacements are elected by a plurality of the votes cast. The
Declaration provides that only a majority of the Trustees then in office shall
have the authority to fill any vacancies on the Board, including vacancies
created by an increase in the number of Trustees. In addition, the Declaration
provides that a new Trustee elected to fill a vacancy will serve for the
remainder of the full term of his or her class and that no decrease in the
number of Trustees shall shorten the term of an incumbent. Moreover, the
Declaration provides that Trustees may be removed with or without cause only
by the affirmative vote of all the remaining Trustees or by holders of at
least two thirds of the voting power of the Shares entitled to vote at the
election of Trustees, voting as a single class.
The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by the Board, of candidates for election as
Trustees (the "Nomination Procedure") which are not included in the Company's
proxy statement. The Nomination Procedure provides that only persons who are
nominated by or at the direction of the Board of Trustees, or by a Shareholder
of record on the date of the giving of the notice who has given timely prior
written notice to the Secretary of the Company prior to the meeting at which
Trustees are to be elected, will be eligible for election as Trustees. To be
timely, notice of a Shareholder proposal in the case of an annual meeting,
other than a proposal to be included in the Company's proxy, must be received
by the Company not less than 90 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting. Nothing in the
Nomination Procedure will preclude discussion by any Shareholder of any
nomination properly made or brought before an annual or special meeting in
accordance with the above mentioned procedures.
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LIABILITY OF TRUSTEES
The Declaration provides that, to the fullest extent permitted by Maryland
law, no Trustee, officer, employee or agent will be personally liable to the
Company or its Shareholders for any act or omission. The Company has been
advised that under current Maryland law, such persons will remain liable for
their own willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. The Trustees are fiduciaries of the Company and must at all
times exercise care and loyalty in handling Company affairs. The general legal
principle for evaluating Trustee conduct is the business judgment rule. This
rule is a mechanism developed by courts which presumes that Trustees are
acting properly if they act on an informed basis, in good faith, in a manner
they reasonably believe to be in the best interests of Shareholders and
without fraud or self dealing. This is a rapidly developing and changing area
of the law and potential Shareholders who have questions concerning the duties
of the Trustees should consult with their own counsel.
The Declaration also limits the liability of Trustees and officers of the
Company to the Company or its Shareholders for money damages to the fullest
extent permitted by Maryland law.
The Declaration obligates the Company to indemnify (i) its Trustees and
officers to the full extent permitted by Maryland law, including in respect of
the advancement of expenses and (ii) other employees and agents to such extent
as shall be authorized by the Trustees and permitted by Maryland law. Maryland
law permits a real estate investment trust to indemnify its present and former
trustees and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities, unless it is established that (i) the
act or omission of the trustee or officer was material to the matter giving
rise to the proceeding and (x) was committed in bad faith or (y) was the
result of active and deliberate dishonesty, (ii) the trustee or officer
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the trustee or officer had
reasonable cause to believe that the act or omission was unlawful. The Company
has the right but has no obligation to obtain insurance including general
liability, securities liability, trustee and officer liability and other
insurance in such amounts and with such carriers as the Company reasonably
deems appropriate in order to support the indemnity described above.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to Trustees,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission (the "Commission") such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
LIMITATION OF LIABILITY; SHAREHOLDER LIABILITY
Maryland law permits a REIT to provide, and the Declaration provides, that
no Trustee, officer, Shareholder, employee or agent of the Company will be
held to any personal liability, jointly or severally, for any obligation of or
claim against the Company, and that, as far as practicable, each written
agreement of the Company is to contain a provision to that effect. Despite
these facts, counsel has advised the Company that in some jurisdictions the
possibility exists that Shareholders of a non-corporate entity such as the
Company may be held liable for acts or obligations of the Company. Counsel has
advised the Company that the State of Texas may not give effect to the
limitation of shareholder liability afforded by Maryland law, but that Texas
law would likely recognize contractual limitations of liability such as those
discussed above. The Company intends to continue to conduct its business in a
manner designed to minimize potential Shareholder liability by, among other
things, inserting appropriate provisions in written agreements of the Company.
No assurance can be given, however, that Shareholders can avoid liability in
all instances in all jurisdictions.
The Declaration provides that, upon payment by a Shareholder of any such
liability, the Shareholder will be entitled to indemnification by the Company.
There can be no assurance that, at the time any such liability arises, there
will be assets of the Company sufficient to satisfy the Company's
indemnification obligation. The Trustees
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intend to conduct the operations of the Company, with the advice of counsel,
in such a way as to minimize or avoid, to the extent practicable, any
liability of the Shareholders of the Company for actions of the Company. The
Trustees do not intend to provide insurance covering such risks to the
Shareholders.
DURATION AND TERMINATION
The Declaration provides that the duration of the Company will be perpetual.
However, the Declaration also permits the holders of two thirds of the then
outstanding Shares entitled to vote thereon to terminate and dissolve the
Company at any time.
PROHIBITED INVESTMENTS AND ACTIVITIES
The Declaration prohibits the Company from undertaking any activity that
would disqualify the Company as a REIT under the provisions of the Code as
long as a REIT is accorded substantially the same treatment or benefits under
the United States tax laws from time to time in effect as under Sections 856-
860 of the Code as in effect at the date of adoption of the Declaration; or
using or applying land for farming, agriculture, horticulture or similar
purposes in violation of Section 8-302(b) of the Corporations and Associations
Article of the Annotated Code of Maryland.
TRANSACTIONS WITH AFFILIATES, TRUSTEES, EMPLOYEES, OFFICERS OR AGENTS
Except as otherwise provided by the Declaration and in the absence of fraud,
any contract or other transaction between the Company and any other Persons,
as defined in the Declaration, in which the Company is interested, will be
valid, and no Trustee or officer, employee or agent of the Company will have
any liability as a result of entering into any such contract, act or
transaction, even though (a) one or more of the Trustees or officers,
employees or agents of the Company are directly or indirectly interested in or
connected with or are trustees, partners, directors, employees, officers or
agents of such other Person, or (b) one or more of the Trustees or officers,
employees or agents of the Company individually or jointly with others, is a
party or are parties to, or are directly or indirectly interested in or
connected with, such contract, act or transaction; provided that in each such
case (i) such interest or connection is disclosed or known to the Trustees and
thereafter the Trustees authorize or ratify such contract, act or other
transaction by affirmative vote of a majority of the Trustees who are not so
interested or (ii) such interest or connection is disclosed or known to the
Shareholders, and thereafter such contract, act or transaction is approved by
Shareholders holding a majority of the Shares then outstanding and entitled to
vote thereon. The Trustees are not restricted by the Declaration from forming
a corporation, partnership, trust or other business association owned by any
Trustee, officer, employee or agent or by their nominees for the purpose of
holding title to property of the Company or managing property of the Company,
provided that the Trustees make a determination that the creation of such
entity for such purpose is in the best interests of the Company.
RESTRICTIONS ON TRANSFER
The Declaration contains certain restrictions on the amount of Shares that
individual Shareholders may own. These restrictions are intended to assist the
Company in complying with REIT ownership restrictions of the Code and
otherwise to promote orderly corporate governance. For the Company to qualify
as a REIT under the Code, no more than 50% in value of its capital stock
(after taking into account options to acquire Shares) may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities and constructive ownership among specified family members)
during the last half of a taxable year (other than the first taxable year) or
during a proportionate part of a shorter taxable year. The Shares must also be
beneficially owned (other than during the first taxable year) by 100 or more
persons during at least 335 days of a taxable year or during a proportionate
part of a shorter taxable year. Because the Company expects to continue to
qualify as a REIT, the Declaration contains restrictions on the acquisition of
Shares intended to ensure compliance with these requirements. See "Federal
Income Tax Considerations--Taxation of the Company--Share Ownership Tests."
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Subject to certain exceptions specified in the Declaration, no holder may
own, directly or indirectly, more than 9.8% of the number or value of the
issued and outstanding Shares of the Company other than HRP, Advisors and
their affiliates, including persons who are deemed to have beneficial
ownership of the Shares directly owned by HRP and Advisors pursuant to the
attribution provisions of the Code, and other Shareholders exempted by
majority vote of the Trustees (the "Exempted Persons"). As a condition of the
exemption of any person, such person must give written notice to the Company
no later than the 15th day prior to any proposed transfer which, if
consummated, would result in such person owning Shares in excess of the
Ownership Limitation, provided, however, that the Trustees may waive the prior
notice requirement upon determination that such waiver is in the best
interests of the Company. In deciding whether to grant an exemption or waive
the prior notice requirement, the Board of Trustees may consider, among other
factors, the general reputation and moral character of the person requesting
an exemption, whether ownership of Shares would be direct or through ownership
attributed to such person, whether such person's ownership of Shares would
adversely affect the Company's ability to acquire additional hotels or engage
in other transactions and whether granting an exemption for the person
requesting an exemption would adversely affect any existing contractual
arrangement of the Company. In addition, the Board of Trustees may require
such opinions of counsel, affidavits, undertakings or agreements as it may
deem necessary or advisable in order to determine or ensure the Company's
status as a REIT or otherwise.
The Declaration contains provisions designed to ensure that a transferee
attempting to acquire Shares in violation of the Ownership Limitation will not
acquire rights or economic interests in the Shares purportedly transferred.
The Declaration defines a transfer as any sale, transfer, gift, assignment,
devise or other disposition of Shares, whether voluntary or involuntary,
whether of record or beneficial ownership and whether constructively, by
operation of law or otherwise. Under the Declaration, any transfer of Shares
that is in violation of the Ownership Limitation, that causes the Company to
be treated as "closely held" under Section 856(h) of the Code or that causes
the Shares to be held by fewer than 100 persons, and that is not otherwise
permitted under the Declaration will result in the designation of excess
shares ("Excess Shares") which Shares will be transferred by operation of law
to a person that is unaffiliated with the Company and unaffiliated with the
intended transferee as trustee of a trust for the exclusive benefit of one or
more organizations described in Sections 170(b)(1)(a) and 170(c) of the Code
("Charitable Beneficiary") designated by the Company. The trustee of the trust
will be deemed to own these Excess Shares for the benefit of the Charitable
Beneficiary on the day prior to the date of the violative transfer. Any
dividends or distributions paid prior to the Company discovering that such
Excess Shares were held in trust must be repaid by the intended transferee to
the Company and any dividend declared but unpaid will be rescinded as void ab
initio with respect to the intended transferee. Any dividends so disgorged or
rescinded will then be paid over to the trustee and held in trust for the
Charitable Beneficiary. Any vote taken by an intended transferee prior to the
discovery by the Company that the Shares were held in trust will be rescinded
as void ab initio. The owner of the Shares will be deemed to have given an
irrevocable proxy to the trustee to vote the Shares for the benefit of the
Charitable Beneficiary. At the direction of the Company, the trustee of the
trust shall transfer the Shares held in the trust to a person whose ownership
of the Shares will not violate the Ownership Limitation. If such a transfer is
made, the interest of the Charitable Beneficiary would terminate and proceeds
of the sale would be payable to the intended transferee and to the Charitable
Beneficiary. The intended transferee would receive the lesser of (i) the price
paid by the intended transferee for the Shares or, if the intended transferee
did not give value for the Shares, the market price of the Shares on the day
of the event causing the Shares to be held in trust and (ii) the price per
Share received by the trustee from the sale or other disposition of the Shares
held in trust. Any proceeds in excess of the amount payable to the intended
transferee will be payable to the Charitable Beneficiary. The Declaration also
provides that all Shares held in trust for the benefit of the Charitable
Beneficiary will be offered for sale to the Company or its designee for a 90
day period, at the lesser of the price paid for the Shares by the intended
transferee and the market price of the Shares on the date that the Company
accepts the offer. This period will commence on the date the Company receives
notice of the event causing the Shares to be held in trust. All certificates
representing Shares will bear a legend referring to the restrictions described
above. All persons who own, directly or by virtue of the attribution
provisions of the Code, 5% or more (or such other percentage between 1/2 of 1%
and 5%, as provided in the rules and regulations promulgated under the Code)
of the number or value of the outstanding Shares must give written notice
thereof to the Company by January 31 of each year. In addition, each
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Shareholder shall upon demand be required to disclose to the Company in
writing such information with respect to the ownership of Shares as the Board
of Trustees deems reasonably necessary to comply with the provisions of the
Code applicable to a REIT, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
These restrictions will not preclude settlement of transactions through the
NYSE.
SHAREHOLDER PROPOSALS
The Company's Bylaws establish an advance notice procedure with regard to
Shareholder proposals to be brought before an annual meeting of Shareholders
(the "Business Procedure"). The Business Procedure provides that Shareholder
proposals, other than proposals timely submitted for inclusion in the
Company's proxy statement, must be submitted in writing in a timely manner in
order to be considered at any annual meeting. To be timely, such notice must
be received by the Company not less than 90 days nor more than 120 days prior
to the anniversary date of the immediately preceding annual meeting. Nothing
in the Business Procedure will preclude discussion by any Shareholder of any
proposal properly made or brought before an annual meeting in accordance with
the above mentioned procedure.
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law (the "MGCL"), certain "business
combinations" (including a merger, consolidation, share exchange, or, in
certain circumstances, an asset transfer or issuance or reclassification of
equity securities) between a Maryland real estate investment trust and any
person who beneficially owns 10% or more of the voting power of the Company's
shares are prohibited or restricted unless exempted. The Declaration provides
that the Company has elected not to be governed by the business combination
provisions of the MGCL.
CONTROL SHARE ACQUISITIONS
The MGCL imposes limitations on the voting rights of Shares above certain
percentage thresholds acquired in a "control share acquisition" relating to a
Maryland real estate investment trust. The Declaration provides that the
Company has elected not to be governed by the control share acquisition
provisions of the MGCL.
AMENDMENT; MEETINGS
The Declaration may be amended by the vote of the holders of a majority of
the outstanding Shares entitled to vote thereon, except that the holders of
two thirds of the outstanding Shares entitled to vote thereon must approve any
amendments to those provisions of the Declaration that set forth the
procedures for the Company's investment policies, policies with respect to
certain distributions to Shareholders, the number, term and qualifications of
the Trustees, as well as certain provisions regarding the duration of the
Trust, the amendment process, restrictions on transfer of Shares and the
ability of the Trustees to designate and issue a series of Preferred Shares.
The approval of two thirds of the Trustees is also required for any such
amendment. In addition, two thirds of the Trustees, may, without the approval
or consent of the Shareholders, adopt any amendment that they in good faith
determine to be necessary to permit the Company to qualify as a REIT under the
Code.
The Declaration permits the Trustees, without the approval of the
Shareholders, to alter the Company's investment policies if the Trustees
determine in the future that such a change is in the best interests of the
Company and its Shareholders. The Company's investment policies and the
methods of implementing its investment policies may, therefore, vary as new
investment opportunities and financing techniques are developed.
Under the Declaration, annual meetings of Shareholders are required to be
held within six months after the end of each fiscal year. Special meetings of
the Shareholders may only be called by a majority of the Trustees and the
Shareholders may not act by written consent.
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ANTITAKEOVER PROVISIONS
The Company's Declaration and Bylaws contains several provisions that will
make it difficult to acquire control of the Company by means of a tender
offer, open market purchases, a proxy fight or otherwise, if the acquisition
is not approved by the Board of Trustees, or to change the composition of the
Board of Trustees in a relatively short period of time. The provisions are
designed to reduce the vulnerability of the Company to an unsolicited proposal
for a takeover or an unsolicited proposal for the restructuring or sale of the
Company and to encourage persons seeking to acquire control of the Company to
consult first with the Board of Trustees to negotiate the terms of any
proposed business combination or offer. These provisions may have the effect
of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its Shareholders. These provisions are
described above and include: the Ownership Limitation; the classified Board of
Trustees; the Nomination Procedure and the Business Procedure; the ability of
the Board of Trustees to designate and issue series of Preferred Shares and
designate the dividend, voting and other rights of each series; provisions
concerning special meetings and Shareholder actions by written consent; and
provisions concerning amendment of the Declaration. The Company has, however,
elected not to be governed by the provisions of Maryland law concerning
control share acquisitions and business combinations.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Shares (which constitutes the only outstanding class of
voting shares of the Company) by (i) each person known by the Company to own
beneficially more than 5% of the outstanding Shares, (ii) each of the
Company's Trustees and (iii) all Trustees and executive officers of the
Company as a group. Unless otherwise indicated, each person or entity named
below has sole voting and investment power with respect to all Shares shown to
be beneficially owned by such person or entity, subject to the matters set
forth in the footnotes to the table below.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
----------------------- --------------------------
NUMBER NUMBER
OF OF
NAME AND ADDRESS(1) SHARES PERCENT SHARES PERCENT(2)
<S> <C> <C> <C> <C>
Health and Retirement
Properties Trust............ 4,000,000 31.7% 4,000,000 15.6%
HRPT Advisors, Inc. ......... 4,250,000 33.7 4,250,000 16.6
Barry M. Portnoy(3)........ 4,250,000 33.7 4,250,000 16.6
Gerard M. Martin(3)........ 4,250,000 33.7 4,250,000 16.6
John L. Harrington(4)...... 300 * 300 *
William J. Sheehan(4)...... 300 * 300 *
Arthur G. Koumantzelis(4).. 300 * 300 *
All Trustees and executive
officers as a group (eight
persons)(3)................. 4,250,900 33.7 4,250,900 16.6
Neuberger & Berman L.P.(5)... 1,014,400 8.1 1,014,400 4.0
</TABLE>
- ---------------------
* Less than 1%.
(1) The address of HRP is 400 Centre Street, Newton, MA 02158. The address of
each other named person or entity is c/o Hospitality Properties Trust, 400
Centre Street, Newton, MA 02158.
(2) Assumes no exercise of the Underwriters' overallotment option.
(3) Neither Mr. Portnoy nor Mr. Martin owns Shares directly. HRP, of which
Messrs. Portnoy and Martin are Managing Trustees, owns 4,000,000 Shares
and Advisors, which is owned by Messrs. Portnoy and Martin, owns 250,000
Shares. Messrs. Portnoy and Martin may be deemed to have beneficial
ownership of these Shares.
(4) Each of the Independent Trustees receives a grant of 300 Shares per annum
as part of their annual compensation. See "Management--Incentive Share
Award Plan."
(5) Neuberger & Berman L.P. ("NBLP") has reported in a Schedule 13G filed
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")
that it is deemed to be the beneficial owner of 1,014,400 Shares since it
has power to make decisions whether to retain or dispose of such Shares
held by many unrelated clients. NBLP further reported that it does not
have any economic interest in such Shares. Of such 1,014,400 Shares, NBLP
reported that it has sole power to vote or direct the vote of 434,800
Shares and shared power (together with Neuberger & Berman Management,
Inc.) to vote or to direct the vote of 522,300 Shares. The 1,014,400
Shares do not include 3,000 Shares which NBLP reported were owned by
partners of NBLP in their personal securities accounts, as to which NBLP
disclaims beneficial ownership. The principal place of business of NBLP
was reported as 605 Third Avenue, New York, New York 10158.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this Offering, the Company will have 25,600,900
Shares issued and outstanding (27,550,900 Shares if the Underwriters'
overallotment option is exercised in full). The Shares issued or sold by the
Company in this Offering will be freely tradeable except with respect to the
Ownership Limitation set forth in the Company's Declaration. The 4,000,000
Shares owned by HRP and the 250,000 owned by Advisors were acquired in
transactions exempt from the registration requirements of the Securities Act
and may not be resold without registration or exemption therefrom. These
Shares also will not be freely tradeable as a result of restrictions on sales
of Shares by affiliates of the Company arising under the Securities Act and
due to certain "lock-up" agreements described below. HRP and Advisors do not
have registration rights with respect to these Shares.
HRP and Advisors may, in limited circumstances, be able to sell their Shares
without registration in accordance with the exemptions provided by Rule 144
under the Securities Act. In general, under Rule 144 as currently in effect, a
person (or persons whose Shares are aggregated in accordance with Rule 144)
who has beneficially owned his or her Shares for at least two years, including
any such persons who may be deemed an "affiliate" of the Company (as defined
below), would be entitled to sell within any three month period a number of
Shares that does not exceed the greater of 1% of the then outstanding number
of Shares or the average weekly trading volume of the Shares during the four
calendar weeks preceding each such sale. After Shares have been held for three
years, a person who is not deemed an affiliate of the Company will generally
be entitled to sell such Shares under Rule 144 without regard to the volume
limitations described above, although sales of such Shares by affiliates will
continue to be subject to the volume limitations. As defined in Rule 144, an
"affiliate" of an issuer is generally a person that directly, or indirectly,
through the use of one or more intermediaries, controls, or is controlled by,
or is under common control with, such issuer. Upon completion of this
Offering, HRP and Advisors will continue to be affiliates of the Company for
purposes of Rule 144.
In connection with the Company's initial public offering, each of HRP and
Advisors agreed not to, and agreed to cause its officers, Trustees and
Directors, as applicable, not to, directly or indirectly, offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any
Shares or any securities convertible into or exercisable or exchangeable for
Shares or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of Shares, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation for a
period of two years up to August 16, 1997. See "Underwriting."
FEDERAL INCOME TAX CONSIDERATIONS
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
The Company intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The following is a summary of the federal income tax considerations for the
Company and its Shareholders with respect to the treatment of the Company as a
REIT. Since these provisions are highly technical and complex, each
prospective purchaser of the Company's Shares is urged to consult his or her
own tax advisor with respect to the federal, state, local, foreign and other
tax consequences of the purchase, ownership and disposition of the Shares.
Based upon certain representations described below, in the opinion of
Sullivan & Worcester LLP, counsel to the Company ("Company Counsel"), the
Company has been organized in conformity with the requirements
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for qualification as a REIT beginning with its taxable year ending December
31, 1995, and its proposed method of operation described in this Prospectus
and as represented by the Company will enable it to satisfy the requirements
for such qualification. This opinion is conditioned upon the assumption that
the Leases, the Company's Declaration and Bylaws and all other legal documents
to which the Company is a party will be complied with by all parties thereto
and upon certain representations made by the Company as to certain factual
matters relating to the Company's organization and intended or expected manner
of operation. In addition, this opinion is based on the law existing and in
effect on the date hereof. The Company's qualification and taxation as a REIT
will depend upon the Company's ability to meet on a continuing basis, through
actual operating results, asset composition, distribution levels and diversity
of stock ownership, the various qualification tests imposed under the Code
discussed below. While the Company has represented that it will operate in a
manner so as to satisfy on a continuing basis the various REIT qualification
tests, Company Counsel will not review compliance with these tests on a
continuing basis, and no assurance can be given that the Company will satisfy
such tests on a continuing basis.
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as the Company, that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to Shareholders. This treatment
substantially eliminates the "double taxation" that generally results from the
use of corporations.
If the Company fails to qualify as a REIT in any year, however, it will be
subject to federal income taxation as if it were a domestic corporation, and
its Shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In such an event, the Company could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its Shareholders would be reduced or eliminated.
The Board of Trustees of the Company currently expects that the Company will
elect REIT status for the taxable year ended December 31, 1995 and will
continue to operate in a manner that permits it to retain REIT status in each
taxable year thereafter. There can be no assurance, however, that this
expectation will be fulfilled, since qualification as a REIT depends on the
Company continuing to satisfy numerous asset, income and distribution tests
described below, which in turn will be dependent in part on the Company's
operating results.
The following summary is based on existing law, is not exhaustive of all
possible tax considerations and does not give a detailed discussion of any
state, local, or foreign tax considerations, nor does it discuss all of the
aspects of federal income taxation that may be relevant to a prospective
Shareholder in light of his or her particular circumstances or to certain
types of Shareholders (including insurance companies, tax-exempt entities,
financial institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) subject to special
treatment under the federal income tax laws.
TAXATION OF THE COMPANY
GENERAL
In any year in which the Company qualifies as a REIT, in general it will not
be subject to federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to Shareholders. The Company may, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gain not distributed.
Notwithstanding its qualification as a REIT, the Company may also be subject
to taxation in certain other circumstances. If the Company should fail to
satisfy either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which the Company fails either the 75% or the 95% gross income test,
multiplied by a fraction intended to reflect the Company's profitability. The
Company will also be subject to a tax of 100% on net income from any
"prohibited transaction" as described below, and if the Company has (i) net
income from the sale or other disposition of "foreclosure property" which is
held for sale
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to customers in the ordinary course of business or (ii) other nonqualifying
income from foreclosure property, it will be subject to tax on such income
from foreclosure property at the highest corporate rate. In addition, if the
Company should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior years, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed. The Company may also be subject to tax in certain circumstances
if it disposes within ten years of their acquisition of assets acquired in a
tax-free reorganization (although no such transaction is currently
contemplated). The Company may also be subject to the corporate alternative
minimum tax. The Company will use the calendar year both for federal income
tax purposes, and for financial reporting purposes.
In order to qualify as a REIT, the Company must meet, among others, the
following requirements:
SHARE OWNERSHIP TESTS
The Company's Shares must be held by a minimum of 100 persons for at least
335 days in each taxable year (or a proportional number of days in any short
taxable year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of the outstanding Shares of the
Company may be owned, directly or indirectly and by applying certain
constructive ownership rules, by five or fewer individuals, which for this
purpose includes certain tax-exempt entities. However, for purposes of this
test, any Shares held by a qualified domestic pension or other retirement
trust will be treated as held directly by its beneficiaries in proportion to
their actuarial interest in such trust rather than by such trust. These share
ownership requirements need not be met until the second taxable year of the
Company for which a REIT election is made.
In order to ensure compliance with the foregoing share ownership tests, the
Company has placed certain restrictions on the transfer of its Shares to
prevent additional concentration of Share ownership. Moreover, to evidence
compliance with these requirements, under Treasury Regulations the Company
must maintain records which disclose the actual ownership of its outstanding
Shares. In fulfilling its obligations to maintain records, the Company must
and will demand written statements each year from the record holders of
designated percentages of its capital stock disclosing the actual owners of
such Shares (as prescribed by the Treasury Regulations). A list of those
persons failing or refusing to comply with such demand must be maintained as a
part of the Company's records. A Shareholder failing or refusing to comply
with the Company's written demand must submit with his tax return a similar
statement disclosing the actual ownership of Shares of the Company and certain
other information. In addition, the Company's Declaration provides
restrictions regarding the transfer of its Shares that are intended to assist
the Company in continuing to satisfy the Share ownership requirements. See
"Summary of the Declaration of Trust--Restrictions on Transfer."
ASSET TESTS
At the close of each quarter of the Company's taxable year, the Company must
satisfy two tests relating to the nature of its assets (determined in
accordance with generally accepted accounting principles). First, at least 75%
of the value of the Company's total assets must be represented by interests in
real property, interests in mortgages on real property, shares in other REITs,
cash, cash items, government securities and qualified temporary investments.
Second, although the remaining 25% of the Company's assets generally may be
invested without restriction, securities in this class may not exceed (i) in
the case of securities of any one non-government issuer, 5% of the value of
the Company's total assets or (ii) 10% of the outstanding voting securities of
any one such issuer.
Where a failure to satisfy the 25% asset test results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of such quarter. The Company intends to maintain adequate records of the value
of its assets to maintain compliance with the 25% asset test, and to take such
action as may be required to cure any failure to satisfy the test within 30
days after the close of any quarter.
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GROSS INCOME TESTS
The Company must satisfy three source of income tests in each taxable year.
The three tests are as follows:
The 75% Test. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i)
rents from real property (as defined below); (ii) interest on obligations
secured by mortgages on, or interests in, real property; (iii) gains from the
sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers
in the ordinary course of the Company's trade or business ("dealer property");
(iv) dividends or other distributions on shares in other REITs, as well as
gain from the sale of such shares; (v) abatements and refunds of real property
taxes; (vi) income from the operation, and gain from the sale, of property
acquired at or in lieu of a foreclosure of the mortgage secured by such
property ("foreclosure property"); (vii) commitment fees received for agreeing
to make loans secured by mortgages on real property or to purchase or lease
real property; and (viii) qualified temporary investment income. When the
Company receives new capital in exchange for its Shares or other capital stock
(other than dividend reinvestment amounts) or in a public offering of five-
year or longer debt instruments, income attributable to the temporary
investment of such new capital in stock or a debt instrument, if received or
accrued within one year of the Company's receipt of the new capital, is
qualifying temporary investment income.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements only if several conditions are met.
Rents received from a tenant will not qualify as rents from real property if
the Company, or an owner of 10% or more of the Company, directly or
constructively owns 10% or more of such tenant. Thus, in order for gross
income from a Hotel to qualify as rents from real property, the Company must
not own, directly or constructively (applying constructive ownership rules
under the Code), 10% or more of Wyndham I, Host I or Host II (the "10%
ownership test"). Such constructive ownership rules generally provide that, if
10% or more in value of the Shares of the Company is owned, directly or
indirectly, by or for any person, the Company is considered as owning the
stock owned, directly or indirectly, by or for such Person. With respect to
the 10% ownership test, the Company initially will not own and does not intend
to acquire, directly or constructively, stock of Wyndham I, Host I or Host II.
There can be no assurance, however, that the Company will be able to monitor
and enforce such restrictions, nor will Shareholders necessarily be aware of
shareholdings attributed to them under the attribution rules. The Company has
represented (which representation Company Counsel has relied upon in rendering
its opinion herein on REIT qualification) that it will satisfy the 10%
ownership test.
If rent attributable to personal property leased in connection with a lease
of real property is greater than 15% of the total rent for the taxable year
under or in connection with the lease, then the portion of rent attributable
to such personal property will not qualify as rents from real property.
Accordingly, the rents attributable to the Company's personal property leased
under or in connection with a lease of the real property comprising a Hotel
must not be greater than 15% of the rents received under the applicable Lease.
The rent attributable to the Company's personal property for a Hotel is the
amount that bears the same ratio to total rent for the taxable year as (i) the
average of the adjusted bases of the Company's personal property of such Hotel
at the beginning and at the end of the taxable year bears to (ii) the average
of the aggregate adjusted bases of both the Company's real and personal
property of such Hotel at the beginning and at the end of such taxable year
(the "Adjusted Basis Ratio"). The Company has represented (which
representation Company Counsel has relied upon in rendering its opinion herein
on REIT qualification) that the allocation of purchase price with respect to
each Hotel is accurate and that not more than 15% of the rent for each taxable
year with respect to each of the Hotels or any other hotel property acquired
by the Company in the future will be attributable to the Company's personal
property under the foregoing rules. In addition, the Company intends not to
acquire additional personal property for any Hotels if such acquisition would
cause the Adjusted Basis Ratio for such Hotels to exceed 15%. While the
Company believes that the allocation for tax purposes of the purchase price
for the Hotels to the personal property is accurate, there can be no assurance
that the Service will not assert that a different allocation is appropriate
and that more than 15% of the rents received under a Lease is attributable to
personal property under the foregoing rules, or that a court would not uphold
such assertion. If such a challenge were successfully
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asserted, the Company could fail the 15% Adjusted Basis Ratio as to one or
more of its leases, which in turn could cause it to fail to satisfy the 75% or
95% gross income test and to fail to qualify as a REIT.
An amount received or accrued, directly or indirectly with respect to any
real or personal property, will not qualify as "rents from real property" for
purposes of the 75% or the 95% gross income test if the determination of such
amount depends in whole or in part on the income or profits derived by any
person from such property (except that an amount so derived or accrued
generally will not be excluded from "rents from real property" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales).
In addition, the Company must not manage the property or furnish or render
services to the tenants of such property, except through an independent
contractor from whom the company derives no income. There is an exception to
this rule permitting a REIT to perform certain customary tenant services of
the sort which a tax-exempt organization could perform without being
considered in receipt of "unrelated business taxable income."
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Company's gross income for the
taxable year must be derived from the above described qualifying income,
dividends, interest, or gains from the sale or other disposition of stock,
securities and real property that is not dealer property. Dividends and
interest on any obligations not collateralized by an interest in real property
are included for purposes of the 95% gross income test, but not for purposes
of the 75% gross income test.
For purposes of determining whether the Company complies with the 75% and
the 95% gross income tests, gross income does not include income from
prohibited transactions. A "prohibited transaction" is a sale of dealer
property (excluding foreclosure property); however, it does not include a sale
of property if such property is held by the Company for at least four years
and certain other requirements (relating to the number of properties sold in a
year, their tax bases, and the cost of improvements made thereto) are
satisfied. See "--Taxation of the Company--General" above. Gain realized by
the Company on the sale of any dealer property generally will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax.
Under existing law, whether property is dealer property is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. The Company intends to hold the Hotels for investment with a view
to long-term appreciation, to engage in the business of acquiring, owning and
developing the Hotels and other hotel properties acquired by the Company in
the future, and to make such occasional sales of such hotels as are consistent
with the Company's investment objectives. Based upon the Company's investment
objectives, the Company believes that overall, the Hotels should not be
considered dealer property and that the amount of income from prohibited
transactions, if any, will not be material.
The Company believes that, for purposes of both the 75% and the 95% gross
income tests, its investment in the Hotels will generally give rise to
qualifying income in the form of rents, and that gains on sales of the Hotels
generally will also constitute qualifying income. The Company also believes
that, for purposes of the 95% gross income test, if the portion of rent
attributable in any case to furniture, furnishings, equipment and operating
equipment were to be recharacterized as payments from a deemed financing of
such items, any gross income attributable to such payments would be qualifying
gross income in the form of interest and such interest income would not cause
the Company to be unable to satisfy the 75% gross income test.
Even if the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will generally be available if: (i) the Company's failure to
comply was due to reasonable cause and not to willful neglect; (ii) the
Company reports the nature and amount of each item of its income included in
the tests on a schedule attached to its tax return; and (iii) any incorrect
information on such schedule is not due to fraud with intent to evade tax. If
these relief provisions apply, however, the Company will nonetheless be
subject to a 100% tax on the greater of the amount by which it fails either
the 75% or the 95% gross income test, multiplied by a fraction intended to
reflect the Company's profitability.
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The 30% Test. The Company must derive less than 30% of its gross income for
each taxable year from the sale or other disposition of (i) real property held
for less than four years (other than foreclosure property and involuntary
conversions); (ii) stock or securities (including certain interest rate swap
or cap agreements) held for less than one year; and (iii) property in a
prohibited transaction. The Company does not anticipate that it will have
difficulty in complying with this test. However, if extraordinary
circumstances were to occur that gave rise to dispositions of Hotels within
four years after the respective dates of the Company's acquisition thereof,
the Company may be unable to satisfy the 30% test.
The Company temporarily invests working capital in short term investments,
including shares in other REITs. Although the Company will use its best
efforts to ensure that its income generated by these investments will be of a
type which satisfies the 75% and 95% gross income tests, there can be no
assurance in this regard (see discussion above of the "new capital" rule under
the 75% test). Moreover, the Company may realize short-term capital gain upon
sale or exchange of such investments, and such short-term capital gain would
be subject to the limitations imposed by the 30% gross income test.
FORECLOSURE PROPERTY
The Company will be subject to tax at the maximum corporate rate (currently
35%) on income from any "foreclosure property," other than income that would
be qualified income under the 75% gross income test, less expenses directly
connected with the production of such income. However, gross income from any
such foreclosure property will qualify under the 75% and the 95% gross income
tests.
Foreclosure property is defined as any real property (including interests in
real property) and any personal property incident to such real property,
acquired by a REIT as the result of a REIT having bid in such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was a default (or
default was imminent) on a lease of such property or on an indebtedness which
such property secured and for which the REIT makes a proper election to treat
such property as foreclosure property. However, a REIT will not be considered
to have foreclosed on a property where it takes control of the property as a
mortgagee in possession and cannot receive any profit or sustain any loss
except as a creditor of the mortgagor. Under the Code, property generally
ceases to be foreclosure property with respect to a REIT on the date which is
two years after the date such REIT acquired such property (or longer if an
extension is granted by the Secretary of the Treasury). However, the foregoing
grace period is terminated and foreclosure property ceases to be foreclosure
property on the first day (i) on which a lease is entered into with respect to
such property which, by its terms, will give rise to income which does not
qualify under the 75% gross income test or any amount is received or accrued,
directly or indirectly, pursuant to a lease entered into on or after such day
which will give rise to income which does not qualify under the 75% gross
income test, (ii) on which any construction takes place on such property
(other than completion of a building, or completion of any other improvement,
where more than 10% of the construction of such building or other improvement
was completed before default became imminent), or (iii) which is more than 90
days after the day on which such property was acquired by the REIT and the
property is used in a trade or business which is conducted by the REIT (other
than through an independent contractor from whom the REIT itself does not
derive or receive any income).
As a result of the rules with respect to foreclosure property, if a Lessee
defaults on its obligations under a Lease for a Hotel and the respective
Manager is not available to manage such Hotel after the Company terminates the
Lessee's leasehold interest therein, and the Company is unable to find a
replacement lessee for such Hotel within 90 days of such foreclosure and
unable to find an independent contractor to manage it, gross income from hotel
operations conducted by the Company from such property would cease to qualify
for the 75% and the 95% gross income tests. (Advisors should qualify as an
independent contractor which could operate foreclosure property for up to two
years.) In such event, the Company might be unable to satisfy the 75% or the
95% gross income test, resulting in its failure to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT the Company is required to distribute
dividends (other than capital gain dividends) to its Shareholders with respect
to each year in an amount at least equal to (A) the sum of (i) 95% of
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the Company's REIT taxable income (computed without regard to the dividends
paid deduction and the Company's net capital gain) and (ii) 95% of the net
income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of noncash income (from certain imputed rental income and income
from transactions inadvertently failing to qualify as like-kind exchanges).
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be. The Company will also be required to distribute
currently as a dividend an amount equal to the earnings and profits of any
corporation it may acquire in a tax-free reorganization (although no such
transaction is currently contemplated).
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first and last sentences of
the preceding paragraph. It is possible that the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution
requirement, due to timing differences between the actual receipt of income
and actual payment of expenses on the one hand, and the inclusion of such
income and deduction of such expenses in computing the Company's REIT taxable
income on the other hand. To avoid any problem with the 95% distribution
requirement, the Company will closely monitor the relationship between its
REIT taxable income and cash flow and intends, if necessary, to borrow funds
in order to satisfy the distribution requirement. However, there can be no
assurance that such borrowing would be available at such time.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to Shareholders in any year in which
the Company fails to qualify as a REIT will not be deductible by the Company,
nor generally will they be required to be made under the Code. In such event,
to the extent of current and accumulated earnings and profits, all
distributions to Shareholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from re-electing
taxation as a REIT for the four taxable years following the year during which
qualification was lost.
OTHER ISSUES
In the case of certain sale leaseback arrangements, the Service could assert
that the Company realized prepaid rental income in the year of purchase to the
extent that the value of a leased property exceeds the purchase price paid by
the Company for that property. In litigated cases involving sale leasebacks
which have considered this issue, courts have concluded that buyers have
realized prepaid rent where both parties acknowledged that the purported
purchase price for the property was substantially less than fair market value
and the purported rents were substantially less than the fair market rentals.
Because of the lack of clear precedent, complete assurance cannot be given
that the Service could not successfully assert the existence of prepaid rental
income.
DEPRECIATION OF PROPERTIES
For tax purposes, the Company's real property generally is depreciated on a
straight line basis over 40 years and personal property owned by the Company
generally is depreciated over nine years.
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TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic Shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the Shareholder has held its Shares.
However, corporate Shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. To the extent that the Company
makes distributions in excess of current and accumulated earnings and profits,
these distributions are treated first as a tax-free return of capital to the
Shareholder, reducing the tax basis of a Shareholder's Shares by the amount of
such excess distribution (but not below zero), with distributions in excess of
the Shareholder's tax basis being taxed as capital gains (if the Shares are
held as a capital asset). In addition, any dividend declared by the Company in
October, November or December of any year and payable to a Shareholder of
record on a specific date in any such month shall be treated as both paid by
the Company and received by the Shareholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of
the following calendar year. Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
Federal income tax rules may also require that certain of the Company's
minimum tax adjustments and preferences be apportioned to Shareholders.
In general, any loss upon a sale or exchange of Shares by a Shareholder who
has held such Shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions from the Company required to be treated by such Shareholder as
long-term capital gains.
Investors (other than certain corporations) who borrow funds to finance
their acquisition of Shares in the Company could be limited in the amount of
deductions allowed for the interest paid on the indebtedness incurred in such
an arrangement. Under Section 163(d) of the Code, interest paid or accrued on
indebtedness incurred or continued to purchase or carry property held for
investment is generally deductible only to the extent of the taxpayer's net
investment income. An investor's net investment income will include the
dividend and (if the investor so elects) capital gain dividend distributions
he receives from the Company; however, distributions treated as a nontaxable
return of the Shareholder's basis will not enter into the computation of net
investment income.
Under Section 469 of the Code, taxpayers (other than certain corporations)
generally will not be entitled to deduct losses from so-called passive
activities except to the extent of their income from passive activities. For
purposes of these rules, distributions received by a Shareholder from the
Company will not be treated as income from a passive activity and thus will
not be available to offset a Shareholder's passive activity losses.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The Service has ruled that amounts distributed by a REIT to a tax-exempt
employees' pension trust do not constitute unrelated business taxable income
("UBTI"). Subject to the discussion below regarding a "pension-held REIT,"
based upon such ruling and the statutory framework of the Code, distributions
by the Company to a Shareholder that is a tax-exempt entity would not
constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its Shares with "acquisition indebtedness" within the meaning
of the Code, that the Shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity, and that the Company, consistent with its
present intent, does not hold a residual interest in a REMIC.
If any pension or other retirement trust that qualifies under Section 401(a)
of the Code ("qualified pension trust") holds more than 10% by value of the
interests in a "pension-held REIT" at any time during a taxable year, a
portion of the dividends paid to the qualified pension trust by such REIT may
constitute UBTI. For these purposes, a "pension-held REIT" is defined as a
REIT if (i) such REIT would not have qualified as a REIT but
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for the provisions of the Code which look through such a qualified pension
trust in determining ownership of shares of the REIT and (ii) at least one
qualified pension trust holds more than 25% by value of the interests of such
REIT or one or more qualified pension trusts (each owning more than a 10%
interest by value in the REIT) hold in the aggregate more than 50% by value of
the interests in such REIT.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company will report to its domestic Shareholders and to the Service the
amount of dividends paid for each calendar year, and the amount of tax
withheld, if any, with respect thereto. Under the back-up withholding rules, a
Shareholder may be subject to backup withholding at the rate of 31% with
respect to dividends paid unless such Shareholder (i) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (ii) provides a taxpayer identification number, certifies as to
no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A Shareholder that
does not provide the Company with its correct taxpayer identification number
may also be subject to penalties imposed by the Service. Any amount paid as
backup withholding is available as a credit against the Shareholder's income
tax liability. In addition, the Company may be required to withhold a portion
of capital gain distributions made to any Shareholders who fail to certify
their non-foreign status to the company. See "Certain United States Tax
Considerations for Non-U.S. Holders of Shares."
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained provided that the required information is furnished to the Service.
OTHER TAX CONSIDERATIONS
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective Shareholders should recognize that the present federal income
tax treatment of investment in the Company may be modified by legislative,
judicial or administrative action at any time and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the Service and the Treasury Department, resulting
in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. No assurance can be given as to the
form or content (including with respect to effective dates) of any tax
legislation which may be enacted. Revisions in federal tax laws and
interpretations thereof could adversely affect the tax consequences of
investment in the Company.
STATE AND LOCAL TAXES
The Company and its Shareholders may be subject to state or local taxation,
and the Company may be subject to state or local tax withholding requirements,
in various jurisdictions, including those in which it or they transact
business or reside. The state and local tax treatment of the Company and its
Shareholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective Shareholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
the Shares.
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CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF SHARES
The following is a discussion of certain anticipated U.S. federal income and
U.S. federal estate tax consequences of the ownership and disposition of
Shares applicable to non-U.S. Shareholders of such Shares. The discussion is
based on current law and is for general information only. The discussion does
not address either aspects of U.S. federal taxation other than income and
estate taxation or all aspects of U.S. federal income and estate taxation. The
discussion does not consider any specific facts or circumstances that may
apply to a particular non-U.S. Shareholder.
In general, a non-U.S. Shareholder will be subject to regular United States
income tax with respect to its investment in the Company if such investment is
"effectively connected" with the non-U.S. Shareholder's conduct of a trade or
business in the United States, or if the non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days or more
during the taxable year. A corporate non-U.S. Shareholder that receives income
that is (or is treated as) effectively connected with a U.S. trade or business
may also be subject to the branch profits tax under Section 884 of the Code,
which is payable in addition to regular United States corporate income tax.
The following discussion will apply to non-U.S. Shareholders whose investment
in the Company is not so effectively connected and who are not individuals
present in the U.S. for 183 days or more during the taxable year.
A distribution by the Company that is not deemed to be attributable to gain
from the sale or exchange by the Company of a United States real property
interest and that is not designated by the Company as a capital gain dividend
will be treated as an ordinary income dividend to the extent that it is made
out of current or accumulated earnings and profits. A distribution by the
Company that is designated as a capital gain dividend will generally not be
subject to withholding except to the extent that such dividend is attributable
to the sale or exchange by the Company of United States real property
interests, as described below. Generally, an ordinary income dividend will be
subject to a United States withholding tax equal to 30% of the gross amount of
the dividend unless such withholding is reduced by an applicable tax treaty. A
distribution of cash in excess of the Company's earnings and profits will be
treated first as a nontaxable return of capital that will reduce a non-U.S.
Shareholder's basis in its Shares (but not below zero) and then as gain from
the disposition of such Shares, the tax treatment of which is described under
the rules discussed below with respect to disposition of Shares. A
distribution in excess of the Company's earnings and profits may be subject to
30% dividend withholding if at the time of the distribution it cannot be
determined whether the distribution will be in an amount in excess of the
Company's current and accumulated earnings and profits. If it is subsequently
determined that such distribution is, in fact, in excess of current and
accumulated earnings and profits, the non-U.S. Shareholder may seek a refund
from the Service. The Company expects to withhold United States income tax at
the rate of 30% on the gross amount of any such distributions made to a non-
U.S. Shareholder in any tax year unless (i) a lower tax treaty applies and the
required form evidencing eligibility for that reduced rate for such tax year
is filed with the Company or (ii) the non-U.S. Shareholder files IRS Form 4224
for such tax year with the Company claiming that the distribution is
"effectively connected" income.
For any year in which the Company qualifies as a REIT, distributions by the
Company that are attributable to gain from the sale or exchange of a United
States real property interest will be taxed to a non-U.S. Shareholder in
accordance with the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a non-U.S.
Shareholder as if such distributions were gains "effectively connected" with a
United States trade or business. Accordingly, a non-U.S. Shareholder will be
taxed at the normal capital gain rates applicable to a U.S. Shareholder
(subject to any applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals). Distributions
subject to FIRPTA may also be subject to a 30% branch profits tax in the hands
of a foreign corporate Shareholder that is not entitled to treaty exemption.
The Company will be required to withhold from distributions to non-U.S.
Shareholders, and remit to the Service, 35% of the amount of any distribution
that could be designated as capital gain dividends to the extent that such
dividends are attributable to the sale or exchange by the Company of United
States real property interests.
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Tax treaties may reduce the Company's withholding obligations. If the amount
of tax withheld by the Company with respect to a distribution to a non-U.S.
Shareholder exceeds the Shareholder's United States liability with respect to
such distribution, the non-U.S. Shareholder may file for a refund of such
excess from the Service. In this regard, it should be noted that the 35%
withholding tax rate on capital gain dividends corresponds to the maximum
income tax rate applicable to corporations but is higher than the 28% maximum
rate on capital gains of individuals.
If the Shares fail to constitute a "United States real property interest"
within the meaning of FIRPTA, a sale of the Shares by a non-U.S. Shareholder
generally will not be subject to United States taxation unless (i) investment
in the Shares is effectively connected with the non-U.S. Shareholder's United
States trade or business, in which case, as discussed above, the non-U.S.
Shareholder would be subject to the same treatment as U.S. Shareholders on
such gain or (ii) the non-U.S. Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year, in which case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains.
The Shares will not constitute a United States real property interest if the
Company is a "domestically controlled REIT." A domestically controlled REIT is
a REIT in which at all times during a specified testing period less than 50%
in value of its shares is held directly or indirectly by non-U.S.
Shareholders. It is currently anticipated that the Company will be a
domestically controlled REIT, and therefore that the sale of Shares will not
be subject to taxation under FIRPTA. However, because the Shares will be
publicly traded, no assurance can be given that the Company will continue to
be a domestically controlled REIT. If the Company did not constitute a
domestically controlled REIT, whether a non-U.S. Shareholder's sale of Shares
would be subject to tax under FIRPTA as a sale of a United States real
property interest would depend on whether the Shares were "regularly traded"
(as defined by applicable Treasury Regulations) on an established securities
market (e.g., the NYSE, on which the Shares will be listed) and on the size of
the selling Shareholder's interest in the Company. If the gain on the sale of
the Shares were subject to taxation under FIRPTA, the non-U.S. Shareholder
would be subject to the same treatment as a U.S. Shareholder with respect to
such gain (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). In any
event, a purchaser of Shares from a non-U.S. Shareholder will not be required
under FIRPTA to withhold on the purchase price if the purchased Shares are
"regularly traded" on an established securities market or if the Company is a
domestically controlled REIT. Otherwise, under FIRPTA, the purchaser of Shares
may be required to withhold 10% of the purchase price and to remit such amount
to the Service.
FEDERAL ESTATE TAX
Shares owned or treated as owned by an individual who is not a citizen or
resident (as defined for United States federal estate tax purposes) of the
United States at the time of death will be includible in the individual's
gross estate for United States federal estate tax purposes unless an
applicable estate tax treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS
The Company must report annually to the Service and to each non-U.S.
Shareholder the amount of dividends paid to and the tax withheld with respect
to such holder. These information reporting requirements apply regardless of
whether withholding was reduced or eliminated by an applicable tax treaty.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities in the
country in which the non-U.S. Shareholder resides. United States backup
withholding tax (which generally is a withholding tax imposed at the rate of
31% on certain payments to persons that fail to furnish the information
required under the United States information reporting requirements) will
generally not apply to dividends paid on Shares to a non-U.S. Shareholder at
an address outside the United States.
The payment of the proceeds from the disposition of Shares to or through the
United States office of a broker will be subject to information reporting and
backup withholding at a rate of 31% unless the owner, under penalties of
perjury, certifies, among other things, its status as a non-U.S. Shareholder,
or otherwise establishes
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an exemption. The payment of the proceeds from the disposition of Shares to or
through a non-U.S. office of a broker generally will not be subject to backup
withholding and information reporting. In the case of proceeds from a
disposition of Shares paid to or through a non-U.S. office of a U.S. broker or
paid to or through a non-U.S. office of a non-U.S. broker that is (i) a
"controlled foreign corporation" for United States federal income tax purposes
or (ii) a person 50% or more of whose gross income from all sources for a
certain three-year period was effectively connected with a United States trade
or business, (a) backup withholding will not apply unless the broker has
actual knowledge that the owner is not a non-U.S. Shareholder, and (b)
information reporting will not apply if the broker has documentary evidence in
its files that the owner is a non-U.S. Shareholder (unless the broker has
actual knowledge to the contrary).
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. Shareholder will be refunded by the Service (or credited against the
non-U.S. Shareholder's United States federal income tax liability, if any),
provided that the required information is furnished to the Service.
OTHER TAX CONSEQUENCES
The Company and its Shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside.
There may be other federal, state, local or foreign income, or estate and
gift, tax considerations applicable to the circumstances of a particular
investor. Shareholders should consult their own tax advisors with respect to
such matters.
ERISA PLANS, KEOGH PLANS AND
INDIVIDUAL RETIREMENT ACCOUNTS
GENERAL FIDUCIARY OBLIGATIONS
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plan") must consider whether their investment in the
Company's Shares satisfies the diversification requirements of ERISA, whether
the investment is prudent in light of possible limitations on the
marketability of the Shares, whether such fiduciaries have authority to
acquire such Shares under the appropriate governing instrument and Title I of
ERISA, and whether such investment is otherwise consistent with their
fiduciary responsibilities. Any ERISA Plan fiduciary should also consider
ERISA's prohibition on improper delegation of control over or responsibility
for "plan assets." Trustees and other fiduciaries of an ERISA plan may incur
personal liability for any loss suffered by the plan on account of a violation
of their fiduciary responsibilities. In addition, such fiduciaries may be
subject to a civil penalty of up to 20% of any amount recovered by the plan on
account of such a violation (the "Fiduciary Penalty"). Also, fiduciaries of
any Individual Retirement Account ("IRA"), Keogh Plan or other qualified
retirement plan not subject to Title I of ERISA because it does not cover
common law employees ("Non-ERISA Plan") should consider that such an IRA or
Non-ERISA Plan may only make investments that are authorized by the
appropriate governing instrument. Fiduciary Shareholders should consult their
own legal advisers if they have any concern as to whether the investment is
inconsistent with any of the foregoing criteria.
PROHIBITED TRANSACTIONS
Fiduciaries of ERISA Plans and persons making the investment decision for an
IRA or other Non-ERISA Plan should also consider the application of the
prohibited transaction provisions of ERISA and the Code in making their
investment decision. Sales and certain other transactions between an ERISA
Plan, IRA, or other Non-ERISA Plan and certain persons related to it are
prohibited transactions. The particular facts concerning the sponsorship,
operations and other investments of an ERISA Plan, IRA, or other Non-ERISA
Plan may cause a wide range of other persons to be treated as disqualified
persons or parties in interest with respect to it. A prohibited transaction,
in addition to imposing potential personal liability upon fiduciaries of ERISA
Plans, may
76
<PAGE>
also result in the imposition of an excise tax under the Code or a penalty
under ERISA upon the disqualified person or party in interest with respect to
the ERISA or Non-ERISA Plan or IRA. If the disqualified person who engages in
the transaction is the individual on behalf of whom an IRA is maintained (or
his beneficiary), the IRA may lose its tax-exempt status and its assets may be
deemed to have been distributed to such individual in a taxable distribution
(and no excise tax will be imposed) on account of the prohibited transaction.
Fiduciary Shareholders should consult their own legal advisers if they have
any concern as to whether the investment is a prohibited transaction.
SPECIAL FIDUCIARY AND PROHIBITED TRANSACTIONS CONSIDERATIONS
The Department of Labor ("DOL"), which has certain administrative
responsibility over ERISA Plans as well as over IRAs and other Non-ERISA
Plans, has issued a regulation defining "plan assets." The regulation
generally provides that when an ERISA or Non-ERISA Plan or IRA acquires a
security that is an equity interest in an entity and that security is neither
a "publicly offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an operating company or that equity
participation in the entity by benefit plan investors is not significant.
The regulation defines a publicly offered security as a security that is
"widely held," "freely transferable" and either part of a class of securities
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration statement under
the Securities Act (provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during
which the offering occurred). The Company's Shares are registered under the
Exchange Act.
The regulation provides that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. However, a security will not fail to be "widely
held" because the number of independent investors falls below 100 subsequent
to the initial public offering as a result of events beyond the issuer's
control.
The regulation provides that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The regulation further provides that, where a security is part
of an offering in which the minimum investment is $10,000 or less, certain
restrictions ordinarily will not, alone or in combination, affect a finding
that such securities are freely transferable. The restrictions on transfer
enumerated in the regulation as not affecting that finding include: any
restriction on or prohibition against any transfer or assignment which would
result in a termination or reclassification of the Company for federal or
state tax purposes, or would otherwise violate any state or federal law or
court order; any requirement that advance notice of a transfer or assignment
be given to the Company and any requirement that either the transferor or
transferee, or both, execute documentation setting forth representations as to
compliance with any restrictions on transfer which are among those enumerated
in the regulation as not affecting free transferability, including those
described in the preceding clause of this sentence; any administrative
procedure which establishes an effective date, or an event prior to which a
transfer or assignment will not be effective; and any limitation or
restriction on transfer or assignment which is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Company's Declaration and Bylaws on the
transfer of Shares do not result in the failure of the Shares to be "freely
transferable." Furthermore, the Company believes that at present there exist
no other facts or circumstances limiting the transferability of the Shares
which are not included among those enumerated as not affecting their free
transferability under the regulation, and the Company does not expect or
intend to impose in the future (or to permit any person to impose on its
behalf) any limitations or restrictions on transfer which would not be among
the enumerated permissible limitations or restrictions. However, the final
regulation only establishes a presumption in favor of a finding of free
transferability, and no guarantee can be given that the DOL or the Treasury
Department will not reach a contrary conclusion.
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<PAGE>
Assuming that the Shares will be "widely held" and that no other facts and
circumstances exist which restrict transferability of the Shares, the Company
has received an opinion from Company Counsel that the Shares should not fail
to be "freely transferable" for purposes of the regulation due to the
restrictions on transfer of the Shares under the Company's Declaration and
Bylaws and that under the regulation the Shares are publicly offered
securities and the assets of the Company will not be deemed to be "plan
assets" of any ERISA Plan, IRA or other Non-ERISA Plan that invests in the
Shares.
If the assets of the Company are deemed to be plan assets under ERISA: (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to investments made by the Company; (ii) the person or
persons having investment discretion over the assets of ERISA Plans which
invest in the Company would be liable under the aforementioned Part 4 of Title
I of ERISA for investments made by the Company which do not conform to such
ERISA standards unless Advisors registers as an investment adviser under the
Investment Advisers Act of 1940 and certain other conditions are satisfied;
and (iii) certain transactions that the Company might enter into in the
ordinary course of its business and operation might constitute "prohibited
transactions" under ERISA and the Code.
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<PAGE>
UNDERWRITING
Subject to certain conditions contained in the Underwriting Agreement, the
Underwriters named below (the "Underwriters") for whom Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Dean Witter Reynolds Inc., A.G.
Edwards & Sons, Inc., Prudential Securities Incorporated, Smith Barney Inc.,
Legg Mason Wood Walker, Incorporated and McDonald & Company Securities, Inc.
are acting as representatives (the "Representatives"), have severally agreed
to purchase from the Company 13,000,000 Shares. The number of Shares that each
Underwriter has agreed to purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation............... 1,218,000
Dean Witter Reynolds Inc. ........................................ 1,218,000
A.G. Edwards & Sons, Inc. ........................................ 1,218,000
Prudential Securities Incorporated................................ 1,218,000
Smith Barney Inc. ................................................ 1,218,000
Legg Mason Wood Walker, Incorporated.............................. 1,218,000
McDonald & Company Securities, Inc. .............................. 1,218,000
Arnhold and S. Bleichroeder, Inc. ................................ 195,000
Bear, Stearns & Co. Inc. ......................................... 195,000
Alex. Brown & Sons Incorporated................................... 195,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc. ...................... 195,000
Dillon, Read & Co. Inc. .......................................... 195,000
Dresdner Securities (USA) Inc. ................................... 195,000
Kleinwort Benson North America Inc. .............................. 195,000
Lehman Brothers Inc. ............................................. 195,000
Morgan Stanley & Co. Incorporated................................. 195,000
Oppenheimer & Co., Inc. .......................................... 195,000
PaineWebber Incorporated.......................................... 195,000
Schroder Wertheim & Co. Incorporated.............................. 195,000
Adams, Harkness & Hill, Inc. ..................................... 97,000
Advest, Inc. ..................................................... 97,000
William Blair & Company, L.L.C. .................................. 97,000
Burnham Securities Inc. .......................................... 97,000
Crowell, Weedon & Co. ............................................ 97,000
Fahnestock & Co. Inc. ............................................ 97,000
First of Michigan Corporation..................................... 97,000
First Southwest Company........................................... 97,000
Interstate/Johnson Lane Corporation............................... 97,000
Janney Montgomery Scott Inc. ..................................... 97,000
Johnston, Lemon & Co. Incorporated................................ 97,000
Ladenburg, Thalmann & Co. Inc. ................................... 97,000
Parker/Hunter Incorporated........................................ 97,000
Pennsylvania Merchant Group Ltd................................... 97,000
Raymond James & Associates, Inc. ................................. 97,000
Roney & Co., LLC.................................................. 97,000
Sands Brothers & Co., Ltd. ....................................... 97,000
Scott & Stringfellow, Inc. ....................................... 97,000
Stifel, Nicolaus & Company, Incorporated.......................... 97,000
Sutro & Co. Incorporated.......................................... 97,000
Tucker Anthony Incorporated....................................... 97,000
Wheat, First Securities, Inc. .................................... 97,000
----------
Total........................................................... 13,000,000
==========
</TABLE>
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<PAGE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the Shares offered hereby (other than the Shares
covered by the overallotment option described below) if any are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Shares to the public initially at the price to the public
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $0.80 per Share; that the
Underwriters may allow, and such dealers may reallow, a discount of not in
excess of $0.10 per Share on sales to other dealers; and that the price to the
public, concessions and discounts to dealers may be changed by DLJ after the
initial public offering.
The Underwriters have been granted an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 1,950,000 additional Shares
from the Company at the initial public offering price less underwriting
discounts and commissions. The Underwriters may exercise such right of
purchase only for the purpose of covering overallotments, if any, incurred in
connection with the sale of Shares offered hereby. To the extent that such
Underwriters exercise such option, each of the Underwriters will become
obligated, subject to certain conditions, to purchase the same proportion of
such additional Shares as the number of other Shares to be purchased by the
Underwriter bears to the total number of Shares being sold in this Offering on
the same terms as those on which all Shares are being sold in this Offering.
In the Underwriting Agreement, the Company and the Underwriters have agreed
to indemnify each other against certain liabilities under the Securities Act.
The Company has agreed not to, and has agreed to cause its affiliates not
to, directly or indirectly, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any Shares or any securities convertible into
or exercisable or exchangeable for Shares or, in any manner, transfer all or a
portion of the economic consequences associated with ownership of the Shares,
without the prior written consent of DLJ, for a period of 90 days from the
date of this Prospectus, other than the Shares being sold in this Offering or
to be issued pursuant to the Company's Incentive Share Award Plan.
Each of HRP and Advisors has agreed not to, and has agreed to cause its
officers, Trustees and Directors, as applicable, not to, directly or
indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any Shares or any securities convertible into or
exercisable or exchangeable for Shares or, in any manner, transfer all or a
portion of the economic consequences associated with ownership of the Shares,
without the prior written consent of DLJ, prior to August 16, 1997.
The Company will pay to DLJ an advisory fee aggregating $1.625 million in
respect of this Offering for financial advisory services rendered in
connection with the acquisition by the Company of the 11 Wyndham Garden(R)
Hotels and in connection with structuring the Expanded Credit Facility with
DLJMC, an affiliate of DLJ.
EXPERTS
The historical financial statements and schedules of the Company, the
Residence Inn Hotels and the Courtyard Hotels and the financial statements of
HMH HPT Residence Inn, Inc. and HMH HPT Courtyard, Inc. included in this
Prospectus to the extent and for the periods indicated in their reports have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports dated January 19, 1996 and February 23, 1996 with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
The combined financial statements and schedule relating to Garden Hotel
Associates LP as of December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995, included in this Prospectus and in the
Registration Statement, have been included herein in reliance on the reports
of Coopers & Lybrand L.L.P., independent accountants, given on the authority
of that firm as experts in accounting and auditing.
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LEGAL MATTERS
Sullivan & Worcester LLP has passed upon the validity of the issuance of the
Shares offered pursuant to this Prospectus and on certain tax matters as
described under "Federal Income Tax Considerations." Certain legal matters
relating to this Offering will be passed upon for the Underwriters by Davis
Polk & Wardwell. Barry M. Portnoy, a partner in the firm of Sullivan &
Worcester LLP, is a Managing Trustee of the Company, a Managing Trustee of HRP
and a Director and 50% shareholder of Advisors. Sullivan & Worcester LLP and
Davis Polk & Wardwell will rely on the opinion of Piper & Marbury L.L.P. with
respect to all matters involving Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part) on Form S-11 under the Securities Act with respect
to the Shares offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding the Company and the Shares offered hereby, reference is hereby made
to the Registration Statement and such exhibits and schedules.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
reports, proxy statements and other information can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Reports, proxy statements and
other information concerning the Company may also be inspected at the office
of the NYSE, 20 Broad Street, New York, New York 10005.
The Company's annual meeting of Shareholders is currently scheduled for May
21, 1996. The record date for such meeting is April 2, 1996, and accordingly
purchasers of Shares in this Offering will not be entitled to vote such Shares
at such meeting.
The Company's Declaration of Trust contains the following provision. The
provision should not be construed as a limitation on the ability of
Shareholders to assert claims for breaches of fiduciary duties.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED MAY 12, 1995, A
COPY OF WHICH, TOGETHER WITH ANY AMENDMENTS THERETO, IS DULY FILED IN THE
OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES
UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF
THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR
ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE
COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE
PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ACMs" means asbestos containing materials.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Additional Hotels" means the 11 Wyndham Garden(R) Hotels, the 18 Residence
Inn by Marriott(R) Hotels and the additional 16 Courtyard by Marriott(R)
Hotels to be acquired by the Company as described in this Prospectus.
"Adjusted Basis Ratio" means, as to a Hotel, the ratio of (i) the average of
the adjusted bases of the Company's personal property of such Hotel at the
beginning and at the end of the taxable year to (ii) the average of the
aggregate adjusted bases of both the Company's real and personal property of
such Hotel at the beginning and at the end of such taxable year.
"ADR" means average daily room rate.
"Advisors" means HRPT Advisors, Inc., a Delaware corporation.
"Advisory Agreement" means the Advisory Agreement between Advisors and the
Company.
"Audit Committee" means the audit committee of the Company consisting of the
Independent Trustees.
"Average Invested Capital" means, for purposes of the Advisory Agreement,
the daily weighted average of the total book value of the Company's real
estate assets (before reserves for depreciation or bad debts or other similar
non-cash reserves) invested, directly or indirectly, in equity interests in,
and loans secured by real estate and personal property owned in connection
with such real estate.
"Award" means any award, compensation or damage paid in connection with the
taking or condemnation of a hotel or any substantial portion thereof by a
public authority for a public or quasi public use.
"Board of Trustees" means the Board of Trustees of the Company.
"Business Procedure" means the advance notice procedure with regard to
Shareholder proposals specified in the Bylaws.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means net income from operations, plus
depreciation and amortization (all computed in accordance with GAAP) and less
Company owned funds escrowed for renovations and refurbishments (i.e., FF&E
Reserves) and adjusted for non-recurring items, if any.
"Charitable Beneficiary" means a qualified trustee of a trust for the
exclusive benefit of one or more organizations described in Section
170(b)(1)(a) and 170(c) of the Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Company" means Hospitality Properties Trust, a Maryland real estate
investment trust, and its consolidated subsidiaries.
"Company Counsel" means Sullivan & Worcester LLP, counsel to the Company.
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"Declaration" means the Declaration of Trust of the Company.
"DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation.
"DLJMC" means DLJ Mortgage Capital, Inc., an affiliate of DLJ.
"DOL" means United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit sharing or other employee benefit plan
subject to Title I of ERISA.
"Excess Shares" means Shares that are in violation of the Ownership
Limitation or which cause the Company to be treated as "closely held "under
Section 856(h) of the Code, and that are not otherwise permitted by the Board
of Trustees.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempted Persons" means HRP, Advisors or their affiliates, including
persons who are deemed to have beneficial ownership of the Shares directly
owned by HRP and Advisors pursuant to the attribution provisions of the Code,
and other Shareholders exempted by majority vote of the Trustees.
"Expanded Credit Facility" means the additional $250.0 million non-revolving
credit line, in excess of the Line of Credit, provided by DLJMC to the
Company.
"FF&E Reserve" means those funds to be escrowed annually pursuant to the
Leases as a reserve for renovations and refurbishment.
"Fiduciary Penalty" means a civil penalty of up to 20% of any amount
recovered by an ERISA Plan on account of a violation by Trustees and other
fiduciaries of their fiduciary responsibilities.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"FFO" means net income (computed in accordance with GAAP), adjusted for non-
recurring items, before real estate depreciation and amortization.
"GAAP" means generally accepted accounting principles.
"Host" means Host Marriott Corporation.
"Host I" means HMH HPT Residence, Inc., a limited purpose subsidiary of Host
which is the Lessee of the Company's 18 Residence Inn by Marriott(R) Hotels.
"Host II" means HMH HPT Courtyard, Inc., a limited purpose subsidiary of
Host which is the Lessee of the Company's 53 Courtyard by Marriott(R) Hotels.
"Hotels" means the Initial Hotels and the Additional Hotels.
"HPT" means the Company and is also the Company's trading symbol on the
NYSE.
"HRP" means Health and Retirement Properties Trust, a Maryland business
trust which is a NYSE listed REIT.
"Incentive Share Award Plan" means the Company's Incentive Share Award Plan
pursuant to which 100,000 Shares have been reserved for issuance to
Independent Trustees and officers of, and consultants (other than Advisors)
to, the Company.
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"Independent Trustees" means Trustees who are not officers of the Company or
otherwise affiliated with the Company, HRP or Advisors.
"Initial Hotels" means the 37 Hotels with 5,286 guest rooms owned by the
Company immediately after completion of the Company's initial public offering.
"Interested Shareholder" means a person who beneficially owns 10% or more of
the voting power of the Shares.
"IRA" means Individual Retirement Account.
"Leases" means the Company's hotel leases for the Hotels.
"Lessees" means Wyndham I, Host I and Host II.
"Line of Credit" means the $200.0 million revolving credit line provided by
DLJMC to the Company.
"Management Agreements" means the management agreements for the Hotels.
"Managers" means Wyndham II, Marriott I and Marriott II.
"Managing Trustees" means Messrs. Barry M. Portnoy and Gerard M. Martin.
"Marriott" means Marriott International, Inc.
"Marriott I" means Residence Inn by Marriott, Inc., a subsidiary of Marriott
which manages the Company's 18 Residence Inn by Marriott(R) Hotels.
"Marriott II" means Courtyard Management Corporation, a subsidiary of
Marriott which manages the Company's 53 Courtyard by Marriott(R) Hotels.
"MGCL" means the Maryland General Corporation Law.
"Nomination Procedure" means the advance notice procedure with regard to the
nomination, other than by the Board of Trustees, of Trustees specified in the
Bylaws.
"Non-ERISA Plan" means an IRA, Keogh Plan or other qualified retirement plan
not subject to Title I of ERISA because it does not cover common law
employees.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the public offering of 13,000,000 Shares of the Company
contemplated by this Prospectus.
"Ownership Limitation" means the restriction on ownership of more than 9.8%
of the Shares by any Shareholder or affiliated group of Shareholders, except
HRP, Advisors and certain other entities.
"Preferred Shares" means Preferred Shares of Beneficial Interest of the
Company, without par value.
"Purchase Agreements" means the purchase agreements among the Company and
each of the applicable sellers pursuant to which the Company has acquired or
will acquire Additional Hotels.
"Registration Statement" means the Registration Statement on Form S-11 under
the Securities Act of which this Prospectus is a part.
"REIT" means a real estate investment trust.
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"REMIC" means a real estate mortgage investment conduit, as defined in the
Code.
"Representatives" means the Representatives of the Underwriters named in
this Prospectus.
"REVPAR" means room revenue per available guest room or suite.
"Rule 144" means the rule promulgated under the Securities Act that permits
holders of restricted securities as well as affiliates of an issuer of the
securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Deposit" means an amount equal to a full year's base rent for each
of the Hotels which has been retained or is permitted to be retained by the
Company as security for the Lessee's obligations under their respective
Leases.
"Service" means the Internal Revenue Service.
"Shareholders" means the holders of the Shares.
"Shares" means the Common Shares of Beneficial Interest of the Company,
$0.01 par value per Share.
"Total Hotel Sales" means all revenues and receipts of every kind derived
from guests or customers related to the operation of the Hotels and has the
same meaning as "Gross Revenues" under the Leases.
"Treasury Regulations" means the income tax regulations that have been
promulgated under the Code.
"UBTI" means unrelated business taxable income.
"Underwriters" means the Underwriters named in this Prospectus.
"Underwriting Agreement" means the Underwriting Agreement between the
Company and the Representatives relating to the purchase of the Shares offered
hereby.
"Wyndham" means Wyndham Hotel Company Ltd. or its proposed successor-in-
interest, Wyndham Hotel Corporation.
"Wyndham I" means the limited purpose subsidiary of Wyndham which leases the
Company's 11 Wyndham Garden(R) Hotels.
"Wyndham II" means Wyndham or the subsidiary of Wyndham which manages the
Company's 11 Wyndham Garden(R) Hotels.
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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
Report of Independent Public Accountants.............................. F-9
Balance Sheet as of December 31, 1995................................. F-10
Statement of Income for the period from February 7, 1995 (inception)
to December 31, 1995................................................. F-11
Statement of Shareholders' Equity for the period from February 7, 1995
(inception) to
December 31, 1995.................................................... F-12
Statement of Cash Flows for the period from February 7, 1995 (incep-
tion) to December 31, 1995........................................... F-13
Notes to Financial Statements......................................... F-14
Report of Independent Public Accountants.............................. F-18
Schedule III--Real Estate and Accumulated Depreciation................ F-19
HMH HPT RESIDENCE INN, INC. (HOST I) FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-21
Unaudited Pro Forma Balance Sheet as of December 29, 1995............. F-22
Unaudited Pro Forma Statement of Income for the fiscal year ended De-
cember 29, 1995...................................................... F-23
Notes to Pro Forma Financial Statements............................... F-24
Report of Independent Public Accountants.............................. F-26
Balance Sheet as of February 21, 1996................................. F-27
Notes to Balance Sheet................................................ F-28
RESIDENCE INN HOTELS COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-29
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-30
Combined Statements of Assets, Liabilities and Net Investment and Ad-
vances as of December 30, 1994 and December 29, 1995................. F-31
Combined Statements of Cash Flows for the fiscal years ended December
31, 1993, December 30, 1994 and December 29, 1995.................... F-32
Notes to Combined Financial Statements................................ F-33
Report of Independent Public Accountants.............................. F-40
Schedule III--Real Estate and Accumulated Depreciation................ F-41
HMH HPT COURTYARD, INC. (HOST II) FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-43
Unaudited Pro Forma Balance Sheet as of December 29, 1995............. F-44
Unaudited Pro Forma Statement of Income for the fiscal year ended De-
cember 29, 1995...................................................... F-45
Notes to Pro Forma Financial Statements............................... F-46
Report of Independent Public Accountants.............................. F-48
Balance Sheet as of December 29, 1995................................. F-49
Statement of Income for the period March 24, 1995 (inception) to De-
cember 29, 1995...................................................... F-50
Statement of Shareholder's Equity for the period March 24, 1995 (in-
ception) to December 29, 1995........................................ F-51
Statement of Cash Flows for the period March 24, 1995 (inception) to
December 29, 1995.................................................... F-52
Notes to Financial Statements......................................... F-53
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
COURTYARD HOTELS COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-58
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-59
Combined Statements of Assets, Liabilities and Net Investment and Ad-
vances as of December 30, 1994 and December 29, 1995................. F-60
Combined Statements of Cash Flows for the fiscal years ended December
31, 1993, December 30, 1994 and December 29, 1995.................... F-61
Notes to Combined Financial Statements................................ F-62
Report of Independent Public Accountants.............................. F-70
Schedule III--Real Estate and Accumulated Depreciation................ F-71
WYNDHAM I FINANCIAL STATEMENTS:
Introduction to Pro Forma Financial Statements........................ F-73
Unaudited Pro Forma Balance Sheet as of December 31, 1995............. F-74
Unaudited Pro Forma Statement of Income for the year ended December
31, 1995............................................................. F-75
Notes to Pro Forma Financial Statements............................... F-76
GARDEN HOTEL ASSOCIATES L.P. FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-77
Balance Sheet as of December 31, 1994 and 1995........................ F-78
Statements of Income for the years ended December 31, 1993, December
31, 1994 and
December 31, 1995.................................................... F-79
Statement of Changes in Partners' Capital for the years ended December
31, 1993, December 31, 1994 and December 31, 1995.................... F-80
Statements of Cash Flows for the years ended December 31, 1993, Decem-
ber 31, 1994 and December 31, 1995................................... F-81
Notes to Financial Statements......................................... F-82
Report of Independent Accountants..................................... F-86
Schedule III--Real Estate and Accumulated Depreciation................ F-87
</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) this 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 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 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>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
Hospitality Properties Trust:
We have audited the accompanying balance sheet of Hospitality Properties
Trust (the "Company") as of December 31, 1995, and the related statements of
income, shareholders' equity and cash flows for the period from February 7,
1995 (inception) to December 31, 1995. These financial statements are the
responsibility of the Company'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 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 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 Hospitality Properties
Trust as of December 31, 1995, and the results of its operations and its cash
flows for the period from February 7, 1995 (inception) to December 31, 1995 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
January 19, 1996
F-9
<PAGE>
HOSPITALITY PROPERTIES TRUST
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1995
-------------
<S> <C>
ASSETS
Real estate properties, at cost:
Land........................................................... $ 62,311
Buildings and improvements..................................... 270,261
--------
332,572
Less accumulated depreciation.................................. 5,820
--------
326,752
Cash and cash equivalents........................................ 2,135
Rent receivable.................................................. 322
FF&E reserve (restricted cash)................................... 5,342
Other assets, net................................................ 4,396
--------
$338,947
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Security deposits................................................ $ 32,900
Dividends payable................................................ 6,930
Advisory fee to affiliate........................................ 770
Accounts payable and accrued expenses............................ 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................................................... 126
Additional paid-in capital....................................... 297,962
Cumulative net income............................................ 11,349
Dividends (paid or declared)..................................... (11,486)
--------
Total shareholders' equity................................... 297,951
--------
$338,947
========
</TABLE>
See accompanying notes.
F-10
<PAGE>
HOSPITALITY PROPERTIES TRUST
STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 7, 1995
(INCEPTION) TO
DECEMBER 31, 1995
-----------------
<S> <C>
Revenues:
Rental income............................................... $19,531
FF&E reserve income......................................... 4,037
Interest income............................................. 74
-------
Total revenues............................................ 23,642
Expenses:
Interest to HRP............................................. 5,039
Depreciation and amortization............................... 5,844
General, administrative and advisory........................ 1,410
-------
Total expenses............................................ 12,293
-------
Net income.................................................... $11,349
=======
Weighted average Shares outstanding........................... 4,515
Net income per Share.......................................... $ 2.51
=======
</TABLE>
See accompanying notes.
F-11
<PAGE>
HOSPITALITY PROPERTIES TRUST
STATEMENT OF SHAREHOLDERS' EQUITY
FEBRUARY 7, 1995 (INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
NUMBER OF COMMON PAID IN NET
SHARES SHARES CAPITAL INCOME DIVIDENDS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization
as of February 7, 1995
(inception)............ 40,000 -- $ 960 -- -- $ 960
Issuance of Common
Shares of Beneficial
Interest, net.......... 12,560,000 126 296,980 -- -- 297,106
Stock grants............ 900 -- 22 -- -- 22
Net income.............. -- -- -- 11,349 -- 11,349
Dividends............... -- -- -- -- (11,486) (11,486)
---------- ---- -------- ------- -------- --------
Balance at December 31,
1995................... 12,600,900 $126 $297,962 $11,349 $(11,486) $297,951
========== ==== ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-12
<PAGE>
HOSPITALITY PROPERTIES TRUST
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 7, 1995
(INCEPTION) TO
DECEMBER 31, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net income.................................................. $ 11,349
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization.............................. 5,844
Funding of FF&E reserve.................................... (4,037)
Changes in assets and liabilities:
Increase in rent receivable and other assets.............. (182)
Increase in accounts payable and accrued expenses......... 396
Increase in due to affiliate.............................. 770
---------
Cash provided by operating activities.................... 14,140
---------
Cash flows from investing activities:
Real estate acquisitions.................................... (328,148)
Increase in security deposits............................... 32,900
Payments for purchase option................................ (4,500)
Purchase of FF&E reserve.................................... (3,904)
---------
Cash used in investing activities........................ (303,652)
---------
Cash flows from financing activities:
Proceeds from issuance of shares, net....................... 198,088
Borrowings and advances from HRP............................ 165,241
Payments on borrowings and advances from HRP................ (65,241)
Dividends (including $2,491 to HRP)......................... (4,556)
Financing costs............................................. (1,885)
---------
Cash provided by financing activities.................... 291,647
---------
Increase in cash and cash equivalents........................ $ 2,135
Cash and cash equivalents at beginning of period............. --
---------
Cash and cash equivalents at end of period................... $ 2,135
=========
Supplemental cash flow information:
Interest paid............................................... $ 5,039
Non-cash activities:
Issuance of shares to HRP................................... $ 100,000
Cancellation of indebtedness to HRP......................... (100,000)
Purchases of fixed assets with FF&E reserve................. (2,424)
</TABLE>
See accompanying notes.
F-13
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND COMMENCEMENT OF OPERATIONS
Hospitality Properties Trust (the Company) was incorporated in the state of
Delaware on February 7, 1995. Subsequently, the Company became a Maryland real
estate investment trust and effected a 400-for-1 split of its common shares of
beneficial interest (the Shares). The Company, which invests in income
producing hotel and lodging related real estate, was a 100% owned subsidiary
of Health and Retirement Properties Trust (HRP) from its inception through
August 22, 1995 when it completed its initial public offering of Shares (the
IPO). HRP remains an affiliate of the Company.
The Company commenced operations on March 24, 1995 by acquiring 21 hotels
and related replacement and refurbishment reserves (the FF&E Reserves) for
approximately $179,400 from affiliates of Host Marriott Corporation. The
properties are leased to a subsidiary (Host II) of Host Marriott Corporation
and are managed by a subsidiary (Marriott) of Marriott International, Inc. The
acquisition was substantially funded by advances from HRP (the HRP loan).
On August 22, 1995, the Company received net proceeds of approximately
$178,000 from its IPO of 7,500,000 shares to the public and 250,000 shares to
HRPT Advisors, Inc. and the concurrent placement of 3,960,000 shares to HRP
which canceled $99,000 in indebtedness due to HRP. On September 18, 1995, the
Company received additional net proceeds of approximately $19,900 from the
sale of 850,000 Shares in connection with the exercise of the underwriters'
over-allotment option. The proceeds were used to repay remaining loan amounts
due to HRP and to acquire 16 additional hotel properties (together with the 21
properties acquired on March 24, 1995, the Initial Hotels) and related FF&E
reserves for $149,600. The Initial Hotels are leased to Host and managed by
Marriott.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real estate properties. Real estate properties are recorded at cost.
Depreciation is provided for on a straight-line basis over the estimated
useful lives ranging up to 40 years.
Cash and cash equivalents. Highly liquid investments with maturities of
three months or less at date of purchase are considered to be cash
equivalents. The carrying amount of cash and cash equivalents is a reasonable
estimate of fair value.
Deferred interest and finance costs. Costs incurred to secure certain
borrowings are capitalized and amortized over the terms of their respective
loans.
Revenue recognition. Rental income from operating leases is recognized on a
straight line basis over the life of the lease agreements. Additional rent and
interest revenue is recognized as earned.
Net income per share. Net income per share is computed using the weighted
average number of shares outstanding during the period.
Use of estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts. Actual results could differ from
those estimates.
Income taxes. The Company elected to be taxed as a Real Estate Investment
Trust (REIT) under Sections 856 through 860 of the Internal Revenue Code of
1986 (the "Code"), commencing with its first taxable year ended December 31,
1995, and intends to conduct its operations so as to continue to qualify as a
REIT under the Code. As a REIT, the Company generally will not be subject to
Federal income tax on its net income that it
F-14
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
currently distributes to shareholders. Qualifications and taxation as a REIT
depends on the Company's ability to meet certain dividend distribution tests,
stock ownership requirements and various qualification tests prescribed in the
Code.
The dividends paid by the Company during 1995 were taxable as ordinary
income.
3. REAL ESTATE PROPERTIES.
The Company's 37 hotel properties are leased pursuant to long term operating
leases expiring in 2006. The leases provide for four automatic renewal terms
totaling 37 years unless the lessee (Host II) properly notifies the Company in
accordance with the leases. Each lease is a triple net lease and generally
requires the lessee to pay: base rent, totaling $32,900 annually for the 37
hotels; percentage rent, equal to 5% of increases in total hotel sales over
1994 sales, FF&E reserve rent, equal to 5% of total hotel sales and all
operating costs associated with the leased property. Host II has posted a
security deposit equal to one year's base rent. The FF&E reserve may be used
by Marriott and Host II to maintain the properties in good working order and
repair. If the FF&E reserve is not available to fund such expenditures, Host
II may require the Company to fund such expenditures, in which case annual
base rent will be increased by 10% of the amount so funded.
Under the management agreements with Marriott, borrowings secured by the
Initial Hotels are limited, according to a formula, to amounts less than 70%
of the allocable purchase price of the applicable Initial Hotels.
The Company also has options to purchase and/or rights of first refusal and
rights of first negotiation to acquire certain additional properties from Host
Marriott Corporation. The option and rights are carried at cost and included
in other assets in the accompanying financial statements. The option and
rights agreements expire at dates beginning June 30, 1996 and running through
August 31, 2002.
Future minimum lease payments to be received by the Company during the
remaining initial term of the leases are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 32,900
1997............................................................. 32,900
1998............................................................. 32,900
1999............................................................. 32,900
2000............................................................. 32,900
Thereafter....................................................... 197,400
--------
$361,900
========
</TABLE>
4. INDEBTEDNESS
The Company has entered into a $200,000 revolving acquisition credit
facility which provides for borrowings at LIBOR plus 150 basis points.
Borrowings, if any, may be repaid and reborrowed as necessary until December
31, 1998, at which time outstanding balances may, at the Company's option
(subject to lender consent), be either repaid or converted into a 10-year term
loan. As of December 31, 1995, the Company had not drawn on the credit
facility.
Substantially all of the funding for the acquisition of the 21 Initial
Hotels plus closing costs and the cost of the option was provided to the
Company by HRP from borrowings under HRP's revolving credit facility. The
Company was a full and unconditional guarantor of HRP's obligations for
payments of interest and principal under HRP's revolving credit facility until
the Company's IPO in August 1995. The loan from HRP was repaid
F-15
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
in 1995 using proceeds from the IPO and the guarantee was released. Interest
incurred on the HRP loan and paid to HRP totaled $5,039 for the period ended
December 31, 1995.
5. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with HRPT Advisors, Inc. ("Advisors") whereby
Advisors provides investment, management and administrative services to the
Company. Advisors is owned by Gerard M. Martin and Barry M. Portnoy. Messrs.
Martin and Portnoy are Managing Trustees of HPT and HRP. Mr. Portnoy is also a
partner in the law firm which provides legal services to the Company. The
Company's officers are also employees of the Advisor.
Advisors is compensated at an annual rate equal to 0.7% of HPT's average
real estate investments up to the first $250,000 of such investments and 0.5%
thereafter. Advisory fees earned for the period February 7, 1995 (inception)
through December 31, 1995 were $1,292. Advisors owns 250,000 shares of HPT
which it acquired at the IPO for $6,250.
HRP owns 4,000,000 shares of HPT, 3,960,000 shares of which it received in
consideration of cancellation of a loan receivable totaling $99,000 from the
Company.
Under the provisions of the Company's Incentive Share Award Plan, 100,000
Common Shares have been reserved for issuance to officers of the Company,
consultants to the Company and Independent Trustees of the Company. On
December 21, 1995 each of the three Independent Trustees were awarded 300
shares under this plan.
6. CONCENTRATION
At December 31, 1995, all of the Company's real estate properties net, were
leased to Host II and managed by Marriott.
The Company's 37 hotels contain 5,286 rooms and are located in 20 states.
The following table sets forth those states where base rent exceeds 5% of
total annual base rent due to the Company:
<TABLE>
<CAPTION>
STATE PERCENTAGE OF ANNUAL BASE RENT
<S> <C>
Massachusetts.............................. 18%
Georgia.................................... 13
California................................. 11
North Carolina............................. 7
</TABLE>
7. PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma income statement gives effect to: (i) the
completion of the Company's initial public offering and the concurrent
placement to HRP and HRPT Advisors, Inc.; (ii) the acquisition of the Initial
Hotels and the commencement of the related leases; (iii) repayment of amounts
due HRP; (iv) and the exercise of the underwriters' over-allotment option as
though such transactions occurred on January 1, 1995.
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.
F-16
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma data is not necessarily indicative of what
the actual results of operations for the Company would have been for the year,
nor does it purport to represent the results of operations for the Company for
future periods.
Pro Forma Income Statement Data:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
<S> <C>
Revenues:
Rental income......................................... $33,308
FF&E reserve income................................... 6,424
Interest income....................................... 144
-------
Total revenues...................................... 39,876
-------
Expenses:
Interest.............................................. --
Depreciation and amortization......................... 9,229
General, administrative and advisory.................. 2,616
-------
Total expenses...................................... 11,845
-------
Net income.............................................. $28,031
=======
Weighted average Shares outstanding (In thousands)...... 12,601
Net income per Share.................................... $ 2.22
</TABLE>
8. SUBSEQUENT EVENTS (UNAUDITED)
In February 1996, the Company entered into letters of intent for three
transactions totaling $484,600 to acquire and lease 45 hotels (the Additional
Hotels). One transaction will involve 11 Wyndham Garden(R) Hotels with 1,940
guest rooms in seven states which will be acquired for $135,320. The initial
lease term is expected to be 17 years. The second transaction will involve 18
Residence Inn Hotels with 2,178 guest suites in 14 states which will be
acquired for $172,200. The initial lease term is expected to be 15 years. The
third transaction will involve 16 Courtyard by Marriott hotels with 2,324
guest rooms in 10 states which will be acquired for $176,400. The initial
lease term is expected to be 17 years. Minimum annual base rent payable to the
Company in connection with the above transactions will total $48,500 and the
leases will include provision for security deposits equal to one year's base
rent, reserves for capital expenditures at 5% of total revenue and
participating rent based on a percentage of increases in total revenue. The
participating rent percentage and base year are 8% and 1996, 7.5% and 1996,
and 5% and 1995 for the Wyndham, Residence Inn, and Courtyard by Marriott
transactions, respectively. While the Company expects to complete these
transactions during the first or second quarter of 1996, no assurance can be
given as to the actual timing or that they will be completed. In addition, as
the permanent financing for these transactions has not been finally
determined, the ultimate impact on the Company's financial position and
results of operations has not yet been determined. In order to accommodate the
Company's acquisition of the Additional Hotels, the Company has entered into
an agreement to expand the funding availability under its revolving credit
facility by up to an additional $250,000.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
Hospitality Properties Trust:
We have audited in accordance with generally accepted auditing standards the
financial statements of Hospitality Properties Trust and have issued our
report thereon dated January 19, 1996. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules on
pages F-19 and F-20 are the responsibility of Hospitality Properties Trust's
management and are presented for the purpose of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
January 19, 1996
F-18
<PAGE>
HOSPITALITY PROPERTIES TRUST
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 31, 1995
----------------- -----------------------
SUBSEQUENT
BUILDINGS & COSTS BUILDINGS & ACCUMULATED DATE DEPRECIATION
DESCRIPTION: DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUIRED LIFE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
37 Courtyard
Hotels................. -- $62 $269 $ 2 $62 $271 $333 $(6) 1995 9-40 years
</TABLE>
The accompanying notes are an integral part of this schedule.
F-19
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO SCHEDULE III
DECEMBER 31, 1995
(IN THOUSANDS)
(A) The change in total cost of properties for the period from February 7,
1995 (inception) to December 31, 1995 is as follows:
<TABLE>
<S> <C>
Balance at February 7,1995......................................... $ --
Additions: Hotel acquisitions and capital expenditures............. 332,572
--------
Balance at December 31, 1995....................................... $332,572
========
(B) The change in accumulated depreciation for the period from February 7,
1995 (inception) to December 31, 1995 is as follows:
Balance at February 7, 1995........................................ $ --
Additions: Hotel acquisitions and capital expenditures............. 5,820
--------
Balance at December 31, 1995....................................... $ 5,820
========
</TABLE>
F-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Residence Inn Hotels:
We have audited in accordance with generally accepted auditing standards the
financial statements of the Residence Inn Hotels (as defined in Note 1 of
those financial statements) included in this prospectus and have issued our
report thereon dated February 23, 1996. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule on pages
F-41 and F-42 is the responsibility of Host Marriott Corporation's management
and is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.,
February 23, 1996
F-40
<PAGE>
RESIDENCE INN HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 29, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 29, 1995
----------------- -----------------------
SUBSEQUENT ASSET
BUILDINGS & COSTS WRITE- BUILDINGS & ACCUMULATED DATE OF DATE
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED DOWN LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residence Inn
Hotels:......... $ -- $38 $104 $21 $(4) $40 $119 $159 $13 Various N/A
<CAPTION>
DEPRECIATION
DESCRIPTION LIFE
<S> <C>
Residence Inn
Hotels:......... 40
</TABLE>
The accompanying notes are an integral part of this schedule.
F-41
<PAGE>
RESIDENCE INN HOTELS
NOTES TO SCHEDULE III
AS OF DECEMBER 29, 1995
(IN THOUSANDS)
(A)The change in total cost of properties for the year ended December 29, 1995
is as follows:
<TABLE>
<S> <C>
Balance at December 30, 1994...................................... $162,860
Writedown of property to net realizable value..................... (3,899)
Additions: Capital expenditures................................... 427
--------
Balance at December 29, 1995...................................... $159,388
========
</TABLE>
(B) The change in accumulated depreciation and amortization for the year ended
December 29, 1995 is as follows:
<TABLE>
<S> <C>
Balance at December 30, 1994....................................... $10,142
Depreciation and amortization...................................... 3,081
-------
Balance at December 29, 1995....................................... $13,223
=======
</TABLE>
F-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Courtyard Hotels:
We have audited in accordance with generally accepted auditing standards the
financial statements of the Courtyard Hotels (as defined in Note 1 of those
financial statements) included in this prospectus and have issued our report
thereon dated February 23, 1996. Our audit was made for the purpose of forming
an opinion on those statements taken as a whole. The schedule on pages F-71
and F-72 is the responsibility of Host Marriott Corporation's management and
is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.,
February 23, 1996
F-70
<PAGE>
COURTYARD HOTELS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 29, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 29, 1995
----------------- SUBSEQUENT ASSET -----------------------
BUILDINGS & COSTS WRITE- BUILDINGS & ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED DOWN LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIFE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Courtyard
Hotels.......... $-- $34 $122 $ 2 $(6) $34 $118 $152 $16 Various N/A 40
</TABLE>
The accompanying notes are an integral part of this schedule.
F-71
<PAGE>
COURTYARD HOTELS
NOTES TO SCHEDULE III
AS OF DECEMBER 29, 1995
(DOLLARS IN THOUSANDS)
(A) This schedule represents the Group C Hotels, as defined in Note 1 to the
accompanying combined financial statements. Amounts for Group A Hotels and
Group B Hotels are excluded from this schedule as the properties were sold
prior to December 29, 1995.
(B)The change in total cost of properties for the year ended December 29, 1995
is as follows:
<TABLE>
<S> <C>
Balance at December 30, 1994..................................... $ 479,615
Dispositions: Sales of Group A Hotels and Group B Hotels......... (332,419)
Additions: Capital expenditures.................................. 5,450
---------
Balance at December 29, 1995..................................... $ 152,646
=========
</TABLE>
(C) The change in accumulated depreciation and amortization for the year ended
December 29, 1995 is as follows:
<TABLE>
<S> <C>
Balance at December 30, 1994..................................... $ 264,198
Dispositions: Sales of Group A Hotels and Group B Hotels......... (257,486)
Depreciation and amortization.................................... 9,372
---------
Balance at December 29, 1995..................................... $ 16,084
=========
</TABLE>
F-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To: The Partners
Garden Hotel Associates L.P.:
In connection with our audits of the financial statements of Garden Hotel
Associates L.P. as of December 31, 1994 and 1995, and for each of the three
years in the period ended December 31, 1995, such financial statements are
included in this Prospectus, we have also audited the financial statement
schedule on the following page F-87.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included herein.
Coopers & Lybrand L.L.P.
Dallas, TX
February 27, 1996
F-86
<PAGE>
GARDEN HOTEL ASSOCIATES, L.P.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
GROSS AMOUNT AT
INITIAL COSTS DECEMBER 31, 1995
---------------------- SUBSEQUENT -----------------------
BUILDINGS & COSTS BUILDINGS & ACCUMULATED DATE OF DEPRECIATION
DESCRIPTION DEBT LAND IMPROVEMENTS CAPITALIZED LAND IMPROVEMENTS TOTAL DEPRECIATION ACQUISITION LIFE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11 Wyndham Garden(R)
Hotels................ $93 $17 $90 $ 2 $17 $92 $109 $13 May 1990 40
</TABLE>
F-87
<PAGE>
H O S P I T A L I T Y P R O P E R T I E S T R U S T
[THE PROSPECTUS CONTAINS
PHOTOGRAPHS OF THE FOLLOWING
COMPANY HOTELS]
[PHOTO OF [PHOTO OF [PHOTO OF
WYNDHAM GARDEN(R) COURTYARD BY WYNDHAM GARDEN(R)
NORTH PHOENIX, ARIZONA MARRIOTT(R) SUNNYVALE, CALIFORNIA
APPEARS HERE] FOXBOROUGH, MASSACHUSETTS APPEARS HERE]
APPEARS HERE]
[THE PROSPECTUS CONTAINS A MAP OF THE CONTINENTAL UNITED STATES; STATES WHERE
THE COMPANY'S HOTELS ARE LOCATED ARE SHADED IN BLUE; THE LOCATION OF THE
COMPANY'S 11 WYNDHAM GARDEN(R) HOTELS ARE IDENTIFIED BY A STAR, THE LOCATION OF
THE COMPANY'S 18 RESIDENCE INN BY MARRIOTT(R) HOTELS ARE IDENTIFIED BY A
DIAMOND, AND THE LOCATION OF THE COMPANY'S 53 COURTYARD BY MARRIOTT(R) HOTELS
ARE IDENTIFIED BY A SQUARE]
[THE PROSPECTUS CONTAINS
PHOTOGRAPHS OF THE FOLLOWING
COMPANY HOTELS]
[PHOTO OF [PHOTO OF [PHOTO OF
WYNDHAM GARDEN(R) RESIDENCE INN BY MARRIOTT(R) COURTYARD BY
ATLANTA, GEORGIA WESTBOROUGH, MASSACHUSETTS MARRIOTT(R)
APPEARS HERE] APPEARS HERE] MILFORD, MASSACHUSETTS
APPEARS HERE]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 7
The Company............................................................... 12
Distribution Policy....................................................... 13
Price Range of Shares..................................................... 15
Use of Proceeds........................................................... 15
Capitalization............................................................ 16
Selected and Pro Forma Financial and Operating Data....................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 28
Management................................................................ 50
Policies with Respect to Certain Activities............................... 55
Description of the Shares................................................. 57
Summary of the Declaration of Trust....................................... 58
Principal Shareholders.................................................... 64
Shares Eligible for Future Sale........................................... 65
Federal Income Tax Considerations......................................... 65
Certain United States Tax Considerations for Non-U.S. Holders of Shares... 74
ERISA Plans, KEOGH Plans and Individual Retirement Accounts............... 76
Underwriting.............................................................. 79
Experts................................................................... 80
Legal Matters............................................................. 81
Additional Information.................................................... 81
Glossary.................................................................. 82
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
13,000,000 SHARES
HOSPITALITY PROPERTIES TRUST
COMMON SHARES OF
BENEFICIAL INTEREST
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
APRIL 1, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
