Filed Pursuant to Rule 424(b)(5)
Registration No. 333-43573
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 15, 1998)
, 1998
$150,000,000
Hospitality Properties Trust
% Senior Notes due
The % Senior Notes due (the "Notes") in an aggregate principal
amount of $150,000,000 are being issued by Hospitality Properties Trust (the
"Company" or "HPT"). Interest on the Notes is payable semi-annually on each
and , commencing on , 1998. The Notes constitute senior
unsecured obligations of the Company, ranking pari passu with all other senior
unsecured obligations of the Company. See "Description of the Notes--General."
The Notes mature on , and are redeemable, in whole or in part,
at the option of the Company at any time and from time to time at a redemption
price equal to the sum of (i) the principal amount of the Notes being redeemed,
plus accrued and unpaid interest to but excluding the redemption date, and (ii)
the Make-Whole Amount set forth herein. See "Description of the Notes--Optional
Redemption of Notes." The Notes are not subject to any sinking fund.
The Notes will be represented by one or more Global Notes registered in
the name of the nominee of The Depository Trust Company ("DTC"). Beneficial
interests in such Global Notes will be shown on, and transfers thereof will be
effected only through, records maintained by DTC and its direct and indirect
participants. Except as described herein, the Notes will not be issued in
definitive form. See "Description of the Notes--Book-Entry System and Form of
Note."
The Company is a real estate investment trust (a "REIT") which acquires,
owns and leases hotels to unaffiliated tenants. Upon completion of pending
acquisitions of 11 hotels, HPT will own 135 hotels with 18,497 rooms located in
35 states. The net proceeds of the Offering will be used to prepay in full all
$125 million of secured indebtedness of subsidiaries of the Company, for
acquisitions of additional hotels and for general business purposes.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
the Public(1) Discount(2) the Company(1)(3)
--------------- -------------- ------------------
<S> <C> <C> <C>
Per Note ......... % % %
Total ............ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from date of issuance.
(2) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
The Notes are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, subject to certain
conditions, including its right to withdraw, cancel or reject orders in whole
or in part. It is expected that delivery of the Notes will be made in New York,
New York, on or about , 1998, in book-entry form through the facilities of
DTC against payment therefor in immediately available funds.
Donaldson, Lufkin & Jenrette
Securities Corporation
A registration statement relating to these securities has been declared
effective by the Securities and Exchange Commission pursuant to Rule
415 under the Securities Act of 1933.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE>
SUMMARY
This summary is qualified by the information and financial statements
appearing elsewhere or incorporated by reference herein and in the accompanying
Prospectus (the "Prospectus"). References herein to the "Company" or "HPT"
include consolidated subsidiaries. Unless otherwise noted, the information
contained in this Prospectus Supplement assumes that the transactions described
below in "Recent Developments--Investments" have been completed, including the
acquisition of the 11 hotels which have not yet been acquired. This offering of
Notes (the "Offering") is not contingent on the consummation of these
transactions, and there can be no assurance that they will be consummated. As
used in this Prospectus Supplement, "adjusted" assumes the completion of this
Offering and the application of the net proceeds therefrom, and "adjusted pro
forma" assumes such matters and consummation of the transactions described in
the Unaudited Adjusted Pro Forma Financial Statements included and incorporated
by reference herein (the "Unaudited Adjusted Pro Forma Financial Statements").
THE COMPANY
The Company is a REIT formed to acquire, own and lease hotels. The Company
currently owns or has entered agreements to acquire a total of 135 hotels with
18,497 rooms costing approximately $1.4 billion. The Company's business
strategy is to invest in high quality hotels leased to experienced hotel
operators for minimum rents which exceed the Company's cost of capital. The
average age of the Company's hotels is 6 years. The Company believes that its
hotels are among the newest, best designed and best located hotels in their
respective market segments.
HPT Investments by Hotel Brand
[Tabular representation of pie chart]
Residence Inn by Marriott[RegTM]
31 hotels/3,961 suites
$335 million 24%
Courtyard by Marriott[RegTM]
63 hotels/8,982 rooms
$621 million 46%
Wyndham[RegTM]
12 hotels/2,321 rooms
$183 million 13%
Sumner Suites[RegTM]
14 hotels/1,641 suites
$140 million 10%
Candlewood[RegTM]
15 hotels/1,592 suites
$100 million 7%
The Company's ability to pay debt service depends primarily upon the
Company's receipt of rents under the terms of its leases. The Company believes
that its lease structure is among the most secure of all hotel REITs. The
Company's leases are designed to increase the Company's rent during cyclical
upturns, to secure its minimum rents during cyclical downturns and generally
provide for the dependability of the Company's cash flow. Important features of
the Company's leases include the following:
Minimum Rent. All the Company's leases require minimum annual rent equal
to 10% of the Company's investment in its hotels.
Percentage Rent. All the Company's leases require percentage rent equal to
between 5% and 10% of increases in gross hotel revenues over threshold amounts.
Pooled Leases. Each Company-owned hotel is part of a combination of
hotels. The leases in each combination are subject to cross default with other
leases to the same tenant. The smallest combination includes nine hotels with
1,336 rooms in which the Company has invested approximately $129 million; the
largest combination includes 53 hotels with 7,610 rooms in which the Company
has invested approximately $505 million.
Geographic Diversification. Each combination of hotels leased to a single
tenant is geographically diversified. In addition, many of HPT's hotels are
located in the vicinity of major demand generators such as airports, medical or
educational facilities and large suburban office parks.
All or None Renewals. All renewal options for each combination of hotels
may only be exercised on an all or none basis and not for separate hotels.
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<PAGE>
Security Deposits. The leases require security deposits equal to one
year's minimum rent.
FF&E Reserves. The leases require the tenants to deposit 5% of gross hotel
revenues into escrow to fund periodic renovations (the "FF&E Reserve"). For
hotels owned throughout 1997, the FF&E Reserve averaged $1,475 per room per
year.
Subordinated Fees. All management fees for the Company's hotels are
subordinated to the rent due to the Company.
Guarantees for New Hotels. When the Company purchases and leases recently
built hotels, the Company requires that payment of rent be guaranteed until the
operations of the hotels achieve negotiated rent coverage levels. Except for
guarantors whose obligations are investment grade rated, these guarantees are
secured.
Rent Coverage. When the Company purchases hotels which have historical
operations, the purchase prices and rents are set at levels which provide
historical as well as projected rent coverage. During 1997, hotels owned by the
Company which had been open at least one year at the beginning of 1997 earned
cash flow available for rent (after paying all non-subordinated expenses and
after a 5% FF&E Reserve) of 1.6 times the minimum rent due to the Company. The
Company believes that this is the highest rent coverage ratio among all public
hotel REITs.
FINANCING POLICIES
Since its initial public offering in 1995 (the "IPO"), the Company has
been conservatively capitalized. At February 6, 1998, the Company's total
consolidated debt of $125 million constituted 8% of the Company's total market
capitalization and 11% of the Company's total book capitalization. The
following chart shows the historical debt and total market capitalization of
the Company as of the end of the periods shown.
HPT Debt Leverage
(dollars in millions)
[Tabular representation of bar chart]
<TABLE>
<CAPTION>
3Q95 4Q95 1Q96 2Q96 3Q96 4Q96 1Q97 2Q97 3Q97 4Q97
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt 0 0 116 94 94 125 125 229 229 125
Total Market Capitalization 331 337 453 812 812 904 948 1,052 1,180 1,403
</TABLE>
The Company believes that its conservative financing policy has enabled
the Company to access the capital markets on favorable terms and will continue
to facilitate its growth. The Company has completed three offerings of common
shares of beneficial interest ("Shares") since 1995, raising over $1 billion in
gross proceeds. The following table presents the Company's ratios contained in
the covenants relating to the Notes, on an adjusted pro forma basis assuming
the consummation of this Offering, the application of the net proceeds
therefrom and the consummation of the other transactions described in the
Unaudited Adjusted Pro Forma Financial Statements. See "Description of the
Notes."
<TABLE>
<CAPTION>
Required Adjusted Pro Forma at
Description of Covenants Ratio December 31, 1997(1)
------------------------ ------------------ ----------------------
<S> <C> <C>
Debt/Adjusted Total Assets ............................................... no more than 60% 13%
Secured Debt/Adjusted Total Assets ....................................... no more than 40% 3%
Consolidated Income Available for Debt Service/Annual Debt Service ....... at least 1.5x 9.7x
Total Unencumbered Assets/Unsecured Debt ................................. at least 200% 605%
</TABLE>
- ---------------
(1) As described in "Recent Developments--Financing," the Company has had
preliminary discussions with several banks and expects to replace its
secured credit facility with an unsecured credit facility. If the
Company's secured facility is replaced with an unsecured facility, on an
Adjusted Pro Forma basis, the Company would have had zero secured debt and
its ratio of Total Unencumbered Assets to Unsecured Debt would have been
773%. There can be no assurance that an unsecured facility will be
available to the Company.
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<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Issuer .................................... Hospitality Properties Trust.
Securities Offered ........................ $150,000,000 principal amount of % Senior Notes due .
Maturity .................................. , .
Interest Payment Dates .................... and of each year, commencing on , 1998.
Ranking ................................... The Notes will be senior unsecured obligations of the Company,
ranking pari passu in right of payment with all other senior unsecured
obligations of the Company. The Notes will be effectively
subordinated to mortgages and other secured indebtedness of the
Company and to all indebtedness and other liabilities of any subsidiary
of the Company. As of February 6, 1998, the Company had an
aggregate of $125 million of secured indebtedness, all of which will
be repaid with the net proceeds of this Offering. See "Capitalization"
and "Use of Proceeds."
Use of Proceeds ........................... The net proceeds to the Company of approximately $149 million from
the sale of the Notes will be used to prepay in full the $125 million
of mortgage notes issued by subsidiaries of the Company (the "CMBS
Notes"), for acquisitions of additional hotels and for general business
purposes. See "Use of Proceeds."
Optional Redemption ....................... Prior to their stated maturity, the Notes will be redeemable, at the option
of the Company, in whole or in part, at a redemption price equal to the
sum of (i) the principal amount of the Notes being redeemed, plus accrued
and unpaid interest to but excluding the redemption date, and (ii) the
Make-Whole Amount. See "Description of the Notes--Optional
Redemption of Notes."
Limitations on Incurrence of Debt ......... The Indenture and Supplemental Indenture under which the Notes will
be issued will contain certain covenants including the following:
(1) Neither the Company nor any Subsidiary may incur any Debt if,
after giving effect thereto, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on a
consolidated basis is greater than 60% of the sum ("Adjusted
Total Assets") of (i) the Total Assets of the Company and its
Subsidiaries as of the end of the most recent calendar quarter and
(ii) the purchase price of any real estate assets or mortgages
receivable acquired, and the amount of any securities offering
proceeds received (to the extent that such proceeds were not used
to acquire real estate assets or mortgages receivable or used to
reduce Debt), by the Company or any Subsidiary since the end
of such calendar quarter, including those proceeds obtained in
connection with the incurrence of such additional Debt. On an
adjusted pro forma basis, Debt would have been 13% of Adjusted
Total Assets as of December 31, 1997.
S-5
<PAGE>
(2) Neither the Company nor any Subsidiary may incur any Secured Debt
if, after giving effect thereto, the aggregate principal amount of
all outstanding Secured Debt of the Company and its Subsidiaries on
a consolidated basis is greater than 40% of the Company's Adjusted
Total Assets. On an adjusted pro forma basis, Secured Debt would
have been 3% of Adjusted Total Assets as of December 31, 1997.
(3) Neither the Company nor any Subsidiary may incur any Debt if, after
giving effect thereto, the ratio of Consolidated Income Available
for Debt Service to the Annual Debt Service for the four
consecutive fiscal quarters most recently ended prior to the date
on which such additional Debt is to be incurred shall have been
less than 1.5x on a pro forma basis after giving effect to certain
assumptions. On an adjusted pro forma basis, the Consolidated
Income Available for Debt Service would have been 9.7x the Annual
Debt Service for 1997.
(4) The Company and its Subsidiaries will maintain at all times Total
Unencumbered Assets of not less than 200% of the aggregate
outstanding principal amount of the Unsecured Debt of the Company
and its Subsidiaries on a consolidated basis. On an adjusted pro
forma basis, Total Unencumbered Assets would have been 605% of
Unsecured Debt as of December 31, 1997. For a more complete
description of the terms and definitions used in the foregoing
summary of Limitations on Incurrence of Debt, see "Description of
the Notes--Certain Covenants."
</TABLE>
S-6
<PAGE>
SUMMARY HISTORICAL AND ADJUSTED PRO FORMA FINANCIAL INFORMATION
The following table sets forth certain financial information with respect
to the Company which is derived from the audited and unaudited financial
statements of the Company included or incorporated herein by reference or in
the Unaudited Adjusted Pro Forma Financial Statements and should be read in
conjunction with these financial statements and the accompanying footnotes.
<TABLE>
<CAPTION>
Historical Adjusted Pro Forma(1)
----------------------------------------------- ----------------------
(unaudited)
February 7, 1995 Year Ended
(inception) to December 31, Year Ended
December 31, ----------------------------- December 31,
1995 1996 1997 1997
(in thousands, except ratios)
<S> <C> <C> <C> <C>
Operating Data:
Rental income .................................... $ 19,531 $ 69,514 $ 98,561 $ 138,273
FF&E Reserve income .............................. 4,037 12,169 14,643 14,643
Interest income .................................. 74 946 928 928
Total revenues .................................. 23,642 82,629 114,132 153,844
Net income ....................................... 11,349 51,664 59,153 84,443(2)
Dividends declared(3) ............................ 11,486 62,841 73,408
Balance Sheet Data (at end of period):
Real estate properties, net ...................... $ 326,752 $ 816,469 $ 1,207,868 $1,363,801
Total assets ..................................... 338,947 871,603 1,313,256 1,386,473
Total borrowings ................................. -- 125,000 125,000 186,701
Total shareholders' equity ....................... 297,951 645,208 1,007,893 1,003,893
Other Data:
Consolidated Income Available for Debt Service(4) $ 18,195 $ 65,539 $ 91,993 $ 129,401
Ratio of earnings to fixed charges(5) ............ 3.2x 10.2x 4.8x 7.3x
</TABLE>
- ---------------
(1) Adjusted Pro Forma data is presented for (i) the year ended December 31,
1997, as if the transactions described under "Recent
Developments--Investments," the December 1997 offering of Shares described
under "Recent Developments--Financing," this Offering and the transactions
described in the Unaudited Adjusted Pro Forma Financial Statements were
consummated as of January 1, 1997, and (ii) as of December 31, 1997, as if
such transactions were consummated as of December 31, 1997.
(2) Excludes an extraordinary loss and other non-recurring charges expected
from the application of the net proceeds from this Offering to the early
extinguishment of debt, estimated to be approximately $4 million, in
accordance with applicable accounting requirements.
(3) Amounts represent dividends declared with respect to the periods shown.
(4) As defined under "Description of the Notes--Certain Covenants."
(5) These ratios were computed by dividing the Company's earnings by fixed
charges. For this purpose, earnings have been calculated by adding fixed
charges to income before income taxes, extraordinary items and gain or
loss on the disposition of real property. Fixed charges consist of
interest costs and amortization of deferred financing costs.
S-7
<PAGE>
RECENT DEVELOPMENTS
From January 1, 1997 through the date hereof, the Company has engaged in
the following significant activities.
Investments
Wyndham[RegTM] Salt Lake City Hotel (381 rooms; $44.0 million). In January
1997 the Company purchased a full service hotel in Salt Lake City, Utah for
$44.0 million. This hotel is located adjacent to the Salt Lake City Salt Palace
Convention Center and contains 381 rooms, 14,469 square feet of meeting space
and two restaurants/lounges. This hotel was previously operated as a
Doubletree[RegTM] hotel, but upon acquisition the Company leased it to a
subsidiary of Wyndham Hotel Corporation ("Wyndham") for an initial term ending
in 2012 plus renewal options. In 1998, the Company provided $3.3 million to
Wyndham for renovations to this hotel. The minimum rent payable to the Company
for this hotel is $4.7 million per year. This lease also requires percentage
rent based upon increases in gross revenues at the hotel and a FF&E Reserve
escrow. The lease obligations due the Company are secured by a $4.7 million
security deposit. Because this hotel is being repositioned by Wyndham and the
purchase price did not meet the Company's underwriting criteria based upon
historical operating results, the Company required Wyndham to guarantee the
lease obligations up to a specified amount until a negotiated ratio of cash
flow coverage of rent is achieved from the operations of this hotel. This
guaranty is secured by a cash deposit. Also, the lease permits the Company to
subject this lease to cross default and all or none renewal options with leases
for 11 other Company-owned hotels leased to another subsidiary of Wyndham.
Fourteen Marriott[RegTM] Hotels (1,819 rooms; $149 million). In March 1997
the Company agreed to acquire 10 Residence Inn by Marriott[RegTM] hotels (1,276
suites) and four Courtyard by Marriott[RegTM] hotels (543 rooms) for $149
million from Marriott International, Inc. ("Marriott"). Marriott is a publicly
owned company listed on the New York Stock Exchange (the "NYSE") under the
symbol "MAR." All of these hotels were developed by Marriott and are less than
two years old. The Company purchased these hotels in 1997 as they opened and
leased them to a subsidiary of Marriott through 2014 plus renewal options. The
annual minimum rent payable under these leases is $14.9 million. The leases
require percentage rents beginning after operations of these hotels are
stabilized as well as FF&E Reserve escrows. The leases for all 14 of these
hotels are subject to cross default and all or none renewal options. A security
deposit equal to one year's minimum rent ($14.9 million) secures the lease
obligations to the Company. In addition, Marriott has guaranteed the lease
payments until operations of these hotels are stabilized and cover the minimum
rent according to a formula negotiated between the Company and Marriott.
Nine Marriott[RegTM] Hotels (1,336 rooms; $129 million). In September 1997
the Company agreed to acquire from Marriott six Courtyard by Marriott[RegTM]
hotels (829 rooms) and three Residence Inn by Marriott[RegTM] hotels (507
suites) for $129 million. These hotels are being leased to a separate
subsidiary of Marriott through 2012 plus renewal options. The terms of these
acquisitions and leases are substantially similar to the terms described above
for the 14 Marriott[RegTM] hotels acquired and leased by the Company. The
purchase price and minimum rent per room for these hotels are higher than the
purchase prices and rents for other Marriott hotels previously acquired by the
Company because several of these hotels are in higher cost urban locations. As
of the date hereof, three of these hotels have been acquired; the remaining six
are expected to be acquired periodically during the remainder of 1998.
Fourteen Sumner Suites[RegTM] Hotels (1,641 suites; $140 million). In
November 1997 the Company acquired 14 Sumner Suites[RegTM] hotels (1,641
suites) for $140 million from ShoLodge, Inc. ("ShoLodge"). ShoLodge is a public
company listed on The Nasdaq National Market under the symbol "LODG." Sumner
Suites[RegTM] is a proprietary brand of all suite hotels owned by ShoLodge.
Thirteen of these hotels were developed by ShoLodge within the past two years
and the remaining hotel is being substantially renovated at this time.
Simultaneous with their acquisition all of these hotels were leased to a
subsidiary of ShoLodge for an initial term ending in 2008 plus renewal options.
The lease requires annual minimum rent of $14.0 million plus percentage rent
and FF&E Reserve escrows. The lease provides that all 14 hotels are subject to
cross default and all or none renewal options. The lease requires a $14.0
million security deposit. In addition, the lease obligations are guaranteed up
to a specified amount by ShoLodge until a negotiated ratio of cash flow
coverage of rent is achieved from the operations of these hotels; this guaranty
is secured by a cash deposit.
Fifteen Candlewood[RegTM] Hotels (1,592 suites; $100 million). In November
1997 the Company agreed to acquire 15 Candlewood[RegTM] hotels for $100 million
from Candlewood Hotel Company, Inc. ("Candlewood"). Candlewood is a publicly
owned company listed on The Nasdaq National Market under the symbol "CNDL."
Candlewood[RegTM]
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<PAGE>
hotels are extended stay hotels developed by Candlewood. As these hotels are
acquired they are leased to a subsidiary of Candlewood for an initial term
ending in 2011 plus renewal options. The lease will require annual minimum rent
equal to 10% of the purchase prices paid (totaling $10.0 million per year when
all 15 hotels are acquired) plus percentage rent and FF&E Reserve escrows.
Security deposits equal to one year's minimum rent totaling $10.0 million are
required. Candlewood guarantees the lease obligations to the Company until a
negotiated ratio of operating cash flow coverage of rent is achieved from the
operations of these hotels; this guaranty is secured by a cash deposit. As of
the date hereof 10 of these hotels have been acquired and leased; the remaining
five of these hotels are expected to be acquired before March 31, 1998.
Financing
Equity Offerings. In December 1997 the Company issued 12,000,000 Shares in
a public offering. The gross proceeds of the offering were approximately $397
million ($33.0625 per Share), and the net proceeds to the Company were
approximately $376 million. The proceeds from this offering of Shares were used
to repay all amounts then outstanding under the Company's revolving credit
facility, to purchase hotels and for general business purposes.
The Company has agreed to sell approximately $15 million of Shares through
a unit investment trust arrangement being established by an investment bank.
These Shares were sold by the Company at market price less an underwriting
discount. The net proceeds of this Shares offering will be used for the
acquisition of additional hotels and for general business purposes. The Company
has had discussions with other investment banks concerning similar unit
investment trust arrangements, and the Company is considering whether to
participate in such arrangements. The $15 million Shares offering is expected
to close in February 1998, but no assurance can be given that such offering or
any other Shares offering will be consummated.
Credit Facility. The Company has a $200 million revolving line of credit
with DLJ Mortgage Capital, Inc. ("DLJMC") which is secured by mortgages on
certain hotels owned by the Company (the "DLJMC Credit Facility"). As of the
date hereof, no amounts are outstanding under the DLJMC Credit Facility.
The Company has had discussions with several banks concerning the
possibility of replacing the DLJMC Credit Facility. After completion of this
Offering, the Company expects to conclude these discussions and to enter a new
unsecured revolving line of credit with a syndicate of banks for at least $250
million and terminate the DLJMC Credit Facility. No assurance can be given that
this new credit facility will be available to the Company on acceptable terms.
Other Matters
Wyndham Merger. The Company currently owns 12 hotels leased to
subsidiaries of Wyndham. In January 1998 Wyndham merged with Patriot American
Hospitality, Inc. ("PAH"), a publicly owned company listed on the NYSE under
the symbol "PAH." The Company believes that this merger as consummated violates
certain of the Wyndham lease terms and the Company has advised Wyndham of this
belief. Wyndham has not disputed the Company's interpretation of these terms
but has requested that the Company consent to the merger. The Company and
Wyndham have reached substantive agreement on the terms of this consent,
including payment to the Company of a consent fee and a contingent increase in
rent to the Company. The Company and Wyndham have agreed to a standstill
arrangement so that the Wyndham/PAH merger might be consummated while the terms
of the Company's consent are being documented and pending receipt of certain
required third party consents. The Company believes that the agreement for its
consent will be documented and the consent consummated. If Wyndham were to
breach its lease obligations the Company might be required to find a new tenant
for its 12 Wyndham hotels. In addition, if the Company were unable to find a
new tenant for these hotels within one year, Wyndham's breach might cause a
default in the $125 million of outstanding CMBS Notes which are partially
secured by 11 of these 12 Wyndham[RegTM] hotels; the CMBS Notes will be prepaid
in full with the net proceeds of this Offering. See "Use of Proceeds." Although
there can be no assurances with regard to the consequences of a Wyndham breach
if it were to occur, the Company believes that these 12 hotels have increased
in value since they were acquired and that it would be able to find a
substitute tenant or tenants willing to pay equal or greater rent than the rent
now paid by Wyndham.
Marriott Spin Off and Merger. The Company currently owns or has agreements
to acquire 23 hotels which are or will be leased to Marriott subsidiaries.
Certain obligations due to the Company under these purchase contracts
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<PAGE>
and leases are guaranteed by Marriott. In October 1997 Marriott announced a
plan to dividend to its shareholders a new company which will own and operate
Marriott's lodging and senior living businesses and to merge the remaining
company with Sodexho SA. As a result of this spin off and merger the current
guarantor of the obligations due to the Company would have a negative net worth
and its obligations are not expected to be investment grade rated. Upon
learning of this planned transaction the Company entered negotiations with
Marriott and, as a result of those negotiations, an agreement was entered into
effective upon consummation of the Marriott spin off and merger transaction.
This agreement requires that the spin off entity created by Marriott assume the
guaranty obligations to the Company. Subsidiaries of the spin off entity will
also become managers of the 94 hotels which are currently managed by
subsidiaries of Marriott. The new spin off entity is expected to be investment
grade rated.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, Adjusted assuming completion of this Offering, and Adjusted
Pro Forma assuming completion of this Offering and consummation of the
transactions described in the Unaudited Adjusted Pro Forma Financial
Statements.
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------------
Adjusted
Actual Adjusted Pro Forma
(in thousands)
<S> <C> <C> <C>
Debt:
Credit facility ..................................... $ -- $ -- $ 36,701
% Senior Notes due ............................ -- 150,000 150,000
CMBS Notes .......................................... 125,000 -- --
---------- ---------- ----------
Total debt(1) ...................................... 125,000 150,000 186,701
Shareholders' equity:
Preferred Shares, no par value
100,000,000 authorized, none issued ............... -- -- --
Common Shares, par value $0.01 per Share
100,000,000 authorized, 38,878,295 issued ......... 389 389 389
Additional paid-in capital .......................... 1,033,073 1,033,073 1,033,073
Cumulative net income(2) ............................ 122,166 118,166 118,166
Dividends (paid or declared) ........................ (147,735) (147,735) (147,735)
---------- ---------- ----------
Total shareholders' equity ......................... 1,007,893 1,003,893 1,003,893
---------- ---------- ----------
Total capitalization ................................. $1,132,893 $1,153,893 $1,190,594
========== ========== ==========
</TABLE>
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(1) Excludes the Company's obligation to refund security deposits upon lease
expirations and to refund guaranty deposits when the operating performance
of the related hotels reaches negotiated rent coverage levels.
(2) Adjusted and Adjusted Pro Forma amounts reflect an extraordinary loss and
other non-recurring charges expected from the application of the net
proceeds from this Offering to the early extinguishment of debt, estimated
to be approximately $4 million, in accordance with applicable accounting
requirements.
USE OF PROCEEDS
The Company estimates that the net proceeds of this Offering will be
approximately $149 million. The net proceeds of this Offering are expected to
be used to prepay in full the $125 million of outstanding CMBS Notes issued by
subsidiaries of the Company, for acquisitions of additional hotels and for
general business purposes. The CMBS Notes are secured by 18 Residence Inn by
Marriott[RegTM] and 11 Wyndham Garden[RegTM] hotels and were financed by the
issuance of $125 million of commercial mortgage pass-through certificates
through a trust created by a subsidiary of the Company. The CMBS Notes bear
interest at LIBOR plus a spread and mature on December 1, 2001. At February 6,
1998, the effective interest rate on this secured debt was 6.44% per annum.
Until the proceeds of this Offering are used, they will be deposited in
interest-bearing accounts or invested in short-term securities, including
securities which may not be investment grade rated.
S-11
<PAGE>
THE COMPANY
The Company is a REIT which acquires, owns and leases hotels to
unaffiliated hotel operators. The Company is organized as a Maryland real
estate investment trust; its principal place of business is at 400 Centre
Street, Newton, Massachusetts 02158; and its telephone number is (617)
964-8389.
A principal business objective of the Company is to ensure stability of
cash flow through dependable and diverse revenue sources. To achieve this
objective 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; design leases which require minimum rents which provide
positive spreads over the Company's cost of investment capital; when market
conditions permit, refinance debt with additional equity or long term debt; and
pursue diversification so that the Company's rents are received from diverse
properties and operators.
Most other public hotel REITs seek to control the operations of hotels in
which they invest by leasing their properties to affiliated tenants. These
other hotel REITs generally design their affiliated leases to capture
substantially all net operating revenues from their hotels as cash available
for distribution ("CAD"). The Company's leases are designed so that net
operating revenues from its hotels exceed its rents by considerable coverage
margins.
Hotels
Upon completion of the acquisitions described in "Recent
Developments--Investments," including the 11 hotels which have not yet been
acquired as of the date hereof, the Company will have investments totaling $1.4
billion in 135 hotels, with 18,479 rooms, located in 35 states.
S-12
<PAGE>
Location of HPT Hotels
[U.S. Map highlighting location of HPT properties]
<TABLE>
<CAPTION>
No. of No. of Investment
State Hotels Rooms (in thousands)
<S> <C> <C> <C>
Alabama ............... 3 340 $ 25,312
Arizona ............... 12 1,669 104,641
California ............ 14 1,982 151,254
Colorado .............. 1 130 6,670
Delaware .............. 1 152 12,100
Florida ............... 4 504 42,017
Georgia ............... 11 1,473 106,971
Illinois .............. 3 514 38,076
Indiana ............... 2 271 18,523
Iowa .................. 1 108 7,800
Kansas ................ 2 188 9,674
Kentucky .............. 1 77 5,305
Louisiana ............. 1 231 27,663
Maryland .............. 4 526 44,851
Massachusetts ......... 8 1,072 69,700
Michigan .............. 3 402 20,784
Minnesota ............. 2 358 18,086
Missouri .............. 2 298 16,200
Nebraska .............. 1 131 $ 6,201
Nevada ................ 1 120 9,093
New Jersey ............ 4 572 47,767
New Mexico ............ 2 237 23,433
New York .............. 3 403 28,500
North Carolina ........ 5 657 41,684
Ohio .................. 3 308 24,943
Oklahoma .............. 1 122 10,414
Pennsylvania .......... 7 911 71,210
Rhode Island .......... 1 148 10,200
South Carolina ........ 1 108 5,800
Tennessee ............. 4 499 39,054
Texas ................. 13 1,780 143,527
Utah .................. 3 601 61,528
Virginia .............. 7 936 77,349
Washington ............ 3 522 43,529
Wisconsin ............. 1 147 8,500
--- ------ ----------
Total (35 states) ..... 135 18,497 $1,378,359
===== ======== ==========
</TABLE>
The purchase of the remaining 11 hotels that the Company has agreed to
acquire as described under "Recent Developments--Investments" is subject to the
satisfaction of a number of conditions, including completion of construction by
the sellers. If these conditions are not satisfied, one or more of these hotels
may not be acquired.
The Company believes that its portfolio of hotels is among the newest and
most competitive of publicly owned hotel REITs. The average age of the
Company's hotels is six years.
Courtyard by Marriott[RegTM] hotels are designed to attract both business
and leisure travelers. A typical Courtyard by Marriott[RegTM] hotel has 145
guest rooms. The guest rooms are larger than those in most other moderately
priced hotels and predominately offer king size beds. Most Courtyard by
Marriott[RegTM] hotels are situated on well landscaped
S-13
<PAGE>
grounds and typically are built with 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 hotels. In addition, many of the same amenities as would be
available in full service Marriott[RegTM] hotels are available in Courtyard by
Marriott[RegTM] hotels, except that restaurants may be open only for breakfast
buffets or serve limited menus, room service may not be available and meeting
and function rooms are limited in size and number. According to Marriott, as of
September 30, 1997, 330 Courtyard by Marriott[RegTM] hotels were open and
operating nationally. The Company believes that the Courtyard by
Marriott[RegTM] brand is a leading brand in the mid-priced segment of the
United States hotel industry.
The Company has invested or agreed to invest a total of $621 million in 63
Courtyard by Marriott[RegTM] hotels which have 8,982 rooms. The 1997 average
daily rate ("ADR"), occupancy and revenue per available room ("REVPAR") for the
Company's 53 Courtyard by Marriott[RegTM] hotels which were open throughout
1997 were as follows:
HPT COURTYARD BY MARRIOTT[RegTM] HOTELS
ADR ......................... $84.29
Occupancy ................... 81.1%
REVPAR ...................... $68.36
Residence Inn by Marriott[RegTM] hotels are designed to attract business,
governmental and family travelers who stay more than five consecutive nights.
Residence Inn by Marriott[RegTM] hotels generally have between 80 and 130
studios, one bedroom and two-bedroom suites. Most Residence Inn by
Marriott[RegTM] hotels are designed as residential- style buildings with
landscaped walkways, courtyards and recreational areas. Residence Inn by
Marriott[RegTM] 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
fireplaces. Most Residence Inn by Marriott[RegTM] hotels also have swimming
pools, exercise rooms, business centers and guest laundries. According to
Marriott, as of September 30, 1997, 248 Residence Inn by Marriott[RegTM] hotels
were open and operating nationally. The Company believes that the Residence Inn
by Marriott[RegTM] brand is the leading brand in the extended stay segment of
the United States hotel industry.
The Company has invested or agreed to invest a total of $335 million in 31
Residence Inn by Marriott[RegTM] hotels which have 3,961 suites. The 1997 ADR,
occupancy and REVPAR for the Company's 18 Residence Inn by Marriott[RegTM]
hotels which were open throughout 1997 were as follows:
HPT RESIDENCE INN BY MARRIOTT[RegTM] HOTELS
ADR ......................... $99.96
Occupancy ................... 83.3%
REVPAR ...................... $83.27
Wyndham[RegTM] Hotels. Eleven of the Company's Wyndham[RegTM] hotels are
Wyndham Garden[RegTM] hotels. Wyndham Garden[RegTM] hotels are mid-sized, full
service hotels located primarily near suburban business centers and airports
and are designed to attract business travelers and small business groups. Each
hotel contains 140 to 250 rooms and approximately 1,500 to 5,000 square feet of
meeting space. Amenities and services include desks large enough to accommodate
personal computers, room service and access to 24 hour telecopy and
mail/package service. The meeting facilities at Wyndham Garden[RegTM] hotels
generally can accommodate groups of between 10 and 200 people and include a
flexible meeting room design and audiovisual equipment. Wyndham Garden[RegTM]
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[RegTM] hotels contain a whirlpool and an exercise facility.
Each Wyndham Garden[RegTM] hotel contains a cafe restaurant and serves a full
breakfast, lunch and dinner menu. The Company believes that the Wyndham
Garden[RegTM] brand is one of the leading brands in the full service segment of
the United States hotel industry. The one additional Wyndham[RegTM] hotel owned
by the Company is a full service hotel located in downtown Salt Lake City
adjacent to the Salt Lake City Salt Palace Convention Center. This hotel
includes 381 rooms, 14,469 square feet of meeting space and two
restaurants/lounges and was renovated recently at a cost in excess of $3.5
million. The Company believes this hotel is a leading convention hotel in Salt
Lake City.
S-14
<PAGE>
The 11 Wyndham Garden[RegTM] hotels owned by the Company represent a total
investment of $135 million and contain 1,940 rooms. These hotels had 1997 ADR,
occupancy and REVPAR as follows:
HPT WYNDHAM GARDEN[RegTM] HOTELS
ADR ......................... $90.07
Occupancy ................... 77.1%
REVPAR ...................... $69.44
The Company purchased the Wyndham[RegTM] hotel in Salt Lake City in
January 1997 for $44.0 million and funded $3.3 million in 1998 for renovations
to this hotel. The ADR, occupancy and REVPAR for this hotel in 1997 were
$94.75, 70.8% and $67.08, respectively.
Sumner Suites[RegTM] hotels are all suite hotels that cater to
value-oriented business travelers. Sumner Suites[RegTM] hotels compete in the
all suite segment of the lodging industry against such brands as Embassy
Suites[RegTM], Hampton Inns and Suites[RegTM] and Amerisuites[RegTM]. Each
Sumner Suites[RegTM] guest room offers an efficient space for working which
includes two phones with data ports and voice mail, a living area which
includes a coffee maker, microwave, mini- refrigerator, sleeper-sofa and
25-inch television, and a separate bedroom area with either one king or two
double beds. Each Sumner Suites[RegTM] hotel has an attractive lobby lounge
where free continental breakfast is provided in the mornings and cocktails are
generally available in the early evening. In addition, all Sumner Suites[RegTM]
hotels have meeting rooms that can accommodate up to 150 persons, fitness
facilities and a pool. Sumner Suites[RegTM] hotels are generally high-rise
hotels of six or seven stories and are of masonry construction.
The Company has invested $140 million in its 14 Sumner Suites[RegTM]
hotels which include 1,641 guest suites. Twelve of these hotels were built and
opened between April 1996 and August 1997, one of these hotels opened in late
1995 and one recently re-flagged hotel is currently undergoing extensive
renovations. The Company believes that the current performance of its Sumner
Suites[RegTM] hotels is not indicative of their operating potential because of
their recent development or renovation; the ADR, occupancy and REVPAR for the
12 Summer Suites[RegTM] hotels which were open for at least six months of 1997
were $72.81, 60.8% and $44.27, respectively, during 1997.
Candlewood[RegTM] Hotels are extended stay hotels which offer studio and
one bedroom suites that cater to business travelers expecting to stay five or
more days. Candlewood[RegTM] hotels compete in the mid-priced extended stay
segment of the lodging industry against such other brands as Sierra Suites by
Summerfield[RegTM], Towne Place Suites by Marriott[RegTM] and MainStay
Suites[RegTM]. Each Candlewood[RegTM] suite contains a kitchen area, a
combination living and work area and a sleeping area. The kitchen includes a
full-size microwave, full-size refrigerator, stove, dishwasher and coffee
maker. The living area contains a convertible sofa, recliner, 25-inch
television, videocassette player and compact disc player. The work area
includes an oversized desk and executive chair, two phone lines, voice mail and
a speaker phone. Each Candlewood[RegTM] suite contains a king size bed. Other
amenities offered at each Candlewood[RegTM] hotel include a fitness center,
free guest laundry facilities, and a Candlewood Cupboard area where guests can
purchase light meals, snacks and other refreshments. The Company believes that
Candlewood[RegTM] will become one of the leading brands in the mid-priced,
extended stay segment of the United States hotel industry.
The Company has agreed to invest $100 million to acquire 15
Candlewood[RegTM] hotels which include 1,592 suites. One of these hotels was
opened during 1998, 13 of these hotels were opened during 1997 and one was
opened in May 1996. The Company believes that the current performance of the
Candlewood[RegTM] hotels is not indicative of their operating potential because
of their recent development; the ADR, occupancy and REVPAR for the three
Candlewood[RegTM] hotels acquired by the Company which were open for at least
three quarters of 1997 were $50.62, 66.1% and $33.46, respectively, during the
fourth quarter of 1997.
S-15
<PAGE>
Leases
The Company's 135 hotels are grouped into seven combinations which are
leased to separate affiliates of publicly owned hotel companies. The following
chart summarizes important features of the Company's leases, including leases
for 11 hotels to be entered as described in "Recent Developments--Investments."
<TABLE>
<CAPTION>
Residence
Inn by
Marriott[RegTM]
(10 hotels)
Residence and
Courtyard by Inn by Courtyard by
Marriott[RegTM] Marriott[RegTM] Marriott[RegTM]
(53 hotels) (18 hotels) (4 hotels)
------------------- ------------------- ------------------
Number of states 24 14 8
<S> <C> <C> <C>
Dollars invested $505 million $172 million $149 million
Tenant subsidiary of subsidiary of subsidiary of
Host Marriott Host Marriott Marriott
Manager subsidiary of subsidiary of subsidiary of
Marriott Marriott Marriott
Minimum rent per year $50.5 million $17.2 million $14.9 million
Initial lease term 2012 2010 2014
expiration
Renewal options all or none all or none all or none
3 for 12 years 1 for 10 years 1 for 12 years
2 for 15 years 1 for 10 years
Security deposit $50.5 million $17.2 million $14.9 million
FF&E Reserves $1,392/room $1,601/suite n/a (new
for 1997 construction)
Cross defaults within yes yes yes
each group
Management fees subordinated subordinated subordinated
Rent coverage: 1.59x 1.66x n/a (new
1997 hotel operating construction)
results after FF&E
Reserves and all non-
subordinated charges
Other security -- -- Marriott has
provided
a limited
guarantee
until cash
flow reaches
a negotiated
rent coverage
ratio
<CAPTION>
Courtyard by
Marriott[RegTM]
(6 hotels) and
Residence Inn Sumner
by Marriott[RegTM] Wyndham[RegTM] Suites[RegTM] Candlewood[RegTM]
(3 hotels) (12 hotels) (14 hotels) (15 hotels)
-------------------- ------------------- ------------------ ------------------
Number of states 7 8 8 13
<S> <C> <C> <C> <C>
Dollars invested $129 million $183 million $140 million $100 million
Tenant subsidiary of subsidiary of subsidiary of subsidiary of
Marriott PAH/ ShoLodge Candlewood
Wyndham
Manager subsidiary of subsidiary of subsidiary of subsidiary of
Marriott PAH/ ShoLodge Candlewood
Wyndham
Minimum rent per year $12.9 million $18.3 million $14.0 million $10.0 million
Initial lease term 2012 2012 2008 2011
expiration
Renewal options all or none all or none all or none all or none
2 for 10 years 4 for 12 years 5 for 10 years 3 for 15 years
Security deposit $12.9 million $18.3 million $14.0 million $10.0 million
FF&E Reserves n/a (new $1,630/room n/a (new n/a (new
for 1997 construction) construction) construction)
Cross defaults within yes yes yes yes
each group
Management fees subordinated subordinated subordinated subordinated
Rent coverage: n/a (new 11 Wyndham n/a (new n/a (new
1997 hotel operating construction) Garden[RegTM] construction) construction)
results after FF&E hotels cover
Reserves and all non- 1.66x
subordinated charges
Other security Marriott has for the ShoLodge Candlewood
provided Salt Lake has provided has provided
a limited City hotel, a secured a secured
guarantee Wyndham limited limited
until cash has provided guarantee guarantee
flow reaches a secured until cash until
a negotiated limited flow reaches cash flow
rent coverage guarantee a negotiated reaches a
ratio until cash rent coverage negotiated
flow reaches ratio rent coverage
a negotiated ratio
rent coverage
ratio
</TABLE>
S-16
<PAGE>
MANAGEMENT
The Trustees and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Barry M. Portnoy ................ 52 Managing Trustee
Gerard M. Martin ................ 63 Managing Trustee
John G. Murray .................. 37 President, Chief Operating Officer and Secretary
Thomas M. O'Brien ............... 31 Treasurer and Chief Financial Officer
John L. Harrington .............. 61 Independent Trustee
William J. Sheehan .............. 53 Independent Trustee
Arthur G. Koumantzelis .......... 67 Independent Trustee
</TABLE>
Barry M. Portnoy is a Managing Trustee of the Company and has been since
its IPO in 1995. Mr. Portnoy is also a Managing Trustee of Health and
Retirement Properties Trust ("HRP") and a 50% owner and Director of REIT
Management & Research, Inc. ("Advisors"). Mr. Portnoy has been actively
involved in real estate and real estate finance activities for approximately 20
years. Mr. Portnoy is an attorney and was a partner of the law firm of Sullivan
& Worcester LLP, Boston, Massachusetts from 1978 through March 31, 1997, where
he served as Chairman from 1994 through March 1997.
Gerard M. Martin is a Managing Trustee of the Company and has been since
its IPO in 1995. Mr. Martin is also a Managing Trustee of HRP and a 50% owner
and Director of Advisors. Mr. Martin has been active in the real estate
industry for approximately 30 years.
John G. Murray is President, Chief Operating Officer and Secretary of the
Company. Mr. Murray is also an Executive Vice President of Advisors. Mr. Murray
served in various capacities for HRP and Advisors from 1993 through August
1995. Prior to joining Advisors in 1993 Mr. Murray was Director of Finance,
Business Analysis and Planning at Fidelity Brokerage Services, Inc. from 1992
to 1993.
Thomas M. O'Brien is the Treasurer and Chief Financial Officer of the
Company. Mr. O'Brien is also a Vice President of Advisors. Prior to joining the
Company and Advisors in March 1996, Mr. O'Brien was employed by Arthur Andersen
LLP for eight years. Mr. O'Brien is a certified public accountant.
John L. Harrington is the Chief Executive Officer of the Boston Red Sox
Baseball Club, Executive Director and Trustee of the Yawkey Foundation and a
Trustee of the JRY Trust. Mr. Harrington is also a director of a bank
subsidiary of Fleet Financial Group, Inc. Mr. Harrington was a Trustee of HRP
from 1991 through August 1995 and has been a Trustee of the Company since its
IPO in 1995.
William J. Sheehan has been a Trustee of the Company since its IPO in
1995, and 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). 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 a Trustee of the Company since its IPO in
1995, and 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. Mr. Koumantzelis was a trustee of HRP from 1992
through August 1995.
S-17
<PAGE>
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
Company's investment advisor nor serve as officers of the Company. Messrs.
Harrington, Sheehan and Koumantzelis are the Company's Independent Trustees.
All major investments and policy decisions affecting the Company are made by
the Board of Trustees.
Advisors provides management services and investment advice to the Company
pursuant to an investment advisory agreement (the "Advisory Agreement").
Advisors also acts as an investment advisor to HRP and has other business
interests. Advisors is owned by Messrs. Portnoy and Martin. The directors of
Advisors are Messrs. Portnoy and Martin and Mr. David J. Hegarty. The officers
of Advisors are Mr. Hegarty, President and Secretary, Mr. Murray, Executive
Vice President, John A. Mannix, Vice President, Mr. O'Brien, Vice President,
Ajay Saini, Vice President, David M. Lepore, Vice President and John Popeo,
Treasurer.
Under the terms of the Advisory Agreement, the Company pays Advisors an
annual advisory fee calculated on the basis of total assets under management
(0.7% of the first $250 million plus 0.5% of additional assets) and an
incentive fee for each year equal to 15% of the annual increase in CAD per
Share multiplied by the weighted average number of Shares outstanding in each
year, but in no event more than $0.02 per Share multiplied by the weighted
average number of Shares outstanding in each year. The incentive fees earned
are paid in Shares.
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 under the Advisory Agreement, the Company is required to pay various
other expenses relating to its activities, including the costs and expenses of
acquiring, owning and disposing of the Company's real estate interests
(including taxes, appraisals, third party diligence, brokerage, audit and legal
fees), its cost of borrowing money and its cost of securities listing,
transfer, registration and compliance with public reporting requirements. Also,
the fees and expenses of the Company's Independent Trustees are paid by the
Company.
S-18
<PAGE>
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Debt Securities set
forth under "Description of Debt Securities" in the accompanying Prospectus, to
which reference is hereby made.
The Notes are to be issued under an Indenture and a Supplemental Indenture
(collectively, the "Indenture"), each dated as of , 1998, between the
Company and State Street Bank and Trust Company (the "Trustee"). The Indenture
will be filed with the Securities and Exchange Commission (the "Commission")
and incorporated by reference herein, and will be available for inspection at
the corporate trust office of the Trustee at Two International Place, Boston,
Massachusetts 02110. The statements made hereunder relating to the Indenture
and the Notes to be issued thereunder are summaries of certain provisions
thereof, do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all provisions of the Indenture and such Notes.
All section references appearing herein are to sections of the Indenture, and
capitalized terms used but not defined herein shall have the respective
meanings set forth in the Indenture.
General
The Notes will be limited to an aggregate principal amount of $150,000,000
and will mature, unless previously redeemed, on , . The Notes will be
issued in registered form, without coupons, and in denominations of $1,000 and
integral multiples of $1,000 in excess thereof. The Notes will be senior
unsecured obligations of the Company and will rank equally with each other and
with all other unsecured and unsubordinated indebtedness of the Company from
time to time outstanding. The Notes will be effectively subordinated to
mortgages and other secured indebtedness of the Company and to indebtedness and
other liabilities of any Subsidiaries (as defined below). Accordingly, such
indebtedness will have to be satisfied in full before holders of the Notes will
be able to realize any value from the secured or indirectly held properties.
As of December 31, 1997, on an adjusted pro forma basis after giving
effect to the issuance of the Notes offered hereby, the application of the net
proceeds therefrom and the consummation of the transactions described in the
Unaudited Adjusted Pro Forma Financial Statements, the total outstanding
indebtedness of the Company and its Subsidiaries was $186,701,000. Certain of
the Company's Subsidiaries are guarantors of the DLJMC Credit Facility, the
current balance of which is zero, and are expected to be guarantors under any
replacement credit facility. The Company and its Subsidiaries may incur
additional indebtedness, including secured indebtedness, subject to the
provisions described below under "--Certain Covenants--Limitations on
Incurrence of Debt."
Except as described under "--Merger, Consolidation or Sale" and "--Certain
Covenants" below and under "Description of Debt Securities--Merger,
Consolidation or Sale" and "--Certain Covenants" in the accompanying
Prospectus, the Indenture does not contain any other provisions that would
limit the ability of the Company to incur indebtedness or that would afford
holders of the Notes protection in the event of (i) a highly leveraged or
similar transaction involving the Company or any Affiliate of the Company, (ii)
a change of control, or (iii) a reorganization, restructuring, merger or
similar transaction involving the Company that may adversely affect the holders
of the Notes. In addition, subject to the limitations set forth under
"--Merger, Consolidation or Sale" and "--Certain Covenants" below or under
"Description of Debt Securities--Merger, Consolidation or Sale" and "--Certain
Covenants" in the accompanying Prospectus, the Company may, in the future,
enter into certain transactions such as the sale of all or substantially all of
its assets or the merger or consolidation of the Company that would increase
the amount of the Company's indebtedness or substantially reduce or eliminate
the Company's assets, which may have an adverse effect on the Company's ability
to service its indebtedness, including the Notes.
Interest
Interest on the Notes will accrue at the rate of % per annum. Interest
on the Notes will be payable semi-annually in arrears on each and
, commencing on , 1998 (each, an "Interest Payment Date"), and on the
date of maturity or earlier redemption of the Notes, as the case may be (the
"Maturity Date").
The interest so payable will be paid to the person (the "Holder") in whose
name the applicable Note is registered at the close of business on the date
(whether or not a Business Day) 15 calendar days preceding the applicable
Interest Payment Date or the Maturity Date (each, a "Regular Record Date").
Interest on the Notes will accrue from the
S-19
<PAGE>
most recent date to which the interest has been paid or, if no interest has
been paid, from the date of original issuance. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. The Notes will be
payable both as to principal and interest at the corporate trust office of the
Trustee, initially at Two International Place, Boston, Massachusetts 02110, or,
at the option of the Company, payment of interest may be made by check mailed
to the Holders of Notes at their addresses set forth in the register of Holders
of Notes.
Optional Redemption of Notes
Prior to their maturity date, the Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at 100% of the outstanding principal amount
thereof, plus accrued and unpaid interest to but excluding the applicable
redemption date, plus the Make-Whole Amount.
The Company is not required to make sinking fund or redemption payments
with respect to the Notes.
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Notes, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of each
dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated
payment) that would have been payable in respect of such dollar if such
redemption or accelerated payment had not been made, determined by discounting,
on a semiannual basis, such principal and interest at the Reinvestment Rate
(determined on the third Business Day preceding the date such notice of
redemption is given or declaration of acceleration is made) from the respective
dates on which such principal and interest would have been payable if such
redemption or accelerated payment had not been made, over (ii) the aggregate
principal amount of the Notes being redeemed or paid.
"Reinvestment Rate" means .25% (twenty-five one hundredths of one percent)
plus the yield on treasury securities at constant maturity under the heading
"Week Ending" published in the Statistical Release under the caption "Treasury
Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to such
maturity, yields for the two published maturities most closely corresponding to
such maturity shall be calculated pursuant to the immediately preceding
sentence and the Reinvestment Rate shall be interpolated or extrapolated from
such yields on a straight-line basis, rounding in each of such relevant periods
to the nearest month. For purposes of calculating the Reinvestment Rate, the
most recent Statistical Release published prior to the date of determination of
the Make-Whole Amount shall be used.
"Statistical Release" means the statistical release designated "H.15(519)"
or any successor publication which is published weekly by the Federal Reserve
System and which establishes yields on actively traded United States government
securities adjusted to constant maturities or, if such statistical release is
not published at the time of any determination under the Indenture, then any
publicly available source of similar market data which shall be designated by
the Company.
Certain Covenants
Limitations on Incurrence of Debt. The Company will not, and will not
permit any Subsidiary to, incur any Debt (as defined below) if, immediately
after giving effect to the incurrence of such additional Debt and the
application of the proceeds thereof, the aggregate principal amount of all
outstanding Debt of the Company and its Subsidiaries on a consolidated basis
determined in accordance with GAAP is greater than 60% of the sum ("Adjusted
Total Assets") of (without duplication) (i) the Total Assets (as defined below)
of the Company and its Subsidiaries as of the end of the calendar quarter
covered in the Company's Annual Report on Form 10-K, or the Quarterly Report on
Form 10-Q, as the case may be, most recently filed with the Commission (or, if
such filing is not permitted under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), with the Trustee) prior to the incurrence of such
additional Debt and (ii) the purchase price of any real estate assets or
mortgages receivable acquired, and the amount of any securities offering
proceeds received (to the extent that such proceeds were not used to acquire
real estate assets or mortgages receivable or used to reduce Debt), by the
Company or any Subsidiary since the end of such calendar quarter, including
those proceeds obtained in connection with the incurrence of such additional
Debt.
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In addition to the foregoing limitation on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Secured Debt
(as defined below) if, immediately after giving effect to the incurrence of
such additional Secured Debt and the application of the proceeds therefrom, the
aggregate principal amount of all outstanding Secured Debt of the Company and
its Subsidiaries on a consolidated basis is greater than 40% of Adjusted Total
Assets.
In addition to the foregoing limitations on the incurrence of Debt, the
Company will not, and will not permit any Subsidiary to, incur any Debt if the
ratio of Consolidated Income Available for Debt Service (as defined below) to
the Annual Debt Service (as defined below) for the four consecutive fiscal
quarters most recently ended prior to the date on which such additional Debt is
to be incurred shall have been less than 1.5x, on a pro forma basis after
giving effect thereto and to the application of the proceeds therefrom, and
calculated on the assumption that (i) such Debt and any other Debt incurred by
the Company and its Subsidiaries since the first day of such four-quarter
period and the application of the proceeds therefrom, including to refinance
other Debt, had occurred at the beginning of such period; (ii) the repayment or
retirement of any other Debt by the Company and its Subsidiaries since the
first date of such four-quarter period had been repaid or retired at the
beginning of such period (except that, in making such computation, the amount
of Debt repaid under any revolving credit facility shall be computed based upon
the average daily balance of such Debt during such period); (iii) in the case
of Acquired Debt (as defined below) or Debt incurred in connection with any
acquisition since the first day of such four-quarter period, the related
acquisition had occurred as of the first day of such period with appropriate
adjustments with respect to such acquisition being included in such pro forma
calculation; and (iv) in the case of any acquisition or disposition by the
Company or its Subsidiaries of any asset or group of assets since the first day
of such four-quarter period, whether by merger, stock purchase or sale, or
asset purchase or sale, such acquisition or disposition or any related
repayment of Debt had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition or disposition being
included in such as adjusted calculation. If the Debt giving rise to the need
to make the foregoing calculation or any other Debt incurred after the first
day of the relevant four-quarter period bears interest at a floating rate then,
for purposes of calculating the Annual Debt Service, the interest rate on such
Debt shall be computed on a pro forma basis as if the average interest rate
which would have been in effect during the entire such four-quarter period had
been the applicable rate for the entire such period.
Maintenance of Total Unencumbered Assets. The Company and its Subsidiaries
will maintain at all times Total Unencumbered Assets (as defined below) of not
less than 200% of the aggregate outstanding principal amount of the Unsecured
Debt (as defined below) of the Company and its Subsidiaries on a consolidated
basis.
As used herein:
"Acquired Debt" means Debt of a Person (i) existing at the time such
Person becomes a Subsidiary or (ii) assumed in connection with the acquisition
of assets from such Person, in each case, other than Debt incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary or
such acquisition. Acquired Debt shall be deemed to be incurred on the date of
the related acquisition of assets from any Person or the date the acquired
Person becomes a Subsidiary.
"Annual Debt Service" as of any date means the maximum amount which is
expended in any 12-month period for interest on Debt of the Company and its
Subsidiaries.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participation or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for capital stock),
warrants or options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations of the Company and its Subsidiaries plus amounts which
have been deducted, and minus amounts which have been added, for the following
(without duplication): (i) interest on Debt of the Company and its
Subsidiaries, (ii) cash reserves made by lessees as required by the Company's
leases for periodic replacement and refurbishment of the Company's assets,
(iii) provision for taxes of the Company and its Subsidiaries based on income,
(iv) amortization of debt discount and deferred financing costs, (v) provisions
for gains and losses on properties and property depreciation and amortization,
(vi) the effect of any noncash charge resulting from a change in accounting
principles in determining Earnings from Operations for such period and (vii)
amortization of deferred charges.
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"Debt" of the Company or any Subsidiary means, without duplication, any
indebtedness of the Company or any Subsidiary, whether or not contingent, in
respect of (i) borrowed money or evidenced by bonds, notes, debentures or
similar instruments, (ii) indebtedness for borrowed money secured by any
encumbrance existing on property owned by the Company or any Subsidiary, to the
extent of the lesser of (x) the amount of indebtedness so secured and (y) the
fair market value of the property subject to such encumbrance, (iii) the
reimbursement obligations, contingent or otherwise, in connection with any
letters of credit actually issued (other than letters of credit issued to
provide credit enhancement or support with respect to other indebtedness of the
Company or any Subsidiary otherwise reflected as Debt hereunder) or amounts
representing the balance deferred and unpaid of the purchase price of any
property or services, except any such balance that constitutes an accrued
expense or trade payable, or all conditional sale obligations or obligations
under any title retention agreement, (iv) the principal amount of all
obligations of the Company or any Subsidiary with respect to redemption,
repayment or other repurchase of any Disqualified Stock, or (v) any lease of
property by the Company or any Subsidiary as lessee which is reflected on the
Company's consolidated balance sheet as a capitalized lease in accordance with
GAAP, to the extent, in the case of items of indebtedness under (i) through
(iii) above, that any such items (other than letters of credit) would appear as
a liability on the Company's consolidated balance sheet in accordance with
GAAP, and also includes, to the extent not otherwise included, any obligation
by the Company or any Subsidiary to be liable for, or to pay, as obligor,
guarantor or otherwise (other than for purposes of collection in the ordinary
course of business), Debt of another Person (other than the Company or any
Subsidiary) (it being understood that Debt shall be deemed to be incurred by
the Company or any Subsidiary whenever the Company or such Subsidiary shall
create, assume, guarantee or otherwise become liable in respect thereof).
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (i) matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise
(other than Capital Stock which is redeemable solely in exchange for common
stock or shares), (ii) is convertible into or exchangeable or exercisable for
Debt or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part (other than Capital Stock which is redeemable
solely in exchange for common stock or shares), in each case on or prior to the
stated maturity of the Notes.
"Earnings from Operations" for any period means net earnings excluding
gains and losses on sales of investments, extraordinary items and property
valuation losses, as reflected in the financial statements of the Company and
its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.
"Secured Debt" means Debt secured by any mortgage, lien, charge, pledge or
security interest of any kind.
"Subsidiary" means any corporation or other entity of which a majority of
(i) the voting power of the voting equity securities or (ii) the outstanding
equity interests of which are owned, directly or indirectly, by the Company or
one or more other Subsidiaries of the Company. For the purposes of this
definition, "voting equity securities" means equity securities having voting
power for the election of directors, whether at all times or only so long as no
senior class of security has such voting power by reason of any contingency.
"Total Assets" as of any date means the sum of (i) the Undepreciated Real
Estate Assets and (ii) all other assets of the Company and its Subsidiaries
determined in accordance with GAAP (but excluding accounts receivable and
intangibles).
"Total Unencumbered Assets" means the sum of (i) those Undepreciated Real
Estate Assets not subject to an encumbrance for borrowed money and (ii) all
other assets of the Company and its Subsidiaries not subject to an encumbrance
for borrowed money determined in accordance with GAAP (but excluding accounts
receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost (original
cost plus capital improvements) of real estate assets of the Company and its
Subsidiaries on such date, before depreciation and amortization determined on a
consolidated basis in accordance with GAAP.
"Unsecured Debt" means Debt which is not secured by any of the properties
of the Company or any Subsidiary.
See "Description of Debt Securities--Certain Covenants" in the
accompanying Prospectus for a description of additional covenants applicable to
the Notes.
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Merger, Consolidation or Sale
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into, any other entity;
provided that (i) either the Company shall be the continuing entity, or the
successor entity (if other than the Company) formed by or resulting from any
such consolidation or merger or which shall have received the transfer of such
assets is a Person organized and existing under the laws of the United States
or any state thereof and shall expressly assume the due and punctual payment of
the principal of (and premium or the Make-Whole Amount) and any interest on all
of the Notes and the due and punctual performance and observance of all of the
covenants and conditions contained in the Indenture to be performed by the
Company; (ii) immediately after giving effect to such transaction and treating
any indebtedness which becomes an obligation of the Company or any Subsidiary
as a result thereof as having been incurred by the Company or such Subsidiary
at the time of such transaction, no Event of Default under the Indenture, and
no event which after notice or the lapse of time, or both, would become such an
Event of Default, shall have occurred and be continuing; and (iii) an Officers'
Certificate and legal opinion covering such conditions shall be delivered to
the Trustee.
Events of Default, Notice and Waiver
The Indenture provides that the following events are "Events of Default"
with respect to the Notes: (i) default for 30 days in the payment of any
installment of interest payable on any Note when due and payable; (ii) default
in the payment of the principal of (or premium or the Make-Whole Amount on) any
Note when due and payable; (iii) default in the performance, or breach, of any
other covenant of the Company contained in the Indenture (other than a covenant
added to the Indenture solely for the benefit of a series of Debt Securities
(as defined) other than the Notes), which continues for 60 days after written
notice as provided in the Indenture; (iv) default under any bond, debenture,
note, mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any indebtedness for money borrowed by
the Company (or by any Subsidiary, the repayment of which the Company has
guaranteed or for which the Company is directly responsible or liable as
obligor or guarantor) having an aggregate principal amount outstanding of at
least $20,000,000, whether such indebtedness now exists or shall hereafter be
incurred or created, which default shall have resulted in such indebtedness
becoming or being declared due and payable prior to the date on which it would
otherwise have become due and payable, without such indebtedness having been
discharged or such acceleration having been rescinded or annulled within a
period of 10 days after written notice to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal amount of
the outstanding Notes, as provided in the Indenture; or (v) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee of the Company or any Significant Subsidiary or for all
or substantially all of their respective property. "Significant Subsidiary"
means any Subsidiary which is a "significant subsidiary" (within the meaning of
Regulation S-X, promulgated under the Securities Act of 1933, as amended) of
the Company.
See "Description of Debt Securities--Events of Default, Notice and Waiver"
in the accompanying Prospectus for a description of rights, remedies and other
matters relating to Events of Default.
Discharge, Defeasance and Covenant Defeasance
The provisions of the Indenture relating to defeasance and covenant
defeasance described under "Description of Debt Securities--Discharge,
Defeasance and Covenant Defeasance" in the accompanying Prospectus will apply
to the Notes.
Book-Entry System and Form of Note
The Notes will be issued in the form of one or more fully registered
global securities without coupons ("Global Notes") which will be deposited
with, or on behalf of, DTC, and registered in the name of DTC's nominee, Cede &
Co. Except under the circumstance described below, the Notes will not be
issuable in definitive form. Unless and until it is exchanged in whole or in
part for the individual Notes represented thereby, a Global Note may not be
transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC
to DTC or another nominee of DTC or by DTC or any nominee of DTC to a successor
depository or any nominee of such successor.
DTC has advised the Company of the following information regarding DTC:
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New
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York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC holds securities that persons having accounts with DTC (its
"Participants") deposit with DTC. DTC also facilitates the clearance and
settlement among its Participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in its Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants of DTC
include securities brokers and dealers (including the Underwriter), banks,
trust companies, clearing corporations, and certain other organizations. DTC is
owned by a number of its direct Participants and by the NYSE, the American
Stock Exchange and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a direct Participant of DTC, either directly or indirectly.
The rules applicable to DTC and its participants are on file with the
Commission.
The Company expects that, pursuant to procedures established by DTC,
ownership of the beneficial interests in the Notes evidenced by the Global Note
will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to beneficial
interests of Participants) and records of Participants (with respect to
beneficial interests of persons who hold through Participants). Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of DTC or for maintaining, supervising or reviewing any
records of DTC or any of its Participants relating to beneficial ownership
interests in the Notes. The laws of some states require that certain purchasers
of securities take physical delivery of such securities in definitive form.
Such limits and laws may impair the ability to own, pledge or transfer
beneficial interests in a Global Note.
So long as DTC or its nominee is the registered owner of a Global Note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by such Global Note for all purposes under the
Indenture. Except as described below, owners of beneficial interest in Notes
evidenced by a Global Note will not be entitled to have any of the individual
Notes represented by such Global Note registered in their names, will not
receive or be entitled to receive physical delivery of any such Notes in
definitive form and will not be considered the owners or holders thereof under
the Indenture. Beneficial owners of Notes evidenced by a Global Note will not
be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any direction, instructions or
approvals to the Trustee thereunder. Accordingly, each person owning a
beneficial interest in a Global Note must rely on the procedures of DTC and, if
such person is not a Participant, on the procedures of the Participant through
which such person owns its interests, to exercise any rights of a Holder under
the Indenture. The Company understands that, under existing industry practice,
if it requests any action of Holders or if an owner of a beneficial interest in
a Global Note desires to give or take any action which a Holder is entitled to
give or take under the Indenture, DTC would authorize the Participants holding
the relevant beneficial interest to give or take such action, and such
Participants would authorize beneficial owners through such Participants to
give or take such actions or would otherwise act upon the instructions of
beneficial owners holding through them.
Payments of principal of (and any premium or Make-Whole Amount and any
interest on) individual Notes represented by a Global Note registered in the
name of DTC or its nominee will be made by the Trustee to or at the direction
of DTC or its nominee, as the case may be, as the registered owner of the
Global Note under the Indenture. Under the terms of the Indenture, the Company
and the Trustee may treat the persons in whose name Notes, including a Global
Note, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes (including principal, premium or Make-Whole Amount and
interest). The Company believes, however, that it is currently the policy of
DTC to immediately credit the accounts of relevant Participants with such
payments in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of DTC's
Participants. Redemption notices with respect to any Notes will be sent to the
holder of the Global Note. If less than all of the Notes of any series are to
be redeemed, the Company expects the holder of the Global Note to determine the
amount of interest of each Participant in such Notes to be redeemed to be
determined by lot. None of the Company, the Trustee, any Paying Agent or the
Security Registrar for such Notes will have any responsibility or liability for
any
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aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note for such Notes.
Neither the Company nor the Trustee will be liable for any delay by the
holder of a Global Note or DTC in identifying the beneficial owners of Notes
and the Company and the Trustee may conclusively rely on, and will be protected
in relying on, instructions from the holder of a Global Note or DTC for all
purposes.
If DTC is at any time unwilling, unable or ineligible to continue as
depository and a successor depository is not appointed by the Company within 90
days, the Company will issue individual Notes in exchange for the Global Note
or Global Notes representing such Notes. In addition, the Company may at any
time and in its sole discretion, subject to certain limitations set forth in
the Indenture, determine not to have any of such Notes represented by one or
more Global Notes and, in such event, will issue individual Notes in exchange
for the Global Note or Global Notes representing the Notes. Individual Notes so
issued will be issued in denominations of $1,000 and integral multiples
thereof.
Same-Day Settlement and Payment
Settlement for the Notes will be made by the Underwriter (as defined
herein) in immediately available funds. All payments of principal and interest
in respect of the Notes will be made by the Company in immediately available
funds.
Secondary trading in long-term notes and debentures of corporate issuers
is generally settled in clearing house or next-day funds. In contrast, the
Notes will trade in DTC's Same-Day Funds Settlement system until maturity or
until the Notes are issued in certificated form, and secondary market trading
activity in the Notes will therefore be required by DTC to settle in
immediately available funds.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. The following discussion deals only with Notes held as capital
assets and does not purport to deal with persons in special tax situations,
such as financial institutions, banks, insurance companies, regulated
investment companies, dealers in securities or currencies, persons holding
Notes as a hedge against currency risks or as a position in a "straddle" for
tax purposes, or persons whose functional currency is not the United States
dollar. It also does not deal with holders other than original purchasers
(except where otherwise specifically noted). Persons considering the purchase
of the Notes should consult their own tax advisors concerning the application
of United States Federal income tax laws to their particular situations as well
as any consequences of the purchase, ownership and disposition of the Notes
arising under the laws of any other taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation or partnership (or other entity
treated as a corporation or partnership for United States Federal income tax
purposes) created or organized in or under the laws of the United States or of
any political subdivision thereof (unless otherwise provided by Treasury
Regulations), (iii) an estate the income of which is subject to United States
Federal income taxation regardless of its source, (iv) a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust (or certain
electing trusts in existence on August 20, 1996 to the extent provided in
Treasury Regulations), or (v) any other person whose income or gain in respect
of a Note is effectively connected with the conduct of a United States trade or
business. As used herein, the term "non-U.S. Holder" means a beneficial owner
of a Note that is not a U.S. Holder.
The Notes
For U.S. Federal income tax purposes, each Note will be treated as
indebtedness issued by the Company.
U.S. Holders
Interest. Interest on a Note will generally be includible in the gross
income of a U.S. Holder as ordinary interest income at the time the interest is
received or when it accrues in accordance with the U.S. Holder's regular method
of tax accounting. Such interest will be treated as U.S. source income for U.S.
Federal income tax purposes.
Disposition. A U.S. Holder will recognize taxable gain or loss on the
sale, exchange, redemption, retirement or other disposition of a Note in an
amount equal to the difference between the amount realized from such
disposition (other than amounts attributable to accrued interest which would
otherwise be taxable as ordinary interest income) and the U.S. Holder's
adjusted tax basis in the Note. Such gain or loss generally will be capital
gain or loss, and will be long-term capital gain or loss if the U.S. Holder has
held the Note for more than one year at the time of disposition; preferential
rates of tax may apply to gains recognized upon the disposition of Notes held
for more than eighteen months.
Gain or Income Received by a Foreign Corporation. A foreign corporation
whose income or gain in respect of a Note is effectively connected with the
conduct of a United States trade or business, in addition to being subject to
regular U.S. income tax, may be subject to a branch profits tax equal to 30% of
its "effectively connected earnings and profits" within the meaning of the
Internal Revenue Code of 1986, as amended (the "Code"), for the taxable year,
as adjusted for certain items, unless it qualifies for a lower rate under an
applicable tax treaty (as modified by the branch profits tax rules).
Non-U.S. Holders
Generally, a non-U.S. Holder will not be subject to United States Federal
income taxes on payments of principal, premium, if any, or interest on a Note,
or on any gain upon disposition or retirement of a Note, if (i) such non-U.S.
Holder does not own 10% or more of the shares of beneficial interest of the
Company and (ii) the last United States payor in the chain of payment (the
"Withholding Agent") has received in the year in which a payment of interest or
principal occurs, or in either of the two preceding calendar years, a statement
signed by the
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beneficial owner of the Note under penalties of perjury certifying that such
owner is not a U.S. Holder and providing the name and address of the beneficial
owner. The statement may be made on an Internal Revenue Service ("IRS") Form
W-8 or a substantially similar form, and the beneficial owner must inform the
Withholding Agent of any change in the information on the statement within 30
days of such change. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the Withholding Agent. However,
in such case, the signed statement must be accompanied by a copy of the IRS
Form W-8 or the substitute form provided by the beneficial owner to the
organization or institution. Interest received or gain recognized by a non-U.S.
Holder which does not qualify for exemption from taxation will be subject to
United States Federal income tax and withholding tax at a rate of 30% unless
reduced or eliminated by applicable tax treaty.
Treasury Regulations issued on October 6, 1997 (the "New Regulations")
alter the withholding rules on interest paid to a non-U.S. Holder of a Note.
The New Regulations are generally effective with respect to interest paid after
December 31, 1998. Withholding will generally be excused under the New
Regulations if the non-U.S. Holder owns less than 10% of the shares of
beneficial interest of the Company and if such non-U.S. Holder executes a
necessary IRS Form W-8. Moreover, under the New Regulations, to obtain a
reduced rate of withholding under an income tax treaty, a non-U.S. Holder
generally will be required to provide an IRS Form W-8 certifying such non-U.S.
Holder's entitlement to benefits under the treaty. The New Regulations also
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, interest paid to a non-U.S. Holder that is an
entity should be treated as paid to the entity or to those holding the
ownership interests in that entity, and whether such entity or such holders in
the entity are entitled to benefits under the tax treaty. The New Regulations
also alter the information reporting and backup withholding rules applicable to
non-U.S. Holders and, among other things, provide certain presumptions under
which a non-U.S. Holder is subject to backup withholding and information
reporting until certification of non-U.S. status is received from such non-U.S.
Holder. The foregoing is not intended to be a complete discussion of the New
Regulations, and prospective investors are urged to consult their tax advisors
with respect to the effect of the New Regulations on an investment in the
Notes.
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual owns directly or indirectly 10% or more of the shares of
beneficial interest of the Company or, at the time of such individual's death,
payments in respect of the Notes would have been effectively connected with the
conduct by such individual of a trade or business in the United States.
Backup Withholding
Backup withholding of United States Federal income tax at a rate of 31%
may apply to payments made in respect of the Notes to registered owners who are
not "exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would
establish an exemption from backup withholding for those non-U.S. Holders who
are not exempt recipients.
In addition, upon the sale of a Note by (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be
reported by the broker to the IRS, unless either (i) the broker determines that
the seller is an exempt recipient or (ii) the seller certifies its non-U.S.
status (and certain other conditions are met). Certification of the registered
owner's non-U.S. status would be made normally on an IRS Form W-8 under
penalties of perjury, although in certain cases it may be possible to submit
other documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to
a beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
S-27
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), Donaldson, Lufkin & Jenrette
Securities Corporation (the "Underwriter") has agreed to purchase the Notes
from the Company at a price equal to % of the principal amount thereof.
The Underwriting Agreement provides that the obligation of the Underwriter
to purchase and accept delivery of the Notes offered hereby is subject to
approval by its counsel of certain legal matters and to certain other
conditions. The Underwriter is obligated to purchase and accept delivery of all
the Notes offered hereby if any are purchased.
The Company has been advised that the Underwriter proposes to offer the
Notes to the public initially at the price to the public set forth on the cover
page of this Prospectus Supplement and in part to certain dealers at such price
less a concession not in excess of % of the principal amount of the Notes.
The Underwriter may allow, and such dealers may reallow, to certain other
dealers a concession not in excess of % of the principal amount of the Notes.
After the completion of the Offering, the offering price and other selling
terms may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriter may be required to make
in respect thereof.
The Notes are a new issue of securities with no established trading
market. The Company does not intend to apply for listing of the Notes on any
securities exchange or The Nasdaq National Market. The Company has been advised
by the Underwriter that it intends to make a market in the Notes; however, it
is not obligated to do so, and it may discontinue any such market making at any
time without notice. Therefore, no assurance can be given as to the liquidity
of the trading market for the Notes.
Other than in the United States, no action has been taken by the Company
or the Underwriter that would permit a public offering of the Notes offered
hereby in any jurisdiction where action for that purpose is required. The Notes
offered hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus Supplement or any other offering material or advertisements in
connection with the offer and sale of any such Notes be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus Supplement comes are advised to
inform themselves about and to observe any restrictions relating to the
Offering of the Notes and the distribution of this Prospectus Supplement. This
Prospectus Supplement does not constitute an offer to sell or a solicitation of
an offer to buy any of the Notes offered hereby in any jurisdiction in which
such an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriter may over-allot the Offering, creating a
syndicate short position. The Underwriter may bid for and purchase Notes in the
open market to cover such syndicate short positions or to stabilize the price
of the Notes. These activities may stabilize or maintain the market price of
the Notes above independent market levels. The Underwriter is not required to
engage in these activities, and may end any of these activities at any time.
In the ordinary course of their respective businesses, the Underwriter and
its affiliates have engaged, and may in the future engage, in commercial
banking and investment banking transactions with the Company.
S-28
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Notes offered by the Company
have been passed upon for the Company by Sullivan & Worcester LLP, Boston,
Massachusetts and will be passed upon for the Underwriter by Davis Polk &
Wardwell, New York, New York. Sullivan & Worcester LLP and Davis Polk &
Wardwell will rely, as to all matters of Maryland law, upon the opinion of
Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. Barry M. Portnoy,
a former partner in the firm of Sullivan & Worcester LLP, is a Managing Trustee
of the Company and of HRP and director and a 50% owner of Advisors. Sullivan &
Worcester LLP represents HRP, Advisors, and certain of their affiliates on
various matters.
EXPERTS
In addition to the matters referred to in the accompanying Prospectus
under the caption "Experts," the consolidated financial statements and related
schedule of the Company for the years ended December 31, 1997, 1996 and 1995
appearing herein and in the Company's Current Report on Form 8-K dated February
11, 1998 and incorporated by reference in this Prospectus Supplement and the
accompanying Prospectus and elsewhere in the related Registration Statement,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto. Such reports are incorporated
herein and in the Registration Statement by reference in reliance upon the
authority of said firm as experts in giving said reports.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents incorporated by reference or deemed
incorporated by reference into the accompanying Prospectus, which Prospectus is
supplemented by this Prospectus Supplement, the Company's Current Reports on
Form 8-K dated February 11, 1998 and February 12, 1998, which have been filed
with the Commission pursuant to the Exchange Act, are hereby incorporated in
this Prospectus Supplement and specifically made a part hereof by reference.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement
and prior to the termination of the offering of the Notes shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents. Any statement
contained herein or in a document incorporated or deemed to be incorporated
herein by reference shall be deemed to be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein,
or in any subsequently filed document that also is or is deemed to be
incorporated herein by reference, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus Supplement.
The Company hereby undertakes to provide without charge to each person to
whom this Prospectus Supplement is delivered, upon the written or oral request
of such person, a copy of any and all of the information that has been
incorporated by reference in this Prospectus Supplement (excluding exhibits
unless such exhibits are specifically incorporated by reference into the
information that this Prospectus Supplement incorporates). Requests for such
copies should be made to the Company at its principal executive offices, 400
Centre Street, Newton, Massachusetts 02158, Attention: Investor Relations,
telephone (617) 964-8389.
S-29
<PAGE>
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS SUPPLEMENT CONTAINS FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED.
PROSPECTIVE PURCHASERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF.
---------------------
THE DECLARATION OF TRUST OF THE COMPANY, AMENDED AND RESTATED ON AUGUST
21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE
"DECLARATION"), 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.
S-30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Adjusted Pro Forma Financial Statements
Introduction to Unaudited Adjusted Pro Forma Financial Statements ....................... F-2
Unaudited Adjusted Pro Forma Balance Sheet as of December 31, 1997 ...................... F-3
Unaudited Adjusted Pro Forma Statement of Income for the year ended December 31, 1997 ... F-4
Notes to Unaudited Adjusted Pro Forma Financial Statements .............................. F-5
Historical Financial Statements
Report of Independent Public Accountants ................................................ F-7
Consolidated Balance Sheet as of December 31, 1997 and 1996 ............................. F-8
Consolidated Statement of Income for the years ended December 31, 1997 and
1996 and the period February 7, 1995 (inception) to December 31, 1995 ................... F-9
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1997 and
1996 and the period February 7, 1995 (inception) to December 31, 1995 ................... F-10
Consolidated Statement of Cash Flows for the years ended December 31, 1997 and
1996 and the period February 7, 1995 (inception) to December 31, 1995 ................... F-11
Notes to Consolidated Financial Statements .............................................. F-12
</TABLE>
F-1
<PAGE>
HOSPITALITY PROPERTIES TRUST
INTRODUCTION TO UNAUDITED ADJUSTED PRO FORMA FINANCIAL STATEMENTS
The following unaudited adjusted pro forma balance sheet at December 31,
1997 is intended to present the financial position of the Company as if the
transactions described in the notes hereto (the "Transactions") were
consummated at December 31, 1997. The following unaudited adjusted pro forma
statement of income for the year ended December 31, 1997 is intended to present
the results of operations of the Company as if the Transactions were
consummated as of January 1, 1997. These unaudited adjusted pro forma financial
statements should be read in conjunction with, and are qualified in their
entirety by reference to, the separate financial statements of the Company and
of certain hotel properties the Company has acquired or entered into agreements
to acquire, and the pro forma financial statements of the Company, incorporated
herein by reference to the Company's Current Reports on Form 8-K dated November
21, 1997, December 9, 1997, February 11, 1998 and February 12, 1998.
In addition to pro forma adjustments relating to operating hotel
properties acquired during 1997, these unaudited adjusted pro forma financial
statements include adjustments for the results of certain hotel properties
which were under development during 1997. See Notes B and H. The Company
believes that presentation of combined pro forma and adjusted financial data is
meaningful and relevant to an understanding of the effects of the Transactions
on the Company. No assurance can be given that these adjusted pro forma
financial statements reflect the financial results which would have been
realized if the acquisition and development of the relevant hotel properties
was completed as of December 31, 1997 or January 1, 1997.
In addition, these unaudited adjusted pro forma financial statements are
not necessarily indicative of what the actual financial position or results of
operations of the Company would have been as of the date or for the period
indicated, nor does it purport to represent the expected financial position or
results of operations of the Company for any future period. Differences may
result from, among other considerations, future changes in the Company's
portfolio of investments, changes in interest rates, changes in the capital
structure of the Company, delays in the acquisition of certain properties or
any determination not to complete the acquisition of any hotel properties and
changes in the Company's operating expenses.
F-2
<PAGE>
HOSPITALITY PROPERTIES TRUST
UNAUDITED ADJUSTED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
As of December 31, 1997
-------------------------------------------------------
Adjusted
Historical (A) Pro Forma
(119 Hotels) Adjustments (135 Hotels)
(in thousands)
<S> <C> <C> <C>
ASSETS
Real estate properties ........................ $1,266,035 $ 155,933(B) $1,421,968
Accumulated depreciation ...................... (58,167) -- (58,167)
---------- ----------- ----------
1,207,868 155,933 1,363,801
Cash and cash equivalents ..................... 81,728 (80,000)(C) 1,728
FF&E reserve (restricted cash) ................ 11,165 -- 11,165
Rent receivable ............................... 1,623 -- 1,623
Other assets .................................. 10,872 (2,716)(D) 8,156
---------- ----------- ----------
$1,313,256 $ 73,217 $1,386,473
========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CMBS Notes .................................... $ 125,000 $ (125,000)(E) $ --
% Senior Notes due ...................... -- 150,000 (E) 150,000
Credit Facility ............................... -- 36,701 (F) 36,701
Security deposits ............................. 146,662 15,516 (G) 162,178
Other liabilities ............................. 33,701 -- 33,701
Shareholders' equity:
Common shares of beneficial interest ......... 389 -- 389
Additional paid-in capital ................... 1,033,073 -- 1,033,073
Cumulative net income ........................ 122,166 (4,000)(D) 118,166
Dividends .................................... (147,735) -- (147,735)
---------- ----------- ----------
Total shareholders' equity ................. 1,007,893 (4,000) 1,003,893
---------- ----------- ----------
$1,313,256 $ 73,217 $1,386,473
========== =========== ==========
</TABLE>
F-3
<PAGE>
HOSPITALITY PROPERTIES TRUST
UNAUDITED ADJUSTED PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------
Adjusted
Historical Adjustments Pro Forma
(in thousands, except per Share data)
<S> <C> <C> <C>
Revenues:
Rental income .............................. $ 98,561 $ 39,712(H) $ 138,273
FF&E reserve income ........................ 14,643 -- (I) 14,643
Interest income ............................ 928 -- 928
--------- --------- ---------
Total revenues .......................... 114,132 39,712 153,844
Expenses:
Depreciation and amortization .............. 31,949 14,281 (J) 46,230
Interest ................................... 15,534 (2,163)(K) 13,371
Terminated acquisition costs ............... 713 -- 713
General and administrative ................. 6,783 2,304 (L) 9,087
--------- --------- ---------
Total expenses .......................... 54,979 14,422 69,401
--------- --------- ---------
Net income .................................. $ 59,153 $ 25,290 $ 84,443
========= ========= =========
Weighted average Shares outstanding ......... 27,530 11,348 (M) 38,878
Net income per Share ........................ $ 2.15 $ 2.17
</TABLE>
F-4
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO UNAUDITED ADJUSTED PRO FORMA FINANCIAL STATEMENTS
(in thousands)
Balance Sheet Adjustments
A. Represents the historical balance sheet of the Company on December 31,
1997.
B. Represents the purchase of the 16 hotels not acquired as of December 31,
1997:
<TABLE>
<S> <C>
Cash purchase prices:
Four Courtyard by Marriott[RegTM] hotels ............ $ 42,647
Two Residence Inn by Marriott[RegTM] hotels ......... 39,357
Ten Candlewood[RegTM] hotels ........................ 57,638
Purchase price withheld as security deposits ......... 15,516
Closing costs ........................................ 775
--------
Total ............................................... $155,933
========
</TABLE>
Included in the above are certain hotel properties the Company has purchased
or expects to purchase from sellers upon completion of construction, of which
five have been completed and purchased by the Company between January 1, 1998
and February 6, 1998 for an aggregate purchase price of $26,068.
C. Represents pro forma impact on cash as follows:
<TABLE>
<S> <C>
Cash transactions:
Cash raised in Offering, net of costs ....................... $ 148,900
Cash used to repay CMBS Notes ............................... (125,000)
Cash used for acquisitions, including closing costs ......... (140,417)
Pro forma Credit Facility borrowings, net of costs .......... 36,517
----------
Net impact on cash .......................................... (80,000)
==========
</TABLE>
D. Represents the write-off of related deferred financing costs related to the
CMBS Notes and the recording of the deferred finance costs in connection
with the issuance of the Notes. The accompanying adjusted pro forma income
statement excludes an extraordinary loss and other non-recurring charges of
$4,000 related to the expected early extinguishment of the CMBS Notes.
E. Represents issuance of the Notes and the prepayment of the $125,000 of CMBS
Notes.
F. Represents pro forma net borrowings by the Company under the Credit
Facility to complete planned hotel acquisitions.
G. Represents security deposits and other deposits held or to be held by the
Company as a result of purchasing and leasing the following hotels:
<TABLE>
<S> <C>
Four Courtyard by Marriott[RegTM] hotels ............ $ 4,739
Two Residence Inn by Marriott[RegTM] hotels ......... 4,373
Ten Candlewood[RegTM] hotels ........................ 6,404
-------
Total .............................................. $15,516
=======
</TABLE>
F-5
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO UNAUDITED ADJUSTED PRO FORMA FINANCIAL STATEMENTS--(Continued)
(in thousands)
Income Statement Adjustments
H. Represents the adjusted pro forma effect of leases entered since January 1,
1997 and to be entered. This adjusted pro forma effect is derived as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
<S> <C>
Pro forma minimum rent ................................. $ 135,745
Pro forma percentage rent .............................. 2,528
Amounts included in historical minimum rent ............ (96,033)
Amounts included in historical percentage rent ......... (2,528)
---------
$ 39,712
=========
</TABLE>
Certain of the hotels owned by the Company as of December 31, 1997 were under
development and others are currently under development by the sellers of
these properties. The Company is not contractually obligated to acquire
these hotels until they are substantially completed. The adjusted pro
forma income statement assumes these hotels were completed and acquired on
January 1, 1997. Percentage rent, which is based upon a percentage of
gross revenue increases, cannot be calculated for unopened hotels under
development.
I. FF&E Reserve escrow accounts for all of the Company's Courtyard by
Marriott[RegTM] and Residence Inn by Marriott[RegTM] hotels are owned by
the Company and periodic payments into these escrow accounts are recorded
as additional rent under generally accepted accounting principles ("GAAP").
No pro forma adjustment for the FF&E Reserve income related to newly
constructed hotels purchased and to be purchased by the Company from
Marriott has been made, as this amount cannot be calculated.
The FF&E Reserve for the renovation and refurbishment of the Company's
Wyndham[RegTM], Sumner Suites[RegTM] and Candlewood[RegTM] hotels remains
the property of these respective tenants during the lease term. The
Company has a security interest in these escrow accounts and at the end of
the lease term, any remaining funds in these FF&E Reserves must be paid to
the Company. Under GAAP, the FF&E Reserve for the leases relating to these
hotels is not recorded as income by the Company.
J. Represents the impact of the Transactions on depreciation expense for the
entire period presented.
K. Represents elimination of interest on the CMBS Notes (principal amount
$125,000) and the Credit Facility at LIBOR plus contractual spreads for the
entire period presented, plus amortization of deferred financing costs,
offset by the pro forma interest expense of the proposed issuance of the
Notes at an assumed rate. The average applicable LIBOR rate was 5.6% for
the year ended December 31, 1997.
L. Represents the estimated impact of the Transactions on general and
administrative expenses of the Company for the period presented.
M. Represents the impact of additional Shares issued in the Company's December
1997 common share offering.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
Hospitality Properties Trust:
We have audited the accompanying consolidated balance sheet of Hospitality
Properties Trust (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 1997, 1996 and 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 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hospitality
Properties Trust as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
and 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 16, 1998
F-7
<PAGE>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
As of December 31,
----------------------------
1997 1996
(in thousands, except Share data)
<S> <C> <C>
ASSETS
Real estate properties, at cost:
Land ................................................. $ 179,928 $ 143,462
Buildings and improvements ........................... 1,086,107 699,225
---------- ---------
1,266,035 842,687
Less accumulated depreciation ........................ (58,167) (26,218)
---------- ---------
1,207,868 816,469
Cash and cash equivalents ............................. 81,728 38,073
Rent receivable ....................................... 1,623 1,671
Restricted cash (FF&E reserve) ........................ 11,165 7,277
Other assets, net ..................................... 10,872 8,113
---------- ---------
$1,313,256 $ 871,603
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Security deposits ..................................... $ 146,662 $ 81,360
Debt .................................................. 125,000 125,000
Dividends payable ..................................... 24,493 15,846
Due to affiliate ...................................... 2,464 2,376
Accounts payable and other ............................ 6,744 1,813
---------- ---------
Total liabilities .................................... 305,363 226,395
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, 38,878,295 and
26,856,800 shares issued and outstanding ............ 389 269
Additional paid-in capital ........................... 1,033,073 656,253
Cumulative net income ................................ 122,166 63,013
Dividends (paid or declared) ......................... (147,735) (74,327)
---------- ---------
Total shareholders' equity ........................... 1,007,893 645,208
---------- ---------
$1,313,256 $ 871,603
========== =========
</TABLE>
See accompanying notes.
F-8
<PAGE>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
February 7, 1995
Year Ended December 31, (inception) to
--------------------------- December 31,
1997 1996 1995
(in thousands, except per Share data)
<S> <C> <C> <C>
Revenues:
Rental income ............................................... $ 98,561 $ 69,514 $ 19,531
FF&E reserve income ......................................... 14,643 12,169 4,037
Interest income ............................................. 928 946 74
--------- -------- --------
Total revenues ............................................ 114,132 82,629 23,642
--------- -------- --------
Expenses:
Interest (including amortization of deferred finance costs
of $1,340, $341 and $24, respectively)...................... 15,534 5,646 5,063
Depreciation and amortization of real estate assets ......... 31,949 20,398 5,820
Terminated acquisition costs ................................ 713 -- --
General and administrative .................................. 6,783 4,921 1,410
--------- -------- --------
Total expenses ............................................ 54,979 30,965 12,293
--------- -------- --------
Net income ................................................... $ 59,153 $ 51,664 $ 11,349
========= ======== ========
Weighted average Shares outstanding .......................... 27,530 23,170 4,515
Net income per Share ......................................... $ 2.15 $ 2.23 $ 2.51
========= ======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Cumulative
Number Of Common Paid-In Net
Shares Shares Capital Income Dividends Total
(in thousands, except Share data)
<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 (paid or declared) .. -- -- -- -- (11,486) (11,486)
---------- ---- ---------- -------- ---------- ----------
Balance at December 31, 1995 .. 12,600,900 $126 $ 297,962 $ 11,349 $ (11,486) $ 297,951
========== ==== ========== ======== ========== ==========
Issuance of Common Shares of
Beneficial Interest, net ..... 14,250,000 $143 $ 358,136 $ -- $ -- $ 358,279
Stock grants .................. 5,900 -- 155 -- -- 155
Net income .................... -- -- -- 51,664 -- 51,664
Dividends (paid or declared) .. -- -- -- -- (62,841) (62,841)
---------- ---- ---------- -------- ---------- ----------
Balance at December 31, 1996 .. 26,856,800 $269 $ 656,253 $ 63,013 $ (74,327) $ 645,208
========== ==== ========== ======== ========== ==========
Issuance of Common Shares of
Beneficial Interest, net ..... 12,000,000 $120 $ 376,146 $ -- $ -- $ 376,266
Stock grants .................. 21,495 -- 674 -- -- 674
Net income .................... -- -- -- 59,153 -- 59,153
Dividends (paid or declared) .. -- -- -- -- (73,408) (73,408)
---------- ---- ---------- -------- ---------- ----------
Balance at December 31, 1997 .. 38,878,295 $389 $1,033,073 $122,166 $ (147,735) $1,007,893
========== ==== ========== ======== ========== ==========
</TABLE>
See accompanying notes.
F-10
<PAGE>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended February 7, 1995
December 31, (inception) to
------------------------------ December 31,
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 59,153 $ 51,664 $ 11,349
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization .............................. 31,949 20,398 5,820
Amortization of deferred finance costs as interest ......... 1,340 341 24
FF&E reserve income ........................................ (14,643) (12,169) (4,037)
Changes in assets and liabilities:
Increase in rent receivable and other assets ............. (469) (1,566) (182)
Increase in accounts payable and other ................... 3,419 1,926 396
Increase in due to affiliate ............................. 476 1,149 770
---------- ---------- ----------
Cash provided by operating activities .................... 81,225 61,743 14,140
---------- ---------- ----------
Cash flows from investing activities:
Real estate acquisitions ..................................... (409,799) (491,638) (332,648)
Increase in security deposits ................................ 65,302 48,460 32,900
Purchase of FF&E reserve ..................................... (2,794) (5,500) (3,904)
---------- ---------- ----------
Cash used in investing activities ........................ (347,291) (448,678) (303,652)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Shares, net ........................ 376,266 358,279 198,088
Draws on credit facility and debt issuance ................... 261,000 240,650 --
Repayments of credit facility ................................ (261,000) (115,650) --
Deferred finance costs incurred .............................. (1,784) (6,481) (1,885)
Borrowings and advances from HRP ............................. -- -- 165,241
Payments on borrowings and advances from HRP ................. -- -- (65,241)
Dividends paid ............................................... (64,761) (53,925) (4,556)
---------- ---------- ----------
Cash provided by financing activities .................... 309,721 422,873 291,647
---------- ---------- ----------
Increase in cash and cash equivalents ......................... $ 43,655 $ 35,938 $ 2,135
Cash and cash equivalents at beginning of period .............. 38,073 2,135 --
---------- ---------- ----------
Cash and cash equivalents at end of period .................... $ 81,728 $ 38,073 $ 2,135
========== ========== ==========
Supplemental cash flow information:
Cash paid for interest ....................................... $ 14,086 $ 4,652 $ 5,039
Non-cash investing and financing activities:
Property managers' deposits in FF&E reserve .................. 14,213 12,100 3,862
Purchases of fixed assets with FF&E reserve .................. (13,549) (15,665) (2,424)
Issuance of Shares to HRP .................................... -- -- 100,000
Cancellation of indebtedness to HRP .......................... -- -- (100,000)
</TABLE>
See accompanying notes.
F-11
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per Share and percent data)
1. Organization and Commencement of Operations
Hospitality Properties Trust (HPT) is a Maryland real estate investment
trust organized on February 7, 1995. HPT, 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 HPT, owning approximately 10.3% of HPT's issued and
outstanding Shares as of December 31, 1997. HPT commenced operations on March
24, 1995. At December 31, 1997 HPT, directly and through subsidiaries, had
purchased 119 properties and committed to purchase an additional 16 properties.
The properties of HPT and its subsidiaries (the Company) are leased to and
managed by subsidiaries (the Lessees and the Managers) of companies
unaffiliated with HPT: Host Marriott Corporation; Marriott International, Inc.
(Marriott); Patriot American Hospitality; Candlewood Hotel Company, Inc.; and
ShoLodge, Inc.
2. Summary of Significant Accounting Policies
Consolidation. These consolidated financial statements include the
accounts of HPT and its subsidiaries. All intercompany transactions have been
eliminated.
Real estate properties. Real estate properties are recorded at cost.
Depreciation is provided for on a straight-line basis over estimated useful
lives of 7 to 40 years. The Company periodically evaluates the carrying value
of its long-lived assets in accordance with Statement of Financial Accounting
Standards No. 121 (FAS 121), which it adopted on January 1, 1996. The adoption
of FAS 121 had no effect on the Company's financial statements.
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 equal to its fair value.
Deferred finance costs. Costs incurred to secure certain borrowings are
capitalized and amortized over the terms of the related borrowing, and were
$7,371, $5,352 and $1,861 at December 31, 1997, 1996 and 1995, respectively,
net of accumulated amortization of $1,143, $313 and $24, respectively.
Financial Instruments--interest rate cap agreements. Certain subsidiaries
of HPT have entered interest rate protection agreements to limit the Company's
exposure to risks of rising interest rates. The cost of the agreements is
included in interest expense ratably over the life of the arrangement. Amounts
receivable from the counterparties to the cap agreements are accrued as
adjustments to interest expense. At December 31, 1997 and 1996, the net
carrying value of such agreements was $1,988 and $2,498, respectively, and the
fair value of such agreements was $802 and $2,756, respectively. Interest rates
have not exceeded the cap amounts and no balances were receivable under the cap
agreements at December 31, 1997 and 1996.
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 income 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. The Company has no
common share equivalents.
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 is a real estate investment trust under the
Internal Revenue Code of 1986. The Company is not subject to Federal income
taxes on its net income provided it distributes its taxable income to
shareholders and meets certain other requirements.
F-12
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per Share and percent data)
New Accounting Pronouncements. The Financial Accounting Standards Board
has issued Financial Accounting Standards Board Statement No. 128 "Earnings Per
Share" ("FAS 128"), Statement No. 129 "Disclosure of Information about Capital
Structure" ("FAS 129"), Statement No. 130 "Reporting Comprehensive Income"
("FAS 130") and Statement No. 131 "Disclosures About Segments of an Enterprise
and Related Information" ("FAS 131"). FAS 128 and FAS 129 were adopted for the
Company's 1997 financial statements. The adoption of each of these had no
impact on the Company's financial statements. FAS 130 and FAS 131 must be
adopted for the Company's 1998 financial statements. The Company anticipates
that FAS 130 and FAS 131 will have no impact on the Company's financial
statements.
3. Real Estate Properties
The Company's hotel properties are leased pursuant to long term operating
leases with initial terms expiring between 2008 and 2014. The leases provide
for various renewal terms generally totaling 20-50 years unless the Lessee
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,
percentage rent of between 5% and 10% of increases in total hotel sales over a
base year, 5% FF&E reserve escrows, and all operating costs associated with the
leased property. Each Lessee has posted a security deposit equal to one year's
base rent. Each of the Company's properties is part of a pool of properties
leased to a single tenant. At December 31, 1997, the Company maintained seven
pools of properties, ranging in number of properties from nine to 53. Each
property within a pool is subject to certain lease provisions including
all-or-none renewals, cross defaults and the ability to use FF&E reserves
generated by all hotels within a pool for the maintenance and refurbishment of
any hotel within such pool. The FF&E reserve may be used by the Manager and
Lessee to maintain the properties in good working order and repair. If the FF&E
reserve is not available to fund such expenditures, the Company may make such
expenditures, in which case annual base rent will be increased by a minimum of
10% of the amount so funded.
During 1995, the Company purchased and leased 37 hotels for a total
purchase price of approximately $329,000. In 1996, the Company purchased and
leased an additional 45 hotels for an aggregate purchase price of approximately
$484,000. During 1997, the company agreed to purchase and lease up to an
additional 53 hotels for an aggregate purchase price of approximately $562,000.
As of December 31, 1997, the Company had completed the acquisition and leasing
of 119 hotels properties and had outstanding commitments, subject to the
satisfaction of certain conditions by the sellers of such properties, to
purchase an additional 16 hotel properties for an aggregate purchase price of
$155,158.
Future minimum lease payments to be received by the Company during the
remaining initial terms of its leases total $1,742,784 ($120,062 annually). As
of December 31, 1997, the weighted average remaining initial term of the
Company's leases was 14 years, and the weighted average remaining total term
(including all renewal options) was 53.4 years.
4. Indebtedness
As of December 31, 1997 and 1996, the Company had no borrowings
outstanding under its $200,000 revolving acquisition credit facility ("Credit
Facility") which provides for interest on borrowings at one-month LIBOR plus a
premium. 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 loan. The Credit Facility is secured by certain assets of HPT and one
of its subsidiaries. The weighted average interest rate on Credit Facility
borrowings outstanding during 1997 and 1996 was 7.27% and 7.05%, respectively.
There were no borrowings outstanding at any time under the Credit Facility
during the 1995 period.
During 1997, the Company temporarily expanded its credit facility with the
same lender to provide up to an additional $255,000 (the "Expanded Facility")
through December 31, 1997. No amounts were outstanding under the Expanded
Facility as of December 31, 1997.
During 1996, certain subsidiaries of the Company issued $125,000 of notes
(Notes) which require payment of interest only through their maturity in
December 2001, at which time the principal balance is due. The Notes are
prepayable at any time without penalty. Interest on the Notes is equal to one
month LIBOR plus a premium.
F-13
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per Share and percent data)
The Notes are non-recourse to HPT and its subsidiaries and are secured by first
mortgages on hotels owned by certain subsidiaries of the Company having a net
carrying value of $319,538 at December 31, 1997. Approximately $30,820 of
annual minimum lease payments are attributed to such hotels. Generally, among
other restrictions, the terms of the Notes limit the ability of certain
subsidiaries of the Company to incur significant secured or unsecured
liabilities and restrict the use of proceeds from any sale or other disposition
of the encumbered assets. The Notes carried a weighted average interest rate in
1997 of 6.44% and from their date of issuance to December 31, 1996 of 6.32%. At
December 31, 1997 and 1996, the Notes carried an interest rate of 6.69% and
6.07%, respectively. The carrying amount of the Notes is equal to their fair
value.
5. Transactions with Affiliates
The Company has an agreement with HRPT Advisors, Inc. (the "Advisor")
whereby the Advisor provides investment, management and administrative services
to the Company. The Advisor 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 plus an incentive fee based upon improvements
in cash available for distribution per Share (as defined). Cash advisory fees
earned for the years ended 1997, 1996 and for period from February 7, 1995
(inception) to December 31, 1995 were $5,299, $3,915 and $1,292 respectively.
As of December 31, 1997 the Advisor owned 264,595 shares of HPT. Incentive
advisory fees are paid to Advisors in restricted Common Shares based on a
formula. The Company accrued $551 and $463 in incentive fees during 1997 and
1996 respectively. In February of 1997 the Company issued 14,595 restricted
Common Shares to the Advisor satisfying the 1996 fee. The 1997 fee will be paid
in restricted Common Shares in 1998.
From time to time the Company may seek short term borrowings from the
Advisor. During 1997, the Company made one such borrowing of $7,000 which was
outstanding for 60 days. Interest paid to the Advisor totaled $62. The Advisor
is under no obligation to make funds available to the Company.
As of January 1, 1998, the functions of the Advisor were assumed by REIT
Management & Research, Inc. ("RMR"), a newly formed affiliate of the Advisor
under a new advisory agreement on substantially the same terms as the previous
agreement. The Advisor and RMR are each owned by Gerard M. Martin and Barry M.
Portnoy, who also serve as Managing Trustees of the Company.
6. Concentration
The Company's assets are income producing lodging related real estate
located throughout the United States. The Company's lessees are:
<TABLE>
<CAPTION>
Annual
Number of Initial % of Minimum % of
Subsidiaries of Properties Investment Total Rent Total
<S> <C> <C> <C> <C> <C>
Host Marriott Corp. .................. 53 $ 505,000 37% $ 50,500 37%
Host Marriott Corp. .................. 18 172,000 13% 17,200 13%
Patriot American Hospitality ......... 12 180,000 13% 18,000 13%
Marriott International, Inc. ......... 14 149,000 11% 14,900 11%
Marriott International, Inc. ......... 9 129,000 9% 12,900 9%
ShoLodge, Inc. ....................... 14 140,000 10% 14,000 10%
Candlewood Hotel Company ............. 15 100,000 7% 10,000 7%
-- ---------- -- -------- --
135 $1,375,000 100% $137,500 100%
</TABLE>
At December 31, 1997 the Company was committed to purchase 16 of the
properties shown in the table above with allocated initial investment and
annual minimum rent of $155,158 and $15,516, respectively.
At December 31, 1997 the Company's 119 hotels contain 16,527 rooms and are
located in 30 states, with 5% to 11% of its hotels in each of Virginia,
Pennsylvania, Massachusetts, Arizona, Georgia, Texas, and California. Including
the commitments to purchase 16 properties, the Company's 135 hotels contain
18,497 rooms and are located in 35 states.
F-14
<PAGE>
HOSPITALITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per Share and percent data)
7. Pro Forma Information (Unaudited)
In December 1997 the Company agreed to acquire and net lease 53 hotels for
a total of $562,000 (including 16 hotels which as of December 31, 1997 had not
been acquired). In December 1997 the Company completed an offering of 12,000
Shares. Assuming the acquisition and leasing of these hotels and the completion
of the December Shares offering had occurred on January 1, 1997, unaudited pro
forma 1997 revenues, net income and earnings per share would have been
$153,844, $84,443, and $2.17 respectively.
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 unaudited pro forma data is not necessarily indicative of what
the actual consolidated results of operations for the Company would have been
for the years indicated, nor does it purport to represent the results of
operations for the Company for future periods.
8. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of
operations of the Company for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues ............................ $25,477 $28,276 $29,017 $31,362
Net Income .......................... 14,910 14,926 15,017 14,300
Net Income per Share ................ .56 .56 .56 .48
Dividends paid per Share(3) ......... .59 .61 .62 .63
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues ............................ $ 10,334 $ 23,011 $24,878 $24,406
Net Income .......................... 6,622 14,623 15,446 14,973
Net Income per Share ................ .53 .56 .58 .56
Dividends paid per Share(3) ......... .58 .58 .59 .59
1995
------------
Third Fourth
Quarter(1) Quarter
Revenues ............................ $ 7,853 $ 9,998
Net income .......................... 3,623 6,989
Net income per Share ................ .24(2) .55
Dividends paid per Share(3) ......... .24 .55
</TABLE>
- ------------
(1) HPT's IPO occurred August 22, 1995 and accordingly the third quarter 1995
figures for revenues and net income partially relate to periods prior to the
IPO.
(2) Represents the per Share amount of net income from the IPO date to
September 30, 1995.
(3) Amounts represent dividends declared with respect to the periods shown.
F-15
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than those contained in or
incorporated by reference in this Prospectus Supplement or the Prospectus in
connection with the offering made by this Prospectus Supplement and the
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
Neither this Prospectus Supplement nor the Prospectus constitutes an offer to
sell or the solicitation of an offer to buy the Notes by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Supplement
Summary ................................................ S-3
Recent Developments .................................... S-8
Capitalization ......................................... S-11
Use of Proceeds ........................................ S-11
The Company ............................................ S-12
Management ............................................. S-17
Description of the Notes ............................... S-19
Certain Federal Income Tax Considerations .............. S-26
Underwriting ........................................... S-28
Legal Matters .......................................... S-29
Experts ................................................ S-29
Incorporation of Certain Information by Reference S-29
Forward-Looking Statements ............................. S-30
Index to Consolidated Financial Statements ............. F-1
Prospectus
Available Information .................................. (ii)
Incorporation of Certain Documents by Reference (ii)
The Company ............................................ 1
Use of Proceeds ........................................ 1
Ratio of Earnings to Fix Charges ....................... 1
Description of Debt Securities ......................... 2
Description of Shares .................................. 11
Description of Preferred Shares ........................ 11
Description of Depositary Shares ....................... 17
Description of Warrants ................................ 20
Limitation of Liability; Shareholder Liability ......... 20
Redemption; Trustees; Business Combinations
and Control Share Acquisitions ....................... 21
Plan of Distribution ................................... 25
Legal Matters .......................................... 26
Experts ................................................ 26
</TABLE>
$150,000,000
Hospitality Properties Trust
% Senior Notes due
------------------------------------------
P R O S P E C T U S S U P P L E M E N T
------------------------------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
, 1998
================================================================================
