SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): April 15, 1998
HOSPITALITY PROPERTIES TRUST
(Exact name of registrant as specified in charter)
Maryland 1-11527 04-3262075
(State of other (Commission file (IRS employer
jurisdiction of number) identification no.)
incorporation)
400 Centre Street, Newton, Massachusetts 02158
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 617-964-8389
<PAGE>
THIS CURRENT REPORT 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.
INVESTORS ARE CUATIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE REGISTRANT UNDERTAKES NO
OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFELCT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
Item 5. Other Events
(a) NEW CREDIT FACILITY
As previously reported, the Company entered into a Revolving Credit
Agreement (the "Credit Agreement") dated as of March 19, 1998, with
Dresdner Bank AG, New York Branch and Grand Cayman Branch, as agent for
itself and the other lenders under such agreement, providing for an
unsecured revolving credit facility (the "Credit Facility") of up to
$250,000,000. The Company concurrently terminated its $200,000,000 secured
revolving credit agreement with DLJ Mortgage Capital, Inc. Borrowings under
the Credit Facility may be used to finance the purchase of hotels and for
general business purposes.
The Credit Facility terminates on March 19, 2002, which is the maturity
date for any loans thereunder. Loans under the Credit Facility bear
interest at an annual rate equal, at the option of the Company, to a base
lending rate or LIBOR, in each case plus a spread based on the rating, if
any, of the Company's senior unsecured debt by certain rating agencies or
on the ratio of the Company's indebtedness to the value of certain of its
assets. As of the closing of the Credit Facility, the spread on base rate
loans was 0% and the spread on LIBOR loans was 1.125%.
The Credit Agreement contains various customary conditions precedent to
borrowings, and requires that the Company comply with certain financial
tests and maintain certain financial ratios, including, without limitation,
a requirement that the value of a designated unencumbered pool of qualified
hotels be at least 200% times the outstanding borrowings under the Credit
Facility and certain other debt. All subsidiaries of the Company that own
hotels included in such unencumbered pool are required to be guarantors of
the Credit Facility.
The Credit Agreement contains a number of other covenants applicable to the
Company and its subsidiaries, including limitations on the incurrence of
certain indebtedness, liens, guaranties, dividends while the Company is in
default under the Credit Facility or in amounts in excess of 100% of cash
available for distribution or 95% of adjusted consolidated net income,
investments, transactions with affiliates, negative pledges, certain
mergers and dispositions of assets, and certain amendments of the Company's
Declaration of Trust and certain other material agreements. The Credit
Agreement includes various events of default including, payment and
covenant defaults, material inaccuracy of material representations and
warranties, dissolution, bankruptcy or insolvency of the Company, death of
both of the Managing Trustees of the Company or their failure collectively
to continue to hold, directly or indirectly, certain levels of voting
shares of the Company, cross-defaults
2
<PAGE>
to debt in excess of $10,000,000, invalidity of the loan documents,
undischarged judgments in excess of $10,000,000, termination of the
Advisory Agreement between the Company and REIT Management & Research,
Inc., and the Company's failure to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended.
The foregoing summary of certain material provisions of the Credit
Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Credit Agreement, a copy of
which has been filed as an exhibit to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1997, filed with the Securities
and Exchange Commission.
(b) ACQUISITION
As previously reported, on March 20, 1998 the Company completed an
acquisition of certain hotel properties (the "Acquired Properties"), as
more fully described in the Company's press release included as Exhibit 99
to this Report. Financial statements of the acquired properties are
included herein as indicated on the index on page F-1. The Company's
investment in the Acquired Properties of $240 million amounts to 18.3 % of
the Company's total assets as of December 31, 1997.
(c) MARRIOTT SPIN OFF AND MERGER.
As previously reported, the Company owns or has agreements to acquire
23 hotels which are or will be leased to subsidiaries of Marriott
International, Inc. ("Marriott"). Certain obligations due to the Company
under these purchase contracts and leases are guaranteed by Marriott.
Marriott has reported the completion of a spin-off transaction which
resulted, as expected, in the assumption of the guarantee obligations to
the Company by the spun-off entity, which also assumed the name Marriott
International, Inc.
Item 7. Exhibits.
23 Consent of Ernst & Young LLP.
99 March 23, 1998 press release of the Company
3
<PAGE>
Index to
Combined Financial Statements
SC Suites Summerfield Partnerships
For the Years ended January 2, 1998,
January 3, 1997 and December 29, 1995
Report of Independent Auditors............................................F-2
Combined Financial Statements
Balance Sheets............................................................F-3
Statements of Operations..................................................F-5
Statements of Partners' Deficit...........................................F-6
Statements of Cash Flows..................................................F-7
Notes to Combined Financial Statements....................................F-9
F-1
<PAGE>
Report of Independent Auditors
The Partners
SC Suites Summerfield Partnerships
We have audited the accompanying combined balance sheets of SC Suites
Summerfield Partnerships as of January 2, 1998 and January 3, 1997, and the
related combined statements of operations, partners' deficit and cash flows for
the three years in the period ended January 2, 1998. These financial statements
are the responsibility of the Partnerships' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of SC Suites Summerfield
Partnerships at January 2, 1998 and January 3, 1997, and the combined results of
their operations and their cash flows for the three years in the period ended
January 2, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
February 3, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
SC Suites Summerfield Partnerships
Combined Financial Statements
Balance Sheets
January 2, January 3,
1998 1997
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 6,880,827 $ 6,247,374
Replacement fund 4,276,132 4,593,116
Accounts receivable 2,505,630 2,069,454
Prepaid expenses and other 458,486 436,887
------------- -------------
Total current assets 14,121,075 13,346,831
Property and equipment, at cost:
Land 41,836,426 41,836,426
Buildings and components 111,788,042 110,470,089
Furniture, fixtures and equipment 42,864,891 41,025,004
Construction in progress -- 1,057,956
------------- -------------
196,489,359 194,389,475
Less accumulated depreciation 55,773,815 50,127,841
------------- -------------
Net property and equipment 140,715,544 144,261,634
Other assets:
Organization costs, net of accumulated amortization of
$17,881 ($13,674 at January 3, 1997) 3,156 7,363
Deferred loan costs, net of accumulated amortization of
$5,204,045 ($4,536,044 at January 3, 1997) 45,792 713,793
Other, net of accumulated amortization of $330,628 ($291,000
at January 3, 1997) 631,552 656,825
Investment in Summerfield Safety Company 792,099 636,847
------------- -------------
Total other assets 1,472,599 2,014,828
------------- -------------
Total assets $ 156,309,218 $ 159,623,293
============= =============
F-3
<PAGE>
<CAPTION>
January 2, January 3,
1998 1997
------------------------------
<S> <C> <C>
Liabilities and partners' deficit
Current liabilities:
Accounts payable, including $579,745 due to affiliate
($481,472 at January 3, 1997) $ 826,865 $ 765,867
Accrued interest, including $675,404 due to affiliate
($742,542 at January 3, 1997) 1,190,753 1,228,175
Accrued property taxes 420,811 399,066
Accrued payroll and taxes 734,354 490,858
Accrued sales and occupancy taxes 807,378 621,385
Accrued primary incentive management fee 648,164 591,936
Accrued secondary incentive management fee 560,000 383,389
Accrued expenses, including $316,188 due to affiliate
($295,262 at January 3, 1997) 1,361,072 1,359,145
Customer room deposits 194,582 205,310
Other 2,693 3,602
Current portion of obligations under capital lease 154,346 125,906
Current portion of mortgages payable 141,293,979 113,076,391
------------- -------------
Total current liabilities 148,194,997 119,251,030
Mortgages payable -- 30,558,075
Subordinated loans 24,688,762 24,688,762
Obligations under capital lease 296,409 326,184
Partners' deficit:
Partners' capital 12,167,511 19,553,740
Accumulated deficit (29,038,461) (34,754,498)
------------- -------------
Net partners' deficit (16,870,950) (15,200,758)
------------- -------------
Total liabilities and partners' deficit $ 156,309,218 $ 159,623,293
============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
SC Suites Summerfield Partnerships
Combined Financial Statements
Statements of Operations
Year ended
------------------------------------------
January 2, January 3, December 29,
1998 1997 1995
------------------------------------------
<S> <C> <C> <C>
Revenue:
Suite revenue $ 63,090,559 $ 58,927,355 $ 53,069,047
Other revenue, net 3,083,887 3,247,174 3,299,434
------------ ------------ ------------
Total revenue 66,174,446 62,174,529 56,368,481
Operating expenses:
Rooms 14,082,497 13,217,647 11,723,034
General and administrative 5,075,212 5,201,529 4,908,423
Sales and promotion 3,598,887 3,483,684 3,445,174
Maintenance 2,605,897 2,631,817 2,463,785
Utilities 2,170,030 2,133,378 2,004,777
------------ ------------ ------------
Total operating expenses 27,532,523 26,668,055 24,545,193
------------ ------------ ------------
Gross operating profit 38,641,923 35,506,474 31,823,288
Other expenses:
Management, franchise and
accounting fees 9,089,626 9,061,316 7,967,447
Property taxes 2,436,628 2,266,391 2,106,128
Insurance 535,212 394,774 392,709
Other 387,694 263,837 289,487
Interest:
Mortgage 9,434,545 10,053,244 10,790,323
Subordinated loan 2,575,323 2,624,848 2,575,323
Other 60,035 54,197 427,253
Loss on disposition of property
and equipment 240,528 362,528 299,777
Depreciation 7,454,459 7,842,356 7,628,349
Amortization 711,836 799,093 875,704
------------ ------------ ------------
Total other expenses 32,925,886 33,722,584 33,352,500
------------ ------------ ------------
Net income (loss) $ 5,716,037 $ 1,783,890 $ (1,529,212)
============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
SC Suites Summerfield Partnerships
Combined Financial Statements
Statements of Partners' Deficit
General Partners Limited Partners
----------------------------- -----------------------------
Summerfield SF
SC Suites Other Hotel
Suites Holding Limited Company
Corp. Corporation Partners L.P. Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 30, 1994 $ (2,779,257) $ (8,620,079) $ (272,681) $ 1,049,866 $(10,622,151)
Net loss (1,157,356) (361,260) (10,460) (136) (1,529,212)
Contributions 1,785,183 23,802 -- 571,259 2,380,244
Distributions (4,020,489) (14,875) (647) (356,666) (4,392,677)
----------------------------------------------------------------------------
Balance at December 29, 1995 (6,171,919) (8,972,412) (283,788) 1,264,323 (14,163,796)
Net income (loss) 1,424,377 (93,289) (16,740) 469,542 1,783,890
Contributions 1,785,182 23,803 -- 571,258 2,380,243
Distributions (4,586,438) (24,576) (47,173) (542,908) (5,201,095)
----------------------------------------------------------------------------
Balance at January 3, 1997 (7,548,798) (9,066,474) (347,701) 1,762,215 (15,200,758)
Net income 4,475,180 224,163 67,238 949,456 5,716,037
Contributions 892,591 11,901 -- 285,629 1,190,121
Distributions (7,068,824) (60,292) (353,558) (1,093,676) (8,576,350)
----------------------------------------------------------------------------
Balance at January 2, 1998 $ (9,249,851) $ (8,890,702) $ (634,021) $ 1,903,624 $(16,870,950)
============================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
SC Suites Summerfield Partnerships
Combined Financial Statements
Statements of Cash Flows
Year ended
----------------------------------------------
January 2, January 3, December 29,
1998 1997 1995
-----------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 5,716,037 $ 1,783,890 $ (1,529,212)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 8,166,295 8,641,449 8,504,053
Loss on disposition of property and equipment 240,528 362,528 299,777
Net change in operating assets and liabilities:
Accounts receivable (436,176) (44,389) (153,975)
Prepaid expenses and other (21,599) 55,634 (42,883)
Accounts payable 60,998 544,919 (10,236)
Accrued interest (37,422) (650,465) (564,091)
Customer room deposits (10,728) 12,652 99,649
Other accrued expenses 685,091 (251,389) (307,487)
Investment in Summerfield Safety Company, net (155,252) (335,085) (301,762)
-------------------------------------------
Net cash provided by operating activities 14,207,772 10,119,744 5,993,833
Investing activities
Net change in other assets (14,355) (13,780) 1,853,322
Increase in replacement fund (2,886,358) (2,684,379) (2,455,147)
Withdrawals from replacement fund 3,203,342 4,412,010 1,496,224
Proceeds from disposition of property and equipment 41,782 43,661 84,238
Additions to property and equipment (4,058,199) (5,133,183) (2,122,901)
-------------------------------------------
Net cash used in investing activities (3,713,788) (3,375,671) (1,144,264)
Financing activities
Payment of mortgage payable (2,340,487) (3,850,243) (3,159,243)
Payment of capital lease (133,815) (113,210) (97,343)
Capital contributions 1,190,121 2,380,243 2,380,244
Capital distributions (8,576,350) (5,201,095) (4,392,677)
-------------------------------------------
Net cash used in financing activities (9,860,531) (6,784,305) (5,269,019)
Increase (decrease) in cash and cash equivalents 633,453 (40,232) (419,450)
Cash and cash equivalents at beginning of year 6,247,374 6,287,606 6,707,056
-------------------------------------------
Cash and cash equivalents at end of year $ 6,880,827 $ 6,247,374 $ 6,287,606
===========================================
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
SC Suites Summerfield Partnerships
Combined Financial Statements
Statements of Cash Flows (continued)
Year ended
-----------------------------------------
January 2, January 3, December 29,
1998 1997 1995
-----------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $12,105,688 $13,382,753 $14,356,998
Supplemental disclosure of non-cash activities:
Capital lease obligation incurred for equipment $ 132,480 $ 67,280 $ 595,363
</TABLE>
Disclosure of accounting policy
For purposes of the statements of cash flows, the Partnerships consider cash and
cash equivalents to include currency on hand, demand deposits and short-term
investments with maturities of three months or less. Cash and cash equivalents
do not include the replacement fund consisting primarily of an interest-bearing
money market account since these funds are used primarily to replace or acquire
capital assets.
See accompanying notes.
F-8
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
1. Significant Accounting Policies
Organization
The accompanying combined financial statements include the accounts of the
following limited partnerships under common ownership with each majority-owned
by SC Suites Corp.:
Atlanta Buckhead Summerfield Associates, L.P.
Atlanta Perimeter Summerfield Associates, L.P.
Chatsworth Summerfield Associates, L.P.
Dulles Summerfield Associates, L.P.
Malvern Summerfield Associates, L.P.
Orlando/Cypress Pointe Summerfield Associates, L.P.
Orlando International Summerfield Associates, L.P.
Princeton Summerfield Associates, L.P.
San Bruno Summerfield Associates, L.P.
San Jose Summerfield Associates, L.P.
Schaumburg Summerfield Associates, L.P.
Somerset Summerfield Associates, L.P.
Sunnyvale Summerfield Associates, L.P.
Torrance Summerfield Associates, L.P.
Westport Summerfield Associates, L.P.
The combined entities will hereinafter collectively be referred to as the
Partnerships. All significant inter-partnership accounts and transactions have
been eliminated.
The Partnerships were formed at various dates ranging from December 19, 1988 to
July 18, 1990 to develop, construct and operate all-suite temporary lodging
facilities, throughout the country, known as Summerfield Suites Hotels (the
Hotels). The Partnerships commenced operations on various dates ranging from
September 15, 1989 to October 1, 1993. The original partners (sometimes referred
to as Summerfield Partners) included Summerfield Suites Holding Corporation
(Holding Corporation) as general partner, and SF Hotel Company, L.P. (SFHC) and
various individuals as limited partners. On dates ranging from December 15, 1989
to January 28, 1993, the Partnerships amended and restated their limited
partnership agreements (Partnership Agreements), and admitted SC Suites Corp.
(SCS) as a general partner.
F-9
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
1. Significant Accounting Policies (continued)
Fiscal Year
The Partnerships' fiscal year end is the Friday closest to December 31. The
Partnerships' fiscal years ended January 2, 1998, January 3, 1997 and December
29, 1995 include 52, 53 and 52 weeks of operations, respectively.
Concentration of Credit Risk
The Partnerships' financial instruments exposed to concentration of credit risk
consist primarily of cash, replacement funds and accounts receivable. The
Partnerships provide credit to a large number of individual and corporate
customers with no individual customer representing a significant portion of
revenues or accounts receivable. The Partnerships do not require collateral or
other security against accounts receivable. The Partnerships place their funds
into high credit quality financial institutions, and at times, such funds may be
in excess of the federal depository insurance limit.
Replacement Fund
Replacement funds, consisting of interest-bearing money market accounts, are
maintained by the Partnerships for the primary purpose of funding the
replacement of, and additions to, furniture, fixtures, equipment and other
capital assets. An amount equal to 4% of the gross revenues of the Hotels, as
defined, is required to be deposited into the replacement funds on an annual
basis.
Property and Equipment
Depreciation is computed using both straight-line and accelerated methods over
the estimated useful lives of the related assets. Useful lives are as follows:
Buildings and components 31-39 years
Furniture, fixtures and equipment 5-15 years
Property and equipment include interest costs and property taxes incurred during
the construction period as well as loan fees and closing costs directly related
to the
F-10
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
1. Significant Accounting Policies (continued)
development and construction of the Hotels. Normal repairs and maintenance are
charged to expense as incurred; betterments and replacements are capitalized.
Deferred Loan Costs
Loan fees, closing and other costs incurred in obtaining mortgage financing have
been capitalized and are amortized over the term of the mortgages payable.
Other Assets
Other non-current assets consist primarily of purchased software which is
amortized over a three-year period and long-term deposits.
Income Taxes
The accompanying financial statements do not include a provision for income
taxes because the Partnerships are not taxpaying entities. Each partner includes
its proportionate share of the Partnerships' taxable income or loss in its
individual tax returns. Differences between income or loss reported for
financial reporting and income tax purposes primarily result from certain costs
capitalized for reporting purposes and expensed for tax purposes and certain
costs capitalized for both reporting and tax purposes, but amortized using
different methods and useful lives.
Financial Instruments
The Partnerships' financial instruments consist of cash, replacement fund,
accounts receivable and notes payable for which the carrying values approximate
fair values.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-11
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
2. Related Party Transactions
The following represents related party expenses incurred during the years ended
January 2, 1998, January 3, 1997 and December 29, 1995:
Year Ended
-----------------------------------------------
January 2, January 3, December 29, Related
1998 1997 1995 Party
-----------------------------------------------
Management fees $2,718,573 $2,556,634 $2,326,815 SSMC
Primary incentive management
fees 2,410,255 2,240,990 1,994,324 SSMC
Secondary incentive management
fees 3,044,862 3,834,692 3,236,807 SSMC
Accounting fees 443,625 429,000 409,501 SSMC
Franchise fees 472,311 -- -- SSMC
Marketing fees 1,577,263 1,405,431 1,257,727 SSMA
Insurance 413,290 284,174 78,165 SSC
Management Agreement
The Partnerships have entered into separate management agreements with
Summerfield Suites Management Company, L.P. (SSMC) to manage and operate the
Hotels. As manager and operator, SSMC is to receive a base management fee equal
to 4% of gross revenues of the Hotels. In addition, SSMC may receive incentive
management fees (IMFs) with two components: (a) the "Primary IMF" and (b) the
"Secondary IMF." These fees are equal to 7 1/2% of the net operating profit of
the Hotels, as defined. SSMC's right to receive the fees shall be cumulative;
however, the payment of the fees is subject to deferral as provided in the
agreement. The Primary IMF is accrued as an expense on an annual basis as
earned. The Secondary IMF is recorded as an expense in the period prior to which
such amounts are expected to be paid or, at the time the Hotels are sold or
refinanced, as payment of the Secondary IMF is contingent upon the Hotels
attaining certain cash flow objectives.
Payment of the Secondary IMF is to be made only after net available cash has
been distributed to repay other priority payments as outlined in Note 5. During
the years ended January 2, 1998, January 3, 1997 and December 29, 1995, the
Partnerships incurred
F-12
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
2. Related Party Transactions (continued)
Secondary IMFs of $3,044,862, $3,834,692 and $3,236,807, respectively. At
January 2, 1998 and January 3, 1997, SSMC had earned cumulative, unrecorded and
unpaid Secondary IMFs of $1,699,329 and $2,333,935 respectively. These Secondary
IMFs will be charged to expense in the future when the contingencies for payment
have been substantially removed.
Franchise Fees
During 1997, the Partnerships entered into separate franchise agreements with
SSMC which allow them to operate as "Summerfield Suites Hotels." Under the
agreements, the Hotels pay SSMC a fee ranging from 1% to 4% of the gross suite
revenues.
Marketing Fees
The Hotels pay a fee equal to 2 1/2% of their gross suite revenues to the
Summerfield Suites Marketing Association (SSMA), which is administered by SSMC.
SSMA provides general advertising and marketing services for all Summerfield
Suites Hotels.
Development Agreement
Summerfield Suites Development Company, L.C. (SSDC), an affiliate, was
responsible for managing the construction of an addition to the San Jose
Summerfield Associates, L.P. Hotel (SJSA). For such services, SJSA agreed to pay
SSDC a development fee of $117,600. As of January 2, 1998 and January 3, 1997,
$117,600 and $88,200 of this fee has been earned and paid, respectively. This
amount has been capitalized as property and equipment in the accompanying
balance sheets.
3. Mortgages Payable
The Partnerships entered into separate loan agreements with various lenders
(primary lenders), which provide for maximum borrowings of $151,155,668.
Pursuant to the agreements, the Partnerships have several options of selecting
interest rates. The rates are defined in the agreements and essentially are
determined by the primary lenders' applicable base rates for certificates of
deposit, Eurodollar rates and Federal Funds rates. In addition, the Partnerships
have the right to convert, from time to time, any portion
F-13
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
3. Mortgages Payable (continued)
or all of the loans to fixed rates as determined by the lenders at the time of
the individual Partnership's election to convert such loan amounts. The election
of interest rates may be for period intervals of one, three, six, or twelve
months or three years, with the exception that once a fixed-rate election is
effective, it will remain in effect until maturity.
Interest (ranging from 6.99% to 7.19% at January 2, 1998, and from 6.45% to
6.52% at January 3, 1997) is payable monthly. The loans have maturities ranging
from March 26, 1998 to September 30, 1998, and are secured by substantially all
of the Partnerships' assets and contract rights.
The Partnerships intend to refinance the full amount of the mortgages payable on
a long-term basis during 1998. The Partnerships are currently reviewing various
options for such refinancing but have not yet entered into any financing
agreements. Accordingly, the mortgages payable balance has been classified in
the accompanying balance sheets as a current liability.
4. Subordinated Loans
SCS has provided subordinated loans aggregating $24,688,762 to the Partnerships,
which remain outstanding at January 2, 1998. The individual Partnership
Agreements provide the subordinated loan is repayable solely out of the proceeds
of a sale, refinancing or liquidation of the Hotels, and interest payments shall
be required only from the Partnerships' net available cash as outlined in Note
5. The subordinated loan agreements, as amended, provide the loans shall bear
interest at the greater of the rate equal to the average interest rate accrued
on the mortgages payable to the primary lenders (primary interest rate) or the
preferred return rate (ranging from 10.0% to 10.5% at January 2, 1998, and
January 3, 1997); however, the payment of such interest is subject to two
different preference levels based on net available cash. The first level of
interest (primary interest) is payable from the first priority of net available
cash. The primary interest is generally paid on a monthly basis. The second
level of interest (incremental interest), which represents the difference
between the primary interest and the preferred return rate, stands behind the
Primary IMF in order of payment priority. Interest on the subordinated loans is
charged to expense as incurred based on the applicable rate in effect during the
period. The subordinated loans are secured by substantially all of the
Partnerships' assets and contract rights; however, their lien is subordinate to
that of the primary lenders.
F-14
<PAGE>
5. Distribution to Partners
The Partnerships' net available cash, as defined, will be distributed from time
to time, generally in the following manner:
o First, to pay any accrued and unpaid primary interest on the
subordinated loans
o next, any accrued and unpaid Primary IMFs
o next, any unpaid incremental interest and preferred returns, as
defined,
o next, any accrued and unpaid interest and principal repayment in
connection with special capital loans should they be required
o next, any accrued and unpaid Secondary IMFs and
o next, pari passu to the partners in proportion to their respective
residual percentage interests.
In the event of a sale, refinancing or liquidation of the Hotels, the
distributions are generally the same as previously described except the unpaid
minimum return amounts, subordinated loan amounts and unreturned capital
contributions are to be repaid prior to any accrued and unpaid Secondary IMFs
and any accrued and unpaid interest and principal repayment in connection with
special capital loans.
F-15
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
5. Distribution to Partners (continued)
Unpaid and unaccrued minimum returns were as follows:
<TABLE>
<CAPTION>
SC Suites Corp.
----------------------------
Subordinated Summerfield
Loan Capital Partners
------------------------------------------
<S> <C> <C> <C>
Unpaid and unaccrued minimum returns at
December 29, 1995 $ 2,434,505 $ 6,806,900 $ 589,026
Minimum returns 3,011,354 3,976,795 444,729
Interest incurred (2,624,848) -- --
Distributions -- (4,554,539) (253,733)
----------- ----------- -----------
Unpaid and unaccrued minimum returns at
January 3, 1997 2,821,011 6,229,156 780,022
Minimum returns 2,954,535 4,090,786 496,361
Interest incurred (2,575,323) -- --
Distributions -- (4,486,906) (370,748)
----------- ----------- -----------
Unpaid and unaccrued minimum returns at
January 2, 1998 $ 3,200,223 $ 5,833,036 $ 905,635
=========== =========== ===========
</TABLE>
At January 2, 1998 and January 3, 1997, the Partnerships had paid distributions
to Summerfield Partners in excess of the minimum return by $1,611,788 and
$475,010, respectively. In addition, at January 2, 1998 and January 3, 1997 the
Partnerships had paid distributions to SC Suites Corp. in excess of the minimum
return by $2,613,817 and $31,899, respectively.
6. Allocation of Income and Loss
Income and loss are allocated among the partners in accordance with the
provisions of the individual Partnership Agreements. In general, income and loss
are allocated based on the respective residual percentage interests of the
partners. However, the first priority for the allocation of income is in
proportion to, and to the extent of, the amount by which the cumulative
allocation of losses previously made to the partners plus certain distributions
to the partners, which are in effect distributions of preference returns, exceed
the cumulative income previously allocated to the partners.
F-16
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
7. Investment in Summerfield Safety Company
Each of the Partnerships are partners in Summerfield Safety Company (SSC). SSC
was formed as a means to provide a form of self-funded workers' compensation
program for its partners, all of which are direct or indirect affiliates of
Summerfield Hotel Corporation (SHC). SSC provides a risk-sharing arrangement for
its partners as it is responsible for paying all workers' compensation claims
and related expenses for its partners. SSC maintains coverage for losses in
excess of $250,000 per occurrence and $850,000 in aggregate. The Partnerships
record their pro rata share of the losses incurred by SSC at the end of each
four-week accounting period based on their proportionate share of SSC's total
capital at the beginning of the measurement period. The losses are in substance
expenses related to the management of the Partnerships' workers' compensation
risks and, accordingly, are included in operating expenses in the accompanying
combined statements of operations. The Partnerships make capital contributions
to SSC on a formula basis which is based on the payments the Partnerships would
be required to make if they were to be participants in local state workers'
compensation pools.
At January 2, 1998, and January 3, 1997, the Partnerships' pro rata investment
interest in SSC was approximately 49.27% and 59.94%, respectively.
An analysis of activity of the Partnerships' combined investment is as follows:
January 2, January 3,
1998 1997
---------------------------
Balance at beginning of year $ 636,847 $ 301,762
Contributions 568,542 619,259
Share of loss allocation (413,290) (284,174)
--------- ---------
Balance at end of year $ 792,099 $ 636,847
========= =========
The principal assets of SSC at January 2, 1998 and January 3, 1997 were cash and
cash equivalents.
F-17
<PAGE>
SC Suites Summerfield Partnerships
Combined Financial Statements
Notes to Combined Financial Statements
Years ended January 2, 1998, January 3, 1997 and December 29, 1995
8. Capital Leases
The Partnerships have entered into agreements to lease certain guest
transportation and entertainment equipment recorded as a capital leases.
Property and equipment include the following property under capital leases:
<TABLE>
<CAPTION>
January 2, 1998 January 3, 1997
-------------------------------------
<S> <C> <C>
Furniture, fixtures and equipment $ 757,779 $ 650,707
Less accumulated depreciation (426,649) (313,056)
--------- ---------
$ 331,130 $ 337,651
========= =========
</TABLE>
Depreciation expense for the property under capital leases for the years ended
January 2, 1998, January 3, 1997 and December 29, 1995 was $132,862, $153,014
and $168,117, respectively.
Following is a schedule of future minimum lease payments under capital leases,
together with the present value of the net minimum lease payments, as of January
2, 1998:
1998 $193,269
1999 164,908
2000 103,559
2001 57,791
2002 6,000
--------
Total remaining lease payments 525,527
Less amount representing interest 74,772
--------
Present value of net minimum lease payments 450,755
Less current portion 154,346
--------
Obligation under capital lease - noncurrent portion $296,409
========
F-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSPITALITY PROPERTIES TRUST
Date: April 15, 1998 By: /s/Thomas M. O'Brien
Thomas M. O'Brien, Treasurer and
Chief Financial Officer
EXHIBIT 23
Consent of Independent Public Accountants
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-43573) of Hospitality Properties Trust and in the related Prospectus
of our report dated February 3, 1998, with respect to the combined financial
statements of SC Suites Summerfield Partnerships included in its Current Report
on Form 8-K dated April 15, 1998, filed with the Securities and Exchange
Commission.
/s/Ernst & Young LLP
Wichita, Kansas
April 15, 1998
Exhibit 99
March 23, 1998
FOR IMMEDIATE RELEASE For More Information Contact:
John G. Murray, President or
Thomas M. O'Brien, CFO
(617) 964-8389
HPT Acquires
15 Summerfield Suites(R) Hotels
for $240 Million Investment
------------------------------------------------------------------
Newton, MA: Hospitality Properties Trust (NYSE:HPT) today announced
that it has completed the purchase and lease back of 15 Summerfield Suites(R)
hotels from affiliates of Summerfield Hotel Corporation, Inc. ("Summerfield")
for approximately $240 million. The 15 hotels contain a total of 1,822 suites
(2,766 bedrooms, 1,822 living rooms and fully equipped kitchens) and are located
in major metropolitan markets in the following eight states: California (5),
Florida (2), Georgia (2), Illinois, Missouri, New Jersey (2), Pennsylvania and
Virginia. Summerfield is a privately owned hotel company based in Wichita, KS
which currently operates 38 hotels and has another 15 under development.
Summerfield Suites(R) hotels are considered upper upscale hotels by Smith Travel
Research. In 1997 these 15 hotels achieved an average occupancy of 81% and an
average daily rate of $117.22. On average these hotels are only six (6) years
old and have recently been fully renovated.
These 15 hotels will initially continue to be operated by Summerfield
under long-term leases. In a related transaction, Summerfield and Patriot
American Hospitality (NYSE:PAH, "Patriot") have signed a definitive agreement
under which Patriot will acquire Summerfield in a transaction expected to be
completed later this year. Although HPT's acquisition was not contingent on the
closing of the Patriot-Summerfield transaction, when and if it does close a
Patriot subsidiary will be HPT's tenant and a subsidiary of Wyndham
International will be the manager of this portfolio.
The minimum rent payable by Summerfield to HPT is $25 million per year.
In addition, the lease provides for additional rent equal to a percentage of
gross revenue increases at these all suite
<PAGE>
hotels beginning in 1999. Like all of HPT's leases, the Summerfield lease is
structured as a portfolio transaction so that each of the 15 hotels is subject
to cross default with each other hotel, renewal options are exercisable on an
all or none basis, and required refurbishment reserves may be used on a combined
basis. HPT funded these acquisitions using cash on hand and borrowings under its
line of credit.
John Murray, president of Hospitality Properties Trust, commented:
"HPT is pleased to be making this investment in Summerfield Suites(R) hotels and
adding Summerfield as a Tenant. Summerfield Suites(R) hotels compete in the
upscale, all suite and extended stay segments of the lodging industry and cater
to business and leisure travelers. These are high quality, well managed one and
two bedroom suite hotels in attractive locations in primary markets. This
transaction increases our tenant and geographic diversity, while maintaining the
brand strength and transaction structure which sets HPT apart from most other
hotel REITs. HPT's hotel portfolio remains among the most modern, high quality
grouping of hotels among all hotel REITs. We expect this transaction to have an
immediate positive impact on cash available for distribution ("CAD")."
HPT is a real estate investment trust headquartered in Newton, MA,
which invests in hotels which are leased to unaffiliated hotel operating
companies. Including the transaction described herein, HPT has investments and
commitments exceeding $1.6 billion in 150 hotels located in 35 states.
This press release contains forward looking statements which involve
risks and uncertainties. Although HPT believes its expectations are based upon
reasonable assumptions, no assurance can be provided that anticipated results
will occur.
(end)
