Item 3. Legal Proceedings
Although in the ordinary course of business the Company is or may become involved in legal proceedings, the Company has a limited operating history and is not aware of any material pending legal proceeding affecting the Company or any of the Hotels for which it might become liable.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Shares are traded on the New York Stock Exchange (symbol: HPT). The following table sets forth for the periods indicated the high and low closing sale prices for the Shares as reported in the New York Stock Exchange Composite Transactions reports since the Company's initial public offering.
1995 High Low ---- ---- ---
August 22 to September 30 $ 27 $ 24 1/2 Fourth Quarter 26 3/4 24 3/8
1996 High Low ---- ---- ---
First Quarter $ 27 7/8 $ 25 1/2 Second Quarter 27 24 5/8 Third Quarter 26 7/8 25 Fourth Quarter 29 1/2 25
1997 High Low ---- ---- ---
First Quarter $ 33 $ 28 3/8 Second Quarter 32 1/8 29 3/8 Third Quarter 35 15/16 30 7/16 Fourth Quarter 38 5/16 33 1/16
The closing price of the Shares on the New York Stock Exchange on March 11, 1998, was $35.00 per Share.
As of March 6, 1998, there were 1,007 Shareholders of record and the Company estimates that as of such date there was an excess of 75,000 beneficial owners of the Shares.
Information about the Company's dividends paid is summarized in the table below. Dividends are generally paid in the quarter following the quarter to which they relate.
Dividend Annualized Per Share Dividend Rate --------- ------------- ----
Third Quarter $0.24 $2.20 Fourth Quarter 0.55 2.20
----
First Quarter $0.58 $2.32 Second Quarter 0.58 2.32 Third Quarter 0.59 2.36 Fourth Quarter 0.59 2.36
----
First Quarter $0.59 $2.36 Second Quarter 0.61 2.44 Third Quarter 0.62 2.48 Fourth Quarter 0.63 2.52
All dividends declared have been paid. The Company intends to continue to declare and pay future dividends on a quarterly basis.
In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Code, the Company is required to make distributions to shareholders which annually will be at least 95% of the Company's "real estate investment trust taxable income" (as defined in the Code). All distributions will be made by the Company at the discretion of the Board of Trustees and will depend on the earnings of the Company, cash available for distribution, the financial condition of the Company and such other factors as the Board of Trustees
deems relevant. The Company intends to distribute substantially all of its "real estate investment trust taxable income" to its shareholders.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected financial and operating data on an historical and a pro forma basis for the Company for the years ended December 31, 1997, 1996 and 1995. The pro forma data for 1995 is unaudited and presented as if the Company's formation transactions, primarily the acquisition and leasing of the 37 hotels acquired in 1995, the Company's initial public offering of Shares, and certain other transactions described below had been consummated as of the date or for the period presented. The pro forma data is not necessarily indicative of what the actual financial position or results of operations would have been, nor do they purport to represent the financial position or results of operations for future periods.
Item 7.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Overview
The Company was organized on February 7, 1995 and commenced operations on March 24, 1995 with the acquisition of its first 21 hotels. The Company completed its initial public offering of shares and acquired an additional 16 hotels on August 22, 1995. Because the Company did not operate for the entire year 1995, the Company believes it is meaningful to an understanding of its operations to discuss the Company's 1995 pro forma results of operations as well as its historical results of operations.
The following discussion should be read in conjunction with the financial statements and the notes thereto included elsewhere herein. Pro forma results and percentage relationships set forth herein may not be indicative of the future operations of the Company.
Historical and Pro Forma Results of Operations
Year Ended December 31, 1997 versus Year Ended December 31, 1996
The Company's assets increased to $1,313 million as of December 31, 1997 from $872 million as of December 31, 1996. The increase resulted primarily from hotel acquisitions completed in 1997.
In January 1997 the Company purchased a full service hotel in Salt Lake City, Utah for $44.0 million. In March 1997 the Company agreed to acquire 10 Residence Inn by Marriott(R) hotels (1,276 suites) and four Courtyard by Marriott(R) hotels (543 rooms) for $149 million and acquired all these properties in 1997 after they opened. In September 1997 the Company agreed to acquire from Marriott six Courtyard by Marriott(R) hotels (829 rooms) and three Residence Inn by Marriott(R)) hotels (507 suites) for $129 million. As of March 11, 1998, four of these hotels have been acquired; the remaining five are expected to be acquired periodically during the remainder of 1998. In November 1997 the Company acquired 14 Sumner Suites(R) hotels (1,641 suites) for $140 million. In November 1997 the Company agreed to acquire 15 Candlewood(R) hotels for $100 million. Five of these 15 Candlewood(R) hotels were acquired in 1997. An additional nine properties were acquired in January and March 1998. The remaining hotel is expected to be acquired during 1998. These acquisitions were funded through the use of cash on hand, borrowings on the Company's line of credit, and the net proceeds from the offering of 12,000,000 common shares of beneficial interest ("Shares") in December 1997.
Total revenues in 1997 were $114.1 million versus 1996 revenues of $82.6 million. Total revenues were comprised principally of base and percentage rent of $98.6 million and FF&E reserve income of $14.6 million in 1997 versus $69.5 million and $12.2 million, respectively, in the 1996 period. The Company's results are reflective of the full year impact of 45 hotels acquired in 1996 and the impact of the 1997 completion of 37 of the 53 hotel acquisitions announced in 1997. During 1997 the Company earned percentage rent revenue of $2.5 million ($0.09/Share) versus $1.1 million ($0.05/Share) in 1996, as a result of increases in gross hotel revenues at the Company's hotels.
Total expenses in 1997 were $55.0 million (including interest expense and depreciation and amortization of real estate assets of $15.5 and $31.9 million, respectively) versus 1996 expenses of $31.0 million (including interest expense and depreciation and amortization of $5.6 million and $20.4 million, respectively). A portion of the hotels purchased in 1997 were temporarily financed with proceeds from the Company's line of credit which was ultimately repaid with the proceeds of the Company's 12,000,000 Share offering in December 1997. These line of credit proceeds, plus the amounts outstanding on certain prepayable mortgage notes issued by a subsidiary of the Company, gave rise to interest expense of $15.5 million in 1997 versus $5.6 million in 1996 when amounts outstanding under the Company's line of credit were smaller, were outstanding for shorter periods and during which the Company's mortgage notes were not in place for the entire period. The substantial increase in the number of hotels owned by the Company has also proportionately increased the Company's general expense levels, including depreciation and general and administrative expenses. The Company incurred $713,000 of costs in 1997 in connection with a terminated acquisition attempt.
Net income in 1997 was $59.2 million ($2.15/Share) and cash available for distribution ("CAD") was $79.3 million ($2.88/Share) versus $51.7 million ($2.23 per Share) and CAD of $60.8 million ($2.62/Share). Growth in net income and CAD is primarily related to the effects of acquisitions in 1996 and 1997.
Cash flow provided by (used for) operating, investing and financing activities was $81.2 million, ($347.3 million) and $309.7 million, respectively, for the year ended December 31, 1997.
Year Ended December 31, 1996 versus Pro Forma Year Ended December 31, 1995
The Company's assets increased to $871.6 million as of December 31, 1996 from $338.9 million at December 31, 1995. The increase primarily resulted from three hotel portfolio acquisitions completed during 1996. In March and April of 1996, the Company acquired 16 Courtyard by Marriott(R) hotels for $176.4 million and 18 Residence Inn(R) by Marriott hotels for $172.2 million. In May 1996, the Company acquired 11 Wyndham Garden(R) hotels for $135.3 million. These acquisitions were funded through the use of cash on hand, borrowings on the Company's line of credit, and the net proceeds from the offering of 14,250,000 Shares in April 1996.
Total revenues in 1996 were $82.6 million versus pro forma 1995 revenue of $39.9 million. Total revenues were comprised principally of base and percentage rent of $69.5 million and FF&E reserve income of $12.2 million in 1996 versus $33.3 million and $6.4 million, respectively, in the pro forma period. The Company's results of operations in 1996 are reflective of the growth in the number of owned hotels to 82, from 37 at year end 1995. The leases for the Company's 82 hotels at December 31, 1996 call for base rent of $81.3 million annually, versus $32.9 million for the 37 hotels owned at December 31, 1995. During 1996, the Company earned revenue of approximately $1.1 million ($0.05/Share) in percentage rents from its portfolio of 53 Courtyard hotels, reflective of continued increases in Total Hotel Sales at these properties.
Total expenses in 1996 were $31.0 million, including interest expense and depreciation and amortization of $5.6 million and $20.4 million, respectively, versus pro forma 1995 expenses of $11.8 million, including depreciation and amortization of $9.2 million. A portion of the hotels purchased in 1996 were financed with proceeds from the Company's line of credit which was ultimately repaid with prepayable floating rate mortgages. Such debt financing in 1996 gave rise to the $5.6 million of interest expense referred to above, versus zero for pro forma 1995, when the Company did not use third-party debt. The substantial increase in the number of hotels owned by the Company has also proportionately increased the Company's general expense levels, including depreciation and amortization and general and administrative expenses.
Net income in 1996 was $51.7 million ($2.23 per Share) and CAD for the period was $60.8 million ($2.62 per Share), based in both cases on average outstanding Shares for the period of 23,170,000. This compares with pro forma 1995 net income of $28.0 million ($2.22 per Share) and CAD of $30.8 million ($2.45 per Share), based in both cases upon 12,600,900 outstanding Shares. This 7% growth in CAD is primarily related to the effects of the Company's 1996 hotel acquisitions and related financing activity as well as growth in percentage rent to $1.1 million in 1996 from $0.4 million in the 1995 pro forma period. During April 1996, the Company completed an offering of 14,250,000 Shares raising net proceeds of approximately $358 million to fund its acquisitions and more than doubling its equity capitalization and shares outstanding.
Cash flow provided by (used for) operating, investing and financing activities was $61.7 million, ($448.7 million) and $422.9 million, respectively, for the year ended December 31, 1996.
February 7, 1995 (Inception) Through December 31, 1995
Total revenues from Inception through December 31, 1995 were $23.6 million, which included base and percentage rent of $19.5 million and FF&E reserve income of $4.0 million. Total expenses for the period were $12.3 million, including interest expense and depreciation and amortization of $5.0 million and $5.8 million, respectively. Net income for the period was $11.3 million ($2.51 per Share) and CAD for the period was $13.2 million ($2.91 per Share), based in both cases on average outstanding Shares for the period of 4,515,000.
From Inception until completion of its initial public offering on August 22, 1995, the Company was a 100% owned subsidiary of Health and Retirement Properties Trust ("HRP") and was initially capitalized with $1 million of equity and $163.3 million of debt. The debt was provided by HRP at rates which were lower than the market rates which the Company would have paid on a stand alone basis. Accordingly, the Company does not believe that its results of operations while it was a wholly owned subsidiary of HRP are comparable to subsequent periods.
Cash flow provided by (used for) operating, investing and financing activities was $14.1 million, ($303.7 million) and $291.6 million, respectively, for the year ended December 31, 1996.
Pro Forma Year Ended December 31, 1995
The pro forma results of operations assume that the Company's formation transactions, the initial public offering of Shares and the acquisition and leasing of the 37 hotels and related transactions all occurred on January 1, 1995. On this pro forma basis, total revenues would have been $39.9 million (principally base and percentage rents of $33.3 million and FF&E reserve income of $6.4 million). Total expenses would have been $11.8 million (including depreciation and amortization of $9.2 million and general and administrative expenses of $2.6 million). Net income would have been $28.0 million or $2.22 per Share, and CAD would have been $30.8 million or $2.45 per Share, based in both cases upon 12,600,900 Shares outstanding.
Liquidity and Capital Resources
The Company's primary source of cash to fund its dividends, interest and day to day operations is the base and percentage rent it receives. Base rent is paid monthly in advance and percentage rent is paid either monthly or quarterly in arrears. This flow of funds from rent has historically been sufficient for the Company to pay dividends, interest and meet day to day operating expenses. The Company believes that its operating cash flow will be sufficient to meet its operating expenses, interest and dividend payments.
In order to fund acquisitions and to accommodate occasional cash needs which may result from timing differences between the receipt of rents and the need to pay dividends or operating expenses, the Company has entered into a line of credit arrangement with DLJ Mortgage Capital, Inc. ("DLJMC"). The line of credit (the "DLJMC Line of Credit") is for up to $200 million, all of which was available at December 31, 1997. During 1997 the Company expanded its credit facilities with DLJMC temporarily to provide up to $455 million. Drawings under the DLJMC Line of Credit are secured by first mortgage liens on certain of the Company's hotels. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. The DLJMC Line of Credit matures on December 31, 1998. Interest on borrowings under the DLJMC Line of Credit are payable until maturity at a spread above LIBOR; and interest during the extended term, if any, will be set at market rates at the time the loan is extended.
During 1996, subsidiaries of the Company issued $125 million of mortgage notes (the "Secured Notes") secured by such subsidiaries' assets, including 18 Residence Inn by Marriott(R) and 11 Wyndham Garden(R) hotels. The mortgage loan was financed by the issuance of $125 million commercial mortgage pass-through certificates through a trust created by another of the Company's subsidiaries. The certificates were sold in a Rule 144A private placement to institutional investors. The Secured Notes carried interest that floated with one-month LIBOR plus a spread and were due December 1, 2001, but could be prepaid by the Company at any time without penalty. In connection with this issuance of the Secured Notes, the Company entered into interest rate cap agreements for $125 million (notional amount) with a major financial institution which limit the Company's maximum interest rate exposure to 7.6925% on this debt. On March 2, 1998, the Secured Notes were prepaid in full.
The Company expects to use existing cash balances, borrowings under the DLJMC Line of Credit or other lines of credit and/or net proceeds of offerings of equity or debt securities to fund future hotel acquisitions. To the extent the Company borrows on a line of credit, the Company will explore various alternatives in both the timing and method of repayment of such amounts. Such alternatives may include incurring long term debt. On January 15, 1997, the Company's shelf registration statement for up to $2 billion of securities, including debt securities, was declared effective by the Securities and Exchange Commission (the "SEC"). An effective shelf registration statement enables the
Company to issue specific securities to the public on an expedited basis by filing a prospectus supplement with the SEC.
In February 1998 the Company issued $150 million of 7.0% senior unsecured notes due 2008. Net proceeds to the Company of approximately $148 million were used for general business purposes and, on March 2, 1998 to repay the Secured Notes in full.
Also in February 1998 the Company issued an aggregate 2,146,571 Shares in connection with three separate unit investment trust arrangements established by investment banks. These Shares were sold at market prices less an underwriting discount. The aggregate net proceeds of these Shares offerings ($71.1 million) will be used for the acquisition of additional hotels and for general business purposes.
At March 11, 1998 the Company had total commitments to purchase property of $88.7 million. Also at March 11, 1998 the Company had cash and cash equivalents of approximately $110 million.
The Company is in the process of negotiating with a commercial bank for an unsecured revolving credit facility. The Company expects to conclude negotiations and documentation during the first half of 1998, enter into a new unsecured revolving line of credit and terminate the DLJMC Line of Credit. No assurance can be given that a new credit facility will be available to the Company on acceptable terms.
Although there can be no assurance that the Company will consummate any debt or equity security offerings or other financings, the Company believes it will have access to various types of financing in the future, including debt or equity securities offerings, with which to finance future acquisitions.
Recent Developments
On March 19, 1998 the Company closed a new unsecured revolving credit facility of $250 million, arranged and fully underwritten by a commercial bank. The facility has a 4 year term and bears interest at LIBOR plus a spread based on the Company's senior debt ratings. The facility contains financial covenants requiring the Company to, among other things, maintain a debt to Asset Value (as defined) of no more than 50% and meet certain debt service coverage ratios (as defined).
On March 20, 1998 the Company completed a $240 million acquisition of 15 Summerfield Suites(R) hotels, containing 1,822 suites (2,766 rooms). These hotels are leased to the seller under a lease with an initial term through 2015 and four renewal terms of 12 years each. The lease requires base rent of $25 million annually and additional rent equal to a percentage of gross revenue increases beginning in 1999. The acquisition was funded with a $125 million borrowing under the Company's unsecured credit line discussed above and cash on hand.
Seasonality
The Company's Hotels have historically experienced seasonal differences typical of the hotel industry with higher revenues in the second and third quarters of calendar years compared with the first and fourth quarters. This seasonality is not expected to cause fluctuations in the Company's rental income because the Company believes that the revenues generated by its Hotels will be sufficient for the lessees to pay rents on a regular basis notwithstanding seasonal fluctuations.
Inflation
The Company believes that inflation should not have a material adverse effect on the Company. Although increases in the rate of inflation may tend to increase interest rates which the Company may be required to pay for borrowed funds, the Company has a policy of obtaining interest rate caps in appropriate circumstances to protect it from interest rate increases. In addition, the Company's leases provide for the payment of percentage rent to the Company based on increases in total sales, and such rent should increase with inflation.
Certain Considerations
The discussion and analysis of the Company's financial condition and results of operations requires the Company to make certain estimates and assumptions and contains certain statements of the Company's beliefs, intent or expectation concerning projections, plans, future events and performance. The estimates, assumptions and statements, such as those relating to the Company's ability to expand its portfolio, performance of its assets, the ability to pay dividends, its tax status as a "real estate investment trust," the ability to appropriately balance the use of debt and equity and to access capital markets, depend upon various factors over which the Company and/or the Company's lessees have or may have limited or no control. Those factors include, without limitation, the status of the economy, capital markets (including prevailing interest rates), compliance with the changes to regulations within the hospitality industry, competition, changes to federal, state and local legislation and other factors. The Company cannot predict the impact of these factors, if any. However, these factors could cause the Company's actual results for subsequent periods to be different from those stated, estimated or assumed in this discussion and analysis of the Company's financial condition and results of operations. The Company believes that its estimates and assumptions are reasonable and prudent at this time.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to the consolidated financial statements and schedule of Hospitality Properties Trust included in Item 7 of the Company's Current Report on Form 8-K dated February 11, 1998. The financial statements for HMH HPT Courtyard, Inc., a significant lessee as of January 3, 1997 and January 2, 1998 and for the two fiscal years ended January 2, 1998 and the period from March 24, 1995 (inception) to December 29, 1995, begin on Page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
The information in Part III (Items, 10, 11, 12 and 13) is incorporated by reference to the Company's definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of the Company's fiscal year.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedule and Reports on Form 8-K.
(a) Index to Financial Statements and Financial Statement Schedules
Exhibits:
3.1 Conformed Amended and Restated Declaration of Trust dated August 21, 1995 (Filed herewith) 3.2 Conformed Amendment dated June 2, 1997 (Filed herewith) 3.3 Conformed Articles Supplementary dated June 2, 1997 (Filed herewith) 3.4 Bylaws of the Registrant (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 4.1 Form of Share Certificate (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 4.2 Rights Agreement, dated as of May 20, 1997, between Hospitality Properties Trust and State Street Bank and Trust Company, as Rights Agent (including the form of Rights Certificate and the form of Articles Supplementary designating the Junior Participating Preferred Shares) (Incorporated by reference to the Company's Current Report on Form 8-K dated May 20, 1997) 4.3 Indenture dated as of February 25, 1998, between the Company and State Street Bank and Trust Company (Filed herewith) 4.4 Supplemental Indenture No. 1 dated as of February 25, 1998, between the Company and State Street Bank and Trust Company (Filed herewith) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters (Filed herewith) 10.1 Advisory Agreement(+) (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.2 Advisory Agreement by and between REIT Management & Research, Inc. and Hospitality Properties Trust dated January 1, 1998 (+) (Incorporated by reference to the Company's Current Report on Form 8-K dated February 11, 1998) 10.3 Hospitality Properties Trust 1995 Incentive Share Award Plan(+) (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.4 Form of Revolving Credit Agreement by and between the Company and DLJ Mortgage Capital, Inc., as amended and restated on December 29, 1995, as further amended by Amendment No. 1, dated February 26, 1996 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 10.5 Amendment, dated November 25, 1996 to the Revolving Credit Agreement, amended and restated on December 29, 1995, by and between the Company and DLJ Mortgage Capital, Inc. 1996 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 10.6 Amendment No. 3, dated November 14, 1997, to the Amended and Restated Credit Agreement, dated as of December 29, 1995, as amended, between the Company and DLJ Mortgage Capital, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.7 First Supplemental Credit Agreement, dated as of November 14, 1997, between the Company, as borrower, and DLJ Mortgage Capital, Inc. as lender (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.8 Second Supplemental Credit Agreement, dated as of November 14, 1997, between the Company, as borrower, and DLJ Mortgage Capital, Inc., as lender (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.9 Promissory Note in the amount of $125,000,000 dated as of November 25, 1996 from HPTRI Corporation and HPTWN Corporation to Column Financial Inc. (Incorporated by reference to the Company's Current Report on Form 8-K dated December 4, 1996) 10.10 Loan Agreement dated as of November 25, 1996 by and between HPTRI Corporation and HPTWN Corporation, as borrowers, and Column Financial Inc., as lender. (Incorporated by reference to the Company's Current Report on Form 8-K dated December 4, 1996) 10.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement from HPTRI Corporation, as Trustor, to Chicago Title Insurance Company, as Trustee, for benefit of Column Financial, Inc. (Incorporated by reference to the Company's Current Report on Form 8-K dated December 4, 1996)
10.12 Trust and Servicing agreement dated as of November 25, 1996 by and among Hospitality Properties Mortgage Acceptance Corp., as Depositor, AMRESCO Management, Inc., as Servicer, and The Chase Manhattan Bank, as Trustee (Incorporated by reference to the Company's Current Report on Form 8-K dated December 4, 1996) 10.13 Revolving Credit Agreement, dated as of March 19, 1998, among the Company, as borrower, the institutions party thereto from time to time as lenders, and Dresdner Bank AG, New York Branch and Grand Cayman Branch, as Agent (Filed herewith) 10.14 Investment Manager's Subordination Agreement, dated as of March 19, 1998, among REIT Management & Research, Inc., the Company and Dresdner Bank AG, New York Branch and Grand Cayman Branch (Filed herewith) 10.15 Purchase-Sale and Option Agreement dated as of February 3, 1995 by and among HMH Courtyard Properties, Inc., HMH Properties, Inc. and Hospitality Properties, Inc., as amended (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.16 Fifth Amendment to Purchase-Sale and Option Agreement dated February 26, 1996, by and between IIIT and IIMII Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 333-1433)) 10.17 Form of Courtyard Management Agreement between HMH Courtyard Properties, Inc., d/b/a HMH Properties, Inc. and Courtyard Management Corporation (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.18 Form of First Amendment to Courtyard Management Agreement between Courtyard Management Corporation and Hospitality Properties, Inc. and Consolidation Letter Agreement by and between Courtyard Management Corporation and Hospitality Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.19 Form of Lease Agreement between Hospitality Properties, Inc. and HMH HPT Courtyard, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.20 Form of Lease Agreement between HMH HPT Residence Inn, Inc. and Hospitality Properties Trust (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 333-1433)) 10.21 Form of Residence Inn Management Agreement between HMH Properties, Inc. and Residence Inn by Marriott(R), Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 333-1433)) 10.22 Lease Agreement by and between HPTSLC Corporation, as landlord, and WIIC Salt Lake Corporation, as tenant, dated January 1996 (Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996) 10.23 Purchase and Sale Agreement by and among Residence Inn by Marriott, Inc. and Courtyard Management Corporation, as sellers, and Hospitality Properties Trust, as purchaser, dated April 3, 1997 (Incorporated by reference to the Company's Current Report on Form 8-K dated April 3, 1997) 10.24 Form of Courtyard Lease Agreement by and between HPTMI Corporation and CR14 Corporation (Incorporated by reference to the Company's Current Report on Form 8-K dated April 3, 1997) 10.25 Form of Residence Inn Lease Agreement by and between HPTMI Corporation and CR14 Corporation (Incorporated by reference to the Company's Current Report on Form 8-K dated April 3, 1997) 10.26 Limited Rent Guaranty, dated April 3, 1997, by and among Marriott International, Inc., as guarantor, and Hospitality Properties Trust and HPTMI Corporation, as landlord (Incorporated by reference to the Company's Current Report on Form 8-K dated April 3, 1997) 10.27 Purchase and Sale Agreement, dated November 19, 1997, by and among Candlewood Hotel Company, Inc. and certain of its affiliates, as sellers, and the Company, as purchaser (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.28 Form of Candlewood Lease Agreement by and between a subsidiary of the Company, as landlord, and Candlewood Leasing No. 1 Inc., as tenant (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997)
10.29 Form of Guaranty Agreement by and among Candlewood Hotel Company, Inc., a subsidiary of the Company and the Company (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.30 Purchase and Sale Agreement, dated as of October 24, 1997, by and among ShoLodge, Inc. and certain of its affiliates, as sellers, and the Company, as purchaser (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.31 Lease Agreement, dated as of November 19, 1997, by and between HPT Suite Properties Trust, as landlord, and Suite Tenant, Inc., as tenant (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.32 Limited Guaranty Agreement, dated as of November 19, 1997, by and among Sholodge, Inc., HPT Suite Properties Trust and the Company (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.33 Purchase Agreement, dated as of October 10, 1997, by and among Residence Inn by Marriott, Inc. and Courtyard management Corporation, as sellers, and the Company, as purchaser (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.34 Form of Residence Inn Lease Agreement by and between HPTMI II Properties Trust and CR9 Tenant Corporation (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.35 Form of Courtyard Lease Agreement by and Between HPTMI II Properties Trust and CR9 Tenant Corporation (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.36 Limited Rent Guaranty, dated as of October 10, 1997, by and among Marriott International, Inc., the Company and HPTMI II Properties Trust (Incorporated by reference to the Company's Current Report on Form 8-K dated November 21, 1997) 10.37 Agreement of Purchase and Sale, dated as of March 18, 1998, between Patriot American Hospitality Partnership, L.P. and Chatsworth Summerfield Associates, L.P. (Filed herewith) 10.38 Assignment of Rights under Agreements of Purchase and Sale, dated as of March 18, 1998, by Patriot American Hospitality Partnership, L.P. to and for the benefit of HPTSHC Properties Trust (Filed herewith) 10.39 Agreement to Lease dated as of March 20, 1998 by and between HPTSHC Properties Trust and Summerfield HPT Lease Company, L.P. (Filed herewith) 12 Ratio of Earnings to Fixed Charges (Filed herewith) 21 Subsidiaries of the Registrant (Filed herewith) 23.1 Consents of Arthur Andersen LLP (Filed herewith) 23.2 Consent of Sullivan & Worcester LLP (included in Exhibit 8.1 to this Annual Report) 99 The Company's Current Report on Form 8-K dated February 11, 1998 (Filed herewith) - ------------------ (+) Management contract or compensatory plan or agreement.
(b) During the fourth quarter of 1997, the Company filed the following Current Reports on Form 8-K: (i) Current Report on Form 8-K dated November 11, 1997 relating to an agreement to acquire fifteen hotels (Items 5 and 7) (ii) Current Report on Form 8-K dated December 12, 1997 relating to (a) certain financial statements, (b) an underwriting agreement and (c) an opinion of counsel relating to certain tax matters (Item 7)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HMH HPT Courtyard, Inc.:
We have audited the accompanying balance sheets of HMH HPT Courtyard, Inc. (the "Company") as of January 2, 1998 and January 3, 1997, and the related statements of operations, shareholder's equity and cash flows for the fiscal years ended January 2, 1998 and January 3, 1997 and for the period March 24, 1995 (inception) through December 29, 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 the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company, as of January 2, 1998 and January 3, 1997, and the results of its operations and its cash flows for the fiscal years ended January 2, 1998 and January 3, 1997 and for the period March 24, 1995 (inception) through December 29, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C. February 27, 1998
See Notes to Financial Statements.
See Notes to Financial Statements.
See Notes to Financial Statements.
See Notes to Financial Statements.
HMH HPT COURTYARD, INC. NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
HMH HPT Courtyard, Inc. (the "Company") was incorporated in Delaware on February 7, 1995 as a whollyowned indirect subsidiary of Host Marriott Corporation ("Host Marriott"). The Company had no operations prior to March 24, 1995 (the "Commencement Date").
On the Commencement Date, affiliates of Host Marriott (the "Sellers") sold 21 Courtyard properties to Hospitality Properties Trust ("HPT"). On August 22, 1995, HPT purchased an additional 16 Courtyard properties from the Sellers. On March 22, 1996 and April 4, 1996, a total of 16 additional Courtyard properties were purchased by HPT for a total of 53 Courtyard hotels (the "Hotels"). The Sellers contributed the assets and liabilities related to the operations of such properties to the Company, including working capital advances to the manager, prepaid rent under leasing arrangements and rights to other assets as described in Note 2. Such assets have been accounted for at the historical cost.
Fiscal Year
The Company's fiscal year ends on the Friday nearest to December 31. Full year results for 1996 include 53 weeks versus 52 weeks for 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenues
Revenues represent house profit from the Hotels because the Company has delegated substantially all of the operating decisions relating to the generation of house profit from the Hotels to Marriott International, Inc. (the "Manager" or "Marriott International"). House profit reflects the net revenues flowing to the Company as lessee and represents total hotel sales less property level expenses excluding depreciation and amortization, real and personal property taxes, lease payments, insurance, contributions to the property improvement fund and management fees.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the revenues and expenses of a managed entity in its financial statements.
The Company is assessing the impact of EITF 97-2 on its policy of excluding the property-level revenues and operating expenses of its hotels from its statements of operations (see Note 6). If the Company concludes that EITF 97-2 should be applied to its hotels, it would include operating results of those managed operations in its financial statements. Application EITF 97-2 to financial statements as of and for the 52 weeks ended January 2, 1998, would have increased both revenues and operating expenses by approximately $103 million and would have had no impact on operating profit or net income.
Corporate Expenses
The Company operates as a unit of Host Marriott, utilizing Host Marriott's employees, centralized system for cash management, insurance and administrative services. The Company has no employees. All cash received by the Company is deposited in and commingled with Host Marriott's general corporate funds. Operating expenses and other cash requirements of the Company are paid by Host Marriott and charged directly or allocated to the Company. Certain general and administrative costs of Host Marriott are allocated to the Company, principally based on Host Marriott's specific identification of individual cost items and otherwise based upon estimated levels of effort devoted by its general and administrative departments to individual entities. In the opinion of management, the methods for allocating corporate, general and administrative expenses and other direct costs are reasonable. It is not practicable to estimate the costs that would have been incurred by the Company if it had been operated on a stand-alone basis, however, management believes that these expenses are comparable to the expected allocations by Host Marriott of general and administrative costs on a forward-looking basis.
Concentration of Credit Risk
The Company's largest asset is the security deposit (see Note 3) which constitutes 86% of the Company's total assets as of January 2, 1998. The security deposit is not collateralized and is due from HPT at the termination of the Lease.
Deferred Gain
Host Marriott contributed to the Company deferred gains relating to the sale of the 53 Courtyard properties to HPT in 1995 and 1996. The Company is amortizing the deferred gain over the initial term of the Lease, as defined below.
NOTE 2. LEASE COMMITMENTS
On the Commencement Date, the Company entered into a lease for 21 Courtyard properties. On August 22, 1995, the Company entered into a lease for an additional 16 Courtyard properties. On March 22, 1996 and April 4, 1996, the Company entered into a lease for an additional 16 Courtyard properties (collectively, the "Lease"). The initial term of the Lease expires in 2012. Thereafter, the Lease automatically renews for consecutive twelveyear terms at the option of the Company.
The Company is required to pay rents equal to aggregate minimum annual rent of $50,635,000 ("Base Rent"), and percentage rent equal to 5% of the excess of total hotel sales over base year total hotel sales ("Percentage Rent"). A pro rata portion of Base Rent is due and payable in advance on the first day of thirteen predetermined accounting periods. Percentage Rent is due and payable quarterly in arrears. Additionally, the Company is required to make payments when due on behalf of HPT for real estate taxes and other taxes, assessments and similar charges arising from or related to the Hotels and their operation, utilities, premiums on required insurance coverage, rents due under ground and equipment leases and all amounts due under the terms of the management agreements described below. The Company is also required to provide the Manager with working capital to meet the operating needs of the Hotels. The Sellers had previously made advances related to the Hotels and transferred their interest in such amounts to the Company in the amount of $3,984,000 and $1,116,000 in 1995 and 1996, respectively.
The Lease also requires the Company to escrow, or cause the Manager to escrow, an amount equal to 5% of the annual total hotel sales into an HPTowned furniture, fixture and equipment reserve (the "FF&E Reserve"), which is available for the cost of required replacements and renovation. Any requirements for funds in excess of amounts in the FF&E Reserve shall be provided by HPT ("HPT Fundings") at the request of the Company. In the event of HPT Fundings, Base Rent shall be adjusted upward by an amount equal to 10% of HPT Fundings.
The Company is required to maintain a minimum net worth equal to one year's base rent. For purposes of this covenant, net worth is defined as shareholder's equity plus the deferred gain.
As of January 2, 1998, future minimum annual rental commitments for the Lease on the Hotels and other noncancelable leases, including the ground leases described below, are as follows (in thousands):
Operating Other Lease Leases ----- ------ 1998 $ 50,635 $ 304 1999 50,635 151 2000 50,635 68 2001 50,635 30 2002 50,635 15 Thereafter 506,350 6 -------- -------- Total minimum lease payments $759,525 $ 574 ======== ========
The land under eight of the Hotels is leased from third parties. The ground leases have remaining terms (including all renewal options) expiring between the years 2039 and 2067. The ground leases provide for rent based on specific percentages of certain sales subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. Total minimum lease payments exclude Percentage Rent which was $1,771,000, $716,000 and $271,000 for 1997 and 1996 and the period March 24, 1995 through December 29, 1995, respectively.
NOTE 3. SECURITY DEPOSIT
HPT holds $50,540,000 as a security deposit for the obligations of the Company under the Leases (the "Security Deposit"). The Security Deposit is due upon termination of the Lease.
NOTE 4. INCOME TAXES
The Company and Host Marriott are members of a consolidated group for federal income tax purposes. Host Marriott has contributed the Security Deposit and deferred gain without contributing their related tax attributes and have agreed that the Company will not be responsible for any tax liability or benefit associated with the Security Deposit or deferred gain. Accordingly, no deferred tax balances are reflected in the accompanying balance sheets. There is no difference between the basis of assets and liabilities for income tax and financial reporting purposes other than for the Security Deposit and the deferred gain.
The components of the Company's effective income tax rate follow:
1997 1996 1995 ---- ---- ---- Statutory Federal tax rate 35.0% 35.0% 35.0% State income tax, net of Federal tax benefit 5.0 5.0 6.0 ----- ----- ----- 40.0% 40.0% 41.0% ===== ===== =====
The provision for income taxes consists of the following (in thousands):
1997 1996 1995 ---- ---- ---- Current - Federal $ 3,849 $ 3,674 $ 1,129 - State 551 575 193 ------- ------- ------- $ 4,400 $ 4,199 $ 1,322 ======= ======= =======
All current tax provision amounts are included in due to Host Marriott Corporation on the accompanying balance sheets.
NOTE 5. MANAGEMENT AGREEMENTS
The Sellers' rights and obligations under management agreements (the "Agreements") with the Manager, were transferred to HPT and then through the Leases to the Company. The Agreement has an initial term expiring in 2013 with an option to extend the Agreement on all of the Hotels for up to 30 years. The Agreements provide that the Manager be paid a system fee equal to 3% of hotel sales, a base management fee of 2% of hotel sales ("Base Management Fee") and an incentive management fee equal to 50% of available cash flow, not to exceed 20% of operating profit, as defined ("Incentive Management Fee"). In addition, the Manager is reimbursed for each Hotel's pro rata share of the actual costs and expenses incurred in providing certain services on a central or regional basis to all Courtyard by Marriott hotels operated by the Manager. Base Rent is to be paid prior to payment of Base Management Fees and Incentive Management Fees. To the extent Base Management Fees are so deferred, they must be paid in future periods. If available cash flow is insufficient to pay Incentive Management Fees, no Incentive Management Fees are earned by the Manager.
Pursuant to the terms of the Agreements, the Manager is required to furnish the hotels with certain services ("Chain Services") which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. In addition, the Hotels participate in Marriott Rewards and Marriott's Courtyard Club programs. The cost of these programs are charged to all hotels in the system.
The Company is obligated to provide the Manager with sufficient funds to cover the cost of (a) certain non-routine repairs and maintenance to the Hotels which are normally capitalized; and (b) replacements and renewals to the Hotels' property and improvements. Under certain circumstances, the Company will be required to establish escrow accounts for such purposes under terms outlined in the Agreements.
Pursuant to the terms of Agreements, the Company is required to provide Marriott International with funding for working capital to meet the operating needs of the hotels. Marriott International converts cash advanced by the Company into other forms of working capital consisting primarily of operating cash, inventories and trade receivables. Under the terms of the Agreements, Marriott International maintains possession of and sole control over the components of working capital and accordingly, the Company reports the total amounts so advanced to Marriott International as advances to manager in the accompanying balance sheet. Upon termination of the Agreements, the working capital will be returned to the Company.
NOTE 6. REVENUES
As discussed in Note 1, hotel revenues reflect house profit from the Company's hotel properties. House profit reflects the net revenues flowing to the Company as lessee and represents all gross hotel operating revenues, less all gross property-level expenses, excluding depreciation, management fees, real and personal property taxes, lease payments, insurance, contributions to the property improvement fund and certain other costs, which are classified as operating costs and expenses.
The following table presents the detail of house profit for 1997, 1996 and from March 24, 1995 (inception) through December 29, 1995 (in thousands):
1997 1996 1995 ---- ---- ---- Hotel Sales: Rooms $189,426 $164,738 $ 66,968 Food and beverage 14,789 14,167 6,225 Other 7,674 7,138 2,999 -------- -------- -------- Total Hotel Sales 211,889 186,043 76,192 -------- -------- -------- Expenses: Rooms (A) 39,280 34,858 14,713 Food and beverage (B) 12,657 12,133 5,044 Other operating departments (C) 2,245 1,904 827 General and administrative (D) 22,536 19,956 7,768 Utilities (E) 8,046 7,200 2,955 Repairs, maintenance and accidents (F) 8,613 6,930 2,899 Marketing and sales (G) 2,281 2,290 1,121 Chain services (H) 7,815 6,611 3,052 -------- -------- -------- Total expenses 103,473 91,882 38,379 -------- -------- --------
Revenues (House Profit) $108,416 $ 94,161 $ 37,813 ======== ======== ========
(A) Includes expenses for linen, cleaning supplies, laundry, guest supplies, reservations costs, travel agents' commissions, walked guest expenses and wages, benefits and bonuses for employees of the rooms department. (B) Includes costs of food and beverages sold, china, glass, silver, paper, and cleaning supplies and wages, benefits and bonuses for employees of the food and beverage department. (C) Includes expenses related to operating the telephone department. (D) Includes management and hourly wages, benefits and bonuses, credit and collection expenses, employee relations, guest relations, bad debt expenses, office supplies and miscellaneous other expenses. (E) Includes electricity, gas and water at the properties. (F) Includes cost of repairs and maintenance and the cost of accidents at the properties. (G) Includes management and hourly wages, benefits and bonuses, promotional expense and local advertising. (H) Includes charges from the Manager for Chain Services as allowable under the Agreements.
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
By: /s/John G. Murray John G. Murray President and Chief Operating Officer
Dated: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
/s/John G. Murray President and March 30, 1998 John G. Murray Chief Operating Officer
/s/Thomas M. O'Brien Treasurer and Chief March 30, 1998 Thomas M. O'Brien Financial Officer
Trustee March __, 1998 John L. Harrington
/s/Arthur G. Koumantzelis Trustee March 30, 1998 Arthur G. Koumantzelis
/s/William J. Sheehan Trustee March 30, 1998 William J. Sheehan
/s/Gerard M. Martin Trustee March 30, 1998 Gerard M. Martin
/s/Barry M. Portnoy Trustee March 30, 1998 Barry M. Portnoy