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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-6828 COMMISSION FILE NUMBER: 1-7959
STARWOOD LODGING STARWOOD LODGING
TRUST CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARTER) CHARTER)
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MARYLAND MARYLAND
(STATE OR OTHER JURISDICTION (STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) OF INCORPORATION OR ORGANIZATION)
52-0901263 52-1193298
(I.R.S. EMPLOYER IDENTIFICATION NO.) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2231 E. CAMELBACK ROAD, SUITE 410 2231 E. CAMELBACK ROAD, SUITE 400
PHOENIX, ARIZONA 85016 PHOENIX, ARIZONA 85016
(ADDRESS OF PRINCIPAL EXECUTIVE (ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES, INCLUDING ZIP CODE) OFFICES, INCLUDING ZIP CODE)
(602) 852-3900 (602) 852-3900
(REGISTRANT'S TELEPHONE NUMBER, (REGISTRANT'S TELEPHONE NUMBER,
INCLUDING AREA CODE) INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------------------------------------------------------------------------------------------
Shares of Beneficial Interest, $0.01 per value, of New York Stock Exchange
Starwood
Lodging Trust ("Trust Shares") paired with
Shares of Common Stock, $0.01 par value, of
Starwood Lodging Corporation ("Corporation Shares")
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
NONE
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of each Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 7, 1997, the aggregate market value of the Registrants' voting stock
held by non-affiliates(1) was $1,730,804,119.
As of February 28, 1997 the Registrants had outstanding 42,975,478 Trust Shares
and 42,975,478 Corporation Shares.
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(1) For purposes of this Joint Annual Report only, includes all voting shares
other than those held by the Registrants' Trustees or Directors and
Executive Officers.
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TABLE OF CONTENTS
ITEM
NUMBER
IN FORM
10-K PAGE
- ------- ----
PART I
1. Business....................................................................... 1
2. Properties..................................................................... 10
3. Legal Proceedings.............................................................. 18
4. Submission of Matters to a Vote of Security Holders............................ 18
PART II
5. Market for Registrants' Common Equity and Related Stockholder Matters.......... 19
6. Selected Financial Data........................................................ 20
Management's Discussion and Analysis of Financial Condition and Results of
7. Operations..................................................................... 22
8. Financial Statements and Supplementary Data.................................... 30
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 30
PART III
10. Trustees, Directors and Executive Officers of the Registrants.................. 31
11. Executive Compensation......................................................... 37
12. Security Ownership of Certain Beneficial Owners and Management................. 44
13. Certain Relationships and Related Transactions................................. 48
PART IV
Exhibits, Financial Statements, Financial Statement Schedules and Reports on
14. Form 8-K....................................................................... 50
(i)
3
This Joint Annual Report of Starwood Lodging Trust (the "Trust") and
Starwood Lodging Corporation (the "Corporation" and, together with the Trust,
"Starwood Lodging" or the "Company") on Form 10-K contains statements which
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements appear in a number of
places in this Report, including, without limitation, Acquisition and
Development Strategy, Operating Strategy, Other Information, and Management's
Discussion and Analysis of Financial Condition and Results of Operations. Such
forward-looking statements include statements regarding the intent, belief or
current expectations of Starwood Lodging, its Trustees, Directors or its
officers with respect to the matters discussed in this Report. Prospective
investors are cautioned that any such forward-looking statements involve risks
and uncertainties, and that actual results may differ materially from those in
the forward-looking statements as a result of various uncertainties and other
factors, including, without limitation, those set forth below.
GENERAL FACTORS AFFECTING INVESTMENTS IN THE HOTEL INDUSTRY
Operating Risks. The properties of the Company are subject to all
operating risks common to the hotel industry. These risks include: changes in
general economic conditions; the level of demand for rooms and related services;
cyclical over-building in the hotel industry; restrictive changes in zoning and
similar land use laws and regulations or in health, safety and environmental
laws, rules and regulations; the inability to secure property and liability
insurance to fully protect against all losses or to obtain such insurance at
reasonable rates; and changes in travel patterns. In addition, the hotel
industry is highly competitive. The properties of the Company compete with other
hotel properties in their geographic markets. However, some of the Company's
competitors may have substantially greater marketing and financial resources
than the Company.
The Company may compete for acquisition opportunities with entities which
have substantially greater financial resources than the Company. These entities
may generally be able to accept more risk than the Company can prudently manage.
Competition may generally reduce the number of suitable investment opportunities
offered to the Company and increase the bargaining power of property owners
seeking to sell. Further, management believes that it will face competition for
acquisition opportunities from entities organized for purposes substantially
similar to the objectives of the Company.
Franchise Agreement Risks. The majority of the Company's hotels are
operated pursuant to existing franchise or license agreements. Franchise
agreements generally contain specific standards for, and restrictions and
limitations on, the operation and maintenance of a hotel property in order to
maintain uniformity in the system created by the franchisor. In addition,
compliance with such standards could require a franchisee to incur significant
expenses or capital expenditures. Certain of the franchise agreements require
the Company to obtain the consent of the franchisor to certain matters,
including certain securities offerings.
Seasonality of Hotel Business. The hotel industry is seasonal in nature.
Generally, hotel revenues are greater in the second and third quarters than in
the first and fourth quarters. As a result, the Trust may be required from time
to time to borrow to provide funds necessary to make quarterly distributions.
Regulation of Gaming Operations. The Company's casino gaming facilities
located in Las Vegas, Nevada, are subject to extensive licensing and regulatory
control by the Nevada Gaming Commission and other Nevada authorities. These
regulatory authorities have broad powers with respect to the licensing of gaming
operations, and may revoke, suspend, condition or limit the gaming approvals and
licenses of the Corporation
(ii)
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and its gaming subsidiary, impose substantial fines and take other actions, any
of which could have a material adverse effect on the Corporation's business and
the going concern value of the Trust's hotel/casinos. Directors, officers and
certain key employees of the Corporation and its gaming subsidiary are subject
to licensing or suitability determinations by the Nevada Gaming Commission and
local gaming authorities. If the Nevada Gaming Commission were to find a person
occupying any such position unsuitable, the Corporation would be required to
sever its relationship with that person.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred. If the
properties of the Company do not generate revenue sufficient to meet operating
expenses, including debt service and capital expenditures, the income of the
Company and its ability to make distributions to its shareholders will be
adversely affected. In addition, income from properties and real estate values
are also affected by a variety of other factors, such as governmental
regulations and applicable laws (including real estate, zoning and tax laws),
interest rate levels and the availability of financing. In addition, equity real
estate investments, such as the investments held by the Company and any
additional properties that may be acquired by the Company, are relatively
illiquid.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real property may become liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of hazardous or toxic substances, or
the failure properly to remediate such substances when present, may adversely
affect the owner's ability to sell or rent such real property or to borrow using
such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic wastes may be liable for the costs of removal or
remediation of such wastes at the disposal or treatment facility, regardless of
whether such facility is owned or operated by such person. Other federal, state
and local laws, ordinances and regulations require abatement or removal of
certain asbestos-containing materials in the event of demolition or certain
renovations or remodeling and govern emissions of and exposure to asbestos
fibers in the air. The operation and subsequent removal of certain underground
storage tanks also are regulated by federal and state laws. Future remediation
costs are not expected to have a material adverse effect on the Company's
results of operations or financial position and compliance with environmental
laws has not had and is not expected to have a material effect on the capital
expenditures, earnings or competitive position of the Company.
RISKS OF DEBT FINANCING
As a result of incurring debt, the Company is subject to the risks normally
associated with debt financing, including the risk that cash flow from
operations will be insufficient to meet required payments of principal and
interest. A majority of the hotels are mortgaged to secure payment of certain of
this indebtedness, and if the mortgage payments cannot be made, a loss could be
sustained as a result of a foreclosure by the mortgagee.
The Company currently maintains floating rate indebtedness, and may utilize
floating rate financing in future transactions. Increases in these interest
rates could adversely affect the Company's results from operations and adversely
impact its ability to meet its debt service.
The Company is obligated to repay certain of this indebtedness in the near
future when it matures. Although the Company anticipates that it will be able to
repay or refinance such indebtedness and any other indebtedness, there can be no
assurance that it will be able to do so or that the terms of such refinancings
will be favorable to the Company.
(iii)
5
PART I
ITEM 1. BUSINESS.
Starwood Lodging Trust, formerly Hotel Investors Trust, was organized in
1969 as a Maryland real estate investment trust, and has invested in fee, ground
leasehold and mortgage loan interests in hotel properties located throughout the
United States.
In order for the Trust to qualify for favorable tax status as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986 (the "Code"),
the Trust leases its properties to third-party operators. In 1980, Starwood
Lodging Corporation, formerly Hotel Investors Corporation, was organized as a
Maryland corporation and has leased hotel properties from the Trust since that
date.
Unless the context otherwise requires, all references herein to "Starwood
Lodging" or the "Company" refer to the Trust and the Corporation, and all
references to the "Trust" and to the "Corporation" include the Trust and the
Corporation, respectively, and those entities respectively owned or controlled
by the Trust or the Corporation, including the Realty Partnership (defined
below) and the Operating Partnership (defined below).
Since 1980, the shares of beneficial interest of the Trust ("Trust Shares")
and the shares of common stock of the Corporation ("Corporation Shares") have
been "paired" on a one-for-one basis and may only be held or transferred in
units consisting of one Trust Share and one Corporation Share ("Paired Shares").
The Code has prohibited the "pairing" of shares between a REIT and a management
company since 1983. This rule does not apply to the Trust because its Paired
Share structure has existed since 1980.
At December 31, 1996, Starwood Lodging owned equity interests in 62 hotel
properties and owned mortgage interests in another 14 hotel properties. At such
date, of the 62 hotels in which Starwood Lodging owned an equity interest, seven
hotels were being managed by third-party operators including four hotels being
managed pursuant to leases to third-party operators. For information as to such
interests and properties, see Item 2 of this Joint Annual Report.
At March 10, 1997 (the "date of this Joint Annual Report"), Starwood
Lodging owned equity or mortgage interests in, or managed for third-party
owners, a total of 98 hotels containing over 26,000 rooms located in 27 states
and the District of Columbia.
ACQUISITION AND DEVELOPMENT STRATEGY
Starwood Lodging intends to continue to expand and diversify its hotel
portfolio through the acquisition of primarily upscale hotels in major
metropolitan areas. Starwood Lodging believes that hotels in this segment can be
purchased at prices below replacement cost and offer better potential for cash
flow growth than hotels in other market segments. Starwood Lodging generally
seeks investments in hotels where management believes that profits can be
increased by the introduction of more professional and efficient management
techniques, a change of franchise affiliation or the injection of capital for
renovating, repositioning or expanding a property. Properties are targeted
throughout the United States, but Starwood Lodging generally focuses on markets
with favorable demographic trends, significant barriers to entry or major room
demand generators such as office or retail complexes, airports, tourist
attractions, or universities.
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Consistent with this strategy, Starwood Lodging acquired equity interests
in the following 30 hotels during 1996 (the "1996 Properties"):
APPROXIMATE
DATE APPROXIMATE PURCHASE PRICE
OF PURCHASE PRICE PER ROOM
HOTEL LOCATION PURCHASE (000'S) ROOMS (000'S)
- --------------------------------- ---------------------- -------- -------------- ------ --------------
Westin Hotel..................... Washington, DC 1/04/96 $ 33,000 263 $125
Boston Park Plaza................ Boston, MA 1/24/96 96,478(1)(2) 960 85
Midland Hotel.................... Chicago, IL 3/22/96 21,000 257 82
Clarion Hotel, San Francisco
Airport........................ Milbrae, CA 4/25/96 30,000 442 68
Doubletree DFW Airport........... Irving, TX 4/26/96 28,568 308 93
Doubletree Cypress Creek......... Ft. Lauderdale, FL 4/26/96 23,220 254 91
Westin Hotel..................... Tampa, FL 4/26/96 21,462 260 83
Doubletree Guest Suites.......... Philadelphia, PA 6/03/96 18,230 251 73
Days Inn......................... Philadelphia, PA 7/01/96 3,570 177 20
The Institutional Portfolio consisting of:
Ritz Carlton..................... Philadelphia, PA 8/12/96 290
Ritz Carlton..................... Kansas City, MO 8/12/96 373
Westin Hotel..................... Waltham, MA 8/12/96 347
Westin LAX....................... Los Angeles, CA 8/12/96 739
Westin Horton Plaza.............. San Diego, CA 8/12/96 450
Westin Hotel Concourse........... Atlanta, GA 8/12/96 370
Doubletree Grand at Mall of
America........................ Bloomington, MN 8/12/96 321
The Wyndham Hotel................ Ft. Lauderdale, FL 8/12/96 251
-------- ----- ----
315,000 3,141 100
Hotels of Distinction Portfolio consisting of:
The Hotel Park Tucson............ Tucson, AZ 8/16/96 215
Embassy Suites................... Palm Desert, CA 8/16/96 198
The Marque of Atlanta............ Atlanta, GA 8/16/96 275
Arlington Park Hilton............ Arlington Heights, IL 8/16/96 422
Sheraton Needham................. Needham, MA 8/16/96 247
Embassy Suites................... St. Louis, MO 8/16/96 297
Radisson Marque.................. Winston-Salem, NC 8/16/96 293
Allentown Hilton................. Allentown, PA 8/16/96 224
Sheraton Minneapolis Metrodome... Minneapolis, MN 9/05/96 254
-------- -----
135,000 2,425 56
Marriott Forrestal Village....... Princeton, NJ 8/29/96 19,600 294 67
Doral Court...................... New York, NY 9/19/96 21,028 199 106
Doral Tuscany.................... New York, NY 9/19/96 12,888 121 107
Westwood Marquis................. Los Angeles, CA 12/31/96 35,000(3) 257 136
-------- ----- ----
$814,044 9,609 $ 85
======== ===== ====
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(1) Represents 100% interest. Starwood Lodging acquired a 58.2% interest in a
joint venture that acquired the property.
(2) Includes $14 million allocated to the purchase price of the office building
portion of the hotel property.
(3) Represents 100% interest. Starwood Lodging acquired a 93.5% interest in a
joint venture that acquired the property.
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In addition, as of March 10, 1997, Starwood Lodging had acquired equity
interests in 1997 in the following 13 hotels containing approximately 4,100
rooms (the "1997 Properties"):
APPROXIMATE
DATE APPROXIMATE PURCHASE PRICE
OF PURCHASE PRICE PER ROOM
HOTEL LOCATION PURCHASE (000'S) ROOMS (000'S)
- -------------------------------- -------------------- -------- -------------- ----- --------------
Deerfield Beach Hilton.......... Deerfield Beach, FL 1/08/97 $ 11,500 220 $ 52
Radisson Denver South........... Denver, CO 1/17/97 21,750 263 83
The HEI Portfolio of owned hotels consisting of:
The Sheraton Hotel.............. Long Beach, CA 2/14/97 460
Omni Waterside Hotel............ Norfolk, VA 2/14/97 446
BWI Airport Marriott............ Baltimore, MD 2/14/97 310
Crown Plaza Edison.............. Edison, NJ 2/14/97 274
Courtyard by Marriott Crystal
City.......................... Arlington, VA 2/14/97 272
Charleston Hilton............... Charleston, SC 2/14/97 296
Park Ridge Hotel................ King of Prussia, PA 2/14/97 265
Sonoma County Hilton............ Santa Rosa, CA 2/14/97 245
Novi Hilton..................... Novi, MI 2/14/97 239
Embassy Suites.................. Atlanta, GA 2/14/97 233
-------------- ----- ------
312,000 3,040 103
Days Inn Chicago................ Chicago, IL 2/21/97 48,000 578 83
-------------- ----- ------
$393,250 4,101 $ 96
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On February 14, 1997, in addition to the acquisition of the ten hotels
referred to above as the HEI Portfolio of owned hotels (together, the "HEI
Portfolio") from PRISA II, an institutional real estate investment fund managed
by Prudential Real Estate Investors, and HEI Hotels LLC ("HEI"), a Westport,
Connecticut based hotel operating company, the Company also completed the
acquisition of the management company, HEI ($15 million). The Company paid $112
million in cash and notes and the remainder in limited partnership interests in
the Realty Partnership and the Operating Partnership exchangeable for 6.548
million Paired Shares of the Trust and Corporation (an approximate value of $215
million). The HEI Portfolio also included contracts to manage the following nine
hotels:
HOTEL LOCATION ROOMS
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Sheraton Gateway Houston Airport................................ Houston, TX 418
Ontario Airport Hilton.......................................... Ontario, CA 309
Grand Junction Hilton........................................... Grand Junction, CO 264
Danbury Hilton & Towers......................................... Danbury, CT 242
Residence Inn By Marriott....................................... Princeton, NJ 208
Long Island Sheraton Hotel...................................... Smithtown, NY 211
Wilmington Hilton Hotel......................................... Wilmington, DE 193
Ramada Hotel Bethesda........................................... Bethesda, MD 160
The Pavillion Hotel............................................. Virginia Beach, VA 292
-----
2,297
=====
Also, as a part of its acquisition strategy Starwood Lodging intends to
continue to acquire debt interests in hotels at discounts to their face amounts
with the intention of acquiring the hotel.
In line with this strategy, in 1996 Starwood Lodging acquired debt
interests in the 305-room Holiday Inn in Milpitas, California, for $17.0 million
and the 480-room Sheraton in Stamford, Connecticut, for $10.25 million. Also in
1996, equity interests were acquired by the Company in the Westin in Washington,
D.C., and the Doubletree Guest Suites and Days Inn, both in Philadelphia,
Pennsylvania, which combined with debt interests previously acquired by the
Company provided the Company with full equity ownership of each hotel.
Starwood Lodging also intends to develop, on a limited basis, new hotels,
either through new construction or conversion of office buildings, in certain
underserved markets. In this respect, in November 1996, the Trust
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paid $7.0 million to acquire a site in downtown Seattle, Washington, which has
entitlements for construction of a 410-room hotel. The Trust expects to begin
construction on this hotel in mid-1997.
Starwood Lodging is evaluating numerous other hotel properties for
acquisition and, as of the date of this Joint Annual Report has entered into
agreements to purchase and has made offers on 20 properties in the aggregate
amount of approximately half a billion dollars, all of which are subject to the
satisfaction of a number of conditions prior to closing. Starwood Lodging
intends to finance the acquisition of these or other hotel properties through
cash flow from operations, through borrowings under new or existing credit
facilities and, when market conditions warrant, through the issuance of debt or
equity securities.
As part of its continuous evaluation of its portfolio and efforts to
redeploy capital in high growth assets, the Company has identified certain
properties for sale. These properties include the Company's gaming assets and
other hotels primarily in market segments that the Company believes have limited
growth potential. In 1996, the Company sold the Best Western Columbus North in
Columbus, Ohio, for approximately $3.1 million; the Bourbon Street Hotel &
Casino ("Bourbon Street") in Las Vegas, Nevada, for $7.6 million; and the real
property of the King 8 Hotel, Gambling Hall and Truck Plaza (the "King 8") in
Las Vegas, Nevada, for approximately $18.8 million. The Corporation has entered
into an agreement to sell the personal property relating to the King 8 for $3
million and expects the closing to occur in the next 18 months following receipt
by the purchaser of required gaming approvals. The Company is currently engaged
in efforts to sell the Radisson Marque in Winston-Salem, North Carolina, and the
Best Western hotels in Savannah, Georgia; El Paso, Texas; Las Cruces, New
Mexico; and Albuquerque, New Mexico.
OPERATING STRATEGY
The Trust and the Corporation intend that the Operating Partnership lease
and operate hotels owned or acquired by the Realty Partnership thereby retaining
for shareholders the economic benefits otherwise captured by third-party
operators. During 1996, the Operating Partnership assumed management of 29
hotels, including 27 of the 30 hotels acquired in 1996 and, as of the date of
this Joint Annual Report, had assumed management in 1997 of an additional 22
hotels including all 13 hotels acquired in 1997 together with 9 other hotels
owned by third parties.
In 1996, the Corporation significantly expanded its operational
capabilities with the hiring of key executives and other corporate staff in the
areas of operations, sales, revenue management, food and beverage, human
resources, finance, accounting, tax, MIS and capital project management.
The Corporation intends to continue to reposition hotels in order to
increase cash flows and asset values by changing or initiating franchise
affiliations and implementing renovations, expansions and upgrades of hotel
facilities. In 1996, the Corporation entered into new franchise affiliations
with respect to seven hotels, of which six were acquired in 1996, including five
hotels converted to Westin, one converted to Wyndham and one converted to
Doubletree Guest Suites. In January 1997 the Dallas Park Central was converted
to a Radisson hotel.
The Corporation also intends to manage hotels on behalf of third-party
owners, thereby capitalizing on the enhanced operational management
infrastructure of the Corporation. The Company believes that third-party
management contracts could provide the Company with an additional source of
earnings as well as a source of potential acquisitions including minority equity
investments in hotel properties.
1995 REORGANIZATION
On January 31, 1995 (the "Reorganization Date"), the Trust and the
Corporation consummated a reorganization (the "Reorganization") with a
predecessor of Starwood Capital Group, L.L.C. ("Starwood Capital"), and certain
affiliates of Starwood Capital (the "Starwood Partners") effective January 1,
1995.
The Reorganization involved a number of related transactions that occurred
simultaneously on the Reorganization Date. Such transactions included (i) the
contribution by the Trust to SLT Realty Limited Partnership (the "Realty
Partnership"), a newly formed Delaware limited partnership, of substantially all
of the properties and assets of the Trust, subject to substantially all of the
liabilities of the Trust (including senior
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debt of the Trust (the "Senior Debt")), in exchange for an approximate 28.3%
interest as a general partner in the Realty Partnership, (ii) the contribution
by the Starwood Partners to the Realty Partnership of approximately $12.6
million in cash and certain hotel properties and first mortgage notes, in
exchange for limited partnership units representing the remaining approximate
71.7% interest in the Realty Partnership, (iii) the contribution by the
Corporation and its subsidiaries to SLC Operating Limited Partnership (the
"Operating Partnership" and together with the Realty Partnership, the
"Partnerships"), a newly formed Delaware limited partnership, of substantially
all of their properties and operating assets (except for their gaming assets),
subject to substantially all of their liabilities, in exchange for an
approximate 28.3% interest as a general partner in the Operating Partnership,
and (iv) the contribution by the Starwood Partners to the Operating Partnership
of approximately $1.4 million in cash and fixtures, furnishings and equipment of
certain hotel properties, in exchange for limited partnership units representing
the remaining approximate 71.7% interest in the Operating Partnership. On March
24, 1995, a Starwood Partner exchanged $12 million of Senior Debt for additional
limited partnership units of the Realty Partnership and the Operating
Partnership resulting in the Starwood Partners owning approximately 74.6% of
each of the Partnerships.
STRUCTURE
As of the date of this Joint Annual Report, the structure of Starwood
Lodging is as follows:
[HOLDERS OF PAIRED SHARES CHART]
The limited partnership units of the Realty Partnership and the Operating
Partnership held by the limited partners are (subject to the ownership
limitation provisions of the Trust and the Corporation) exchangeable for, at the
option of the Trust and the Corporation, either cash, Paired Shares representing
up to approximately 22.8% of the Paired Shares after such exchange, or a
combination of cash and such Paired Shares. The ownership limitation provisions
of Starwood Lodging are designed to preserve the status of the Trust as a REIT
for tax purposes by providing in general that no shareholder may own, directly
or indirectly, more than 8% of the outstanding Paired Shares.
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Since the Reorganization, the Trust has conducted substantially all of its
business and operations through the Realty Partnership. As of December 31, 1996,
the Realty Partnership held fee interests, ground leaseholds and mortgage loan
interests in 76 hotel properties containing over 19,000 rooms located in 24
states throughout the United States and the District of Columbia. The Trust
controls the Realty Partnership as the sole general partner of the Realty
Partnership.
Since the Reorganization, the Corporation (together with its wholly-owned
subsidiaries) has conducted substantially all of its business and operations
(other than its gaming operations) through the Operating Partnership. As of
December 31, 1996, the Operating Partnership leased from the Realty Partnership
all but four of the 59 hotel properties owned in fee or held pursuant to
long-term leases by the Realty Partnership. In addition, the Operating
Partnership owns the Milwaukee Marriott hotel, the Midland Hotel, both subject
to mortgages to the Trust, and the Radisson Marque Hotel which is currently held
for sale.
GAMING APPROVALS
Upon receipt of certain Nevada gaming regulatory approvals, the Corporation
will control the Operating Partnership as its managing general partner. Prior to
the receipt of such approvals, the Operating Partnership is being managed by a
management committee, the members of which are identical to the members of the
Board of Directors of the Corporation that will hold office upon receipt of
Nevada gaming regulatory approvals (see Item 10 of this Joint Annual Report).
The gaming operations (which, as of the date of this Joint Annual Report,
consist of one hotel/casino located in Las Vegas, Nevada) are being operated
through Hotel Investors Corporation of Nevada ("HICN"), a wholly-owned
subsidiary of the Corporation. Upon receipt of such approvals (or such time as
such approvals are no longer required), HICN will become a wholly-owned
subsidiary of the Operating Partnership. The real property of the Company's
hotel/casino has been sold and the sale of the personal property and gaming
assets will close once the buyer or its designee has received Nevada gaming
regulatory approval. Pending receipt of such approvals, which are expected by
the end of 1997, the Corporation is operating the hotel/casino pursuant to a
lease from the buyer.
1996 OFFERINGS
APRIL 1996 OFFERING
The Company completed a public offering of 3,000,000 Paired Shares (after
giving effect to the three-for-two stock split in January 1997) in April 1996
(the "April 1996 Offering"). Net proceeds from the April 1996 Offering of
approximately $62.4 million were used, in part, to fund the acquisition of the
442-room Clarion Hotel located at the San Francisco Airport (acquired on April
24, 1996) and three Doubletree Guest Suite hotels located in Irving, Texas; Ft.
Lauderdale, Florida; and Tampa, Florida (now a Westin) (all three properties
were acquired on April 26, 1996).
AUGUST 1996 OFFERING
In August 1996, the Company completed a public offering of 15,000,000
Paired Shares (after giving effect to the three-for-two stock split in January
1997) and on August 23, 1996, the underwriter exercised its over-allotment
option to purchase 1.2 million Paired Shares (after giving effect to the
three-for-two stock split in January 1997) (together, the "August 1996 Offering"
and, with the April 1996 Offering, the "1996 Offerings"). Net proceeds from the
August 1996 Offering of approximately $367.2 million were used to fund the
acquisition of a portfolio of 8 hotels owned by an institution (the
"Institutional Portfolio") and partially fund the acquisition of a portfolio of
9 hotels owned by Hotels of Distinction Ventures, Inc. (the "HOD Portfolio").
LINES OF CREDIT AND MORTGAGES
At December 31, 1996, the Company had two loan facilities and a term loan
with Lehman Brothers, Inc., and certain of its affiliates ("Lehman Brothers")
and a loan facility with Goldman Sachs (together, the "Lines of Credit").
6
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MORTGAGE FACILITY
In October 1995, the Company amended its Mortgage Loan Funding Facility
Agreement, dated July 25, 1995 (the "Mortgage Facility"), with Lehman Brothers
to increase the amount available under this facility to $70.6 million. The
Mortgage Facility is recourse to the Realty Partnership, is secured by certain
mortgage loans owned by the Realty Partnership, bore interest at a rate equal to
1.5% plus the one-month LIBOR for the first 12 months, and bears interest at a
rate of 1.75% plus the one-month LIBOR thereafter. In August 1996, the maturity
date for the Mortgage Facility was extended to July 1997. As of December 31,
1996, the Company had borrowed $70.6 million under the Mortgage Facility.
ACQUISITION FACILITY
In October 1995, the Company entered into a three-year, $135 million
secured revolving credit facility (the "Acquisition Facility") with Lehman
Brothers. In August 1996, a portion of the Acquisition Facility was syndicated
amongst a number of banks, whereupon First National Bank of Boston became the
lead agent bank. The Acquisition Facility is recourse to the Realty Partnership,
is secured by certain properties of the Company and may be secured by other
properties acquired by the Company, all on a cross-collateralized basis within
various pools. Amounts drawn under the Acquisition Facility bear interest at a
rate equal to 1.625% plus the one, two or three-month LIBOR at the Company's
option. The Acquisition Facility matures in October 1998. As of December 31,
1996, the Company had borrowed $117.8 million under the Acquisition Facility.
BPP MORTGAGE
In March 1996, the joint venture in which the Company holds a 58.2%
interest, refinanced a mortgage secured by the Boston Park Plaza with a new
non-recourse mortgage in the amount of $25 million with the Life Insurance
Company of Georgia at an interest rate of 8.4% due July, 2003 (the "BPP
Mortgage"). As of December 31, 1996, the balance outstanding under the BPP
Mortgage was $25 million.
TERM LOAN
In March 1996, the Company entered into a $24 million one year non-recourse
secured term loan (the "Term Loan") with Lehman Brothers. In April 1996, the
Company amended the Term Loan to increase the amount available under this
facility to $94 million. The Term Loan is secured by certain properties of the
Company and bears interest at a rate equal to the one, two or three-month LIBOR,
at the Company's option, plus (a) 1.95% for the first $24 million drawn, and (b)
1.75% for the remaining balance drawn. The Term Loan matures in April 1997. As
of December 31, 1996, the Company had borrowed $94 million under the Term Loan.
GOLDMAN FACILITY
In August 1996, the Company entered into a loan facility with an affiliate
of Goldman Sachs for a one-year (extendible to 18 months) loan of up to $300
million to fund a portion of the acquisition cost of the Institutional Portfolio
and the HOD Portfolio (the "Goldman Facility"). The Goldman Facility is recourse
to the Realty Partnership, bears interest at one-month LIBOR plus 1.75% (an
extendible six month period bears interest at one-month LIBOR plus 2.75%) and is
secured by interests in the Institutional Portfolio and the HOD Portfolio. As of
December 31, 1996, the Company had borrowed $140 million under the Goldman
Facility.
DORAL MORTGAGE
In September, 1996, upon acquisition of the Doral Court and Doral Tuscany
in New York, the Company assumed liability under and amended the terms of a
mortgage with The Sumitomo Trust and Banking Co., Ltd. (the "Doral Mortgage").
As amended, the Doral Mortgage is recourse to the Realty Partnership, bears
interest at a rate of 7.64% and is due September 2001. As of December 31, 1996,
the balance outstanding under the Doral Mortgage was $27.4 million.
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TREASURY LOCKS
In January 1996, the Company entered into two interest-rate-hedging
agreements (the "January Treasury Locks"), which had the effect of fixing the
base rate of interest at 5.70% for debt the Company intended to issue in October
1996 with an aggregate notional principal amount of $100 million and a term to
maturity of seven years. The Company has extended the settlement date to March
31, 1997, and the base rate increased to 5.86%. The actual interest rate on debt
the Company intends to issue will be determined by reference to this base rate.
At settlement, the Trust will pay or receive an amount which will be
capitalized and amortized over the term of the related debt of seven years. Such
amount is not anticipated to have a material effect on the Trust's liquidity or
operating results. If the Trust did not issue any such debt, such amount would
still be payable or receivable and would be treated as a loss or gain,
accordingly. Such a gain or loss could have a material effect on the Trust's
results from operations; however, due to management's current intention to issue
$100 million of debt in 1997, with a term to maturity of seven years, no such
gain or loss is anticipated. If the January Treasury Locks had been settled on
December 31, 1996, the Trust would have received $2.5 million.
In August 1996, the Company entered into another interest rate hedging
agreement (the "August Treasury Lock"), which has the effect of fixing the base
rate of interest at 6.67% for debt the Company had intended to issue in March
1997, with an aggregate notional principal amount of $150 million and a term to
maturity of ten years. The Company, due to other financing circumstances, has
decided to postpone the issuance of the ten year, $150 million debt to June 30,
1997. Accordingly, the Company plans to extend the settlement date in respect of
the August Treasury Lock. The actual interest rate of debt to be issued at that
time will be determined by reference to the base rate determined at the time of
extension of the settlement date.
At settlement, the Company will pay or receive an amount which will be
capitalized and amortized over the term of the related debt of ten years. Such
amount is not anticipated to have a material effect on the Company's liquidity
or operating results. If the Company did not issue any such debt, such amount
would still be payable or receivable and would be treated as a loss or gain,
accordingly. Such a gain or loss could have a material effect on the Company's
results from operations; however due to Management's current intention to issue
$150 million of debt with a term to maturity of ten years, no such gain or loss
is anticipated. If the August Treasury Lock had been settled on December 31,
1996, the Trust would have paid $2.96 million.
PRUDENTIAL LOAN
On February 14, 1997, in connection with the acquisition of the HEI
Portfolio, the Company entered into a short term loan with The Prudential
Insurance Company of America in the principal amount of $97.5 million (the
"Prudential Loan") in order to partially fund the acquisition of the HEI
Portfolio. As of the date of this Joint Annual Report, the Company had borrowed
$72.0 million under the Prudential Loan, which bears interest at a rate of 7.0%
and is due April 15, 1997. The Company may elect to extend the maturity date to
May 14, 1997. Presently, the Company intends to make the election to extend the
maturity date.
TAX EXEMPT BONDS
On February 20, 1997, the Company issued bonds in the principal amount of
$39.5 million due October, 2013 (the "Tax Exempt Bonds"). The Tax Exempt Bonds
bear interest at a rate of 6.5% with no principal amortization, were issued at a
discount to yield 6.7% and are secured by two hotels of the Company located at
the Philadelphia International Airport. Net proceeds from the Tax Exempt Bonds
of approximately $37.6 million were used to partially fund the acquisition of
the 578-room Days Inn in Chicago, Illinois.
TAX STATUS OF THE TRUST
The Trust elected to be taxed as a REIT, commencing with its taxable year
ended December 31, 1995. The Trust expects to also make this election for the
year ended December 31, 1996, when it files its tax return for such period,
which is due no later than September 15, 1997. The Trust was taxed as a REIT
beginning in 1969 through and including its taxable year ended December 31,
1990. During 1994, the Trust discovered that
8
13
it may not have qualified as a REIT in 1991 through 1994, due to its failure to
comply with certain procedural requirements of the Code. The Trust requested and
received a letter from the Internal Revenue Service providing that the Trust's
election to be taxed as a REIT terminated beginning with the Trust's taxable
year ended December 31, 1991, and permitting the Trust to re-elect to be taxed
as a REIT commencing with its taxable year ended December 31, 1995. Because the
Trust had net losses for tax purposes for its 1991 through 1994 taxable years,
the Trust does not owe any Federal income tax for such years.
OTHER INFORMATION
SEASONALITY AND COMPETITION.
The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters
due to generally decreased travel during winter months.
The hotel industry is highly competitive. The properties of the Company
compete with other hotel properties in their geographic markets. Many of the
Company's competitors may have substantially greater marketing and financial
resources than the Company.
The Company may compete for acquisition opportunities with entities which
have greater financial resources than the Company or which may accept more risk
than the Company. Competition may generally reduce the number of suitable
investment opportunities and increase the bargaining power of property owners
seeking to sell. Further, management of the Company believes that it will face
competition for acquisition opportunities from entities organized for purposes
substantially similar to the objectives of the Trust or the Company.
ENVIRONMENTAL MATTERS.
None of the Trust, the Corporation, the Realty Partnership or the Operating
Partnership has been identified by the United States Environmental Protection
Agency or any similar state agency as a responsible or potentially responsible
party for, nor have they been the subject of any governmental proceeding with
respect to, any hazardous waste contamination. If the Trust, the Corporation,
the Realty Partnership or the Operating Partnership were to be identified as a
responsible party, they would in most circumstances be strictly liable, jointly
and severally with other responsible parties, for environmental investigation
and clean-up costs incurred by the government and, to a more limited extent, by
private persons.
Since January 1, 1995, preliminary or "Phase I" environmental site
assessments have been prepared with respect to each of the Company's 62 fee
interest and ground leasehold properties owned as of December 31, 1996. The
results of the Phase I assessments and subsequent "Phase II" assessments
performed at six of the properties has led to an assessment by the Company and
its outside consultants that the Company's overall potential for environmental
impairment is low.
Based upon the environmental reports described above, the Company believes
that a substantial number of its hotels incorporate potentially
asbestos-containing materials. Under applicable current Federal, state and local
laws, asbestos need not be removed from or encapsulated in a hotel unless and
until the hotel is renovated or remodeled. The Company has asbestos operation
and maintenance plans for each property testing positive for asbestos.
Based upon the above-described environmental reports and testing, future
remediation costs are not expected to have a material adverse effect on the
results of operations, financial position or cash flows of the Trust or the
Corporation and compliance with environmental laws has not had and is not
expected to have a material effect on the capital expenditures, earnings or
competitive position of the Trust or the Corporation.
REGULATION AND LICENSING.
The ownership and operation of the casino gaming facilities of the
Corporation in Nevada are subject to extensive licensing and regulatory control
by the Nevada Gaming Commission, the Nevada State Gaming
9
14
Control Board and the Clark County Liquor and Gaming Licensing Board. See Item
2, "Regulation and Licensing" of this Joint Annual Report.
EMPLOYEES.
As of December 31, 1996, the Trust had three employees and the Corporation
had approximately 8,900 employees.
The Trust's executive offices are located at 2231 East Camelback Road,
Suite 410, Phoenix, Arizona 85016 (telephone (602) 852-3900) and the
Corporation's executive offices are located at 2231 East Camelback Road, Suite
400, Phoenix, Arizona 85016 (telephone (602) 852-3900).
Financial information with respect to the two segments of the hospitality
industry (hotels and gaming) in which the Corporation operates is included in
Note 16 of the Notes to Financial Statements included in Item 8 of this Joint
Annual Report.
ITEM 2. PROPERTIES.
At December 31, 1996, the Company owned, operated and managed a
geographically diverse portfolio of hotel assets, including fee, ground lease
and first mortgage interests in 76 hotel properties, comprising approximately
20,000 rooms located in 24 states and the District of Columbia. Sixty of such
hotels are operated under licensing, membership, franchise or management
agreements or leases with national hotel organizations, including Ritz
Carlton(R), Westin(R), Marriott(R), Hilton(R), Sheraton(R), Omni(R),
Doubletree(R), Embassy Suites(R), Harvey(R), Radisson(R), Clarion(R), Holiday
Inn(R), Residence Inn(R), Days Inn(R), Best Western(R) and Vagabond Inn(R).
EQUITY INVESTMENTS.
As of December 31, 1996, the Company had equity investments in 62
properties containing a total of over 16,200 guest rooms. All but three of the
properties are owned by the Trust. Of these three properties, the Operating
Partnership owns the Milwaukee Marriott hotel and the Midland Hotel, both
subject to mortgages to the Trust, and the Radisson Marque Hotel which is
currently held for sale. Of the 59 hotels owned by the Trust, all but five are
leased to the Corporation or its subsidiaries pursuant to leases between the
Trust and the Corporation (the "Intercompany Leases").
Each of the Intercompany Leases provides for the lessee's payment of annual
minimum rent in a specified amount plus additional rent based on a percentage of
the gross revenues (or items thereof) of the leased property. The Intercompany
Leases have an average remaining term of three years. The Intercompany Leases
are "triple-net" -- i.e., the lessee is generally responsible for paying all
operating expenses of the hotel property, including maintenance and repair
costs, insurance premiums and real estate and personal property taxes, and for
making all rental and other payments required pursuant to any underlying ground
leases. As lessee, the Operating Partnership retains all of the profits, net of
rents and other expenses, and bears all risk of losses, generated by the hotel
property's operations.
In addition to the Intercompany Leases, three Vagabond Inns (the "Vagabond
Inns") are leased by the Trust to a third-party pursuant to ground leases which
expire in 2001, 2007 and 2008, respectively. The remaining two properties, the
Doral Inn and the Marriott Forrestal Village are leased to third parties and
such leases expire in 2005 and 2007, respectively. In respect of the Doral Inn,
the Trust owns the land and holds a leasehold mortgage on the building and
personal property and the Operating Partnership operates the hotel pursuant to a
sublease. In respect of the Marriott Forrestal Village, the Trust can terminate
the lease beginning in 1999 for a stipulated fee.
The following table sets forth the 1996, 1995, and 1994 average occupancy,
room rates ("ADR"), revenue per available room ("REVPAR") and certain other
information concerning the Company's non-gaming hotels (excluding the Vagabond
Inns) as of December 31, 1996. Each hotel in the following table is owned by the
Trust and leased to the Corporation, except as noted.
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15
ADR($)
--------------------------
# OF YEAR YEAR YEAR ENDED DECEMBER 31,
HOTEL/LOCATION STATE ROOMS OPENED ACQUIRED(1) 1996 1995 1994
- --------------------------------------------- ----- ------ ------ ----------- ------ ------ ------
Embassy Suites -- Phoenix(6)................. AZ 227 1981 1983 97.71 85.14 80.23
Embassy Suites -- Tempe(6)................... AZ 224 1984 1995 104.96 95.75 83.37
Hotel Park -- Tucson(9)...................... AZ 215 1986 1996 79.63 74.12 69.29
Plaza Hotel & Conference
Center -- Tucson(6)........................ AZ 149 1971 1983 51.83 48.34 46.12
Clarion Hotel SFO Airport -- Milbrae(8)...... CA 442 1962 1996 73.89 60.36 55.09
Doubletree Club -- Rancho Bernardo(6)........ CA 209 1988 1995 74.63 71.02 65.68
Embassy Suites -- Palm Desert(9)............. CA 198 1985 1996 102.43 97.30 96.81
Westin Horton Plaza -- San Diego(9).......... CA 450 1987 1996 111.78 98.64 92.44
Westin LAX Airport -- Los Angeles(9)......... CA 720 1986 1996 65.68 55.82 56.87
Westwood Marquis -- Los Angeles(12).......... CA 257 1969 1996 171.09 161.83 157.02
Capitol Hill Suites -- Washington(6)......... DC 152 1955 1995 99.62 95.09 91.93
Westin Grand -- Washington(7)................ DC 263 1984 1995 135.36 127.62 N/A
Doubletree Guest Suites -- Cypress
Creek(8)................................... FL 254 1985 1996 82.16 77.10 82.07
Radisson Hotel -- Gainesville(6)............. FL 195 1974 1986 61.82 60.43 59.89
Westin Airport -- Tampa(8)................... FL 260 1987 1996 89.47 84.46 86.14
Wyndham Ft. Lauderdale Airport -- Dania(9)... FL 251 1986 1996 84.20 77.18 77.71
Best Western Historic District-
Savannah(5)(6)............................. GA 142 1971 1986 51.64 46.75 47.27
Holiday Inn -- Albany(6)..................... GA 151 1989 1989 61.61 59.08 56.06
Lenox Inn -- Atlanta(8)...................... GA 180 1965 1995 82.82 69.48 63.57
Sheraton Colony Square -- Atlanta(6)......... GA 462 1973 1995 111.01 89.59 86.57
Terrace Garden Inn -- Atlanta(8)............. GA 364 1975 1995 110.56 93.51 88.39
The Marque -- Atlanta(9)..................... GA 275 1980 1996 99.30 82.21 74.66
Westin at Concourse -- Atlanta(9)............ GA 370 1986 1996 109.40 96.25 87.32
Arlington Park Hilton -- Arlington
Heights(9)................................. IL 422 1968 1996 83.08 77.76 71.55
The Midland Hotel -- Chicago(2)(8)........... IL 257 1934 1996 127.72 111.48 107.43
Harvey Hotel -- Wichita(6)................... KS 259 1974 1995 58.07 62.52 50.62
Doubletree Guest Suites -- Lexington(6)...... KY 155 1989 1995 91.74 82.93 84.96
Park Plaza -- Boston(10)..................... MA 960 1927 1996 106.88 101.42 98.12
Sheraton Hotel -- Needham(9)................. MA 247 1986 1996 97.12 84.60 80.01
Westin Hotel -- Waltham(9)................... MA 347 1990 1996 111.28 100.15 97.17
Holiday Inn Calverton -- Beltsville(8)....... MD 206 1987 1995 71.01 67.49 63.37
Bay Valley Resort -- Bay City(6)............. MI 151 1973 1984 64.03 62.02 62.22
Doubletree Grand at MOA -- Bloomington(9).... MN 321 1975 1996 94.23 88.34 79.28
Sheraton Hotel Metrodome -- Minneapolis(9)... MN 254 1980 1996 75.22 72.00 66.96
Embassy Suites -- St. Louis(9)............... MO 297 1985 1996 96.77 88.02 86.48
Ritz Carlton -- Kansas City(9)............... MO 373 1973 1996 129.49 122.82 116.76
Omni Europa -- Chapel Hill(6)................ NC 168 1981 1995 91.34 84.33 74.54
Radisson Marque -- Winston-Salem(3)(5)(9).... NC 293 1974 1996 72.48 71.88 69.32
Marriott Forestal
Village -- Princeton(4)(8)................. NJ 294 1987 1996 102.09 94.46 89.47
Best Western -- Las Cruces(5)(6)............. NM 166 1974 1982 50.00 44.94 42.74
Best Western Airport
Inn -- Albuquerque(5)(6)................... NM 123 1980 1984 58.41 56.70 54.45
Doral Court -- New York(11).................. NY 199 1927 1996 149.43 131.57 130.25
Doral Inn -- New York(13).................... NY 652 1927 1995 108.83 96.34 88.31
Doral Tuscany -- New York(11)................ NY 121 1935 1996 189.02 178.18 175.35
Days Inn City Center -- Portland(6).......... OR 173 1962 1984 69.25 60.71 53.12
Riverside Inn -- Portland(6)................. OR 137 1964 1984 92.18 71.35 64.69
Days Inn -- Philadelphia..................... PA 177 1984 1996 65.11 67.20 66.14
Doubletree Guest Suites -- Philadelphia...... PA 251 1985 1996 89.58 95.94 91.41
Hilton Hotel -- Allentown(9)................. PA 224 1981 1996 64.68 60.57 57.96
Ritz Carlton -- Philadelphia(9).............. PA 290 1990 1996 157.96 153.28 144.13
Best Western Airport -- El Paso(5)(6)........ TX 175 1974 1985 37.42 36.12 34.76
Doubletree Guest Suites DFW -- Irving(8)..... TX 308 1985 1996 99.29 91.18 91.24
Park Central -- Dallas(6).................... TX 445 1972 1972 56.44 55.03 59.97
Residence Inn Tysons Corner -- Vienna(6)..... VA 96 1984 1984 112.44 103.87 99.68
Days Inn Town Center -- Seattle(6)........... WA 90 1957 1984 73.89 62.73 60.99
Meany Tower -- Seattle(6).................... WA 155 1932 1984 78.42 72.83 70.47
Sixth Avenue Inn -- Seattle(6)............... WA 166 1959 1984 84.08 74.42 70.04
The Tyee Hotel -- Olympia(6)................. WA 155 1961 1987 64.57 61.64 60.63
Marriott Brookfield -- Milwaukee(2)(7)....... WI 393 1972 1990 74.72 72.19 67.91
ALL HOTELS................................... 15,910 94.41 85.05 81.01
OCCUPANCY (%) REVPAR($)
---------------------- --------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
HOTEL/LOCATION 1996 1995 1994 1996 1995 1994
- --------------------------------------------- ------ ------- ------ ------ ------ ------
Embassy Suites -- Phoenix(6)................. 76.5 80.3 75.6 74.73 68.37 60.65
Embassy Suites -- Tempe(6)................... 81.9 80.2 82.8 85.93 76.79 69.03
Hotel Park -- Tucson(9)...................... 67.6 70.4 71.3 53.83 52.18 49.40
Plaza Hotel & Conference
Center -- Tucson(6)........................ 71.0 77.3 77.1 36.79 37.37 35.56
Clarion Hotel SFO Airport -- Milbrae(8)...... 80.4 86.3 81.3 59.43 52.09 44.79
Doubletree Club -- Rancho Bernardo(6)........ 67.8 68.3 65.6 50.61 48.51 43.09
Embassy Suites -- Palm Desert(9)............. 71.1 72.2 69.1 72.80 70.25 66.90
Westin Horton Plaza -- San Diego(9).......... 71.0 70.0 67.9 79.38 69.05 62.77
Westin LAX Airport -- Los Angeles(9)......... 71.6 79.9 70.9 47.05 44.60 40.32
Westwood Marquis -- Los Angeles(12).......... 63.6 56.8 59.0 108.86 91.98 92.57
Capitol Hill Suites -- Washington(6)......... 67.4 69.2 64.1 67.14 65.80 58.93
Westin Grand -- Washington(7)................ 56.8 45.5 N/A 76.95 58.07 N/A
Doubletree Guest Suites -- Cypress
Creek(8)................................... 72.3 71.8 65.1 59.39 55.36 53.43
Radisson Hotel -- Gainesville(6)............. 60.1 58.0 59.4 37.13 35.05 35.57
Westin Airport -- Tampa(8)................... 69.7 63.5 62.9 62.36 53.63 54.18
Wyndham Ft. Lauderdale Airport -- Dania(9)... 75.4 82.4 76.2 63.48 63.60 59.22
Best Western Historic District-
Savannah(5)(6)............................. 63.0 63.7 56.9 32.54 29.78 26.90
Holiday Inn -- Albany(6)..................... 69.5 77.2 78.9 42.79 45.61 44.23
Lenox Inn -- Atlanta(8)...................... 76.4 79.2 77.0 63.24 55.03 48.95
Sheraton Colony Square -- Atlanta(6)......... 68.0 72.4 72.4 75.44 64.86 62.68
Terrace Garden Inn -- Atlanta(8)............. 55.9 65.4 65.2 61.82 61.16 57.63
The Marque -- Atlanta(9)..................... 63.1 69.2 68.0 62.69 56.89 50.77
Westin at Concourse -- Atlanta(9)............ 71.9 71.6 74.2 78.67 68.92 64.79
Arlington Park Hilton -- Arlington
Heights(9)................................. 69.2 69.4 64.2 57.45 53.97 45.94
The Midland Hotel -- Chicago(2)(8)........... 72.4 73.5 71.2 92.50 81.94 76.49
Harvey Hotel -- Wichita(6)................... 61.8 63.7 57.7 35.89 39.83 29.21
Doubletree Guest Suites -- Lexington(6)...... 72.8 74.6 69.4 66.82 61.87 58.96
Park Plaza -- Boston(10)..................... 80.2 76.0 76.0 85.67 77.08 74.57
Sheraton Hotel -- Needham(9)................. 76.9 74.8 73.6 74.72 63.28 58.89
Westin Hotel -- Waltham(9)................... 75.3 72.3 69.8 83.76 72.41 67.82
Holiday Inn Calverton -- Beltsville(8)....... 62.0 63.0 58.0 44.03 42.52 36.75
Bay Valley Resort -- Bay City(6)............. 61.9 63.1 63.5 39.65 39.13 39.51
Doubletree Grand at MOA -- Bloomington(9).... 76.0 77.2 74.7 71.62 68.20 59.22
Sheraton Hotel Metrodome -- Minneapolis(9)... 74.8 85.3 75.7 56.27 61.42 50.69
Embassy Suites -- St. Louis(9)............... 68.0 72.0 71.7 65.79 63.37 62.01
Ritz Carlton -- Kansas City(9)............... 76.0 74.9 73.2 98.44 91.99 85.47
Omni Europa -- Chapel Hill(6)................ 69.6 71.0 64.8 63.56 59.87 48.30
Radisson Marque -- Winston-Salem(3)(5)(9).... 50.6 54.0 51.2 36.70 38.82 35.49
Marriott Forestal
Village -- Princeton(4)(8)................. 84.1 81.8 77.3 85.91 77.27 69.16
Best Western -- Las Cruces(5)(6)............. 61.6 75.1 71.2 30.82 33.75 30.43
Best Western Airport
Inn -- Albuquerque(5)(6)................... 77.4 82.9 86.4 45.22 47.00 47.04
Doral Court -- New York(11).................. 77.9 75.9 74.8 116.46 99.86 97.43
Doral Inn -- New York(13).................... 81.8 75.0 81.0 89.04 72.26 71.53
Doral Tuscany -- New York(11)................ 70.7 65.0 63.5 133.65 115.82 111.35
Days Inn City Center -- Portland(6).......... 72.4 77.8 70.6 50.17 47.23 37.50
Riverside Inn -- Portland(6)................. 64.9 77.5 78.1 59.80 55.30 50.52
Days Inn -- Philadelphia..................... 71.9 71.5 75.7 46.82 48.05 50.07
Doubletree Guest Suites -- Philadelphia...... 74.0 70.3 73.1 66.26 67.45 66.82
Hilton Hotel -- Allentown(9)................. 77.4 77.5 73.5 50.07 46.94 42.60
Ritz Carlton -- Philadelphia(9).............. 80.0 71.7 73.3 126.35 109.90 105.65
Best Western Airport -- El Paso(5)(6)........ 62.4 79.4 80.4 23.36 28.68 27.95
Doubletree Guest Suites DFW -- Irving(8)..... 78.1 78.7 67.8 77.51 71.76 61.86
Park Central -- Dallas(6).................... 24.6 36.0 42.3 13.90 19.81 25.37
Residence Inn Tysons Corner -- Vienna(6)..... 82.5 85.0 83.0 92.80 88.29 82.73
Days Inn Town Center -- Seattle(6)........... 76.4 81.4 79.4 56.46 51.06 48.43
Meany Tower -- Seattle(6).................... 68.1 72.9 71.2 53.40 53.09 50.17
Sixth Avenue Inn -- Seattle(6)............... 75.4 78.7 75.1 63.39 58.57 52.60
The Tyee Hotel -- Olympia(6)................. 55.7 58.4 57.4 35.96 36.00 34.80
Marriott Brookfield -- Milwaukee(2)(7)....... 74.1 71.3 69.8 55.37 51.47 47.40
ALL HOTELS................................... 70.4 71.7 70.3 66.46 61.00 56.98
11
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- ---------------
(1) "Year acquired" represents the calendar year in which the Trust or
Corporation (or a predecessor) made its initial investment in the property.
(2) Property owned by the Corporation subject to a first mortgage to the Trust.
(3) Property owned by the Corporation.
(4) Property is subject to a ground lease expiring in December, 2055, which is
terminable by the ground lessor after September, 1999, upon six months'
notice under certain circumstances.
(5) Property is an asset held for sale at December 31, 1996.
(6) Property is subject to a mortgage under the Acquisition Facility.
(7) Property is subject to a mortgage under the Mortgage Facility.
(8) Property is subject to a mortgage under the Term Loan.
(9) Property is subject to a security interest under the Goldman Facility.
(10) The Trust owns a 58.2% general partnership interest in this hotel and
property is subject to a mortgage under the BPP Mortgage.
(11) Property is subject to a mortgage under the Doral Mortgage.
(12) The Trust owns a 93.5% general partnership interest in this hotel.
(13) The Trust owns the land and holds a leasehold mortgage on the building and
personal property and the Operating Partnership operates the hotel pursuant
to a sublease.
MORTGAGE AND OTHER NOTES RECEIVABLES.
At December 31, 1996, the Trust held five intercompany promissory notes
issued by the Operating Partnership, three of which ($29.6 million in aggregate
principal amount at December 31, 1996) are related to the Marriott in Milwaukee,
Wisconsin; one note ($40.3 million in principal amount at December 31, 1996) is
secured by the Doral Inn in New York, New York; and one note ($18.2 million in
principal amount at December 31, 1996) is secured by the Midland Hotel in
Chicago, Illinois.
At December 31, 1996, the Trust held nineteen promissory notes either
contributed by the Starwood Partners as part of the Reorganization, executed by
third-party purchasers of its hotels, or purchased during 1996 by the Trust, all
of which are secured by mortgages (including deeds of trust) on fourteen hotels
in the aggregate. Of these nineteen promissory notes, thirteen notes ($112.0
million in aggregate principal amount at December 31, 1996) are secured by first
mortgages; four notes ($1.3 million in aggregate principal amount as of December
31, 1996) are secured by second mortgages; one note ($1.3 million in principal
amount as of December 31, 1996) is secured by a third mortgage; and one note
($169,000 in principal amount as of December 31, 1996) is secured by a fourth
mortgage. Of these nineteen promissory notes, nine notes have fixed interest
rates that currently range from 7.0% to 10.0% per annum; six notes have variable
interest rates that range from 6.81% to 13.5% per annum at December 31, 1996;
three notes require principal payments only; one note also provides for
contingent interest based on a percentage of the gross revenue of the property
securing such note; and one note was purchased at a significant discount with no
payment of interest expected. The maturity dates of the notes range from 1997 to
2010.
For additional information with respect to the mortgage notes receivable
held by the Trust, see Notes 8 and 9 of Notes to Financial Statements included
in Item 8 of this Joint Annual Report.
In December 1987, in connection with the acquisition by the Company of an
interest in two Atlanta, Georgia, area hotels (which have been subsequently
sold), John F. Rothman, a former President and Chief Executive Officer of the
Trust, assumed certain obligations of the seller, which obligations are
evidenced by an unsecured promissory note to the Trust in the principal amount
of $800,000. Interest on the outstanding principal amount of this note accrues
interest at an annual rate of 10% and is payable annually; the entire principal
amount of the note is due in December 1999.
In addition, during 1995 the Trust loaned Jeffery C. Lapin, a former
President of the Trust, $250,000. During 1996, the Corporation made a $150,000
non-interest bearing bridge loan to Eric A. Danziger, the President and Chief
Executive Officer of the Corporation. The bridge loan is secured by a second
mortgage on Mr. Danziger's residence in Phoenix, Arizona. The bridge loan
matures in September 1997. During 1996, the Corporation made a $266,667
non-interest bearing bridge loan to an officer of the Corporation, Theodore W.
Darnall. The bridge loan is secured by a second mortgage on Mr. Darnall's
residence in Phoenix, Arizona. The
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bridge loan will mature as to $100,000 upon the sale of Mr. Darnall's home in
Pittsburgh, Pennsylvania, and the balance upon termination of his employment
with the Corporation. (see Note 15 of Notes to Financial Statements included in
Item 8 of this Joint Annual Report and Item 11 of this Joint Annual Report --
"Employment and Compensation Agreements with Executive Officers").
FRANCHISE AGREEMENTS
Forty-seven of the 62 hotel properties in which Starwood Lodging had an
equity interest at December 31, 1996, are operated pursuant to franchise or
license agreements ("Franchise Agreements"). The Franchise Agreements generally
require the payment of a monthly royalty fee based on gross room revenue and
various other fees associated with certain marketing or advertising and
centralized reservation services, also generally based on gross room revenues.
The Franchise Agreements have various durations but generally may be
terminated upon prior notice no greater than three years or upon payment of
certain specified fees.
The Franchise Agreements generally contain specific standards for, and
restrictions and limitations on, the operation and maintenance of the hotels
which are established by the franchisors to maintain uniformity in the system
created by each such franchisor. Such standards generally regulate the
appearance of the hotel, quality and type of goods and services offered,
signage, and protection of marks. Compliance with such standards may from time
to time require significant expenditures for capital improvements.
The Franchise Agreements also generally contain financial reporting
requirements relating to the calculation of royalty and other fees and insurance
requirements with respect to specified liabilities, approved coverage limits and
minimum insurance company rating.
The Franchise Agreements generally require the consent of the franchisor to
a transfer of an interest in the applicable franchise, and both the consent of
the franchisor and the execution of a new franchise agreement in the event of a
transfer of all or controlling portion of the franchisee under the relevant
Franchise Agreement. In addition, some Franchise Agreements may require payment
of an initial fee upon establishment of a franchise relationship.
MANAGEMENT AGREEMENTS
As of December 31, 1996, four of the Company owned hotels were managed by
third-party operators: The Marriott Forrestal Village is operated by Marriott
International, Inc. ("Marriott") pursuant to a lease expiring in 2007 (subject
to earlier termination if certain annual financial performance standards are not
met or upon payment of a termination fee by the Company), the Ritz Carlton
Hotels in Philadelphia, Pennsylvania, and Kansas City, Missouri, are operated by
an affiliate of Marriott pursuant to operating agreements that terminate in 1999
(subject to earlier termination if certain annual financial performance
standards are not met) and the Harvey Hotel in Wichita, Kansas, is operated by
Bristol Hotel Company pursuant to a management agreement that terminates in 1998
(subject to earlier termination if certain annual financial performance
standards are not met or upon payment of a fee by the Company).
Each such agreement with a third-party provides that the operator has the
exclusive right to direct the operations of the hotel subject to that agreement.
The operator is responsible for maintaining and making all necessary repairs to
the managed hotel, hiring, training and supervising all hotel employees, and
performing all hotel bookkeeping and other administrative duties.
Each operator is required to submit to the Company for its approval an
annual budget that includes proposed capital expenditures, and the operator
makes only those capital expenditures that are approved by Company. The Company
is required to make available to each operator sufficient working capital to
operate the hotel.
For their services in managing the hotels, each third-party operator
receives a fee equal to a specified percentage (generally 2% - 3%) of the gross
revenues of the managed hotel, plus additional incentive fees based upon the
hotel's operating profits.
As of the date of this Joint Annual Report, the Company manages nine hotels
owned by third-parties.
The management agreements have expiration dates ranging from 1997 to 2016
with management fees ranging from 2.5% of hotel revenues to 4% of hotel
revenues.
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REGULATION AND LICENSING
The lease and operation of the casino gaming facilities by Starwood Lodging
in Nevada are subject to extensive licensing and regulatory control of the
Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming
Control Board (the "Nevada Board") and the Clark County Liquor and Gaming
Licensing Board (the "Clark County Board" and, together with the Nevada
Commission and the Nevada Board, the "Nevada Gaming Authorities").
The gaming laws, regulations and supervisory procedures of Nevada seek to
(i) prevent unsavory or unsuitable persons from having any direct or indirect
involvement with gaming at any time or in any capacity; (ii) establish and
maintain responsible accounting practices and procedures; (iii) maintain
effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable record keeping and making periodic
reports to the Nevada Gaming Authorities; (iv) prevent cheating and fraudulent
practices; and (v) provide a source of state and local revenues through taxation
and licensing fees. Changes in these laws, regulations and procedures could have
an adverse effect on the Corporation's gaming operations.
The Corporation is registered with the Nevada Commission as a publicly
traded corporation and has been found suitable as a holding company by the
Nevada Gaming Authorities to own all of the outstanding capital stock of HICN.
HICN operates the King 8 pursuant to licenses granted by the Nevada Gaming
Authorities. No person may become a stockholder of, or receive any percentage of
profits from, HICN without first obtaining licenses and approvals from the
Nevada Gaming Authorities. Prior approval of the Nevada Commission is required
for the sale, assignment, transfer, pledge or other disposition of any security
issued by HICN.
During 1996, Starwood Lodging sold Bourbon Street and the real property
related to the King 8. The Company continues to own the personal property
related to the King 8 and to operate the King 8 pending the buyer's receipt of
the requisite licenses and approvals from the Nevada Gaming Authorities.
The licenses and approvals held by HICN are not transferable and must be
renewed periodically upon the payment of appropriate taxes and license fees. The
licensing authorities have broad discretion with regard to the renewal of the
licenses. The issuing agency may at any time revoke, suspend, condition, limit
or restrict a license or approval to own stock in a corporate licensee for any
cause deemed reasonable by the issuing agency. Substantial fines for each
violation of gaming laws or regulations may be levied against HICN, the
Corporation and the individuals involved. A violation under any one of the
licenses held by HICN may be deemed a violation of one or more other licenses or
approvals held by HICN. If HICN's licenses are revoked or suspended or are not
renewed, the Nevada Commission may petition a Nevada district court to appoint a
supervisor to operate the affected property until a new operator is licensed.
Suspension or revocation of the license of HICN, disapproval of the Corporation
to own the stock of HICN or court appointment of a supervisor over operations of
the King 8 could have a material adverse effect upon the Trust and the
Corporation.
Directors, officers and certain key employees of HICN must file license
applications with the Nevada Gaming Authorities. Certain officers, directors and
key employees of HICN are licensed by the Nevada Gaming Authorities, and any
required license applications of the remaining officers, directors or key
employees have been filed with the Nevada Board. An application for licensing
may be denied for any cause deemed reasonable by the issuing agency. Changes in
corporate management or executive positions must be reported to the Nevada
Gaming Authorities. In addition to its authority to deny an application for a
license, the Nevada Commission has jurisdiction to disapprove a change in a
management or executive position with a regulated corporation. If the Nevada
Gaming Authorities were to find a director, officer or key employee unsuitable
for licensing or unsuitable to continue having a relationship with HICN or the
Corporation, the Corporation and HICN would have to sever all relationships with
that person. The Corporation and HICN would have similar obligations with regard
to any person who refused to file appropriate applications. Each gaming employee
must obtain, and periodically renew, a work permit, which may be revoked upon
the occurrence of certain specified events.
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HICN must submit detailed financial and operating reports to the Nevada
Commission, which are subject to routine audit by the Nevada Board.
Substantially all loans, leases, sales of securities and similar financing
transactions entered into by HICN must be reported to or approved by the Nevada
Commission. The fiscal stability of HICN must be adequate to satisfy gaming
financial obligations such as state and local government taxes and fees, and the
payment of winning wagers to patrons. Failure to satisfy these gaming financial
obligations is grounds for the Nevada Gaming Authorities to limit, condition,
restrict, suspend or revoke the gaming licenses and approvals of HICN and the
registration and approvals of the Corporation, or to impose administrative fines
against HICN or the Corporation.
As a registered publicly traded holding company found suitable as the sole
stockholder of HICN, the Corporation is required periodically to submit detailed
financial and operating reports to the Nevada Commission and to furnish any
other information that the Nevada Commission or Nevada Board may require. The
Corporation's directors, officers and key employees who are actively and
directly engaged in the administration or supervision of gaming are subject to
licensing and findings of suitability by the Nevada Commission. Certain
directors and officers of the Corporation have filed their license applications
as requested by the Nevada Board. The finding of suitability is comparable to
licensing, and both require submission of detailed personal background and
personal financial information followed by a thorough investigation, and payment
by the applicant of all investigative costs and charges. Any individual who is
found to have a material relationship to or material involvement with the
Corporation also may be required to be found suitable or be licensed and may be
investigated. Key employees, controlling persons or others who exercise
significant influence upon the management or affairs of the Corporation, or are
actively engaged in the administration or supervision of gaming activities, may
be deemed to have this type of a relationship or involvement.
Any beneficial holder of the Corporation's voting securities, regardless of
the number of shares owned, may be required to file an application, be
investigated, and have his suitability as a beneficial holder of the
Corporation's voting securities determined if the Nevada Commission has reason
to believe that such ownership would otherwise be inconsistent with the declared
policies of the state of Nevada. The applicant must pay all costs of
investigation incurred by the Nevada Gaming Authorities in conducting any such
investigation.
Any person who acquires more than 5% of any class of voting securities of
the Corporation must report the acquisition to the Nevada Commission. Beneficial
owners of more than 10% of any class of the Corporation's voting securities must
apply to be found suitable by the Nevada Commission within 30 days after the
Chairman of the Nevada Board mails the written notice requiring such filing, and
any beneficial owner of the Corporation's voting securities, whether or not such
person is a controlling stockholder, may be required to be found suitable if the
Nevada Commission has reason to believe that such ownership would be
inconsistent with the declared policy of the state of Nevada that licensed
gaming be conducted honestly and competitively and that the gaming industry be
free from criminal and corruptive elements.
An "institutional investor" (as defined by the Regulations of the Nevada
Commission) holding at least 10%, and in certain circumstances up to 15%, of the
voting securities of the Corporation may apply for and hold a waiver of the
mandatory suitability determination requirement prescribed by the Nevada Gaming
Control Act. To qualify as an "institutional investor," a person or entity must
satisfy one of several alternative criteria under the federal Securities
Exchange Act of 1934, the Investment Company Act of 1940, or state and federal
pension and retirement laws, as well as acquire and hold the voting securities
for investment purposes in the ordinary course of business and not for the
purpose of effecting any change of control in or the management or policies of
the registered holding company or its gaming affiliates. Activities which are
not deemed to be inconsistent with holding voting securities for investment
purposes only include: (i) voting on all matters voted on by stockholders; (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
A change in investment intent of an institutional investor must be reported
to the Chairman of the Nevada Board within two business days of such change of
intent. The Chairman of the Nevada Board may
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require an institutional investor to apply for a finding of suitability upon
receipt of notice of change in investment intent, or at any time deemed
necessary to protect the public interest. An aggrieved institutional investor
may apply for Nevada Commission review of the decision of the Chairman of the
Nevada Board ordering the filing of a suitability determination application. The
Corporation or HICN must promptly report to the Nevada Commission any
information that materially affects the institutional investor's eligibility to
hold a waiver.
If the stockholder who must be found suitable is a corporation, partnership
or trust, that stockholder must submit detailed business and financial
information including a list of beneficial owners. In addition, the Clark County
Board has taken the position that it has the authority to approve all persons
owning or controlling more than two percent of the stock of a gaming licensee or
of any corporation controlling a gaming licensee. The applicant is required to
pay all costs of investigation.
Any stockholder found unsuitable by the Nevada Commission who directly or
indirectly holds any beneficial or ownership interest in Corporation shares
beyond whatever period of time may be prescribed by the Nevada Commission may be
guilty of a criminal offense. Any person who fails or refuses to apply for a
finding of suitability or a license within 30 days after being ordered to do so
by the Nevada Commission or Chairman of the Nevada Board may be found
unsuitable. The same restrictions that apply to a security holder who is found
unsuitable may be held to apply to a beneficial owner of the Corporation's
securities if the record owner, after request, fails to identify the beneficial
owner. The Corporation is subject to disciplinary action if, after receiving
notice that a person is unsuitable to be a stockholder or to have any other
relations with the Corporation or its gaming subsidiaries, the Corporation (i)
pays the unsuitable person any dividend or interest upon any voting securities
of the Corporation or makes any other unpermitted payment or distribution of any
kind whatsoever; (ii) recognizes the exercise, directly or indirectly, of any
voting rights in the Corporation's securities by the unsuitable person; (iii)
pays the unsuitable person any remuneration in any form for services rendered or
otherwise, except in certain limited and specific circumstances; or (iv) fails
to pursue all lawful efforts to require the unsuitable person to divest himself
of his voting securities, including, if necessary, the immediate purchase by the
Corporation of the voting securities for cash at fair market value. In addition,
Nevada law requires that any holder or owner of a voting security who is found
unsuitable by the Nevada Commission immediately offer those securities to the
Corporation for purchase, which securities would be purchased by the Corporation
for cash at fair market value within 10 days from the date the securities are
offered.
The Nevada Commission may, in its discretion, require the holder of any
debt security of a corporation registered under the Nevada Gaming Control Act to
file applications, be investigated and be found suitable to own the debt
security of a registered corporation. If the Nevada Commission determines that a
person is unsuitable to own such debt security, then pursuant to the Regulations
of the Nevada Commission, the registered corporation can be sanctioned,
including the loss of its approvals, if without the prior approval of the Nevada
Commission it (i) pays to the unsuitable person any dividend, interest or other
distribution whatsoever; (ii) recognizes any voting right of such unsuitable
person in connection with such securities; (iii) pays the unsuitable person
remuneration in any form; or (iv) makes any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation, or similar
transaction.
The Corporation is required to maintain a current and comprehensive stock
ledger in the state of Nevada, which ledger may be examined by the Nevada Gaming
Authorities at all reasonable times, but without notice. If any securities are
held in trust, by an agent or by a nominee, the owner of record of those
securities may be required to disclose the identity of the beneficial owner to
the Nevada Gaming Authorities. A failure to make this disclosure may be grounds
for finding the owner of record unsuitable. The Corporation must render maximum
assistance to the Nevada Gaming Authorities in determining the identity of the
beneficial owner.
The Nevada Commission has the power at any time to require that the
Corporation's stock certificates bear a legend to the general effect that the
securities of the Corporation are subject to the Nevada Gaming Control Act and
the regulations of the Nevada Commission. However, to date, the Nevada
Commission has not imposed such a requirement on the Corporation. The Clark
County Board also claims jurisdiction to approve or disapprove holders of the
Corporation's securities. The Nevada Gaming Authorities, through the
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power to regulate licensees and otherwise by Nevada law, have the power to
impose additional restrictions on the holders of the Corporation's securities at
any time.
The Regulations of the Nevada Commission provide that changes in the
control of the Corporation or HICN through a merger, consolidation, acquisition
of assets, management or consulting agreements or any form of takeover cannot
occur without the prior approval of the Nevada Commission. Entities seeking to
acquire control of the Corporation must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming control of the
Corporation. The Nevada Commission may also require controlling stockholders,
officers, directors and other persons having a material relationship or
involvement with the entity proposing to acquire control, to be investigated and
licensed as part of the approval process relating to the transaction.
The Nevada Legislature has declared that some corporate acquisitions
opposed by management, repurchases of securities and corporate defense tactics
affecting corporate gaming licensees in Nevada, and publicly traded corporations
affiliated with those licensees may be injurious to stable and productive
corporate gaming operations. The Nevada Commission has established a regulatory
scheme to ameliorate the potential adverse effects of these business practices
upon Nevada's gaming industry and to advance Nevada's policy to (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals may be required from the Nevada Commission before the
corporation may make exceptional repurchases of securities above current market
price (commonly referred to as "greenmail"), and before a corporate acquisition
opposed by management can be consummated. Nevada's gaming regulations also
require prior approval of the Nevada Commission in the event of a corporation
plan of recapitalization proposed by the board of directors in opposition to a
tender offer made directly to shareholders for the purpose of acquiring control
of the corporation.
Nevada law prohibits the Corporation from making a public offering of its
securities without the approval of the Nevada Commission if any part of the
proceeds of the offering is to be used to finance the construction, acquisition
or operation of gaming facilities in Nevada, or to retire or extend obligations
incurred for one or more such purposes. Approval of the public offering will not
constitute a finding by the Nevada Commission as to the accuracy, adequacy or
investment merit of the securities offered to the public. Any representation to
the contrary is unlawful.
The gaming regulatory requirements discussed above apply to certain aspects
of the Reorganization. The contribution by HICN of the Gaming Assets (and the
transfer of certain liabilities to be retained by HICN) to the Operating
Partnership will occur on receipt of certain licenses or approvals by the Nevada
Gaming Authorities. Likewise, the election of the new members of the Board of
Directors of the Corporation since the Reorganization will be effective upon
receipt of certain licenses or approvals by the Nevada Commission. Nevada gaming
regulatory approvals are expected to be received by the end of 1997, unless
previously received by the purchaser of the King 8. In conjunction with applying
for and obtaining such licenses and approvals, the Corporation has developed
various policies and procedures subject to review, approval and oversight by the
Nevada Board. The purpose of these corporate policies and procedures is to
ensure compliance with the regulatory requirement that prior approval of the
Nevada Commission is obtained for any transaction that would result in either
Starwood Capital or the Starwood Partners acquiring control of the Corporation
or its Nevada gaming operations. The Corporation expects that these policies and
procedures will be eliminated upon receipt of certain licenses and approvals
from the Nevada Commission. If the required licenses or approvals of the Nevada
Gaming Authorities are not received on or before December 31, 1997, then on such
date HICN has agreed to contribute to the Operating Partnership cash equal to
the fair value of the Gaming Assets on such date.
License fees and taxes, computed in various ways depending on the type of
gaming involved, are payable to the State of Nevada and to the County of Clark
where HICN's gaming operations are conducted. Depending upon the particular fee
or tax involved, these assessments are payable either monthly, quarterly, or
annually and are based upon either (i) a percentage of the gross gaming revenues
received by the casino operations; (ii) the number of slot machines or other
gaming devices operated by the casino; or (iii) the
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number of table games operated by the casino. A casino entertainment tax is also
paid by the licensees where entertainment is furnished in connection with the
selling of food or refreshments.
The sale of alcoholic beverages by HICN is subject to licensing, control
and regulation by the Clark County Board. Such liquor licenses are revocable and
are not transferable. The Clark County Board has full power to limit, condition,
suspend or revoke any liquor license, and any disciplinary action of this nature
or license revocation would have a material adverse effect on HICN's gaming
operations.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 30, 1996, (i) the Trust held its 1996 annual meeting of
shareholders of the Trust (the "Trust Meeting") to elect two Trustees to the
Board of Trustees of the Trust and to approve the amendment and restatement of
the 1995 Share Option Plan of the Trust as the Starwood Lodging Trust 1995
Long-Term Incentive Plan and (ii) the Corporation held its 1996 annual meeting
of stockholders of the Corporation (the "Corporation Meeting") to elect three
Directors to the Board of Directors of the Corporation (to take effect upon
receipt of a Gaming Approval) and to approve the amendment and restatement of
the 1995 Stock Option Plan of the Corporation as the Starwood Lodging
Corporation 1995 Long-Term Incentive Plan.
At the Trust Meeting, shareholders of the Trust voted upon and approved (i)
the election as Trustees of the Trust of Stephen R. Quazzo and Steven R. Goldman
and (ii) the adoption of the Starwood Lodging Trust 1995 Long-Term Incentive
Plan (Amended and Restated as of August 12, 1996) (the "Trust LTIP"). Messrs.
Grose, Simms, Duncan, Stern and Sternlicht continued as Trustees.
The following sets forth, with respect to each matter voted upon at the
Trust Meeting, the number of votes cast for, the number of votes cast against,
and the number of votes abstaining (or, with respect to the election of
Trustees, the number of votes withheld) with respect to such matter and are
presented after giving effect to the three-for-two stock split in January 1997:
VOTES VOTES VOTES
FOR AGAINST ABSTENTIONS WITHHELD
---------- --------- ----------- ---------
Election of Trustees:
Stephen R. Quazzo................................ 34,620,521 0 0 60,215
Steven R. Goldman................................ 34,551,746 0 0 128,990
Adoption of the Starwood Lodging Trust 1995
Long-Term Incentive Plan (Amended and Restated as
of August 12, 1996).............................. 22,737,539 7,560,834 58,995
At the Corporation Meeting, stockholders of the Corporation voted upon and
approved (i) the election as Directors of the Corporation of the following
nominees: Jean-Marc Chapus, Eric A. Danziger and Michael A. Leven (Messrs.
Chapus, Danziger and Leven to take office upon receipt of Gaming Approval), and
(ii) the adoption of the Starwood Lodging Corporation 1995 Long-Term Incentive
Plan (Amended and Restated as of August 12, 1996) (the "Corporation LTIP").
Messrs. Ford, Jones and Henderson continued to serve as the Directors of the
Corporation. These three individuals, as well as Messrs. Yih, Eilian,
Sternlicht, Chapus, Danziger and Leven serve as the Management Committee of the
Operating Partnership. Messrs. Yih, Eilian, Sternlicht, Chapus, Danziger and
Leven are Directors-Elect of the Corporation and will take office as Directors
on the receipt of the Gaming Approvals or sale of all the gaming assets. Messrs.
Ford and Henderson have indicated that upon the sale of Starwood Lodging's
gaming operations or receipt of the approval of the Nevada Gaming Authorities
(see Item 2, "Regulation and Licensing" of this Joint Annual Report) by the
Directors who have not yet received such approval, they intend to resign as
Directors.
The following sets forth, with respect to each matter voted upon at the
Corporation Meeting, the number of votes cast for, the number of votes cast
against, and the number of votes abstaining (or, with respect to the
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election of Directors, the number of votes withheld) with respect to such matter
and are presented after giving effect to the three-for-two stock split in
January 1997:
VOTES VOTES VOTES
FOR AGAINST ABSTENTIONS WITHHELD
---------- --------- ----------- ---------
Election of Directors:
Jean-Marc Chapus................................. 31,036,356 0 0 3,644,379
Eric A. Danziger................................. 34,551,098 0 0 129,638
Michael A. Leven................................. 34,619,913 0 0 60,822
Adoption of Starwood Lodging Corporation
1995 Long-Term Incentive Plan
(Amended and Restated as of August 12, 1996)..... 24,584,796 6,509,378 55,199
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Paired Shares are traded principally on the New York Stock Exchange
(the "NYSE") under the symbol "HOT".
The following table sets forth, for the fiscal periods indicated, the high
and low sales prices per Paired Share on the NYSE Composite Tape (as adjusted
for the one-for-six reverse stock split in June 1995 and the three-for-two stock
split in January 1997).
DISTRIBUTIONS RETURN OF CAPITAL
HIGH LOW MADE GAAP BASIS(a)
------ ------ ------------- -----------------
1996
First quarter.................................. $23.25 $19.67 $0.31 $0.11
Second quarter................................. $25.75 $21.17 $0.33 --
Third quarter.................................. $27.92 $22.08 $0.33 $0.14
Fourth quarter................................. $36.75 $27.42 $0.39(b)(c) $0.22
1995
First quarter.................................. $16.00 $10.50 None N/A
Second quarter................................. $16.50 $14.00 None N/A
Third quarter.................................. $19.42 $15.75 $0.31 $0.14
Fourth quarter................................. $20.00 $17.92 $0.31(d) $0.11
- ---------------
(a) Represents distributions per Paired Share in excess of net income per Paired
Share on a GAAP basis, and is not the same as return of capital on a tax
basis.
(b) The Trust declared a distribution for the fourth quarter of 1996 to
shareholders of record on December 30, 1996. The distribution was paid in
January 1997.
(c) During the fourth quarter of 1996 the Trust and the Corporation each
declared a three-for-two stock split in the form of a 50% stock dividend
payable to shareholders of record on December 30, 1996. The stock dividend
was paid in January 1997.
(d) The Trust declared a distribution for the fourth quarter of 1995 to
shareholders of record on December 29, 1995. The distribution was paid in
January 1996.
HOLDERS
As of February 28, 1997, there were approximately 1,869 holders of record
of Paired Shares.
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DISTRIBUTIONS MADE/DECLARED
During the fourth quarter of 1996 the Trust and the Corporation each
declared a three-for-two stock split in the form of a 50% stock dividend payable
to shareholders of record on December 30, 1996. The stock dividend was paid in
January 1997. The Trust declared and paid dividends of $0.31, $0.33, $0.33 and
$0.39 per share (as adjusted for the three-for-two stock split in January 1997)
for the first, second, third and fourth quarters of 1996 respectively. The
fourth quarter dividend was paid in January 1997. The Trust declared and paid a
dividend of $0.31 per share (as adjusted for the three-for-two stock split in
January 1997) for the third and fourth quarters of 1995. The fourth quarter
dividend was paid in January 1996. No distributions were made by the Trust
during 1994. The Corporation has not paid any cash dividends since its
organization and does not anticipate that it will make any such distributions in
the near future. Under the terms of the Lines of Credit, Starwood Lodging is
generally permitted to distribute to its shareholders on an annual basis an
amount equal to the greatest of (1) 95% of combined funds from operations for
any four consecutive calendar quarters; (2) an amount sufficient to maintain the
Trust's tax status as a real estate investment trust; and (3) the amount
necessary for the Trust to avoid the payment of federal income or excise tax.
ITEM 6. SELECTED FINANCIAL DATA.
The following data sets forth certain financial information for each of the
Trust and the Corporation, and the Trust and the Corporation on a combined
basis. This information is based on and should be read in conjunction with the
financial statements and the notes thereto appearing elsewhere in this Joint
Annual Report.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA
Revenue:
Trust........................... $115,059 $ 44,023 $ 21,671 $ 20,342 $ 26,784
Corporation..................... 410,156 149,184 110,962 114,828 116,172
Combined(1)..................... 428,538 161,716 113,997 117,155 117,656
Net Income (Loss):
Trust(2)........................ $ 33,589 $ 10,709 $ (3,465) $ (3,889) $ (9,818)
Corporation(2).................. (6,638) (1,739) (1,198) (3,143) (9,925)
-------- -------- -------- -------- --------
Combined........................ 26,951 8,970 (4,663) (7,032) (19,743)
Net Income (Loss) Per Share/Paired
Share(3):
Trust........................... $ 1.12 $ 0.92 $ (1.14) $ (1.28) $ (3.24)
Corporation..................... (0.22) (0.15) (0.39) (1.04) (3.27)
-------- -------- -------- -------- --------
Combined........................ $ 0.90 $ 0.77 $ (1.53) $ (2.32) $ (6.51)
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AT DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA
Total Assets:
Trust............................ $1,233,366 $425,737 $162,245 $232,845 $245,540
Corporation...................... 185,192 120,721 48,626 49,993 53,611
Combined(1)...................... 1,312,740 459,994 183,955 195,352 210,945
Total Debt:
Trust............................ $ 477,603 $119,200 $146,734 $156,526 $157,541
Corporation...................... 107,781 90,749 40,664 101,846 100,246
Combined(1)...................... 479,566 123,485 160,482 170,886 170,297
Shareholders' Equity (Deficit):
Trust............................ $ 569,300 $204,728 $ 10,450 $ 72,205 $ 76,371
Corporation...................... 23,361 10,740 (1,742) (58,879) (55,752)
---------- -------- -------- -------- --------
Combined......................... 592,661 215,468 8,708 13,326 20,351
Paired Shares outstanding at end of
period(3)........................ 40,078 20,697 3,033 3,033 3,033
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CASH FLOW AND DIVIDEND DATA
Net cash provided by operating
activities:
Trust............................. $ 61,589 $ 11,267 $ 4,455 $ 3,136 $ 2,773
Corporation....................... 12,578 5,144 4,438 2,396 1,917
Combined.......................... 74,167 16,411 8,893 5,532 4,690
Net cash provided by (used in)
investing activities:
Trust............................. $(726,427) $(175,506) $ 8,239 $ 2,474 $ (161)
Corporation....................... (33,774) (44,003) 215 (4,426) (942)
Combined(1)....................... (746,800) (181,995) 4,489 (3,645) (1,514)
Net cash provided by (used in)
financing activities:
Trust............................. $ 667,938 $ 164,694 $(13,357) $(7,307) $ (850)
Corporation....................... 34,190 42,671 (4,577) (1,138) (816)
Combined(1)....................... 688,727 169,851 (13,969) (6,752) (1,255)
Cash distributions to
shareholders -- Trust(4).......... 46,218 9,265 $ 0 $ 0 $ 0
Cash distributions per share --
Trust(3)(4)....................... $ 1.36 $ 0.62 $ 0 $ 0 $ 0
- ---------------
(1) The individual amounts with respect to the Trust and Corporation do not add
to Combined amounts due to accounting elimination entries.
(2) For the Trust, includes gains (losses) on sales in the amount of $4,290,000,
($125,000), $432,000, ($53,000) and ($791,000) for the years ended December
31, 1996, 1995, 1994, 1993 and 1992 respectively, and provisions for
investment losses of $759,000, $2,369,000 and $3,419,000 in the years ended
December 31, 1994, 1993 and 1992, respectively. For the Corporation,
includes gains on sales of $24,000, $74,000 and $4,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
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(3) As adjusted for a one-for-six reverse stock split in June 1995 and a
three-for-two stock split in January 1997.
(4) Presented only for the Trust, as the Corporation did not pay cash dividends
for the periods presented.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HISTORICAL RESULTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
THE TRUST
Rents from the Corporation, which are based largely on hotel revenues,
increased $60.9 million for the year ended December 31, 1996, as compared to the
corresponding period of 1995. The increase was primarily the result of rents
earned by the Trust on 33 hotels containing approximately 9,700 rooms (the
"Acquired Hotels") acquired by the Trust since April 1995. The investment in 33
hotels (the 168-room Omni Europa acquired in April 1995; the 462-room Sheraton
Colony Square acquired in July 1995; the 224-suite Embassy Suites Tempe acquired
in July 1995; the 364-room Terrace Garden Inn, and 180-room Lenox Inn acquired
in October 1995; the 206-room Holiday Inn Calverton acquired in November 1995;
the 263-room Westin, Washington, D.C. acquired in January 1996; the 960-room
Boston Park Plaza acquired in January, 1996; the 442-room Clarion Hotel acquired
in April 1996; the three Doubletree Guest Suites hotels acquired in April 1996;
the 177-room Days Inn and 251-suite Doubletree Guest Suites acquired in July
1996; the Institutional Portfolio, the HOD Portfolio (excluding the 293-room
Radisson Marque which was acquired by the Corporation) and the 294-room Marriott
Forrestal Village acquired in August 1996, and the 121-room Doral Tuscany and
the 199-room Doral Court acquire