Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 0-24097
CNL HOSPITALITY PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 59-3396369
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 650-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $0.01 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has 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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes No X
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 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. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of shares of common stock (the
"Shares") on Form S-11 under the Securities Act of 1933, as amended. As of
February 17, 2000, 29,939,869 shares were beneficially owned by non-affiliates.
Since no established market for such Shares exists, there is no market value for
such Shares. Each Share was originally sold at $10 per Share.
The number of Shares of common stock outstanding as of February 17,
2000, was 31,371,829.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL Hospitality
Properties, Inc. Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 30, 2000.
PART I
Item 1. Business
CNL Hospitality Properties, Inc. was organized pursuant to the laws of
the state of Maryland on June 12, 1996. CNL Hospitality GP Corp. and CNL
Hospitality LP Corp. are wholly owned subsidiaries of CNL Hospitality
Properties, Inc., each of which were organized in Delaware in June 1998. CNL
Hospitality Partners, LP is a Delaware limited partnership (the "Partnership")
formed in June 1998. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are
the general and limited partners, respectively, of CNL Hospitality Partners, LP.
Properties acquired are generally expected to be held by the Partnership and, as
a result, owned by CNL Hospitality Properties, Inc. through the Partnership. The
terms "Company" or "Registrant" include, unless the context otherwise requires,
CNL Hospitality Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality
GP Corp., CNL Hospitality LP Corp. and CNL Philadelphia Annex, LLC (formerly
known as Courtyard Annex L.L.C.). The Company operates for federal income tax
purposes as a real estate investment trust (a "REIT").
The Company was formed primarily to acquire properties (the
"Properties") located across the United States to be leased on a long-term
(generally, 10 to 20 years, plus renewal options for up to an additional 20
years), "triple-net" basis, which means that the tenants generally are
responsible for repairs, maintenance, property taxes, utilities and insurance.
The Properties are leased to operators of selected national and regional limited
service, extended stay and full service hotel chains (the "Hotel Chains"). The
Company structures the leases of its Properties to provide for payment of base
rent with (i) automatic increases in base rent and/or (ii) percentage rent based
on a percentage of gross sales above a specified level. The Company may also
provide Mortgage Loans (the "Mortgage Loans") in the aggregate principal amount
of approximately 5% to 10% of the gross offering proceeds. The Company also may
offer furniture, fixture and equipment financing ("Secured Equipment Leases") to
operators of Hotel Chains. Secured Equipment Leases will be funded from the
proceeds of financing to be obtained by the Company. The aggregate outstanding
principal amount of Secured Equipment Leases will not exceed 10% of gross
proceeds from the Company's offerings of Shares of common stock.
On July 9, 1997, the Company commenced an offering to the public of up
to 16,500,000 shares of common stock (the "Shares") ($165,000,000) (the "Initial
Offering") pursuant to a registration statement on Form S-11 under the
Securities Act of 1933, as amended. Of the 16,500,000 Shares of common stock
offered, 1,500,000 ($15,000,000) were available only to stockholders who elected
to participate in the Company's reinvestment plan. Upon completion of the
Initial Offering on June 17, 1999, the Company had received aggregate
subscription proceeds of $150,072,637 (15,007,264 Shares), including $72,637
(7,264 Shares) through the Company's reinvestment plan. Following the completion
of its Initial Offering, the Company commenced a second offering (the "1999
Offering") of up to 27,500,000 Shares of common stock ($275,000,000). Of the
27,500,000 Shares of common stock offered, 2,500,000 are available only to
stockholders purchasing Shares through the reinvestment plan. As of December 31,
1999, the Company had received subscription proceeds of $138,885,350 (13,888,535
Shares) from its 1999 Offering, including 43,118 Shares ($431,182) issued
pursuant to the reinvestment plan. The price per Share and the other terms of
the 1999 Offering, including the percentage of gross proceeds payable (i) to the
managing dealer for selling commissions and expenses in connection with the
offering and (ii) to the Advisor for acquisition fees, are substantially the
same as those for the Initial Offering.
As of December 31, 1999, net proceeds to the Company from its Initial
Offering and 1999 Offering of Shares and capital contributions from the Advisor,
after deduction of selling commissions, marketing support and due diligence
expense reimbursement fees and organizational and offering expenses totaled
approximately $257,000,000. The Company has used net proceeds from the offerings
to invest, directly or indirectly, approximately $136,500,000 in 11 hotel
Properties, to pay $7,940,800 as deposits on six additional hotel Properties, to
redeem 12,885 Shares of common stock for $118,542 and to pay approximately
$15,000,000 in acquisition fees and expenses, leaving approximately $97,500,000
available for investment in Properties and Mortgage Loans.
On October 26, 1999, the Company filed a registration statement on Form
S-11 with the Securities and Exchange Commission in connection with the proposed
sale by the Company of up to an additional 45,000,000 Shares of common stock
($450,000,000) (the "2000 Offering") in an offering expected to commence
immediately following the completion of the 1999 Offering. Of the 45,000,000
Shares of common stock to be offered, up to 5,000,000 will be available to
stockholders purchasing Shares through the reinvestment plan. The price per
Share and the other terms of the 2000 Offering, including the percentage of
gross proceeds payable (i) to the managing dealer for selling commissions and
expenses in connection with the offering and (ii) to the Advisor for acquisition
fees, are substantially the same as those for the Initial Offering and 1999
Offering.
During the period January 1, 2000 through January 21, 2000, the Company
received additional net offering proceeds of approximately $8,000,000 and had
approximately $106,500,000 available for investment in Properties and Mortgage
Loans. The Company expects to use the uninvested net proceeds, plus any
additional net proceeds from the sale of shares from the 1999 Offering and 2000
Offering to purchase additional Properties and, to a lesser extent, invest in
Mortgage Loans. In addition, the Company intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay certain related fees. The Company intends to encumber assets in
connection with such borrowings. The Company currently has a $30,000,000 line of
credit available, as described below. Borrowings on the line of credit may be
repaid with offering proceeds, working capital or permanent financing. The
maximum amount the Company may borrow, absent a satisfactory showing that a
higher level of borrowing is appropriate as approved by a majority of the
Independent Directors, is 300% of the Company's net assets. The Company believes
that the net proceeds received from the 1999 Offering and 2000 Offering will
enable the Company to continue to grow and take advantage of acquisition
opportunities until such time, if any, that the Company lists it shares on a
national securities exchange or over-the-counter market, although there is no
assurance that listing ("Listing") will occur. In addition, if Listing does not
occur by December 31, 2007, the Company will commence the orderly sale of its
assets and the distribution of the proceeds. Listing does not assure liquidity.
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making quarterly distributions; (ii)
obtaining fixed income through the receipt of base rent, and increasing the
Company's income (and distributions) and providing protection against inflation
through automatic increases in base rent and/or receipt of percentage rent, and
obtaining fixed income through the receipt of payments from Mortgage Loans and
Secured Equipment Leases; (iii) continuing to qualify as a REIT for federal
income tax purposes; and (iv) providing stockholders of the Company with
liquidity of their investment within two to seven years, either in whole or in
part, through (a) Listing or (b) the commencement of orderly sales of the
Company's assets and distribution of the proceeds thereof (outside the ordinary
course of business and consistent with its objectives of qualifying as a REIT).
There can be no assurance that these investment objectives will be met.
For the next three to eight years, the Company intends, to the extent
consistent with the Company's objective of qualifying as a REIT, to reinvest in
additional Properties or Mortgage Loans any proceeds of the sale of a Property
or Mortgage Loan that are not required to be distributed to stockholders in
order to preserve the Company's REIT status for federal income tax purposes.
Similarly, and to the extent consistent with REIT qualification, the Company
plans to use the proceeds of the sale of a Secured Equipment Lease to fund
additional Secured Equipment Leases, or to reduce its outstanding indebtedness
on the line of credit. The Company will not sell any assets if such sale would
not be consistent with the Company's objective of qualifying as a REIT. The
Company intends to provide stockholders of the Company with liquidity of their
investment, either in whole or in part, through Listing of the Shares of the
Company (although liquidity cannot be assured thereby) or by commencing orderly
sales of the Company's assets. If Listing occurs, the Company intends to
reinvest in additional Properties, Mortgage Loans and Secured Equipment Leases
any net sales proceeds not required to be distributed to stockholders in order
to preserve the Company's status as a REIT. The Company's Articles of
Incorporation provide, however, that if Listing does not occur, the Company
thereafter will undertake the orderly liquidation of the Company and the sale of
the Company's assets and will distribute any net sales proceeds to stockholders.
In deciding the precise timing and terms of Property sales, the Advisor
will consider factors such as national and local market conditions, potential
capital appreciation, cash flows, and federal income tax considerations. The
terms of certain leases, however, may require the Company to sell a Property at
an earlier time if the tenant exercises its option to purchase a Property after
a specified portion of the lease term has elapsed. The Company will have no
obligation to sell all or any portion of a Property at any particular time,
except as may be required under property or joint venture purchase options
granted to certain tenants. In connection with sales of Properties by the
Company, purchase money obligations may be taken by the Company as part payment
of the sales price. The terms of payment will be affected by custom in the area
in which the Property is located and prevailing economic conditions. When a
purchase money obligation is accepted in lieu of cash upon the sale of a
Property, the Company will continue to have a mortgage on the Property and the
proceeds of the sale will be realized over a period of years rather than at
closing of the sale.
The Company currently does not anticipate selling any Secured Equipment
Leases prior to expiration of the lease term, except in the event that the
Company undertakes orderly liquidation of its assets. In addition, the Company
currently does not anticipate selling any Mortgage Loans prior to the expiration
of the loan term, except in the event (i) the Company owns the Property (land
only) underlying the building improvements which secure the Mortgage Loan and
the sale of the Property occurs, or (ii) the Company undertakes an orderly sale
of its assets.
Leases
As of December 31, 1999, the Company had acquired directly four
Properties which are subject to long-term, triple-net leases. In addition,
during 1999 the Company invested in CNL Hotel Investors, Inc. ("Hotel
Investors"), an unconsolidated subsidiary, which acquired seven Properties.
Although there are variations in the specific terms of the leases, the following
is a summarized description of the general structure of the Company's leases.
The leases of the Properties generally provide for initial terms of 15 to 19
years and expire between 2014 and 2018. The leases are on a triple-net basis,
and in most cases the tenants are required to pay all repairs, maintenance,
property taxes, utilities, and insurance. The tenants also are required to pay
for special assessments, sales and use taxes, and the cost of any renovations
permitted under the leases. The leases of the Properties provide for minimum
base annual rental payments (payable in monthly installments) ranging from
approximately $1,204,000 to $6,500,000. In addition to minimum rent, the tenant
must generally pay the Company "percentage rent" and/or automatic increases in
the minimum annual rent at predetermined intervals during the term of the lease.
Percentage rent is generally computed as a percentage of the gross sales above a
specified level at a particular Property. The leases of the Properties also
provide for the tenant to fund, in addition to its lease payment, a reserve fund
up to a pre-determined amount. Generally, money in that fund may be used by the
tenant to pay for replacement of furniture and fixtures. The Company may be
responsible for capital expenditures or repairs in excess of the amounts in the
reserve fund, and the tenant generally would be responsible for replenishing the
reserve fund and to pay a specified return on the amount of capital expenditures
or repairs paid for by the Company in excess of amounts in the reserve fund.
Generally, the leases provide for up to four, five-year renewal
options. During the initial term of each lease, the tenant must pay the Company,
as landlord, minimum annual rent equal to a specified percentage of the
Company's cost of purchasing the Property payable in monthly installments. If
the Company is acquiring a Property that is to be constructed or renovated
pursuant to a development agreement, the costs of purchasing the Property will
include the purchase price of the land, including all fees, costs, and expenses
paid by the Company in connection with its purchase of the land, and all fees,
costs, and expenses disbursed by the Company for construction of building
improvements. In addition to the minimum annual rent, the leases generally
provide for percentage rent based on a percentage of the gross sales above a
specified amount to be paid by the tenant.
Major Tenants
During 1999, two lessees, STC Leasing Associates, LLC ("STC") (which
operates and leases two Properties) and WI Hotel Leasing, LLC (which leases the
seven Properties in which the Company owns an interest through Hotel Investors,
an unconsolidated subsidiary), each contributed more than ten percent of the
Company's total rental income (including the Company's share of the total rental
income from Hotel Investors). In addition, all of the Company's rental income
(including the Company's share of rental income from Hotel Investors) was earned
from Properties operating as Marriott brand chains. Although the Company
intends to acquire Properties located in various states and regions and to
carefully screen its tenants in order to reduce risks of default, failure of
these lessees or the Marriott chains could significantly impact the results of
operations of the Company. However, management believes that the risk of such a
default is reduced due to the essential or important nature of these Properties
for the ongoing operations of the lessees. It is expected that the percentage of
total rental income contributed by STC will decrease as additional Properties
are acquired and leased by the Company in subsequent years.
Joint Venture Arrangements
In February 1999, the Company executed a series of agreements with Five
Arrows Realty Securities II L.L.C. ("Five Arrows") pursuant to which the Company
and Five Arrows formed a jointly owned real estate investment trust, Hotel
Investors, for the purpose of acquiring up to eight hotel Properties from
various sellers affiliated with Western International. At the time the agreement
was entered into, the eight Properties were either newly constructed or in
various stages of completion.
In February 1999 and June 1999, Hotel Investors purchased seven of the
eight Properties for an aggregate purchase price of approximately $167 million
and paid $3 million as a deposit on the one remaining Property. The Properties
acquired were a Courtyard by Marriott located in Plano, Texas, a Marriott Suites
located in Dallas, Texas, a Residence Inn by Marriott located in Las Vegas,
Nevada, a Residence Inn by Marriott located in Plano, Texas, a Courtyard by
Marriott located in Scottsdale, Arizona, a Courtyard by Marriott located in
Seattle, Washington and a Residence Inn by Marriott located in Phoenix, Arizona.
The $3 million deposit relating to the eighth Property was refunded to Hotel
Investors by the seller in January 2000 as a result of Hotel Investors
exercising its option to terminate its obligation to purchase the Property under
the purchase and sale agreement.
In order to fund these purchases, Five Arrows invested approximately
$48 million and the Company invested approximately $38 million in Hotel
Investors. Hotel Investors funded the remaining amount of approximately $88
million with permanent financing, collateralized by Hotel Investors' interests
in the Properties (the "Hotel Investors Loan").
In return for their respective investments, Five Arrows received a 51%
common stock interest and the Company received a 49% common stock interest in
Hotel Investors. Five Arrows received 48,337 shares of Hotel Investors' 8% Class
A cumulative, preferred stock ("Class A Preferred Stock"), and the Company
received 37,979 shares of Hotel Investors' 9.76% Class B cumulative, preferred
stock ("Class B Preferred Stock"). The Class A Preferred Stock is exchangeable
upon demand into common stock of the Company, as determined pursuant to a
formula that is intended to make the conversion not dilutive to funds from
operations (based on the revised definition adopted by the Board of Governors of
the National Association of Real Estate Investment Trusts which means net
earnings determined in accordance with generally accepted accounting principles,
excluding gains or losses from debt restructuring and sales of property, plus
depreciation and amortization of real estate assets and after adjustments for
unconsolidated partnerships and joint ventures) per Share of the Company's
common stock.
Cash available for distributions of Hotel Investors is distributed
first to Five Arrows with respect to dividends payable on the Class A Preferred
Stock. Such dividends are calculated based on Five Arrows' "special investment
amount," or $1,294.78 per share, representing the sum of its investment in Hotel
Investors and its approximately $14 million investment in the Company, on a per
share basis, adjusted for any dividends received from the Company. Then, cash
available for distributions is distributed to the Company with respect to its
Class B Preferred Stock. Next, cash available for distributions is distributed
to 100 associates of CNL Holdings, Inc. and its affiliates who each own one
share of Class C preferred stock in Hotel Investors, to provide a quarterly,
cumulative, compounded 8% return. All remaining cash available for distributions
is distributed pro rata with respect to the interest in the common shares.
Five Arrows also invested approximately $14 million in the Company
through the purchase of common stock pursuant to the Company's Initial Offering
and the 1999 Offering, the proceeds of which were used by the Company to fund
approximately 38% of its funding commitment to Hotel Investors. During 1999,
approximately $3.7 million of this amount was initially treated as a loan due to
the stock ownership limitations specified in the Company's Articles of
Incorporation at the time of investment. Subsequently, this loan was converted
to common stock.
In addition to the above investments, Five Arrows purchased a 10%
interest in the Advisor. In connection with Five Arrow's investment in the
Company, the Advisor and Hotel Investors, certain affiliates have agreed to
waive certain fees otherwise payable to them by the Company. The Advisor is also
the advisor to Hotel Investors pursuant to a separate advisory agreement. The
Company will not pay the Advisor fees, including the Company's pro rata portion
of Hotel Investors' advisory fees, in excess of amounts payable under its
advisory agreement.
On November 16, 1999, the Company acquired an 89% interest in CNL
Philadelphia Annex, LLC (the "LLC") (formerly known as Courtyard Annex, L.L.C.)
for approximately $58 million. The sole purpose of the LLC is to own and lease
the Courtyard by Marriott hotel Property located in Philadelphia, Pennsylvania.
This historic Property was recently renovated and converted into a hotel which
commenced operations in late November 1999. The LLC is included with the
accounts of the Company except for the 11% interest which is reflected as
minority interest in the accompanying consolidated financial statements.
Certain Management Services
Pursuant to an advisory agreement (the "Advisory Agreement") with the
Company, the Advisor provides management services relating to the Company, the
Properties, the Mortgage Loans and the Secured Equipment Lease program. Under
this agreement, the Advisor is responsible for assisting the Company in
negotiating leases, Mortgage Loans, the line of credit and Secured Equipment
Leases; collecting rental, Mortgage Loan and Secured Equipment Lease payments;
inspecting the Properties and the tenants' books and records; and responding to
tenants inquiries and notices. The Advisor also provides information to the
Company about the status of the leases, the Properties, the Mortgage Loans, the
line of credit and the Secured Equipment Leases. In exchange for these services,
the Advisor is entitled to receive certain fees from the Company. For
supervision of the Properties and the Mortgage Loans, the Advisor receives the
asset management fee, which is payable monthly in an amount equal to one-twelfth
of .60% of the total amount invested in the Properties, exclusive of acquisition
fees and acquisition expenses (the "Real Estate Asset Value") plus one-twelfth
of .60% of the outstanding principal amount of any Mortgage Loans, as of the end
of the preceding month. For negotiating Secured Equipment Leases and supervising
the Secured Equipment Lease program, the Advisor will receive, upon entering
into each lease, a Secured Equipment Lease servicing fee, payable out of the
proceeds of the line of credit, equal to 2% of the purchase price of the
equipment subject to each Secured Equipment Lease. For identifying the
Properties, structuring the terms of the acquisition and leases of the
Properties and structuring the terms of the Mortgage Loans, the Advisor will
receive a fee equal to 4.5% of gross proceeds, loan proceeds from permanent
financing and amounts outstanding on the line of credit, if any, at the time of
Listing, but excluding that portion of the permanent financing used to finance
Secured Equipment Leases.
The Advisory Agreement continues until June 16, 2000, and thereafter
may be extended annually upon mutual consent of the Advisor and the Board of
Directors of the Company unless terminated at an earlier date upon 60 days prior
written notice by each party.
Borrowing
On July 31, 1998, the Company entered into a line of credit and
security agreement to be used by the Company to acquire hotel Properties. The
line of credit provides that the Company will be able to receive advances of up
to $30,000,000 until July 30, 2003, with an annual review to be performed by the
bank to ensure that there has been no substantial deterioration, as determined
by the bank in its reasonable discretion, of the credit quality. Interest on
each advance shall be payable monthly, with all unpaid interest and principal
due no later than five years from the date of the advance. Advances under the
line of credit will bear interest at either (i) a rate per annum equal to 318
basis points above the London Interbank Offered Rate (LIBOR) or (ii) a rate per
annum equal to 30 basis points above the bank's base rate, whichever the Company
selects at the time advances are made. In addition, a fee of 0.5% per advance
will be due and payable to the bank on funds as advanced. Each advance made
under the line of credit will be collateralized by an assignment of rents and
leases. In addition, the line of credit provides that the Company will not be
able to further encumber the applicable hotel Property during the term of the
advance without the bank's consent. The Company will be required, at each
closing, to pay all costs, fees and expenses arising in connection with the line
of credit. The Company must also pay the bank's attorney's fees, subject to a
maximum cap, incurred in connection with the line of credit and each advance. In
connection with the line of credit, the Company incurred a commitment fee, legal
fees and closing costs of approximately $138,000. Proceeds from the line of
credit were used in connection with the purchase of two hotel Properties and the
commitment to acquire three additional Properties during 1998. As of December
31, 1999, the Company had no amounts outstanding under the line of credit. The
Company has not yet received a commitment for any permanent financing and there
is no assurance that the Company will obtain any long-term financing on
satisfactory terms.
The Company expects to use net proceeds it receives from the 1999
Offering, plus any net proceeds from the sale of Shares in the 2000 Offering, to
purchase additional Properties and, to a lesser extent, to invest in Mortgage
Loans. In addition, the Company intends to borrow money to acquire additional
Properties, to invest in Mortgage Loans and Secured Equipment Leases, and to pay
certain related fees. The Company intends to encumber assets in connection with
such borrowing. The Company currently plans to obtain one or more revolving
lines of credit in an aggregate amount initially of up to $100,000,000 and may,
in addition, also obtain permanent financing. The line of credit may be repaid
with offering proceeds, working capital or permanent financing. Although the
Board of Directors anticipates that the line of credit will initially be in an
amount up to $100,000,000 and that the aggregate amount of any permanent
financing will not exceed 30% of the Company's total assets, the maximum amount
the Company may borrow, absent a satisfactory showing that a higher level of
borrowing is appropriate as approved by a majority of the independent directors,
is 300% of the Company's net assets.
Competition
The hotel industry is generally characterized as being intensely
competitive. The operators of the hotels located on the Properties do, and are
expected to in the future, compete with independently owned hotels, hotels which
are part of local or regional chains, and hotels in other well-known national
chains, including those offering different types of accommodations.
The Company will be in competition with other persons and entities both
to locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders, and sale/leaseback companies for suitable Properties,
tenants, Mortgage Loan borrowers and equipment tenants.
Employees
Reference is made to Item 10. Directors and Executive Officers of the
Registrant for a listing of the Company's Executive Officers. The Company has no
other employees.
Item 2. Properties
As of December 31, 1999, the Company owned directly four hotel
Properties located in three states. In addition, during 1999 the Company
invested in Hotel Investors, an unconsolidated subsidiary, which acquired seven
Properties located in four states. Reference is made to the Schedule of Real
Estate and Accumulated Depreciation filed with this report for a listing of the
Properties and their respective costs, including acquisition fees and certain
acquisition expenses. The Company is presently negotiating to acquire additional
Properties, but as of January 21, 2000, had not acquired any such Properties.
Generally, Properties acquired or to be acquired by the Company consist
of both land and building; although in some cases, the Company may acquire the
land underlying the building with the building owned by the tenant or a third
party, or may acquire the building only with the land owned by a third party.
The 11 Properties directly or indirectly owned by the Company as of December 31,
1999, conform generally to the following specifications of size, cost, and type
of land and buildings.
Hotel Properties. The lot sizes generally range up to 10 acres
depending on product, market and design considerations, and are available at a
broad range of pricing. The hotel sites are generally in primary or secondary
urban, suburban, airport, highway or resort markets which have been evaluated
for past and future anticipated lodging demand trends.
The hotel buildings generally are mid-rise construction. The Properties
consist of limited service, extended stay or full service hotel Properties.
Limited service hotels generally minimize non-guest room space and offer limited
food service such as complimentary continental breakfasts and do not have
restaurant or lounge facilities on-site. Extended stay hotels generally contain
guest suites with a kitchen area and living area separate from the bedroom.
Extended stay hotels vary with respect to providing on-site restaurant
facilities. Full service hotels generally have conference or meeting facilities
and on-site food and beverage facilities. The Properties include equipment. In
addition, the Properties are one of Marriott's approved designs.
The tenants generally are required by the lease agreements to make such
capital expenditures as may be reasonably necessary to refurbish buildings,
premises, signs, and equipment so as to comply with the tenant's obligations
under the franchise agreement to reflect the current commercial image of its
Hotel Chain. These capital expenditures generally will be paid by the tenant
during the term of the lease. Some Property leases however, obligate the tenant
to fund, in addition to its lease payment, a reserve fund up to a pre-determined
amount. Generally, money in that fund may be used by the tenant to pay for
replacement of furniture and fixtures. The Company may be responsible for
capital expenditures or repairs. The tenant is responsible for replenishing the
reserve fund and to pay a specified return on the amount of capital expenditures
paid for by the Company in excess of amounts in the reserve fund.
Leases with Major Tenants. The terms of the leases with the Company's
major tenants as of December 31, 1999 (see Item 1. Business - Major Tenants),
are substantially the same as those described in Item 1. Business - Leases.
STC Leasing Associates, LLC leases two Residence Inn by Marriott hotel
Properties. The initial term of each lease is 19 years (expiring in 2017) and
the aggregate minimum base annual rent is approximately $2,900,000.
WI Leasing, LLC leases seven Properties, indirectly owned by the
Company through its investment in Hotel Investors, an unconsolidated subsidiary,
three Residence Inn by Marriott hotel Properties, three Courtyard by Marriott
hotel Properties and one Marriott Suites. The initial term of each lease is
approximately 19 years (expiring in 2018) and the aggregate minimum base annual
rent is approximately $17,200,000.
Management considers the Properties to be well-maintained and
sufficient for the Company's operations.
Item 3. Legal Proceedings
Neither the Company, nor its Advisor, nor any of their respective
Properties, is a party to, or subject to, any material pending legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) As of February 17, 2000, there were 11,047 stockholders of record of common
stock. There is no public trading market for the Shares, and even though the
Company intends to list the Shares on a national securities exchange or
over-the-counter market within three to eight years of, there is no assurance
that one will develop and it is not known at this time if a public market for
the Shares will develop. The Company is not aware of trades in its shares other
than purchases made in its public offering and redemptions of shares by the
Company. Prior to such time, if any, as Listing occurs, any stockholder (other
than the Advisor) may present all or any portion equal to at least 25% of such
stockholder's Shares to the Company for redemption at any time, in accordance
with the procedures outlined in the Company's prospectus. At such time, the
Company may, at its sole option, redeem such Shares presented for redemption for
cash to the extent it has sufficient funds available. The price to be paid for
any Share transferred other than pursuant to the redemption plan is subject to
negotiation by the purchaser and the selling stockholder. For the year ended
December 31, 1999, 12,885 Shares were transferred, or retired pursuant to the
redemption plan.
As of December 31, 1999, the offering price per Share was $10.
The Company expects to make distributions to the stockholders pursuant
to the provisions of the Articles of Incorporation. For the years ended December
31, 1999 and 1998, the Company declared cash distributions of $10,765,881 and
$1,168,145, respectively, to the stockholders. No amounts distributed to
stockholders for the years ended December 31, 1999 and 1998, are required to be
or have been treated by the Company as a return of capital for purposes of
calculating the stockholders' return on their invested capital. The following
table presents total distributions and distributions per Share:
1999 Quarter First Second Third Fourth Year
- ------------ --------- ---------- --------- ---------- -----------
Total distributions declared $998,652 $2,053,964 $3,278,456 $4,434,809 $10,765,881
Distributions per Share 0.175 0.181 0.181 0.181 0.718
1998 Quarter First Second Third Fourth Year
- ------------ --------- ---------- --------- ---------- -----------
Total distributions declared $101,356 $155,730 $362,045 $549,014 $1,168,145
Distributions per Share 0.075 0.075 0.142 0.175 0.467
On January 1, 2000 and February 1, 2000, the Company declared
distributions totaling $1,745,931 and $1,835,433, respectively, or $0.0604 per
Share of common stock, payable in March 2000, to stockholders of record on
January 1, 2000 and February 1, 2000, respectively.
The Company intends to continue to declare distributions of cash to
stockholders on a monthly basis during the offering period, and quarterly
thereafter.
(b) The information required by this item is set forth in Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations and is
hereby incorporated by reference.
Item 6. Selected Financial Data
1999 1998 1997 (1) 1996 (2)
---------------- ---------------- ------------ ------------
Year Ended December 31:
Revenues $ 10,677,505 $ 1,955,461 $ 46,071 $ --
Net earnings 7,515,988 958,939 22,852 --
Cash flows from operating activities 12,890,161 2,776,965 22,469 --
Cash distributions declared 10,765,881 1,168,145 29,776 --
Funds from operations (3) 10,478,103 1,343,105 22,852 --
Earnings per share:
Basic 0.47 0.40 0.03 --
Diluted 0.45 0.40 0.03 --
Cash distributions declared per share 0.72 0.47 0.05 --
Weighted average number of shares
outstanding (4):
Basic 15,890,212 2,402,344 686,063 --
Diluted 21,437,859 2,402,344 686,063 --
At December 31:
Total assets $266,968,274 $48,856,690 $9,443,476 $598,190
Total stockholders' equity 253,054,839 37,116,491 9,233,917 $200,000
(1) No operations commenced until the Company received minimum offering
proceeds and funds were released from escrow on October 15, 1997.
(2) Selected financial data for 1996 represents the period June 12, 1996
(date of inception) through December 31, 1996.
(3) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with generally accepted accounting principles
("GAAP"), excluding gains or losses from debt restructuring and sales
of property, plus depreciation and amortization of real estate assets
and after adjustments for unconsolidated partnerships and joint
ventures. (Net earnings determined in accordance with GAAP include the
noncash effect of straight-lining rent increases throughout the lease
terms. This straight-lining is a GAAP convention requiring real estate
companies to report rental revenue based on the average rent per year
over the life of the leases. During the years ended December 31, 1999
and 1998, net earnings included $35,238 and $44,160, respectively, of
these amounts. No such amounts were earned during 1997.) FFO was
developed by NAREIT as a relative measure of performance and liquidity
of an equity REIT in order to recognize that income-producing real
estate historically has not depreciated on the basis determined under
GAAP. However, FFO (i) does not represent cash generated from operating
activities determined in accordance with GAAP (which, unlike FFO,
generally reflects all cash effects of transactions and other events
that enter into the determination of net earnings), (ii) is not
necessarily indicative of cash flow available to fund cash needs and
(iii) should not be considered as an alternative to net earnings
determined in accordance with GAAP as an indication of the Company's
operating performance, or to cash flow from operating activities
determined in accordance with GAAP as a measure of either liquidity or
the Company's ability to make distributions. Accordingly, the Company
believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be
considered in conjunction with the Company's net earnings and cash
flows as reported in the accompanying consolidated financial statements
and notes thereto.
(4) The weighted average number of shares outstanding is based upon the
period the Company was operational.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following information, including, without limitation, the Year 2000
Readiness Disclosure, that are not historical facts, may be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. These statements generally are
characterized by the use of terms such as "believe," "expect" and "may."
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company's
actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a difference
include the following: changes in general economic conditions, changes in local
and national real estate conditions, availability of capital from borrowings
under the Company's line of credit and security agreement, continued
availability of proceeds from the Company's offering, the ability of the Company
to obtain permanent financing on satisfactory terms, the ability of the Company
to identify suitable investments, the ability of the Company to locate suitable
tenants for its properties and borrowers for its mortgage loans and secured
equipment leases, and the ability of such tenants and borrowers to make payments
under their respective leases, mortgage loans or secured equipment leases. Given
these uncertainties, readers are cautioned not to place undue reliance on such
statements.
Introduction
The Company
CNL Hospitality Properties, Inc. was organized in Maryland on June 12,
1996. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are wholly owned
subsidiaries of CNL Hospitality Properties, Inc., organized in Delaware in June
1998. CNL Hospitality Partners, LP is a Delaware limited partnership formed in
June 1998. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are the general
and limited partner, respectively, of CNL Hospitality Partners, LP. The term
"Company" includes, unless the context otherwise requires, CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp., CNL
Hospitality LP Corp, and CNL Philadelphia Annex, LLC (formerly known as
Courtyard Annex, L.L.C.). The Company was formed to acquire properties located
across the United States to be leased on a long-term, "triple-net" basis to
operators of selected national and regional limited service, extended stay and
full service hotel chains.
The Company may also provide mortgage financing and furniture, fixture
and equipment financing to operators of Hotel Chains. Secured Equipment Leases
will be funded from the proceeds of financing to be obtained by the Company. The
aggregate outstanding principal amount of Secured Equipment Leases will not
exceed 10% of gross proceeds from the Company's offerings of shares of common
stock.
Liquidity and Capital Resources
Common Stock Offerings
The Company was formed in June 1996, at which time it received initial
capital contributions of $200,000 for 20,000 Shares of common stock from CNL
Hospitality Corp. (formerly known as CNL Hospitality Advisors, Inc.) On July 9,
1997, the Company commenced an offering to the public of up to 16,500,000 Shares
of common stock ($165,000,000) pursuant to a registration statement on Form S-11
under the Securities Act of 1933, as amended. Of the 16,500,000 Shares of common
stock offered, 1,500,000 ($15,000,000) were available only to stockholders who
elected to participate in the Company's Reinvestment Plan. Upon completion of
the Initial Offering on June 17, 1999, the Company had received aggregate
subscription proceeds of $150,072,637 (15,007,264 Shares), including $72,637
(7,264 Shares) through the Company's Reinvestment Plan. Following the completion
of its Initial Offering, the Company commenced a second offering of up to
27,500,000 Shares of common stock ($275,000,000). Of the 27,500,000 Shares of
common stock offered, 2,500,000 are available only to stockholders purchasing
Shares through the Reinvestment Plan. As of December 31, 1999, the Company had
received subscription proceeds of $138,885,350 (13,888,535 Shares) from its 1999
Offering, including 43,118 Shares ($431,182) issued pursuant to the Reinvestment
Plan. The price per Share and the other terms of the 1999 Offering, including
the percentage of gross proceeds payable (i) to the managing dealer for selling
commissions and expenses in connection with the offering and (ii) to the Advisor
for acquisition fees, are substantially the same as those for the Initial
Offering.
As of December 31, 1999, net proceeds to the Company from its Initial
Offering and 1999 Offering of Shares and capital contributions from the Advisor,
after deduction of selling commissions, marketing support and due diligence
expense reimbursement fees and organizational and offering expenses totaled
approximately $257,000,000. The Company has used net proceeds from the offerings
to invest, directly or indirectly, approximately $136,500,000 in 11 hotel
Properties, to pay $7,940,800 as deposits on six additional hotel Properties, to
redeem 12,885 shares of common stock for $118,542 and to pay approximately
$15,000,000 in acquisition fees and expenses, leaving approximately $97,500,000
available for investment in Properties and Mortgage Loans.
On October 26, 1999, the Company filed a registration statement on Form
S-11 with the Securities and Exchange Commission in connection with the proposed
sale by the Company of up to an additional 45,000,000 Shares of common stock
($450,000,000) in an offering expected to commence immediately following the
completion of the 1999 Offering. Of the 45,000,000 Shares of common stock to be
offered, up to 5,000,000 will be available to stockholders purchasing Shares
through the Reinvestment Plan. The price per Share and the other terms of the
2000 Offering, including the percentage of gross proceeds payable (i) to the
managing dealer for selling commissions and expenses in connection with the
offering and (ii) to the Advisor for acquisition fees, are substantially the
same as those for the Initial Offering and 1999 Offering.
During the period January 1, 2000 through January 21, 2000, the Company
received additional net offering proceeds of approximately $8,000,000 and had
approximately $106,500,000 available for investment in Properties and Mortgage
Loans. The Company expects to use the uninvested net proceeds, plus any
additional net proceeds from the sale of Shares from the 1999 Offering and 2000
Offering to purchase additional Properties and, to a lesser extent, invest in
Mortgage Loans. In addition, the Company intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay certain related fees. The Company intends to encumber assets in
connection with such borrowings. The Company currently has a $30,000,000 line of
credit available, as described below. Borrowings on the line of credit may be
repaid with offering proceeds, working capital or permanent financing. The
maximum amount the Company may borrow, absent a satisfactory showing that a
higher level of borrowing is appropriate as approved by a majority of the
Independent Directors, is 300% of the Company's net assets.
Redemptions
In October 1998, the Board of Directors elected to implement the
Company's redemption plan. Under the redemption plan, the Company elected to
redeem Shares, subject to certain conditions and limitations. During the year
ended December 31, 1999, 12,885 Shares were redeemed at $9.20 per Share
($118,542) and retired from Shares outstanding of common stock; no Shares were
redeemed in 1998 or 1997.
Line of Credit and Security Agreement
On July 31, 1998, the Company entered into a line of credit and
security agreement with a bank to be used by the Company to acquire hotel
Properties. The line of credit provides that the Company will be able to receive
advances of up to $30,000,000 until July 30, 2003, with an annual review to be
performed by the bank to ensure that there has been no substantial
deterioration, as determined by the bank in its reasonable discretion, of the
credit quality. Interest on each advance shall be payable monthly, with all
unpaid interest and principal due no later than five years from the date of the
advance. Advances under the line of credit will bear interest at either (i) a
rate per annum equal to 318 basis points above the London Interbank Offered Rate
(LIBOR) or (ii) a rate per annum equal to 30 basis points above the bank's base
rate, whichever the Company selects at the time advances are made. In addition,
a fee of 0.5% per advance will be due and payable to the bank on funds as
advanced. Each advance made under the line of credit will be collateralized by
an assignment of rents and leases. In addition, the line of credit provides that
the Company will not be able to further encumber the applicable hotel Property
during the term of the advance without the bank's consent. The Company will be
required, at each closing, to pay all costs, fees and expenses arising in
connection with the line of credit. The Company must also pay the bank's
attorney's fees, subject to a maximum cap, incurred in connection with the line
of credit and each advance. In connection with the line of credit, the Company
incurred a commitment fee, legal fees and closing costs of approximately
$138,000. Proceeds from the line of credit were used in connection with the
purchase of two hotel Properties and the commitment to acquire three additional
Properties during 1998. As of December 31, 1999, the Company had no amounts
outstanding under the line of credit. The Company has not yet received a
commitment for any permanent financing and there is no assurance that the
Company will obtain any long-term financing on satisfactory terms.
Market Risk
The Company may be subject to interest rate risk through any
outstanding balances on its variable rate line of credit. The Company may
mitigate this risk by paying down any outstanding balances on the line of credit
from offering proceeds should interest rates rise substantially. There were no
amounts outstanding on its variable line of credit at December 31, 1999.
Property Acquisitions and Investments
As of December 31, 1998, the Company owned two Properties in the
Atlanta, Georgia area which were being operated by the tenant as Residence
Inn(R) by Marriott(R). In February 1999, the Company executed a series of
agreements with Five Arrows Realty Securities II L.L.C. pursuant to which the
Company and Five Arrows formed a jointly owned real estate investment trust, CNL
Hotel Investors, Inc. ("Hotel Investors") for the purpose of acquiring up to
eight hotel Properties from various sellers affiliated with Western
International. At the time the agreement was entered into, the eight Properties
were either newly constructed or in various stages of completion.
In February 1999 and June 1999, Hotel Investors purchased seven of the
eight Properties for an aggregate purchase price of approximately $167 million
and paid $3 million as a deposit on the one remaining Property. The Properties
acquired were a Courtyard by Marriott located in Plano, Texas, a Marriott Suites
located in Dallas, Texas, a Residence Inn by Marriott located in Las Vegas,
Nevada, a Residence Inn by Marriott located in Plano, Texas, a Courtyard by
Marriott located in Scottsdale, Arizona, a Courtyard by Marriott located in
Seattle, Washington and a Residence Inn by Marriott located in Phoenix, Arizona.
The $3 million deposit relating to the eighth Property was refunded to Hotel
Investors by the seller in January 2000 as a result of Hotel Investors
exercising its option to terminate its obligation to purchase the Property under
the purchase and sale agreement.
In order to fund these purchases, Five Arrows invested approximately
$48 million and the Company invested approximately $38 million in Hotel
Investors. Hotel Investors funded the remaining amount of approximately $88
million with permanent financing, collateralized by Hotel Investors' interests
in the Properties.
In return for their respective investments, Five Arrows received a 51%
common stock interest and the Company received a 49% common stock interest in
Hotel Investors. Five Arrows received 48,337 shares of Hotel Investors' 8% Class
A cumulative, preferred stock and the Company received 37,979 shares of Hotel
Investors' 9.76% Class B cumulative, preferred stock. The Class A Preferred
Stock is exchangeable upon demand into common stock of the Company, as
determined pursuant to a formula that is intended to make the conversion not
dilutive to funds from operations (based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate Investment
Trusts which means net earnings determined in accordance with generally accepted
accounting principles, excluding gains or losses from debt restructuring and
sales of property, plus depreciation and amortization of real estate assets and
after adjustments for unconsolidated partnerships and joint ventures) per Share
of the Company's common stock.
Cash available for distributions of Hotel Investors is distributed
first to Five Arrows with respect to dividends payable on the Class A Preferred
Stock. Such dividends are calculated based on Five Arrows' "special investment
amount," or $1,294.78 per share, representing the sum of its investment in Hotel
Investors and its approximately $14 million investment in the Company, on a per
share basis, adjusted for any dividends received from the Company. Then, cash
available for distributions is distributed to the Company with respect to its
Class B Preferred Stock. Next, cash available for distributions is distributed
to 100 CNL Holdings, Inc. and affiliates' associates who each own one share of
Class C preferred stock in Hotel Investors, to provide a quarterly, cumulative,
compounded eight percent return. All remaining cash available for distributions
is distributed pro rata with respect to the interest in the common shares.
Five Arrows also invested approximately $14 million in the Company
through the purchase of common stock pursuant to the Company's Initial Offering
and the 1999 Offering, the proceeds of which were used by the Company to fund
approximately 38% of its funding commitment to Hotel Investors. During 1999,
approximately $3.7 million of this amount was initially treated as a loan due to
the stock ownership limitations specified in the Company's Articles of
Incorporation at the time of investment. Subsequently, this loan was converted
to common stock.
In addition to the above investments, Five Arrows purchased a 10%
interest in the Advisor. In connection with Five Arrow's investment in the
Company, the Advisor and Hotel Investors, certain affiliates have agreed to
waive certain fees otherwise payable to them by the Company. The Advisor is also
the advisor to Hotel Investors pursuant to a separate advisory agreement. The
Company will not pay the Advisor fees, including the Company's pro rata portion
of Hotel Investors' advisory fees, in excess of amounts payable under its
Advisory Agreement.
On November 16, 1999, the Company acquired an 89% interest in CNL
Philadelphia Annex, LLC (formerly known as Courtyard Annex, L.L.C.) for
approximately $58 million. The sole purpose of the LLC is to own and lease the
Courtyard by Marriott hotel Property located in Philadelphia, Pennsylvania. This
historic Property was recently renovated and converted into a hotel which
commenced operations in late November 1999. The LLC is included with the
accounts of the Company except for the 11% interest which is reflected as
minority interest in the accompanying consolidated financial statements.
In addition, on December 10, 1999, the Company acquired a newly
constructed Property located in Mira Mesa, California for approximately $15.5
million. The Property is being operated by the tenant as a Residence Inn by
Marriott.
Hotel Investors, the LLC and the Company, as lessors, have entered into
long-term, triple-net leases with operators of Hotel Chains, as described below
in "Liquidity Requirements."
Commitments
As of January 21, 2000, the Company had initial commitments to acquire
directly six hotel Properties for an anticipated aggregate purchase price of
approximately $148 million. The acquisition of each of these Properties is
subject to the fulfillment of certain conditions. In order to acquire these
Properties, the Company must obtain additional funds through the receipt of
additional offering proceeds and/or advances on the line of credit. In
connection with three of these agreements, the Company has a deposit, in the
form of a letter of credit, collateralized by a certificate of deposit,
amounting to $5 million. In connection with two of the remaining agreements, the
Company has a deposit of approximately $1.6 million held in escrow. There can be
no assurance that any or all of the conditions will be satisfied or, if
satisfied, that one or more of these Properties will be acquired by the Company.
The Company is presently negotiating to acquire additional Properties, but as of
January 21, 2000, the Company had not acquired any such Properties or entered
into any Mortgage Loans. In addition, as of January 21, 2000, the Company had
not entered into any other arrangements creating a reasonable probability a
particular Property, Mortgage Loan or Secured Equipment Lease would be funded.
Cash and Cash Equivalents
Until Properties are acquired, or Mortgage Loans are entered into, net
offering proceeds are held in short-term (defined as investments with a maturity
of three months or less), highly liquid investments, such as demand deposit
accounts at commercial banks, certificates of deposits and money market
accounts. This investment strategy provides high liquidity in order to
facilitate the Company's use of these funds to acquire Properties at such time
as Properties suitable for acquisition are located or to fund Mortgage Loans. At
December 31, 1999, the Company had $101,972,441 invested in such short-term
investments as compared to $13,228,923 at December 31, 1998. The increase in the
amount invested in short-term investments is primarily attributable to proceeds
received from the sale of common stock in the Initial Offering and 1999
Offering. These funds will be used to purchase additional Properties, to make
Mortgage Loans, to pay offering and acquisition expenses, to pay distributions
to stockholders and other Company expenses and, in management's discretion, to
create cash reserves.
Liquidity Requirements
The Company expects to meet its short-term liquidity requirements,
other than for offering expenses, acquisition and development of Properties and
investment in Mortgage Loans and Secured Equipment Leases, through cash flow
provided by operating activities. The Company believes that cash flow provided
by operating activities will be sufficient to fund normal recurring operating
expenses, regular debt service requirements and distributions to stockholders.
To the extent that the Company's cash flow provided by operating activities is
not sufficient to meet such short-term liquidity requirements as a result, for
example, of unforeseen expenses due to tenants defaulting under the terms of
their lease agreements, the Company will use borrowings under its line of
credit.
Due to the fact that the Company leases its Properties on a triple-net
basis, meaning that tenants are generally required to pay all repairs and
maintenance, property taxes, insurance and utilities, management does not
believe that working capital reserves are necessary at this time. Management
believes that the Properties are adequately covered by insurance. In addition,
the Advisor has obtained contingent liability and property coverage for the
Company. This insurance policy is intended to reduce the Company's exposure in
the unlikely event a tenant's insurance policy lapses or is insufficient to
cover a claim relating to a Property. The Company expects to meet its other
short-term liquidity requirements, including payment of offering expenses,
Property acquisitions and development and investment in Mortgage Loans and
Secured Equipment Leases, with additional advances under its line of credit and
proceeds from its offerings. The Company expects to meet its long-term liquidity
requirements through short or long-term, unsecured or secured debt financing or
equity financing.
Distributions
During the years ended December 31, 1999, 1998 and 1997, the Company
generated cash from operations of $12,890,161, $2,776,965 and $22,469,
respectively. Based on cash from operations and dividends due to the Company
from Hotel Investors at December 31, 1999 (and received in January 2000), the
Company declared and paid distributions to its stockholders of $10,765,881,
$1,168,145 and $29,776 during the years ended December 31, 1999, 1998 and 1997,
respectively. In addition, on January 1, 2000, the Company declared
distributions to stockholders of record on January 1, 2000 totaling $1,745,931
($0.0604 per share), payable in March 2000.
For the years ended December 31, 1999, 1998 and 1997, approximately 75
percent, 76 percent and 100 percent, respectively, of the distributions received
by stockholders were considered to be ordinary income and approximately 25
percent and 24 percent were considered a return of capital for federal income
tax purposes for the years ended December 31, 1999 and 1998, respectively. No
amounts distributed to the stockholders for the years ended December 31, 1999,
1998 and 1997 are required to be or have been treated by the Company as a return
of capital for purposes of calculating the stockholders' return on their
invested capital.
Related Party Transactions
During the years ended December 31, 1999, 1998 and 1997, affiliates of
the Company incurred on behalf of the Company $3,257,822, $459,250 and $638,274,
respectively, for certain organizational and offering expenses, $653,231,
$392,863 and $26,149, respectively, for certain acquisition expenses, and
$325,622, $98,212 and $11,003 respectively, for certain operating expenses. As
of December 31, 1999 and 1998, the Company owed the Advisor and other related
parties $1,085,343 and $318,937, respectively, for expenditures incurred on
behalf of the Company and for acquisition fees. The Advisor has agreed to pay or
reimburse to the Company all offering expenses (excluding commissions and
marketing support and due diligence expense reimbursement fees) in excess of
three percent of gross offering proceeds.
During 1999, the Company opened three bank accounts in a bank in which
certain officers and directors of the Company serve as directors, and in which
an affiliate of the Advisor is a stockholder. The amount deposited with this
affiliate was $15,275,629 at December 31, 1999.
Other
As of December 31, 1999 and 1998, the tenants of the Properties have
established reserve funds which will be used for the replacement and renewal of
furniture, fixtures and equipment relating to the hotel Properties (the "FF&E
Reserve"). Funds in the FF&E Reserve have been paid, granted and assigned to the
Company, or in the case of the seven Properties owned indirectly, to Hotel
Investors. For the years ended December 31, 1999 and 1998, revenues relating to
the FF&E Reserve of the Properties directly owned by the Company totaled
$320,356 and $98,099, of which $275,630 and $82,407, respectively, is classified
as restricted cash. No such amounts were outstanding or earned during 1997. For
the year ended December 31, 1999, revenues relating to the FF&E Reserve of the
Properties indirectly owned through Hotel Investors totaled $343,264, of which
$288,644 is classified as restricted cash. Due to the fact that the Properties
are leased on a long-term, triple-net basis, management does not believe that
other working capital reserves are necessary at this time. Management has the
right to cause the Company to maintain additional reserves if, in their
discretion, they determine such reserves are required to meet the Company's
working capital needs.
Results of Operations
Comparison of year ended December 31, 1999 to year ended December 31, 1998
As of December 31, 1999, the Company owned 11 Properties, either
directly or indirectly, consisting of land, buildings and equipment and had
entered into long-term, triple-net lease agreements relating to these
Properties. The Property leases provide for minimum base annual rental payments
ranging from approximately $1,204,000 to $6,500,000, which are payable in
monthly installments. In addition, certain of the leases also provide that,
commencing in the second lease year, the annual base rent required under the
terms of the leases, will increase. In addition to annual base rent, the tenant
pays contingent rent computed as a percentage of gross sales of the Property.
The Company's leases also require the establishment of the FF&E Reserves. The
FF&E Reserves established for the Properties, directly or indirectly owned by
the Company, have been reported as additional rent for the years ended December
31, 1999 and 1998.
During the years ended December 31, 1999 and 1998, the Company earned
rental income from operating leases, contingent rental income and FF&E Reserve
revenue of $4,230,995 and $1,316,599, respectively. No contingent rental income
was earned for the year ended December 31, 1998. The 221% increase in rental
income, contingent rental income and FF&E Reserve income is due to the fact that
the Company owned two Properties for the full year ended December 31, 1999, as
compared to two Properties for approximately six months during the year ended
December 31, 1998. In addition, the Company invested in two additional
Properties during 1999. Because the Company has not yet acquired all of its
Properties, revenues for the year ended December 31, 1999, represent only a
portion of revenues which the Company is expected to earn in future periods.
During the year ended December 31, 1999, the Company acquired and
leased seven Properties indirectly through its investment in Hotel Investors, as
described above in "Liquidity Capital Resources - Property Acquisitions and
Investments". In connection with its investment, the Company recognized
$2,753,506 in dividend income and $778,466 in equity in loss after deduction of
preferred stock dividends, resulting in net earnings attributable to this
investment of $1,975,040.
During the years ended December 31, 1999 and 1998, the Company also
earned $3,693,004 and $638,862, respectively, in interest income from
investments in money market accounts and other short-term highly liquid
investments and other income. The 478% increase in interest income was primarily
attributable to increased offering proceeds in the current year being
temporarily invested in money market accounts or other short-term, highly liquid
investments pending investment in Properties or Mortgage Loans. As net offering
proceeds from the Company's offerings are invested in Properties and used to
make Mortgage Loans, the percentage of the Company's total revenues from
interest income from investments in money market accounts or other short term,
highly liquid investments is expected to decrease.
During the year ended December 31, 1999, two lessees, STC Leasing
Associates, LLC ("STC") (which operates and leases two Properties) and WI Hotel
leasing, LLC (which leases the seven Properties in which the Company owns an
interest through Hotel Investors), each contributed more than ten percent of the
Company's total rental income (including the Company's share of total rental
income from Hotel Investors). In addition, all of the Company's rental income
(including the Company's share of total rental income from Hotel Investors) was
earned from Properties operating as Marriott(R) brand chains. Although the
Company intends to acquire additional Properties located in various states and
regions and to carefully screen its tenants in order to reduce risks of default,
failure of these lessees or the Marriott chains could significantly impact the
results of operations of the Company. However, management believes that the risk
of such a default is reduced due to the essential or important nature of these
Properties for the ongoing operations of the lessees. It is expected that the
percentage of total rental income contributed by STC will decrease as additional
Properties are acquired and leased during 2000 and subsequent years.
Operating expenses, including interest expense and depreciation and
amortization expense, were $2,318,717 and $996,522 for the years ended December
31, 1999 and 1998, respectively (21.7% and 51%, respectively, of total
revenues). The increase in operating expenses during the year ended December 31,
1999, as compared to 1998, was primarily as a result of the Company owning two
Properties for approximately six months during 1998 compared to a full year
during 1999. Additionally, general operating and administrative expenses
increased as a result of Company growth, while interest expense decreased from
$350,322 for the year ended December 31, 1998 to $248,094 for the year ended
December 31, 1999. The decrease in interest expense of 29.2% was a result of the
line of credit being outstanding for two months in 1999 as compared to the
majority of 1998.
Pursuant to the Advisory Agreement, the Advisor is required to
reimburse the Company the amount by which the total operating expenses paid or
incurred by the Company exceed in any four consecutive fiscal quarters, the
greater of two percent of average invested assets or 25 percent of net income
(the "Expense Cap"). For the year ended December 31, 1999, the Company's
operating expenses did not exceed the Expense Cap. For the year ended December
31, 1998, the Company's operating expenses exceeded the Expense Cap by $92,733;
therefore, the Advisor reimbursed the Company such amount in accordance with the
Advisory Agreement.
The dollar amount of operating expenses is expected to increase as the
Company acquires additional Properties and invests in Mortgage Loans. However,
general operating and administrative expenses as a percentage of total revenues
is expected to decrease as the Company acquires additional Properties and
invests in Mortgage Loans.
Comparison of year ended December 31, 1998 to year ended December 31, 1997
Operations of the Company commenced on October 15, 1997 when the
Company received the minimum offering proceeds of $2,500,000. As of December 31,
1998, the Company had acquired two Properties, each consisting of land,
buildings and equipment, and had entered into a long-term, triple-net lease
agreement relating to each of the Properties. The Company earned $1,316,599 in
rental income from operating leases and FF&E Reserve income from the two
Properties during the year ended December 31, 1998.
During the years ended December 31, 1998 and 1997, the Company earned
$638,862 and $46,071, respectively, in interest income from investments in money
market accounts and other short-term highly liquid investments. The increase was
attributable to offering proceeds being temporarily invested in money market
accounts or other short term, highly liquid investments.
Operating expenses, including interest expense and depreciation and
amortization expense, were $996,522 and $23,219 for the years ended December 31,
1998 and 1997, respectively. Operating expenses increased during the year ended
December 31, 1998 as compared to the year ended December 31, 1997, primarily as
a result of the fact that the Company did not commence operations until October
15, 1997 and due to the fact that the Company acquired Properties and received
advances under the line of credit during 1998. As discussed above, for the year
ended December 31, 1998, the Company's operating expenses exceeded the Expense
Cap by $92,733; therefore, the Advisor reimbursed the Company such amount in
accordance with the Advisory Agreement. For the year ended December 31, 1997,
the Expense Cap was not applicable.
Other
The Company has made an election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ended December 31, 1997. As a REIT, for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax on its taxable income at regular corporate rates and will not
be permitted to qualify for treatment as a REIT for federal income tax purposes
for four years following the year during which qualification is lost. Such an
event could materially affect the Company's net earnings. However, the Company
believes that it is organized and operates in such a manner as to qualify for
treatment as a REIT for the years ended December 31, 1999, 1998 and 1997. In
addition, the Company intends to continue to operate the Company so as to remain
qualified as a REIT for federal income tax purposes.
The Company anticipates that its leases will continue to be triple-net
leases and will contain provisions that management believes will mitigate the
effect of inflation. Such provisions will include clauses requiring the payment
of percentage rent based on certain gross sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease. Management expects that increases in gross sales volumes due to inflation
and real sales growth should result in an increase in rental income over time.
Continued inflation also may cause capital appreciation of the Company's
Properties. Inflation and changing prices, however, also may have an adverse
impact on the sales of the Properties and on potential capital appreciation of
the Properties.
Management of the Company currently knows of no trends that will have a
material adverse effect on liquidity, capital resources or results of
operations.
Year 2000 Readiness Disclosure
Overview of Year 2000 Compliance Issues
The year 2000 compliance issues concern the ability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Readiness Status
The Advisor and its affiliates generally provide all services requiring
the use of information and some non-information technology systems pursuant to
the Advisory Agreement with the Company. The Company generally does not directly
own information technology systems. The non-information technology systems of
the Advisor, its affiliates and the Company are primarily facility related and
include hotel and building security systems, elevators, fire suppressions, HVAC,
electrical systems and other utilities. In early 1998, affiliates of the Advisor
formed a year 2000 committee (the "Y2K Team") that assessed the readiness of any
systems that were date sensitive and completed upgrades for the hardware
equipment and software that was not year 2000 compliant, as necessary. The cost
for these upgrades and other remedial measures was the responsibility of the
Advisor and its affiliates. The Company has not incurred, and the Advisor and
its affiliates do not expect that the Company will incur, any costs in
connection with the year 2000 remedial measures. In addition, the Y2K team
requested and received certifications of compliance from other companies with
which the Advisor, its affiliates, and the Company have material third party
relationships.
In assessing the risks presented by the year 2000 compliance issues,
the Y2K Team identified potential worst case scenarios involving the failure of
the information and non-information technology systems used by the Company's
transfer agent, financial institutions and tenants. As of January 21, 2000, the
Company did not experience material disruption or other significant problems in
its information and non-information technology systems. In addition, as of the
same date, the Advisor was not aware of any material year 2000 compliance issues
relating to information and non-information technology systems of third parties
with which the Company maintains material relationships, including those of the
Company's transfer agent, financial institutions and tenants. Additionally, the
Company's interactions with the systems of its transfer agent, financial
institutions and tenants, have functioned normally. Until the Company's first
distribution in 2000 and the delivery of the information by the transfer agent
to stockholders in early 2000, the Advisor will continue to monitor the year
2000 compliance of the transfer agent. In addition, the Advisor continues to
monitor the systems used by the Company and to maintain contact with third
parties with which the Company has material relationships with respect to year
2000 compliance and any year 2000 issues that may arise at a later date. The
Advisor will develop contingency plans relating to ongoing year 2000 issues at
the time that such issues are identified and such plans are deemed necessary.
Based on the information provided to the Y2K Team, the upgrades and
remedial measures by the Advisor and its affiliates, and the normal functioning
to date of information and non-information technology systems used by the
Company and those third parties, the Advisor does not foresee significant risks
associated with its year 2000 compliance at this time. In addition, the Advisor
and its affiliates do not expect to incur any material additional costs in
connection with the year 2000 compliance efforts. However, there can be no
assurance that the Advisor and its affiliates or any third parties will not have
ongoing year 2000 compliance issues that may have adverse effects on the
Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk for information related to quantitative
and qualitative disclosure about market risk.
Item 8. Financial Statements and Supplementary Data
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONTENTS
Page
Report of Independent Certified Public Accountants 20
Financial Statements:
Consolidated Balance Sheets 21
Consolidated Statements of Earnings 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 26
Report of Independent Certified Public Accountants
To the Board of Directors
CNL Hospitality Properties, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of CNL Hospitality Properties, Inc. (a Maryland corporation)
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Orlando, Florida
January 21, 2000
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
-------------- -------------
ASSETS
Land, buildings and equipment on operating leases, net $112,227,771 $28,368,383
Investment in unconsolidated subsidiary 38,364,157 --
Cash and cash equivalents 101,972,441 13,228,923
Restricted cash 275,630 82,407
Certificate of deposit 5,000,000 5,000,000
Dividends receivable 1,215,993 --
Receivables 112,184 44,832
Prepaid expenses 41,165 9,391
Organization costs, less accumulated amortization of
$5,221 -- 19,752
Loan costs, less accumulated amortization of $86,627 and
$12,980, respectively 51,969 78,282
Accrued rental income 79,399 44,160
Other assets 7,627,565 1,980,560
---------------
--------------
$266,968,274 $48,856,690
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ -- $ 9,600,000
Interest payable -- 66,547
Accounts payable and accrued expenses 405,855 333,726
Due to related parties 1,085,343 318,937
Security deposits 5,042,054 1,417,500
Rents paid in advance 255,568 3,489
--------------- --------------
Total liabilities 6,788,820 11,740,199
--------------- --------------
Commitments and contingencies
Minority interest 7,124,615 --
--------------- --------------
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares -- --
Excess shares, $.01 par value per share.
Authorized and unissued 63,000,000 shares -- --
Common stock, $.01 par value per share. 60,000,000
authorized shares, issued and outstanding 28,902,914
and 4,321,908 shares, respectively 289,029 43,219
Capital in excess of par value 256,231,833 37,289,402
Accumulated distributions in excess of net earnings (3,466,023 ) (216,130 )
--------------- --------------
Total stockholders' equity 253,054,839 37,116,491
--------------- --------------
$266,968,274 $48,856,690
=============== ==============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
1999 1998 1997
------------ ------------- ------------
Revenues:
Rental income from
operating leases $3,910,639 $1,218,500 $ --
FF&E reserve income 320,356 98,099 --
Dividend income 2,753,506 -- --
Interest and other income 3,693,004 638,862 46,071
------------- ------------- -------------
10,677,505 1,955,461 46,071
------------- ------------- -------------
Expenses:
Interest and loan cost amortization
248,094 350,322 --
General operating and administrative 626,649
167,951 22,386
Professional services 69,318 21,581 --
Asset management fees to
related party 106,788 68,114 --
Depreciation and amortization 1,267,868 388,554 833
------------- ------------- -------------
2,318,717 996,522 23,219
------------- ------------- -------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiary
After Deduction of Preferred
Stock Dividends and Minority
Interest 8,358,788 958,939 22,852
Equity in Loss of Unconsolidated
Subsidiary After Deduction of
Preferred Stock Dividends (778,466 ) -- --
Minority Interest (64,334 ) -- --
------------- ------------- -------------
Net Earnings $7,515,988 $ 958,939 $ 22,852
============= ============= =============
Earnings Per Share of Common Stock:
Basic $ 0.47 $ 0.40 $ 0.03
============= ============= =============
Diluted $ 0.45 $ 0.40 $ 0.03
============= ============= =============
Weighted Average Number of Shares of
Common Stock Outstanding:
Basic 15,890,212 2,402,344 686,063
============= ============= =============
Diluted 21,437,859 2,402,344 686,063
============= ============= =============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Accumulated
distributions
Common stock Capital in in excess
Number Par excess of of net
of Shares value par value earnings Total
----------- ---------- --------------- --------------- ---------------
Balance at December 31, 1996 20,000 $ 200 $ 199,800 $ -- $ 200,000
Subscriptions received for
common stock through public
offering and distribution
reinvestment plan 1,132,540 11,325 11,314,077 -- 11,325,402
Stock issuance costs -- -- (2,284,561 ) -- (2,284,561 )
Net earnings -- -- -- 22,852 22,852
Distributions declared and paid
($.05 per share) -- -- -- (29,776 ) (29,776 )
------------ ---------- --------------- -------------- --------------
Balance at December 31, 1997 1,152,540 11,525 9,229,316 (6,924 ) 9,233,917
Subscriptions received for
common stock through public
offering and distribution
reinvestment plan 3,169,368 31,694 31,661,984 -- 31,693,678
Stock issuance costs -- -- (3,601,898 ) -- (3,601,898 )
Net earnings -- -- -- 958,939 958,939
Distributions declared and paid
($.47 per share) -- -- -- (1,168,145 ) (1,168,145 )
------------ ---------- --------------- -------------- --------------
Balance at December 31, 1998 4,321,908 43,219 37,289,402 (216,130 ) 37,116,491
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 24,593,891 245,939 245,692,968 -- 245,938,907
Retirement of common stock (12,885) (129) (118,413 ) -- (118,542 )
Stock issuance costs -- -- (26,632,124 ) -- (26,632,124 )
Net earnings -- -- -- 7,515,988 7,515,988
Distributions declared and paid
($.72 per share) -- -- -- (10,765,881 ) (10,765,881 )
------------ ---------- --------------- -------------- --------------
Balance at December 31, 1999 28,902,914 $289,029 $256,231,833 $(3,466,023 ) $253,054,839
============ ========== =============== ============== ==============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1999 1998 1997
------------- ------------ ------------
Cash flows from operating activities:
Net earnings $ 7,515,988 $ 958,939 $ 22,852
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 1,230,499 384,166 --
Amortization 130,769 17,368 833
Distribution from investment in
unconsolidated subsidiary, net
of equity in loss 1,478,111 -- --
Minority interest 64,334 -- --
Changes in operating assets and
liabilities:
Dividends receivable (1,215,993 ) -- --
Receivables (67,352 ) (44,832 ) --
Prepaid expenses (31,774 ) 1,788 (11,179 )
Accrued rental income (35,239 ) (44,160 ) --
Interest payable (66,547 ) 66,547 --
Accounts payable and accrued
expenses (2,191 ) 5,322 3,822
Due to related parties -
operating expenses 12,923 10,838 6,141
Security deposits 3,624,554 1,417,500 --
Rents paid in advance 252,079 3,489 --
--------------- ------------- -------------
Net cash provided by
operating activities 12,890,161 2,776,965 22,469
--------------- ------------- -------------
Cash flows from investing activities:
Additions to land, buildings and
equipment on operating leases (85,089,887 ) (28,752,549 ) --
Investment in affiliates (39,879,638 ) -- --
Investment in certificate of deposit -- (5,000,000 ) --
Increase in restricted cash (193,223 ) ) --
(82,407
Additions to other assets (5,068,727 ) (676,026 ) (463,470 )
--------------- ------------- -------------
Net cash used in investing
activities (130,231,475 ) (34,510,982 ) (463,470 )
--------------- ------------- -------------
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31,
1999 1998 1997
--------------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings on line of
credit -- 9,600,000 --
Repayment of borrowings on line of (9,600,000 ) -- --
credit
Payment of loan costs (47,334 ) (91,262 ) --
Contributions from minority interest
of consolidated subsidiary 7,150,000 -- --
Subscriptions received from
stockholders 245,938,907 31,693,678 11,325,402
Distributions to stockholders (10,765,881 ) (1,168,145 ) (29,776 )
Retirement of common stock (118,542 ) -- --
Payment of stock issuance costs (26,472,318 ) (3,948,669 ) (1,979,371 )
Other -- 7,500 (7,500 )
--------------- -------------- ---------------
Net cash provided by financing
activities 206,084,832 36,093,102 9,308,755
--------------- -------------- ---------------
Net increase in cash and cash equivalents 88,743,518 4,359,085 8,867,754
Cash and cash equivalents at beginning of
year 13,228,923 8,869,838 2,084
--------------- -------------- ---------------
Cash and cash equivalents at end of year $ 101,972,441 $13,228,923 $ 8,869,838
=============== ============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 240,994 $ 270,795 $ --
=============== ============== ===============
Supplemental schedule of non-cash financing
activities:
Distributions declared not paid to
minority interest $ 89,719 $ -- $ --
=============== ============== ===============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. Significant Accounting Policies:
Organization and Nature of Business - CNL Hospitality Properties, Inc. was
organized in Maryland on June 12, 1996. CNL Hospitality GP Corp. and CNL
Hospitality LP Corp. are wholly owned subsidiaries of CNL Hospitality
Properties, Inc., organized in Delaware in June 1998. CNL Hospitality
Partners, LP is a Delaware limited partnership formed in June 1998. CNL
Hospitality GP Corp. and CNL Hospitality LP Corp. are the general and
limited partners, respectively, of CNL Hospitality Partners, LP. The term
"Company" includes, unless the context otherwise requires, CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp.,
CNL Hospitality LP Corp. and CNL Philadelphia Annex, LLC (see note 4).
The Company was formed primarily to acquire properties (the "Properties")
located across the United States to be leased on a long-term, "triple-net"
basis to hotel operators. The Company may also provide mortgage financing
(the "Mortgage Loans") and furniture, fixture and equipment financing
("Secured Equipment Leases") to operators of hotel chains. The aggregate
outstanding principal amount of Secured Equipment Leases will not exceed
10% of gross proceeds from the Company's offerings of shares of common
stock.
The Company was a development stage enterprise from June 12, 1996 through
October 15, 1997. Since operations had not begun, activities through
October 15, 1997 were devoted to organization of the Company.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of CNL Hospitality Properties, Inc., and
its wholly owned subsidiaries, CNL Hospitality GP Corp. and CNL Hospitality
LP Corp., as well as the accounts of CNL Hospitality Partners, LP and CNL
Philadelphia Annex, LLC (an 89% owned limited liability company). All
significant intercompany balances and transactions have been eliminated in
consolidation. Interest of unaffiliated third party is reflected as
minority interest.
Real Estate and Lease Accounting - The Company records the acquisition of
land, buildings and equipment at cost, including acquisition and closing
costs. Land, buildings and equipment are leased to unrelated third parties
on a triple-net basis, whereby the tenant is generally responsible for all
operating expenses relating to the Property, including property taxes,
insurance, maintenance and repairs.
The Property leases are accounted for using the operating method. Under the
operating method, land, building and equipment are recorded at cost,
revenue is recognized as rentals are earned and depreciation is charged to
operations as incurred. Buildings and equipment are depreciated on the
straight-line method over their estimated useful lives of 40 and seven
years, respectively. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce a constant
periodic rent over the lease term commencing on the date the Property is
placed in service. Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of scheduled rental
payments to date.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1999, 1998 and 1997
1. Significant Accounting Policies - Continued:
When the Properties or equipment are sold, the related cost and accumulated
depreciation, plus any accrued rental income, will be removed from the
accounts and any gain or loss from sale will be reflected in income.
Management reviews its Properties for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable through operations. Management determines whether impairment in
value has occurred by comparing the estimated future undiscounted cash
flows, including the residual value of the Property, with the carrying cost
of the individual Property. If an impairment is indicated, the assets are
adjusted to their fair value.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less to be cash equivalents.
Cash and cash equivalents consist of demand deposits at commercial banks
and money market funds (some of which are backed by government securities).
Cash equivalents are stated at cost plus accrued interest, which
approximates market value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks and money market funds may exceed federally insured
levels; however, the Company has not experienced any losses in such
accounts. The Company limits investment of temporary cash investments to
financial institutions with high credit standing; therefore, management
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Loan Costs - Loan costs incurred in connection with the Company's line of
credit and a $5,000,000 letter of credit have been capitalized and are
being amortized over the term of the loan and the term of the letter of
credit commitment, respectively, using the straight-line method which
approximates the effective interest method.
Income Taxes - The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes on
amounts distributed to stockholders, providing it distributes at least 95
percent of its REIT taxable income and meets certain other requirements for
qualifying as a REIT. Accordingly, no provision for federal income taxes
has been made in the accompanying consolidated financial statements.
Notwithstanding the Company's qualification for taxation as a REIT, the
Company is subject to certain state taxes on its income and Properties.
Earnings Per Share - Basic earnings per share ("EPS") is calculated based
upon the weighted average number of shares of common stock outstanding
during each year and diluted earnings per share is calculated based upon
weighted average number of common shares outstanding plus potentially
dilutive common shares (see Note 12).
Reclassification - Certain items in the prior years' financial statements
have been reclassified to conform with the 1999 presentation, including a
change in the presentation of the cash flow from the direct to the indirect
method. These reclassifications had no effect on stockholders' equity or
net earnings.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1999, 1998 and 1997
1. Significant Accounting Policies - Continued:
Use of Estimates - Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
2. Public Offerings:
On June 17, 1999, the Company completed its offering of 16,500,000 shares
of common stock ($165,000,000) (the "Initial Offering"), which included
1,500,000 shares ($15,000,000) available only to stockholders who elected
to participate in the Company's reinvestment plan. Following the completion
of the Initial Offering, the Company commenced an offering of up to
27,500,000 additional shares of common stock ($275,000,000) (the "1999
Offering"). Of the 27,500,000 shares of common stock to be offered,
2,500,000 will be available only to stockholders purchasing shares through
the reinvestment plan. The price per share and other terms of the 1999
Offering, including the percentage of gross proceeds payable (i) to the
managing dealer for selling commissions and expenses in connection with the
offering and (ii) to CNL Hospitality Corp. (formerly known as CNL
Hospitality Advisors, Inc.) (the "Advisor") for acquisition fees, are
substantially the same for the Company's Initial Offering. As of December
31, 1999, the Company received total subscription proceeds from the Initial
Offering and the 1999 Offering of $289,157,987 (28,915,799 shares),
including $503,819 (50,382 shares) through the reinvestment plan.
On October 26, 1999, the Company filed a registration statement on Form
S-11 with the Securities and Exchange Commission in connection with the
proposed sale by the Company of up to 45,000,000 additional shares of
common stock ($450,000,000) (the "2000 Offering") in an offering expected
to commence immediately following the completion of the Company's 1999
Offering. Of the 45,000,000 shares of common stock to be offered, up to
5,000,000 will be available to stockholders purchasing shares through the
reinvestment plan. The price per share and other terms of the 2000
Offering, including the percentage of gross proceeds payable (i) to the
managing dealer for selling commissions and expenses in connection with the
offering and (ii) to the Advisor for acquisition fees, are substantially
the same for the Company's 1999 Offering. The Company expects to use the
net proceeds from the 2000 Offering to purchase additional Properties and,
to a lesser extent, make Mortgage Loans.
3. Investment in Unconsolidated Subsidiary:
In February 1999, the Company executed a series of agreements with Five
Arrows Realty Securities II L.L.C. ("Five Arrows") pursuant to which the
Company and Five Arrows formed a jointly owned real estate investment
trust, CNL Hotel Investors, Inc. ("Hotel Investors"), for the purpose of
acquiring up to eight hotel Properties from various sellers affiliated with
Western International. At the time the agreement was entered into, the
eight Properties (four as Courtyard(R) by Marriott(R) hotels, three as
Residence Inn(R) by Marriott(R) hotels, and one as a Marriott Suites(R))
were either newly constructed or in various stages of completion.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1999, 1998 and 1997
3. Investment in Unconsolidated Subsidiary - Continu