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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, 2000
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 X No --
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of 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 22, 2001, 53,913,501 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 22,
2001, was 53,913,501.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL Hospitality
Properties, Inc. Definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 30, 2001.
CONTENTS
Page
Part I
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 45
Part III.
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
Signatures. 51
Schedule III - Real Estate and Accumulated Depreciation 53
Exhibits 56
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 was 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 partner, respectively, of CNL Hospitality Partners, LP.
Properties acquired are generally expected to be held by the Partnership and, as
a result, are owned by CNL Hospitality Properties, Inc. through the Partnership.
Various other wholly-owned subsidiaries have been formed for purposes of
acquiring or developing hotel properties. 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., CNL Hotel Investors, Inc. ("Hotel Investors"), CNL DRR Investors, LP, CNL
Philadelphia Annex, LLC (formerly known as Courtyard Annex L.L.C.), CNL LLB LP
Holding, Ltd., and each of their subsidiaries. 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, 5 to 20
years, plus renewal options generally 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 either (i) to operators of selected national and regional limited
service, extended stay and full service hotel chains (the "Hotel Chains"), or
(ii) to indirect, wholly-owned subsidiaries of the Company with management of
the Properties to be performed by third-party Hotel Chain operators, as
permitted by the Work Incentives Act of 1999, also known as the REIT
Modernization Act of 1999 ("RMA"). In November 1999, Congress passed the RMA,
effective January 1, 2001, which, among other things, allows REITs to own a
taxable REIT subsidiary ("TRS"). A TRS may lease lodging facilities from its
affiliated REIT. The Company, consistent with the requirements of the RMA,
formed two subsidiaries (one owned directly and one indirectly through a joint
venture) which made elections to be treated as TRS's, to act as tenants.
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 percent to 10 percent 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 percent 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 (the "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). Upon completion of the 1999 Offering, on September 14, 2000, the
Company had received aggregate subscription proceeds of $274,998,988 (27,499,899
Shares) from its 1999 Offering, including $965,194 (96,520 Shares) issued
pursuant to the Reinvestment Plan. Following the completion of the 1999
Offering, the Company commenced a third offering (the "2000 Offering") of up to
45,000,000 Shares of common stock ($450,000,000). Of the 45,000,000 Shares of
common stock 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 CNL Hospitality Corp. (the "Advisor")
for acquisition fees, are substantially the same as those for the Initial
Offering and 1999 Offering. As of December 31, 2000, the Company had received
subscription proceeds of $67,570,406 (6,757,040 Shares) from its 2000 Offering,
including $702,339 (70,233 Shares) issued pursuant to the Reinvestment Plan.
As of December 31, 2000, net proceeds to the Company from its Initial
Offering, 1999 Offering and 2000 Offering of Shares, loan proceeds 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 $615,052,000. The
Company has used approximately $332,202,000 of net offering proceeds and
$179,952,000 of loan proceeds to invest in 28 hotel Properties, including two on
which hotel Properties are being constructed, approximately $8,800,000 to invest
in a joint venture, approximately $26,300,000 to acquire an additional 22
percent ownership in Hotel Investors, approximately $2,622,000 to redeem 282,161
Shares of common stock and approximately $29,300,000 to pay acquisition fees
and expenses, leaving approximately $35,900,000 available for investment in
Properties and Mortgage Loans.
During the period January 1, 2001 through February 22, 2001, the
Company received additional net offering proceeds of approximately $46,300,000
and had approximately $57,100,000 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 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 percent of the Company's net assets. The Company believes that
the net proceeds received from the 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 such a listing
("Listing") will occur. 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.
In November 1999, Congress passed the RMA, which allows a REIT to
own 100 percent of the stock of a TRS. A TRS can provide services to REIT
tenants and others without disqualifying the rents that a REIT receives from its
tenants from being "rents from real property" under federal tax law. A TRS may
not operate or manage lodging facilities, but it may lease lodging facilities
from its affiliated REIT, at market rates, as long as an independent contractor
operates and manages the lodging facilities. The provisions of the RMA are
effective January 1, 2001. The Company, consistent with the provisions of the
RMA, formed two subsidiaries, which made elections to be treated as TRS's(one
directly owned and one indirectly owned through a joint venture), to act as
tenants.
For the next two to seven 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 Secured Equipment Leases 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 invest
in additional Properties, Mortgage Loans and Secured Equipment Leases. 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 partial
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, 2000, the Company had acquired directly or through
its subsidiaries 29 Properties, including two Properties on which hotels are
being constructed, and one Property through a joint venture, on which a resort
is being constructed, which are subject to long-term, "triple-net" leases.
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 5 to 20
years and expire between 2014 and 2021. 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 $716,000 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 is owned by the
Company and 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 to ten-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
Crestline Capital Corporation, City Center Annex Tenant Corporation and
WI Leasing, LLC each contributed more than 10 percent of the Company's total
rental income for the year ended December 31, 2000. In addition, a significant
portion of the Company's rental income was earned from Properties operating as
Marriott(R) brand chains. Although the Company intends to acquire Properties 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(R) brand
chains could significantly impact the results of operations of the Company.
However, management believes that the risk of 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
contribution by these lessees will decrease as additional Properties are
acquired and leased during 2001 and subsequent years.
Joint Venture Arrangements
Hotel Investors. During 1999, Five Arrows Realty Securities II LLC
("Five Arrows") and the Company invested a total of approximately $86 million in
Hotel Investors, resulting in the Company owning 49 percent and Five Arrows
owning 51 percent of Hotel Investors. Five Arrows owned 48,337 shares of 8
percent Class A cumulative preferred stock ("Class A Preferred Stock") of Hotel
Investors and the Company owned 37,979 shares of 9.76 percent Class B cumulative
preferred stock ("Class B Preferred Stock") of Hotel Investors. The Class A
Preferred Stock was exchangeable upon demand into common stock of the Company,
using an exchange ratio based on the relationship between the Company's
operating results and that of Hotel Investors.
In October 2000, Five Arrows, the Company and Hotel Investors entered
into an agreement ("Initial Transaction") with the following terms:
o Hotel Investors agreed to redeem 2,104 shares of both Class A
Preferred Stock and common stock of Hotel Investors held by Five Arrows
for $2,104,000;
o Hotel Investors agreed to redeem 1,653 shares of Class B Preferred
Stock and an aggregate of 10,115 shares of common stock of Hotel
Investors held by the Company for $1,653,000;
o The Company purchased 7,563 shares of both the Class A Preferred
Stock and common stock of Hotel Investors from Five Arrows for
$11,395,000;
o The Company repurchased 65,285 shares of the Company's common stock
owned by Five Arrows for $620,207;
o The remaining Class A Preferred Stock owned by Five Arrows (38,670
shares) and the Company (7,563 shares) were exchanged for an equivalent
number of shares of Class E Preferred Stock par value $0.01 ("Class E
Preferred Stock") of Hotel Investors;
o Five Arrows granted the following options (1) on or before January 31,
2001, the Company had the option to purchase 7,250 shares of Class E
Preferred Stock and an equal number of shares of common stock of Hotel
Investors held by Five Arrows for $1,000 per pair of Class E Preferred
Stock and common stock of Hotel Investors, and (2) provided that the
Company purchased all of the shares under the first option, the Company
would have the option, until June 30, 2001, to purchase 7,251 shares of
both Class E Preferred Stock and an equal number of shares of common
stock of Hotel Investors for $1,000 for each pair;
o The Company has agreed to pay Five Arrows additional consideration for
agreeing to defer the conversion of its Class A Preferred Stock (prior
to its conversion to Class E Preferred Stock) to common stock of the
Company. These payments are equivalent to the difference between any
distributions received by Five Arrows from Hotel Investors and the
distributions that Five Arrows would have received from the Company if
Five Arrows had converted its Class A Preferred Stock into the
Company's common stock on June 30, 2000;
o Five Arrows has agreed to forfeit its priority cash distributions from
Hotel Investors;
o Cash available for distributions of Hotel Investors 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 8 percent return. All remaining cash
available for distributions is distributed pro rata with respect to the
interest in the common shares of Hotel Investors.
On December 29, 2000, the Company exercised its two options to acquire
14,501 shares of Class E Preferred Stock and common stock ("Option Transaction")
owned by Five Arrows. As of December 31, 2000, after the Initial Transaction and
the Option Transaction, the Company owned approximately 71 percent and Five
Arrows owned approximately 29 percent of Hotel Investors. The total amount paid
by the Company for the additional 22 percent interest was approximately $26.3
million. This acquisition has been accounted for under the purchase method of
accounting and, accordingly, the operating results of Hotel Investors have been
included in the Company's consolidated statement of earnings from the date of
acquisition (October 2000). The purchase price approximated the fair value of
the net assets acquired. The resulting purchase price adjustment (fair value
adjustment) of approximately $5.5 million has been reflected in land, buildings
and equipment on operating leases in the accompanying consolidated balance
sheet.
During the nine months ended September 30, 2000, prior to the
consolidation of Hotel Investors, the Company recorded $2,780,063 in dividend
income and $386,627 in equity in loss after deduction of preferred stock
dividends, resulting in net earnings of $2,393,436 attributable to its
investment in Hotel Investors. During the year ended December 31, 1999, the
Company recorded $2,753,506 in dividend income and $778,466 in equity in loss
after deduction of preferred stock dividends, resulting in net earnings of
$1,975,040 attributable to the investment.
Desert Ridge. On December 21, 2000, the Company, through subsidiaries,
acquired a 44 percent interest in Desert Ridge Resort Partners, LLC, a joint
venture (the "Desert Ridge Joint Venture") with an affiliate of Marriott
International, Inc. and a partnership in which an affiliate of the Advisor is
the general partner. The Desert Ridge Joint Venture invested in Desert Ridge
Resort, LLC, a single purpose limited liability company (the "Resort Owner")
that owns the Desert Ridge Marriott Resort & Spa in Phoenix, Arizona (the
"Desert Ridge Property"), which is currently under construction. The Company
made an initial capital contribution of $8.8 million of its anticipated $25
million investment in the Desert Ridge Joint Venture. The total cost of the
Desert Ridge Property (including acquisition of land, development and
construction) is estimated to be $298 million. On December 21, 2000, the Resort
Owner obtained permanent financing from a third party lender for $179 million,
secured by a mortgage on the Desert Ridge Property. The notes have a term of
seven years with interest payable quarterly in arrears commencing on March 2,
2001. Interest with respect to $109 million of the notes is payable at a rate of
7.90 percent per annum, while interest with respect to $70 million of the notes
is payable at a floating rate equal to 185 basis points above the three-month
London Interbank Offered Rate ("LIBOR"). The blended fixed rate of interest
after an interest rate swap is 9.48 percent. All unpaid interest and principal
will be due at maturity. In addition, an affiliate of Marriott International,
Inc. will provide financing for 19 percent of the costs to the Desert Ridge
Joint Venture, secured by pledges of the co-venturers' equity contributions to
the Desert Ridge Joint Venture. This investment is accounted for using the
equity method of accounting.
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 0.60 percent of the total amount invested in the Properties, exclusive of
acquisition fees and acquisition expenses (the "Real Estate Asset Value") plus
one-twelfth of 0.60 percent 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 percent 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 percent of gross proceeds, loan proceeds from
permanent financing and the line of credit that are used to acquire Properties,
but excluding loan proceeds used to finance Secured Equipment Leases.
The Advisory Agreement continues until June 16, 2001, 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.
Borrowings
The Company has a line of credit ("Line of Credit") which allows the
Company to receive advances of up to $30,000,000 until July 30, 2003. 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 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 percent 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. Advances on the
Line of Credit are subject to absolute discretion of the lender. As of December
31, 2000 and 1999, the Company had no amounts outstanding under the Line of
Credit.
In March 2000, the Company through CNL Philadelphia Annex, LLC ("LLC")
entered into a Tax Incremental Financing Agreement with the Philadelphia
Authority for Industrial Development ("TIF Note") for $10 million, which is
collateralized by the LLC's hotel Property. The principal and interest on the
TIF note are expected to be fully paid by the LLC's hotel Property's incremental
property taxes over a period of 18 years. The payment of the incremental
property taxes is the responsibility of the tenant of the hotel Property.
Implicit interest on the TIF Note is 12.85 percent and payments are due yearly
through 2017. In the event that incremental property taxes are insufficient to
cover the principal and interest due, Marriott International, Inc. is required
to fund such shortfalls pursuant to its guarantee of the TIF Note. As of
December 31, 2000, approximately $9,685,000 was outstanding on the TIF Note.
In November 2000, the Company secured permanent financing for the
Courtyard(R) by Marriott(R) in Philadelphia, Pennsylvania in the amount of $32.5
million. The loan is collateralized by the hotel Property and monthly rents
derived from the tenant of the hotel Property. The loan agreement requires
monthly payments, representing interest only, through November 2001 and then
principal and interest payments of $257,116 to maturity. The loan bears interest
of 8.29 percent and matures in December 2007, at which time any unpaid principal
and interest will become due. As of December 31, 2000, $32.5 million was
outstanding on the loan.
In November 2000, the Company entered into a construction line of
credit ("Construction LOC") totaling $55 million, which is collateralized by
land and building improvements of two of the Properties under construction and
two hotel Properties located in Georgia. Borrowings under the Construction LOC
bear interest at LIBOR plus 275 basis points. Interest only payments are due
monthly through maturity, November 15, 2003, at which time any remaining
principal and interest become due. As of December 31, 2000, approximately
$9,897,000 was outstanding on the Construction LOC.
In December 2000, the Company secured permanent financing for three
hotel Properties located in Orlando, Florida in the amount of $50 million. The
loans are collateralized by the hotel Properties and monthly rents derived from
the tenants of such hotel Properties. The loan agreements require monthly
interest only payments of approximately $347,000 through 2007. The loans bear
interest of 8.335 percent and mature in 2007, at which time the principal and
any unpaid interest will become due. As of December 31, 2000, $50 million was
outstanding on the loans.
As of December 31, 2000, Hotel Investors had notes payable totaling
approximately $87,555,000, which are collateralized by seven hotel Properties
and the monthly rents relating to such Properties. The loan agreements require
monthly principal and interest payments totaling approximately $660,000. The
loans bear interest ranging from 7.50 percent to 7.75 percent and mature July
31, 2009, at which time any unpaid principal and interest will become due.
The Company expects to use net proceeds it receives from 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 increase its
borrowing capacity under the Line of Credit from $30 million to $75 million,
and, in addition, obtain additional 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 be $75
million and that the aggregate amount of any permanent financing will not exceed
30 percent 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
percent 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, 2000, the Company owned directly and through its
subsidiaries 29 hotel Properties, located in 15 states, including two Properties
on which hotels are being constructed, and one Property through a joint venture,
on which a resort is being constructed. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation filed with this report for a listing of
the directly owned Properties and their respective costs, including acquisition
fees and certain acquisition expenses. The Company is currently negotiating to
acquire additional 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 29 Properties directly or indirectly owned by the Company as of December 31,
2000, 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 held conform to the Hotel Chain's approved design
concepts.
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 or manager's
obligations under the franchise agreement to reflect the current commercial
image of the 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 is owned by the Company and
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 paid for by the Company in excess of amounts in the reserve
fund.
As of December 31, 2000, 15 Properties (including three under
construction) were pledged as collateral under the Company's financing
arrangements. For more detailed information relating to these arrangements, see
"Item 1. Business - Borrowings".
The following table lists the number of Properties owned, directly or
indirectly through joint ventures, by the Company as of December 31, 2000, by
state and includes properties under construction. More detailed information
regarding the location of the Properties is contained in the Schedule of Real
Estate and Accumulated Depreciation filed with this report.
State Total Number of Properties
--------------------------------- -------------------------------
Arizona 3*
California 4
Colorado 1
Florida 5**
Georgia 3
Maine 1
Massachusetts 2
Maryland 1
Nevada 1
New Jersey 1
Pennsylvania 1
Texas 3
Utah 1
Virginia 1
Washington 1
--------------------------------- -------------------------------
Total Number of Properties 29
================================= ===============================
* Includes one Property owned by a joint venture currently under
construction.
** Includes two Properties currently under construction.
Leases with Major Tenants. The terms of the leases with the Company's
major tenants as of December 31, 2000 (see Item 1. Business - Major Tenants),
are substantially the same as those described in Item 1. Business - Leases.
Crestline Capital Corporation leases five Properties owned by the
Company. Properties include a Residence Inn(R) by Marriott(R), three TownePlace
Suites(TM) by Marriott(R) and one Courtyard(R) by Marriott(R). The initial term
of each lease is approximately 19 years (expiring in 2019) and the aggregate
minimum base annual rent is approximately $5,237,000.
City Center Annex Tenant Corporation leases the Courtyard(R) by
Marriott(R) Property in Philadelphia, Pennsylvania. The initial term of the
lease is 15 years (expiring in 2015) and the aggregate minimum base annual rent
is approximately $6,500,000.
WI Leasing, LLC leases seven Properties owned by Hotel Investors.
Properties include three Residence Inns(R) by Marriott(R), three Courtyards(R)
by Marriott(R) and one Marriott Suites(R). The initial term of each lease is
approximately 19 years (expiring in 2018) and the aggregate minimum base annual
rent is approximately $17,500,000.
Management considers the Properties to be well-maintained and
sufficient for the Company's operations.
Item 3. Legal Proceedings
Neither the Company, nor any of its subsidiaries, 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
As of February 22, 2001, there were 17,062 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 two to seven years, 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 percent 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 years ended
December 31, 2000 and 1999, 269,276 and 12,885 Shares, respectively, were
retired pursuant to the redemption plan.
As of December 31, 2000, 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, 2000 and 1999, the Company declared cash distributions of $28,082,275 and
$10,765,881, respectively, to the stockholders. No amounts distributed to
stockholders for the years ended December 31, 2000 and 1999, 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:
2000 Quarter First Second Third Fourth Year
- ------------ --------- ---------- --------- ---------- -----------
Total distributions declared $5,522,124 $6,414,210 $7,533,536 $8,612,405 $28,082,275
Distributions per Share 0.181 0.181 0.188 0.188 0.738
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
On January 1, 2001 and February 1, 2001, the Company declared
distributions totaling $3,120,827 and $3,217,630, respectively, or $0.06354 per
Share of common stock, payable in March 2001, to stockholders of record on
January 1, 2001 and February 1, 2001, respectively.
The Company intends to continue to declare distributions of cash to
stockholders on a monthly basis during the offering period, and quarterly
thereafter.
Item 6. Selected Financial Data
2000 1999 1998 1997 (1)(4) 1996(1)(2)(4)
---------------- --------------- -------------- -------------- --------------
Year Ended December 31:
Revenues $36,099,219 $10,677,505 $1,955,461 $ 46,071 $ --
Net earnings 20,670,462 7,515,988 958,939 22,852 --
Cash flows from operating activities 43,650,561 12,890,161 2,776,965 22,469 --
Cash flows from investing activities (334,236,686) (130,231,475) (34,510,982) (463,470) --
Cash flows from financing activities 238,811,538 206,084,832 36,093,102 9,308,755 --
Cash distributions declared 28,082,275 10,765,881 1,168,145 29,776 --
Funds from operations (3) 30,316,348 10,478,103 1,343,105 22,852 --
Earning per Share:
Basic 0.53 0.47 0.40 0.03 --
Diluted 0.53 0.45 0.40 0.03 --
Cash distributions declared per Share 0.74 0.72 0.47 0.05 --
Weighted average number of Shares
outstanding:
Basic 38,698,066 15,890,212 2,402,344 686,063 --
Diluted 45,885,742 21,437,859 2,402,344 686,063 --
At December 31:
Total assets $653,962,058 $266,968,274 $48,856,690 $9,443,476 $598,190
Mortgages payable 170,055,326 -- -- -- --
Other notes payable 19,581,950 -- -- -- --
Total stockholders' equity 419,288,998 253,054,839 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") in October 1999 and as used herein, means
net earnings determined in accordance with generally accepted
accounting principles ("GAAP"), excluding gains or losses from 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, 2000,
1999 and 1998, net earnings included $117,282, $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 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 and 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 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 was 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 partner, respectively, of CNL Hospitality Partners, LP.
Properties acquired are generally expected to be held by the Partnership and, as
a result, are owned by CNL Hospitality Properties, Inc. through the Partnership.
Various other wholly-owned subsidiaries have been formed for purposes of
acquiring or developing hotel Properties. 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., CNL Hotel Investors, Inc. ("Hotel Investors"), CNL DRR Investors, LP, CNL
Philadelphia Annex, LLC (formerly known as Courtyard Annex L.L.C.), CNL LLB LP
Holding, Ltd. and each of their subsidiaries. The Company operates for federal
income tax purposes as a real estate investment trust (a "REIT").
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 percent 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. 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). Upon completion of the 1999 Offering, on September 14,
2000, the Company had received aggregate subscription proceeds of $274,998,988
(27,499,899 Shares) from its 1999 Offering, including $965,194 (96,520 Shares)
issued pursuant to the Reinvestment Plan. Following the completion of the 1999
Offering on September 14, 2000, the Company commenced a third offering of up to
45,000,000 Shares of common stock ($450,000,000). Of the 45,000,000 Shares of
common stock 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. As
of December 31, 2000, the Company had received subscription proceeds of
$67,570,406 (6,757,040 Shares) from its 2000 Offering, including $702,339
(70,233 Shares) issued pursuant to the Reinvestment Plan.
As of December 31, 2000, net proceeds to the Company from its Initial
Offering, 1999 Offering and 2000 Offering of Shares, loan proceeds 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 $615,052,000. The
Company has used approximately $332,202,000 of net offering proceeds and
$179,952,000 of loan proceeds to invest in 28 hotel Properties, including two on
which hotel Properties are being constructed, approximately $8,800,000 to invest
in a joint venture, approximately $26,300,000 to acquire an additional 22
percent ownership in Hotel Investors, approximately $2,622,000 to redeem 282,161
Shares of common stock and approximately $29,300,000 to pay acquisition fees
and expenses, leaving approximately $35,900,000 available for investment in
Properties and Mortgage Loans.
During the period January 1, 2001 through February 22, 2001, the
Company received additional net offering proceeds of approximately $46,300,000
and had approximately $57,100,000 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 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 percent 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 years
ended December 31, 2000 and 1999, 269,276 Shares and 12,885 Shares,
respectively, were redeemed at $2,503,484 and $118,542, respectively, and
retired from Shares outstanding of common stock. No Shares were redeemed in 1998
or 1997.
Borrowings
The Company has a Line of Credit which allows the Company to receive
advances of up to $30,000,000 until July 30, 2003. 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 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 percent 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. Advances on the Line of
Credit are subject to absolute discretion of the lender. As of December 31, 2000
and 1999, the Company had no amounts outstanding under the line of credit.
In March 2000, the Company, through the LLC, entered into a Tax
Incremental Financing Agreement with the Philadelphia Authority for Industrial
Development for $10 million, which is collateralized by the LLC's hotel
Property. The principal and interest on the TIF note are expected to be fully
paid by the LLC's hotel Property's incremental property taxes over a period of
18 years. The payment of the incremental property taxes is the responsibility of
the tenant of the hotel Property. Implicit interest on the TIF Note is 12.85
percent and payments are due yearly through 2017. In the event that incremental
property taxes are insufficient to cover the principal and interest due,
Marriott International, Inc. is required to fund such shortfalls pursuant to its
guarantee of the TIF Note. As of December 31, 2000, approximately $9,685,000 was
outstanding on the TIF Note.
In November 2000, the Company secured permanent financing for the
Courtyard(R) by Marriott(R) in Philadelphia, Pennsylvania in the amount of $32.5
million. The loan is collateralized by the hotel Property and monthly rents
derived from the tenant of the hotel Property. The loan agreement requires
monthly payments, representing interest only, through November 2001 and then
principal and interest payments of $257,116 to maturity. The loan bears interest
of 8.29 percent and matures in December 2007, at which time any unpaid principal
and interest will become due. As of December 31, 2000, $32.5 million was
outstanding on the loan.
In November 2000, the Company entered into a Construction LOC totaling
$55 million, which is collateralized by land and building improvements of two of
the Properties under construction and two hotel Properties located in Georgia.
Borrowings under the Construction LOC bear interest at LIBOR plus 275 basis
points. Interest only payments are due monthly through maturity, November 15,
2003, at which time any remaining principal and interest become due. As of
December 31, 2000, approximately $9,897,000 was outstanding on the Construction
LOC.
In December 2000, the Company secured permanent financing for three
hotel Properties located in Orlando, Florida in the amount of $50 million. The
loans are collateralized by the hotel Properties and monthly rents derived from
the tenants of such hotel Properties. The loan agreements require monthly
interest only payments of approximately $347,000 through 2007. The loans bear
interest of 8.335 percent and mature in 2007, at which time the principal and
any unpaid interest will become due. As of December 31, 2000, $50 million was
outstanding on the loans.
As of December 31, 2000, Hotel Investors had notes payable totaling
approximately $87,555,000, which are collateralized by seven hotel Properties
and monthly rents relating to such Properties. The loan agreements require
monthly principal and interest payments totaling approximately $666,000. The
loans bear interest ranging from 7.50 percent to 7.75 percent and mature July
31, 2009, at which time any unpaid principal and interest will become due.
The Company expects to use net proceeds it receives from 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 increase its
borrowing capacity under the Line of Credit from $30 million to $75 million, and
obtain additional 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 be $75 million and that the
aggregate amount of any permanent financing will not exceed 30 percent 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 percent of the Company's net
assets.
Market Risk
The Company may be subject to interest rate risk through any
outstanding balances on its variable rate Line of Credit and Construction LOC.
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
and approximately $9,897,000 outstanding on the Construction LOC at December 31,
2000.
In addition, the Company has issued fixed interest rate mortgages
payable and notes payable to lenders under permanent financing arrangements. The
Company believes that the estimated fair value of the amounts outstanding on
such notes at December 31, 2000 approximated the outstanding principal amount.
The following table presents the expected cash flows of principal that are
sensitive to these changes:
Notes Payable
----------------------------
2001 $ 2,292,415
2002 2,194,877
2003 12,243,846
2004 2,510,389
2005 2,687,520
Thereafter 167,708,229
----------------------------
$ 189,637,276
============================
Property Acquisitions and Investments
During 1999, Five Arrows and the Company invested a total of
approximately $86 million in Hotel Investors, resulting in the Company owning 49
percent and Five Arrows owning 51 percent of Hotel Investors. Five Arrows owned
48,337 shares of 8 percent Class A cumulative preferred stock of Hotel Investors
and the Company owned 37,979 shares of 9.76 percent Class B cumulative preferred
stock of Hotel Investors. The Class A Preferred Stock was exchangeable upon
demand into common stock of the Company, using an exchange ratio based on the
relationship between the Company's operating results and that of Hotel
Investors.
In October 2000, Five Arrows, the Company and Hotel Investors entered
into an agreement ("Initial Transaction") with the following terms:
o Hotel Investors agreed to redeem 2,104 shares of both Class A
Preferred Stock and common stock of Hotel Investors held by Five
Arrows for $2,104,000;
o Hotel Investors agreed to redeem 1,653 shares of Class B Preferred
Stock and an aggregate of 10,115 shares of common stock of Hotel
Investors held by the Company for $1,653,000;
o The Company purchased 7,563 shares of both the Class A Preferred Stock
and common stock of Hotel Investors from Five Arrows for $11,395,000;
o The Company repurchased 65,285 shares of the Company's common stock
owned by Five Arrows for $620,207;
o The remaining Class A Preferred Stock owned by Five Arrows (38,670
shares) and the Company (7,563 shares) were exchanged for an equivalent
number of shares of Class E Preferred Stock par value $0.01 of Hotel
Investors;
o Five Arrows granted the following options (1) on or before January 31,
2001, the Company had the option to purchase 7,250 shares of Class E
Preferred Stock and an equal number of shares of common stock of Hotel
Investors held by Five Arrows for $1,000 per pair of Class E Preferred
Stock and common stock of Hotel Investors, and (2) provided that the
Company purchased all of the shares under the first option, the Company
would have the option, until June 30, 2001, to purchase 7,251 shares of
both Class E Preferred Stock and an equal number of shares of common
stock of Hotel Investors for $1,000 for each pair;
o The Company has agreed to pay Five Arrows additional consideration for
agreeing to defer the conversion of its Class A Preferred Stock (prior
to its conversion to Class E Preferred Stock) to common stock of the
Company. These payments are equivalent to the difference between any
distributions received by Five Arrows from Hotel Investors and the
distributions that Five Arrows would have received from the Company if
Five Arrows had converted its Class A Preferred Stock into the
Company's common stock on June 30, 2000;
o Five Arrows has agreed to forfeit its priority cash distributions from
Hotel Investors;
o Cash available for distributions of Hotel Investors 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 8 percent return. All remaining cash
available for distributions is distributed pro rata with respect to the
interest in the common shares of Hotel Investors.
On December 29, 2000, the Company exercised its two options to acquire
14,501 shares of Class E Preferred Stock and common stock owned ("Option
Transaction") by Five Arrows as of December 31, 2000. After the Initial
Transaction and the Option Transaction, the Company owned approximately 71
percent and Five Arrows owned approximately 29 percent of Hotel Investors. The
total amount paid by the Company for the additional 22 percent interest was
approximately $26.3 million. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the operating results of Hotel
Investors have been included in the Company's consolidated statement of earnings
from the date of acquisition (October 2000). The purchase price approximated the
fair value of the net assets acquired. The resulting purchase price adjustment
(fair value adjustment) of approximately $5.5 million has been reflected in
land, buildings and equipment on operating leases in the accompanying
consolidated balance sheet.
During the nine months ended September 30, 2000, prior to the
consolidation of Hotel Investors, the Company recorded $2,780,063 in dividend
income and $386,627 in equity in loss after deduction of preferred stock
dividends, resulting in net earnings of $2,393,436 attributable to its
investment in Hotel Investors. During the year ended December 31, 1999, the
Company recorded $2,753,506 in dividend income and $778,466 in equity in loss
after deduction of preferred stock dividends, resulting in net earnings of
$1,975,040 attributable to the investment.
During 2000, the Company made the following additional acquisitions,
all of which are operated by a tenant as the noted brand affiliation:
Brand Affiliation Property Location Purchase Date
---------------------------------- ----------------------- ------------------
Wyndham(SM) Billerica, MA June 1, 2000
Wyndham(SM) Denver, CO June 1, 2000
Residence Inn(R)by Marriott(R) Palm Desert, CA June 16, 2000
Courtyard(R)by Marriott(R) Palm Desert, CA June 16, 2000
SpringHill Suites(TM) by Marriott(R) Gaithersburg, MD July 28, 2000
Residence Inn(R)by Marriott(R) Merrifield, VA July 28, 2000
TownePlace Suites(R)by Marriott(R) Mt. Laurel, NJ August 22, 2000
TownePlace Suites(R)by Marriott(R) Scarborough, ME August 22, 2000
TownePlace Suites(R)by Marriott(R) Tewksbury, MA August 22, 2000
Courtyard(R)by Marriott(R) Alpharetta, GA August 22, 2000
Residence Inn(R)by Marriott(R) Salt Lake City, UT August 22, 2000
TownePlace Suites(R)by Marriott(R) Newark, CA November 3, 2000
Courtyard(R)by Marriott(R) Orlando, FL November 21, 2000
Fairfield Inn by Marriott(R) Orlando, FL November 21, 2000
Residence Inn(R)by Marriott(R) Orlando, FL December 6, 2000
SpringHill Suites(TM) by Marriott(R) Orlando, FL December 15, 2000
Courtyard(R)by Marriott(R) Weston, FL December 22, 2000
The Company, as lessor, has entered into long-term, "triple-net" leases
with operators of Hotel Chains or wholly-owned subsidiaries of the Company, as
described below in "Liquidity Requirements."
On December 21, 2000, the Company, through subsidiaries, acquired a 44
percent interest in Desert Ridge Resort Partners, LLC, a joint venture with an
affiliate of Marriott International, Inc. and a partnership in which an
affiliate of the Advisor is the general partner. The Desert Ridge Joint Venture
invested in Desert Ridge Resort, LLC, a single purpose limited liability company
that owns the Desert Ridge Marriott Resort & Spa in Phoenix, Arizona, which is
currently under construction. The Company made an initial capital contribution
of $8.8 million of its anticipated $25 million investment in the Desert Ridge
Joint Venture. The total cost of the Desert Ridge Property (including
acquisition of land, development and construction) is estimated to be $298
million. On December 21, 2000, the Resort Owner obtained permanent financing
from a third party lender for $179 million, secured by a mortgage on the Desert
Ridge Property. The notes have a term of seven years with interest payable
quarterly in arrears commencing on March 2, 2001. Interest with respect to $109
million of the notes is payable at a rate of 7.90 percent per annum, while
interest with respect to $70 million of the notes is payable at a floating rate
equal to 185 basis points above the three-month LIBOR. The blended fixed rate of
interest after an interest rate swap is 9.48 percent. All unpaid interest and
principal will be due at maturity. In addition, an affiliate Marriott
International, Inc. will provide financing for 19 percent of the costs to the
Desert Ridge Joint Venture, secured by pledges of the co-venturers' equity
contributions to the Desert Ridge Joint Venture. This investment is accounted
for using the equity method of accounting.
Commitments
As of January 26, 2001, the Company had initial commitments to acquire
four hotel Properties for an anticipated aggregate purchase price of
approximately $45 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. 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 26, 2001, the Company had not acquired any such Properties or entered
into any Mortgage Loans. In addition, as of January 26, 2001, the Company had
not entered into any other arrangements creating a reasonable probability that 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 deposit 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,
2000, the Company had $50,197,854 invested in such short-term investments as
compared to $101,972,441 at December 31, 1999. The decrease in the amount
invested in short-term investments was primarily attributable to the acquisition
of Properties during 2000 offset by proceeds received from the sale of common
stock in the 1999 Offering and 2000 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, at management's discretion, to create cash reserves.
Liquidity Requirements
The Company expects to meet its short-term liquidity requirements,
other than for offering expenses, for the 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. No such borrowings had occurred through
December 31, 2000.
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.
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.
Distributions
During the years ended December 31, 2000, 1999 and 1998, the Company
generated cash from operations of $43,650,561, $12,890,161 and $2,776,965,
respectively. The Company declared and paid distributions to its stockholders of
$28,082,275, $10,765,881 and $1,168,145 during the years ended December 31,
2000, 1999 and 1998, respectively. In addition, on January 1, 2001 and February
1, 2001, the Company declared distributions to stockholders of record on January
1, 2001 and February 1, 2001, totaling $3,120,827 and $3,217,630, respectively,
or $0.6354 per Share, payable in March 2001.
For the years ended December 31, 2000, 1999 and 1998, approximately 63
percent, 75 percent and 76 percent, respectively, of the distributions received
by stockholders were considered to be ordinary income and approximately 37
percent, 25 percent and 24 percent were considered a return of capital for
federal income tax purposes. No amounts distributed to the stockholders for the
years ended December 31, 2000, 1999 and 1998 were 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, 2000, 1999 and 1998, affiliates of
the Company incurred on behalf of the Company $4,363,326, $3,257,822 and
$459,250, respectively, for certain offering expenses, $717,273, $653,231 and
$392,863, respectively, for certain acquisition expenses, and $605,517, $325,622
and $98,212, respectively, for certain operating expenses. As of December 31,
2000 and 1999, the Company owed the Advisor and other related parties $1,359,417
and $995,500, 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.
The Company maintains 13 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 $17,568,909 and $15,275,629 at December 31, 2000 and 1999,
respectively.
Other
As of December 31, 2000, 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. For the years ended December 31, 2000, 1999 and 1998,
revenues relating to the FF&E Reserve of the Properties owned by the Company
totaled, directly or indirectly, $2,508,949, $320,356 and $98,099, of which
$3,263,712, $275,630 and $82,407, respectively, 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, 2000 to year ended December 31, 1999
As of December 31, 2000, the Company directly and indirectly owned 29
Properties, consisting of land, buildings and equipment, including two
Properties on which hotel Properties are being constructed and one Property,
through a joint venture, on which a resort is being constructed 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 $716,000 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 have been reported as additional rent for the
years ended December 31, 2000 and 1999.
During the years ended December 31, 2000 and 1999, the Company earned
rental income from operating leases, contingent rental income and FF&E Reserve
revenue of $26,681,838 and $4,230,995, respectively. The increase in rental
income, contingent rental income and FF&E Reserve income is due to the Company
owning 28 Properties during the year ended December 31, 2000, as compared to 11
Properties during the year ended December 31, 1999. In addition, several of the
Properties, which were owned for only a portion of 1999, were owned for a full
year in 2000. Because additional Property acquisitions are expected to occur,
revenues for the year ended December 31, 2000, represent only a portion of
revenues which the Company is expected to earn in future periods.
In October 2000, the Company acquired a majority interest in Hotel
Investors, as described above in "Liquidity and Capital Resources - Property
Acquisitions and Investments." In connection with its investment, the Company
recognized $2,780,063 in dividend income and $386,627 in equity in loss after
deduction of preferred stock dividends, resulting in net earnings of $2,393,436
prior to consolidating Hotel Investors, for the nine months ended September 30,
2000. During the year ended December 31, 1999, 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, 2000 and 1999, the Company earned
$6,637,318 and $3,693,004, respectively, in interest income from investments in
money market accounts and other short-term highly liquid investments and other
income. The increase in interest income was primarily attributable to an
increase in the dollar amount invested in short-term liquid investments and the
period of time the funds were invested as compared to 1999. As net offering
proceeds from the Company's offering 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 remain constant or decrease.
Crestline Capital Corporation, City Center Annex Tenant Corporation,
and WI Leasing, LLC each contributed more than 10 percent of the Company's total
rental income for the year ended December 31, 2000. In addition, a significant
portion of the Company's rental income was earned from Properties operating as
Marriott(R) brand chains. Although the Company intends to acquire Properties 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(R) brand
chains could significantly impact the result of operations of the Company.
However, management believes that the risk of such as 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 these lessees will decrease as additional Properties are acquired
and leased during 2001 and subsequent years.
Operating expenses, including interest expense and depreciation and
amortization expense, were $13,525,893 and $2,318,717 for the years ended
December 31, 2000 and 1999, respectively (37.5 percent and 21.7 percent,
respectively, of total revenues). The increase in operating expenses during the
year ended December 31, 2000, as compared to 1999, was as a result of the
Company owning 11 Properties during 1999 compared to 29 Properties in 2000.
Additionally, general, operating and administrative expenses increased as a
result of Company growth, while interest expense increased from $248,094 for the
year ended December 31, 1999 to $2,383,449 for the year ended December 31, 2000.
The increase in interest expense was a result of the Company securing permanent
financing in 2000.
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 years ended December 31, 2000 and 1999, the
Company's operating expenses did not exceed the Expense Cap.
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, 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 increase in rental income,
contingent rental income and FF&E Reserve income was due to the fact that the
Company owned directly four Properties during the year ended December 31, 1999,
as compared to two Properties for approximately six months during the year ended
December 31, 1998. Because the Company had 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 and 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 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 increase in interest income was primarily attributable to increased
offering proceeds in 1999 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, three lessees, City Center
Annex Tenant Corporation, Crestline Capital Corporation and WI Hotel Leasing,
LLC, each contributed more than 10 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(R) 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.
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 percent and 51 percent, respectively, of
total revenues). The increase in operating expenses during the year ended
December 31, 1999, as compared to 1998, was 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 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.
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, 2000, 1999 and 1998. 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.
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 23
Financial Statements:
Consolidated Balance Sheets 24
Consolidated Statements of Earnings 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 30
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors
CNL Hospitality Properties, Inc.
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) presents fairly, in all material respects,
the financial position of CNL Hospitality Properties, Inc. (a Maryland
corporation) and its subsidiaries at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
14(a)(2) presents 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 of America, 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 our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Orlando, Florida
January 26, 2001
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
2000 1999
--------------- --------------
ASSETS
Land, buildings and equipment on operating leases, less
accumulated depreciation of $9,433,790 and $1,603,334,
respectively $ 581,528,928 $ 112,227,771
Investment in unconsolidated subsidiaries 10,174,209 38,364,157
Cash and cash equivalents 50,197,854 101,972,441
Restricted cash 3,263,712 275,630
Certificate of deposit -- 5,000,000
Dividends receivable -- 1,215,993
Receivables 1,009,421 112,184
Prepaid expenses 28,170 41,165
Loan costs, less accumulated amortization of $152,621 and
$86,627, respectively 1,976,630 51,969
Accrued rental income 597,234 79,399
Other assets 5,185,900 7,627,565
--------------- ---------------
$ 653,962,058 $ 266,968,274
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages payable and accrued interest $ 170,055,326 $ --
Other notes payable 19,581,950 --
Accounts payable and accrued expenses 2,126,365 405,855
Distributions payable 1,089,394 89,843
Due to related parties 1,359,417 995,500
Security deposits 15,418,626 5,042,054
Rents paid in advance 2,271,836 255,568
--------------- ---------------
Total liabilities 211,902,914 6,788,820
--------------- ---------------
Commitments and contingencies -- --
Minority interest 22,770,146 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. Authorized
150,000,000 and 60,000,000 shares, respectively; issued 49,284,203
and 28,915,799 shares, respectively; outstanding 49,002,042 and
28,902,914 shares, respectively 490,020 289,029
Capital in excess of par value 432,403,246 256,231,833
Accumulated distributions in excess of net earnings (10,877,836) (3,466,023)
Minority interest distributions in excess of contributions
and accumulated earnings (2,726,432) --
--------------- ---------------
Total stockholders' equity 419,288,998 253,054,839
--------------- ---------------
$ 653,962,058 $ 266,968,274
=============== ===============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
2000 1999 1998
------------ ------------ ------------
Revenues:
Rental income from
operating leases $ 24,172,889 $ 3,910,639 $ 1,218,500
FF&E reserve income 2,508,949 320,356 98,099
Dividend income 2,780,063 2,753,506 --
Interest and other income 6,637,318 3,693,004 638,862
------------- ------------- -------------
36,099,219 10,677,505 1,955,461
------------- ------------- -------------
Expenses:
Interest and loan cost amortization 2,383,449 248,094 350,322
General operating and administrative 1,780,472 626,649 167,951
Professional services 196,028 69,318 21,581
Asset management fees to
related parties 1,335,488 106,788 68,114
Depreciation and amortization 7,830,456 1,267,868 388,554
------------- ------------- -------------
13,525,893 2,318,717 996,522
------------- ------------- -------------
Earnings Before Equity in Loss of
Unconsolidated Subsidiaries
After Deduction of Preferred
Stock Dividends and Minority
Interest 22,573,326 8,358,788 958,939
Equity in Loss of Unconsolidated
Subsidiaries After Deduction of
Preferred Stock Dividends (386,627) (778,466) --
Minority Interest (1,516,237) (64,334) --
------------- ------------- -------------
Net Earnings $ 20,670,462 $ 7,515,988 $ 958,939
============= ============= =============
Earnings Per Share of Common Stock:
Basic $ 0.53 $ 0.47 $ 0.40
============= ============= =============
Diluted $ 0.53 $ 0.45 $ 0.40
============= ============= =============
Weighted Average Number of Shares of
Common Stock Outstanding:
Basic 38,698,066 15,890,212 2,402,344
============= ============= =============
Diluted 45,885,742 21,437,859 2,402,344
============= ============= =============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
Years Ended December 31,
2000, 1999 and 1998
Minority interest
Accumulated distributions
Common stock distributions in excess of
-------------------------- Capital in in excess contributions
Number of Par excess of of net and accumulated
Shares value par value earnings Earnings Total
------------- ----------- -------------- ------------- ------------------ --------------
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) $ -- $253,054,839
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 20,368,404 203,684 203,480,360 -- -- 203,684,044
Retirement of common stock (269,276) (2,693) (2,500,791) -- -- (2,503,484)
Stock issuance costs -- -- (24,808,156) -- -- (24,808,156)
Net earnings -- -- -- 20,670,462 -- 20,670,462
Minority interest
distributions in excess of
contributions and
accumulated earnings -- -- -- -- (2,726,432) (2,726,432)
Distributions declared and paid
($.74 per share) -- -- -- (28,082,275) -- (28,082,275)
------------ ----------- -------------- ------------- ------------------ --------------
Balance at December 31, 2000 49,002,042 $ 490,020 $432,403,246 $(10,877,836) $ (2,726,432) $419,288,998
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See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2000 1999 1998
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Cash flows from operating activities:
Net earnings $ 20,670,462 $ 7,515,988 958,939
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 7,830,456 1,230,499 384,166
Amortization 65,994 1