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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No _____
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: No established market exists for the Registrant's shares of common
stock, so there is no market value for such shares. Each share was originally
sold at $10 per share. Based on the $10 offering price of the shares,
$1,003,214,560 of our common stock was held by non-affiliates as of June 28,
2002.
The number of Shares of common stock outstanding as of February 21, 2003,
was 134,921,073.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant incorporates by reference portions of the CNL Hospitality
Properties, Inc. Definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 30, 2003.
CONTENTS
Page
Part I
Item 1. Business 2
Item 2. Properties 5
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 60
Part III.
Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 60
Item 12. Security Ownership of Certain Beneficial Owners and Management 60
Item 13. Certain Relationships and Related Transactions 60
Item 14. Controls and Procedures 61
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 62
Signatures 101
Certifications 103
Schedule III - Real Estate and Accumulated Depreciation 106
Exhibits 111
PART I
(in thousands, except per share data)
Item 1. Business
(in thousands, except per share data)
CNL Hospitality Properties, Inc. is a corporation which was organized
pursuant to the laws of the State of Maryland on June 12, 1996 and operates for
federal income tax purposes as a real estate investment trust (a "REIT"). 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 Philadelphia Annex, LLC, CNL Hotel
Investors, Inc., CNL LLB SHS Management, LP, CNL LLB F-Inn Management, LP, CNL
LLB C-Hotel Management, LP, CNL Bridgewater Hotel Partnership, LP, CNL MI-4
Hotel, LP and each of their wholly owned subsidiaries. Various other wholly
owned subsidiaries have been and will be formed in the future, for purposes of
acquiring or developing hotel Properties. Amounts contained herein are in
thousands, unless otherwise noted, except for per share data.
The Company is engaged primarily in the acquisition and ownership of
interests in hotel properties ("Properties") generally located across the United
States and has retained CNL Hospitality Corp. (the "Advisor") as its advisor to
provide management, acquisition, advisory and certain administrative services.
The hotel Properties may include limited service, extended stay, and full
service hotel Properties. The Company generally leases its Properties to wholly
owned taxable REIT subsidiary ("TRS") entities and contracts with third-party
managers to operate the Properties. Hotel operating revenues and expenses for
these Properties are included in the consolidated results of operations of the
Company. Other Properties are leased on a triple-net basis to unrelated
third-party tenants who operate the Properties or contract with hotel managers
to run their hotel operations. Rental income from operating leases is included
in the Company's consolidated results of operations for these Properties. All of
the Properties acquired in 2002 are, and Properties acquired in the future are
generally expected to be, leased to the Company's TRS entities. Additionally,
several previously entered into third-party leases were assumed by TRS entities
of the Company during 2002 and additional leases may be assumed by the Company
in the future. For certain Properties, the Company has received various credit
enhancement guarantees from third-party managers who, subject to certain
limitations, have guaranteed performance levels for Properties they manage. See
Note 13, "Commitments and Contingencies" of the Company's consolidated financial
statements for additional information on credit enhancements.
The Company may also provide mortgage financing ("Mortgage Loans") to
operators of national and regional hotel brands ("Hotel Brands"), however, it
has not done so as of December 31, 2002. In addition, the Company may invest up
to a maximum of 5 percent of total assets in equity interests in businesses that
provide services to or are otherwise ancillary to the lodging industry
("Ancillary Businesses"). As of December 31, 2002, the Company had limited
investments in Ancillary Businesses (0.4% of total assets).
The Company was formed in June 1996, at which time it received an initial
capital contribution of $200 from the Advisor for 20 shares of common stock. On
July 9, 1997, the Company commenced its initial public offering of up to 16,500
shares of common stock ($165,000) (the "Initial Offering") pursuant to a
registration statement on Form S-11 under the Securities Act of 1933, as amended
(the "Securities Act"). Subsequent to the completion of the Initial Offering,
through December 31, 2002, the Company has had three follow-on, best efforts
offerings of up to 117,500 shares of common stock, including an offering for up
to 45,000 shares that was being offered as of December 31, 2002 ("the 2002
Offering"). In addition, upon completion of the 2002 Offering on February 4,
2003, the Company commenced an offering of up to 175,000 shares of common stock
at $10 per share ($1,750,000) (the "2003 Offering"). Of the 175,000 shares of
common stock to be offered, up to 25,000 will be available to stockholders
purchasing shares through the reinvestment plan. The price per share and the
other terms of the 2003 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 Company's 2002 Offering. CNL Securities
Corp., an affiliate of the Advisor, is the managing dealer for the Company's
equity offerings. As of December 31, 2002, the Company had received gross
proceeds totaling $1,267,821 from the sale of 126,782 shares of common stock
through its four prior public offerings.
As of December 31, 2002, net proceeds from its four prior public offerings,
loan proceeds and capital contributions from the Advisor, after deduction of
selling commissions, marketing support fees, due diligence expense
reimbursements and organizational and offering expenses, totaled approximately
$1,535,263. As of such date, the Company has used approximately $739,359 in net
offering proceeds and approximately $276,928 of loan proceeds to invest in 42
hotel Properties and a parcel of land on which a hotel Property was being
constructed, approximately $220,872 to invest in 13 Properties through seven
partnerships, including three Properties on which hotels were being constructed
or renovated, approximately $8,467 to redeem 914 shares of common stock,
approximately $160,407 to pay down the two construction lines of credit and
approximately $93,980 to pay acquisition fees and expenses, leaving
approximately $35,250 available for investment in Properties and Mortgage Loans
or other permitted investments.
During the period January 1, 2003 through February 21, 2003, the Company
received additional net offering proceeds of approximately $81,442 from the 2002
and 2003 Offerings, used approximately $16,196 to invest in four new Properties
through an existing partnership, used approximately $39,125 to acquire one
additional Property, and as of February 21, 2003, had approximately $60,372
available for investment in Properties, Mortgage Loans and other permitted
investments. The Company expects to use the uninvested net proceeds from the
2002 Offering, plus any additional net proceeds from the sale of shares from the
2003 Offering to purchase interests in additional Properties and, to a lesser
extent, invest in Mortgage Loans or other permitted investments such as
investments in other real estate companies and partnerships. Additionally, the
Company intends to borrow money to acquire interests in additional Properties,
to invest in Mortgage Loans and to pay certain related fees. The Company intends
to encumber assets in connection with such borrowings. The Company currently has
a $96,725 line of credit (the "Revolving LOC") as described below in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." A total of approximately $72,646 was available under the Revolving
LOC as of December 31, 2002. The maximum amount the Company may borrow, absent
the Company demonstrating 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 2003 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 ("Listing"),
although there is no assurance that such a 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 receipt of percentage rent and/or automatic increases in base rent, and
obtaining fixed income through the receipt of payments on Mortgage Loans; (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
five years, either in whole or in part, through (a) Listing of the Company's
shares or (b) if Listing does not occur within five years, the commencement of
orderly sales of the Company's assets and distribution of the proceeds thereof
(outside the ordinary course of business and consistent with its objectives of
qualifying as a REIT). There can be no assurance that these investment
objectives will be met.
For the next five years or until Listing occurs, the Company intends, to
the extent consistent with the Company's objective of qualifying as a REIT, to
invest in additional Properties or Mortgage Loans or other permitted
investments, any proceeds of the sale of a Property or Mortgage Loan or other
permitted investments that are not required to be distributed to stockholders in
order to preserve the Company's REIT status for federal income tax purposes. 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 as discussed above. If Listing occurs, the Company intends to use any net
sales proceeds not required to be distributed to stockholders in order to
preserve the Company's status as a REIT to invest in additional Properties,
Mortgage Loans and other permitted investments.
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 and partnership agreements, however, may require the
Company to sell a Property at an earlier time if the tenant or co-venture
partner exercises its option to purchase a Property after a specified portion of
either the lease or partnership agreement term has elapsed or certain other
events have occurred. 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 purchase options granted to certain tenants or co-partners in
partnerships. 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.
Leases
As of December 31, 2002, the Company owned interests in 55 Properties (42
directly owned and 13 held indirectly through partnerships), generally
consisting of land, buildings and equipment. The Company also owns one parcel of
land on which a hotel is being developed. Of the Properties in which it owns
interests, the Company currently leases 43 Properties to TRS entities, with
management performed by third-party operators, and 12 Properties on a triple-net
basis to third-party operators. For Properties leased to TRS entities, the lease
rental income and expenses have been eliminated in consolidation and the hotel
operating revenues and expenses have been included in the consolidated results
of operations of the Company. Leases to unrelated third parties are operating
leases and resulted in rental income from operating leases being included in the
results of operations of the Company.
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 and the Mortgage Loans. Under this agreement, the Advisor is
responsible for assisting the Company in negotiating leases, permanent
financing, Mortgage Loans and the Revolving LOC; collecting rental and Mortgage
Loan 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 and the Revolving LOC. In exchange for these services, the
Advisor is entitled to receive certain fees. For supervision of the Properties
and the Mortgage Loans, the Advisor receives an 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, 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 identifying the
Properties, structuring the terms of the acquisition and leases of the
Properties and structuring the terms of the Mortgage Loans, the Advisor receives
an acquisition fee equal to 4.5 percent of gross proceeds from the offerings,
loan proceeds from permanent financing and a portion of the Revolving LOC that
are used to acquire Properties.
The Advisory Agreement continues until March 31, 2003, 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.
Competition
The hotel industry is generally characterized as being intensely
competitive. The hotels 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 competes with other persons and entities to locate suitable
Properties to acquire interests in 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
and Mortgage Loan borrowers.
Concentration of Risk
A significant portion of the Company's rental income and hotel revenues
were earned from Properties operating as various Marriott International, Inc.
("Marriott")and Hilton Hotels Corporation ("Hilton") brands for the year ended
December 31, 2002. Although the Company intends to acquire Properties in various
states and regions, carefully screens its managers and tenants and has obtained
interests in non-Marriott(R) and Hilton (R) branded Properties, failure of the
Company's hotels or the Marriott(R) and Hilton (R) brands could significantly
impact the results of operations of the Company. Management believes that the
risk of such a default will be reduced through future acquisitions and
diversification, and through the initial and continuing due diligence procedures
performed by the Company.
Available Information
The Company makes available free of charge on or through its Internet
website (http://www.cnlonline.com) the Company's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") as
soon as reasonable practicable after the Company electronically files such
material with, or furnishes it to, the Securities and Exchange Commission (the
"Commission").
Employees
The Company has no employees, other than its officers. Information with
respect to the Company's officers is incorporated by reference to the Company's
Definitive Proxy Statement to be filed with the Commission no later than April
30, 2003. The Company has retained the Advisor to provide management,
acquisition, advisory and certain administrative services and retained certain
other affiliates to provide additional administrative services.
Environmental Matters
In the ordinary course of business, the Company may acquire Properties
where environmental issues exist. In accordance with Company policy, when an
environmental issue exists for a Property to be acquired, and cannot be resolved
prior to the acquisition of the Property, the Company will obtain
indemnification from the seller or negotiate other comparable arrangements such
as reduction in the purchase price of the Property to be acquired. When a
reduction in the purchase price is obtained, the Company will establish an
escrow fund in an amount equal to or greater than the estimated remediation
costs in order to fund the cost of such remediations. As of December 31, 2002,
the Company had $1,000 set aside for remediation at one Property. No
environmental remediation reserve funds existed as of December 31, 2001. The
Company has obtained indemnification in writing from sellers on several of its
Properties to cover potential remediation costs. The Company obtains detailed
environmental studies for each Property prior to acquisition. Additionally, the
Company also carries contingent insurance to cover the cost of unexpected
issues.
Item 2. Properties
(in thousands, except per share data)
As of December 31, 2002, the Company had acquired interests, directly or
indirectly through its partnerships, in 55 Properties, located in 21 states,
consisting of land, buildings and equipment, including 13 Properties through
interests in four partnerships with Marriott; two partnerships with Hilton; and
one partnership with Interstate Hotels and Resorts. The Company also owns one
parcel of land on which a hotel is being developed. Of the Properties in which
it owns interests, the Company currently leases, 43 to TRS entities, with
management performed by third-party operators, and 1eases 12 Properties on a
triple-net basis to third-party operators.
The Company has committed to fund improvements at many of its Properties.
Three Properties are currently in the final stages of renovation. Renovations
are typically funded with proceeds from the Company's stock offerings, permanent
financing, or borrowings under the Revolving LOC.
Generally, Properties acquired consist of land, building and equipment;
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 55 Properties directly
or indirectly owned by the Company as of December 31, 2002, generally conform 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 and
the Properties held conform to the Hotel Brand's approved design concepts.
For leases to independent third parties, the tenants of the Properties have
established FF&E Reserve funds which are used for the replacement and renewal of
furniture, fixtures, and equipment, and routine capital expenditures. FF&E
Reserve funds and any replacement furniture, fixtures, or equipment are owned by
the Company. In addition, leases with third parties generally require the tenant
to make a security deposit relating to the Property which is retained as
security for the tenant's obligations under the lease.
As of December 31, 2002, most of the Properties directly owned, including
the parcel of land being developed, were pledged as collateral under the
Company's financing arrangements. For more detailed information relating to
these arrangements, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Borrowings".
The following table lists the number of Properties owned, directly or
indirectly through partnerships, by the Company as of December 31, 2002, by
state, including the Property under development. More detailed information
regarding the location of the Properties is contained in the Schedule of Real
Estate and Accumulated Depreciation filed as an exhibit to this report.
State Total Number of Properties
--------------------------------- ----------------------------------
Arizona 4
California 12 *, **
Colorado 1
Connecticut 2
Florida 6 *
Georgia 3
Hawaii 1 *
Kansas 1
Maine 1
Massachusetts 2
Maryland 1
Michigan 1
Nevada 1
New Jersey 4
North Carolina 2
Oregon 1
Pennsylvania 2
Texas 5
Utah 1
Virginia 4
Washington 1
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Total Number of Properties 56
==================================
*Includes one Property owned by a partnership currently under final stages
of renovation.
**Includes one parcel of land on which a hotel is being developed.
Significant Leases and Assignment of Leases with Major Tenants. The Company
leases its Properties primarily to wholly owned TRS entities and contracts with
third-party managers to operate the Properties. Hotel operating revenues and
expenses for these Properties are included in the consolidated results of
operations of the Company.
Land, buildings and equipment for other Properties are leased to, and
operated by, unrelated third-party tenants on a "triple-net" basis, whereby the
tenant is generally responsible for all operating expenses relating to the
Property, including property taxes, insurance, maintenance and repairs. Rental
income from operating leases is included in the Company's consolidated results
of operations for these Properties.
Of the 55 Properties in which it owns interests, the Company currently
leases 43 Properties to TRS entities with management performed by third-party
operators, and 12 Properties on a triple-net basis to third-party operators.
RST4 Tenant, LLC leases the Courtyard(R) by Marriott(R) Property in Palm
Desert, California, the Residence Inn by Marriott(R) Property in San Diego,
California, the Residence Inn by Marriott(R) Property in Merrifield, Virginia,
the Residence Inn by Marriott(R) Property in Palm Desert, California, the
SpringHill Suites (TM) by Marriott(R) Property in Gaithersburg, Maryland and the
TownePlace Suites(R) by Marriott(R) Property in Newark, California. The initial
term of each lease is 17 years (expiring in 2016) and the aggregate minimum base
annual rent is approximately $9,330.
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.
LLB Tenant Corporation leases three Properties owned by the Company. These
Properties include one Courtyard(R) by Marriott(R), one Fairfield Inn(R) by
Marriott(R) and one SpringHill Suites (TM) by Marriott(R). The initial term of
each lease is approximately 15 years (expiring in 2016) and the aggregate
minimum base annual rent is approximately $10,884.
Effective January 1, 2002, the Company took assignment of its leases with
WI Hotel Leasing, LLC for seven hotel Properties. These Properties are being
leased by a TRS of the Company and are managed by affiliates of Marriott. The
operations of these Properties have been reflected in the results of operations
for the Company for the year ended December 31, 2002. The Company paid
approximately $69 for this assignment.
Effective June 28, 2002, the Company took assignment of its leases from
CCCL Leasing, LLC, an affiliate of Crestline Capital Corporation, for nine hotel
Properties. These Properties are managed by an affiliate of Marriott. The
operations of these Properties are reflected in the consolidated results of
operations for the Company effective June 28, 2002. In connection with this
transaction, CCCL Leasing, LLC agreed to give up its claim to security deposits
totaling approximately $4,000. Additionally, the Company assumed a liquidity
facility loan of approximately $3,600 and paid approximately $25 in legal fees
and other expenses. This transaction resulted in net other income of
approximately $400 being recognized by the Company during the year ended
December 31, 2002.
Effective June 30, 2002, the Company took assignment of its leases from CC
GB Leasing, LLC, an affiliate of Crestline Capital Corporation, for two hotel
Properties. These Properties are managed by an affiliate of Interstate Hotels
and Resorts under the Residence Inn by Marriott brand. The operations of the
Properties are reflected in the consolidated results of operations for the
Company effective June 30, 2002. In connection with this transaction, CC GB
Leasing, LLC forfeited its claim to security deposits totaling $1,400 and the
Company assumed net assets of approximately $59, resulting in other income of
approximately $1,500 being recognized by the Company during the year ended
December 31, 2002.
Item 3. Legal Proceedings
(in thousands, except per share data)
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
(in thousands, except per share data)
On November 1, 2002, at a special meeting of the stockholders, a majority
of the common stockholders approved an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized equity
shares from 216,000 shares (consisting of 150,000 common shares, 3,000 preferred
shares and 63,000 excess shares) to 516,000 shares (consisting of 450,000 common
shares, 3,000 preferred shares and 63,000 excess shares).
PART II
(in thousands, except per share data and number of stockholders)
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(in thousands, except per share data)
As of February 21, 2003, there were 46,538 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 five years, there is no assurance that a public
market for the shares will develop. 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, at a redemption price equal to
the then current offering price, less a discount of 8 percent. The current
offering price is $10 per share; thereby the current net redemption price is
$9.20 per share. Redemptions are limited to the extent sufficient funds are
available. In addition, the Company may, at its discretion, use up to $100 per
calendar quarter of the proceeds of any public offering of its common stock for
redemptions. There is no assurance that there will be sufficient funds available
for redemptions and, accordingly, a stockholder's shares may not be redeemed.
The Board of Directors of the Company, in its discretion, may amend or suspend
the redemption plan at any time they determine that such amendment or suspension
is in the best interest of the Company. For the years ended December 31, 2002
and 2001, 239 and 251 shares, respectively, were redeemed at $9.20 per share and
retired from shares outstanding of common stock. 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. Amounts contained
hereinafter are in thousands, unless otherwise noted, except for per share data.
As of December 31, 2002, the Company is aware of the following trades in
its shares, other than purchases made in its public offering and redemptions of
shares by the Company:
Effective Date No. of Shares Price Per Share
-------------- ------------- ---------------
April 1, 2002 4 $ 7.05
July 1, 2002 3 10.00
October 1, 2002 2 9.20
October 1, 2002 556 9.00
The Company is not aware of any other trades as of this date. As of
December 31, 2002, the offering price per share of common stock was $10. Based
on the continued sale of shares through February 21, 2003, for $10 per share,
the Company estimates that the value of its shares is $10 per share. The
Company's shares are not publicly traded. Investors are cautioned that common
stock not publicly traded is generally considered illiquid and the estimated
value per share may not be realized when an investor seeks to liquidate his or
her common stock.
The Company expects to make distributions to the stockholders pursuant to
the provisions of the Articles of Incorporation. For the years ended December
31, 2002 and 2001, the Company declared cash distributions of approximately
$74,217 and $48,409 respectively, to the stockholders. For the years ended
December 31, 2002 and 2001, approximately 51 percent and 52 percent,
respectively, of the distributions paid to stockholders were considered ordinary
income and approximately 49 percent and 48 percent, respectively, were
considered a return of capital to stockholders for federal income tax purposes.
No amounts distributed to stockholders for the years ended December 31, 2002 and
2001, 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. The following table presents total distributions and distributions per
share:
2002 Quarter First Second Third Fourth Year
- ------------------------------ ------------- --------------- ---------------- --------------- ---------------
Total distributions declared $15,432 $17,058 $19,322 $22,405 $74,217
Distributions per share 0.194 0.194 0.194 0.194 0.776
2001 Quarter
- ------------------------------
Total distributions declared $9,772 $11,257 $13,037 $14,343 $48,409
Distributions per share 0.191 0.191 0.194 0.194 0.770
On January 1, 2003 and February 1, 2003, the Company declared distributions
totaling approximately $8,152 and $8,490, respectively, or $0.064583 per share
of common stock, payable by March 31, 2003, to stockholders of record on January
1, 2003 and February 1, 2003, respectively.
The Company intends to continue to declare distributions of cash to
stockholders on a monthly basis during the offering period, and quarterly
thereafter to the extent that cash is available for distribution. There is no
assurance that the Company will continue to be able to pay distributions, except
to maintain REIT status in accordance with the Internal Revenue Code of 1986, as
amended. The Company is required to distribute annually at least 90 percent of
its real estate investment trust taxable income to maintain its objective of
qualifying as a REIT. Distributions will be made at the discretion of the Board
of Directors, depending primarily on net cash from operations and the general
financial condition of the Company, subject to the obligation of the Board of
Directors to cause the Company to remain qualified as a REIT for federal income
tax purposes.
Item 6. Selected Financial Data
(in thousands, except per share data)
The following selected financial data should be read in conjunction with
the consolidated financial statements and related notes in Item 8 hereof.
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Year Ended December 31:
Revenues $ 156,408 $ 71,463 $ 36,099 $ 10,678 $ 1,955
Net earnings (1) 15,810 19,328 20,670 7,516 959
Cash flows from operating activities 70,340 52,937 43,651 12,890 2,777
Cash flows used in investing activities (451,745) (295,991) (334,237) (130,231) (34,511)
Cash flows from financing activities 386,573 237,681 238,811 206,085 36,093
Cash distributions declared (2) 74,217 48,409 28,082 10,766 1,168
Funds from operations (4) 59,366 40,838 30,053 10,478 1,343
Earnings per share:
Basic 0.16 0.30 0.53 0.47 0.40
Diluted 0.16 0.30 0.53 0.45 0.40
Cash distributions declared per share 0.78 0.77 0.74 0.72 0.47
Weighted average number of shares
Outstanding (3):
Basic 97,874 64,458 38,698 15,890 2,402
Diluted 97,874 64,458 45,886 21,438 2,402
At December 31:
Total assets $ 1,303,860 $ 901,406 $ 653,962 $ 266,968 $ 48,857
Mortgages payable 207,206 168,884 170,055 -- --
Other notes payable and line of credit 53,818 65,072 19,582 -- --
Total stockholders' equity 1,012,499 637,876 419,289 253,055 37,116
(1) To the extent that operating expenses payable or reimbursable by the
Company in any four consecutive fiscal quarters (the "Expense Year") exceed
the greater of 2 percent of average invested assets or 25 percent of net
income (the "Expense Cap"), the Advisor shall reimburse the Company within
60 days after the end of the Expense Year the amount by which the total
operating expenses paid or incurred by the Company exceed the Expense Cap.
During the years ended December 31, 2002, 2001 and 2000, operating expenses
did not exceed the Expense Cap.
(2) Cash distributions are declared by the Board of Directors and generally are
based on various factors, including cash available from operations.
Approximately 79%, 60%, 26%, 30% and 18% of cash distributions for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively,
represent a return of capital in accordance with generally accepted
accounting principles ("GAAP"). Cash distributions treated as a return of
capital on a GAAP basis represent the amount of cash distributions in
excess of accumulated net earnings on a GAAP basis, including deductions
for depreciation expense. The Company has not treated such amounts as a
return of capital for purposes of calculating the stockholders' return on
their invested capital.
(3) The weighted average number of shares outstanding is based upon the period
the Company was operational.
(4) Management considers funds from operations ("FFO") to be an indicative
measure of operating performance due to the significant effect of
depreciation of real estate assets on net earnings. 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
debt restructuring and sales of property, plus depreciation and
amortization of real estate assets and after adjustments for unconsolidated
partnerships. (Net earnings determined in accordance with GAAP includes the
non-cash 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, 2002, 2001,
2000, 1999, and 1998, net earnings included approximately $76, $118, $117,
$35 and $44, respectively, of these amounts.) 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. FFO, as presented, may not be
comparable to similarly titled measures reported by other companies.
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.
The following is a reconciliation of net earnings to FFO for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998:
Year Ended
December 31,
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Net earnings $ 15,810 $ 19,328 $ 20,670 $ 7,516 $ 959
Adjustments:
Effect of unconsolidated subsidiaries 12,341 2,702 1,825 1,710 --
Effect of minority interest (237) (941) (272) (16) --
Amortization of real estate assets 1,353 535 131 49 --
Depreciation of real estate assets 26,523 19,214 7,699 1,219 384
Effect of assumption of liabilities 3,576 -- -- -- --
------------- ------------- ------------- ------------- -------------
Funds From Operations $ 59,366 $ 40,838 $ 30,053 $ 10,478 $ 1,343
============= ============= ============= ============= =============
Weighted average shares:
Basic 97,874 64,458 38,698 15,890 2,402
============= ============= ============= ============= =============
Diluted 97,874 64,458 45,886 21,438 2,402
============= ============= ============= ============= =============
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (in thousands, except per share data)
The following information contains forward-looking statements within the meaning
of Section 27A of the Securities Act, and Section 21E of the Exchange Act. 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, availability of capital from
borrowings under the Company's line of credit and security agreement, continued
availability of proceeds from the Company's offerings, the ability of the
Company to obtain permanent financing on satisfactory terms, the ability of the
Company to continue to identify suitable investments, the ability of the Company
to continue to locate suitable managers and tenants for its Properties and
borrowers for its Mortgage Loans, and the ability of such tenants and borrowers
to make payments under their respective leases or Mortgage Loans. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements.
Introduction
------------
The Company
CNL Hospitality Properties, Inc. is a corporation which was organized
pursuant to the laws of the State of Maryland on June 12, 1996 and operates for
federal income tax purposes as a REIT. 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 ("Hospitality
Partners") formed in June 1998. CNL Hospitality GP Corp. and CNL Hospitality LP
Corp. are the general and limited partner, respectively, of Hospitality
Partners. Properties acquired are generally expected to be held by Hospitality
Partners and, as a result, are owned by CNL Hospitality Properties, Inc. through
Hospitality Partners. Various other wholly owned subsidiaries have been and will
be formed in the future for purposes of acquiring or developing hotel
Properties. The terms "Company" or "Registrant" include, unless the context
otherwise requires, CNL Hospitality Properties, Inc., Hospitality Partners, CNL
Hospitality GP Corp., CNL Hospitality LP Corp., CNL Philadelphia Annex, LLC, CNL
Hotel Investors, Inc., CNL LLB SHS Management, LP, CNL LLB F-Inn Management, LP,
CNL LLB C-Hotel Management, LP, CNL Bridgewater Hotel Partnership, LP, CNL MI-4
Hotel, LP and each of their wholly owned subsidiaries. Amounts contained herein
are in thousands, unless otherwise noted, except for per share data.
The Company is engaged primarily in the acquisition and ownership of
interests in hotel Properties generally located across the United States, and
has retained CNL Hospitality Corp. (the "Advisor") as its Advisor to provide
management, acquisition, advisory and certain administrative services. The hotel
properties may include limited service, extended stay and full service hotel
Properties. The Company generally leases its Properties to wholly owned TRS
entities and contracts with third-party managers to operate the Properties.
Hotel operating revenues and expenses for these Properties are included in the
consolidated results of operations of the Company. Other Properties are leased
on a triple-net basis to unrelated third-party tenants who operate the
Properties or contract with hotel managers to run their hotel operations. Rental
income from operating leases is included in the Company's consolidated results
of operations for these Properties. All Properties acquired in 2002 are, and
Properties acquired in the future are generally expected to be, leased to the
Company's TRS entities. Additionally, several previously entered into
third-party leases were assumed by TRS entities of the Company during 2002 and
additional leases may be assumed by the Company in the future. For certain
Properties, the Company has received various credit enhancement guarantees from
third-party managers who, subject to certain limitations, have guaranteed
performance levels for Properties they manage. See Note 13, "Commitments and
Contingencies" of the Company's consolidated financial statements for additional
information on credit enhancements.
The Company may also provide Mortgage Loans to operators of Hotel Brands,
however, it has not done so as of December 31, 2002. In addition, the Company
may invest up to a maximum of 5 percent of total assets in equity interests in
Ancillary Businesses. As of December 31, 2002, the Company has limited
investments in Ancillary Businesses (0.4% of total assets).
Liquidity and Capital Resources
-------------------------------
Common Stock Offerings
The Company was formed in June 1996, at which time it received an initial
capital contribution of $200 from the Advisor for 20 shares of common stock. On
July 9, 1997, the Company commenced its Initial Offering of up to 16,500 shares
of common stock ($165,000) pursuant to a registration statement on Form S-11
under the Securities Act. Subsequent to the completion of the Initial Offering,
through December 31, 2002, the Company has had three follow-on, best efforts
offerings of up to 117,500 shares of common stock, including an offering for up
to 45,000 shares that was being offered as of December 31, 2002. In addition,
upon completion of the 2002 Offering on February 4, 2003, the Company commenced
its 2003 Offering of up to 175,000 shares of common stock at $10 per share
($1,750,000). Of the 175,000 shares of common stock being offered, up to 25,000
will be available to stockholders purchasing shares through the reinvestment
plan. The price per share and the other terms of the 2003 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 Company's 2002
Offering. CNL Securities Corp., an affiliate of the Advisor, is the managing
dealer for the Company's equity offerings. As of December 31, 2002, the Company
had received gross proceeds totaling $1,267,821 from the sale of 126,782 shares
of common stock through its public offerings.
As of December 31, 2002, net proceeds to the Company from its four prior
public offerings, loan proceeds and capital contributions from the Advisor,
after deduction of selling commissions, marketing support fees, due diligence
expense reimbursements and organizational and offering expenses, totaled
approximately $1,535,263. As of such date, the Company has used approximately
$739,359 of net offering proceeds and approximately $276,928 of loan proceeds to
invest in 42 hotel Properties and a parcel of land on which a hotel Property was
being constructed, approximately $220,872 to invest in 13 Properties through
seven partnerships, including three Properties on which hotels were being
constructed or renovated, approximately $8,467 to redeem 914 shares of common
stock, approximately $160,407 to pay down the two construction lines of credit
and approximately $93,980 to pay acquisition fees and expenses, leaving
approximately $35,250 available for future investments.
During the period January 1, 2003 through February 21, 2003, the Company
received additional net offering proceeds of approximately $81,442 from the 2002
and 2003 Offerings, used approximately $16,196 to invest in four new Properties
through an existing partnership, used approximately $39,125 to acquire one
additional Property, and as of February 21, 2003, had approximately $60,372
available for investment in Properties and Mortgage Loans or other permitted
investments. The Company expects to use the uninvested net proceeds from the
2002 Offering, plus any additional net proceeds from the sale of shares from the
2003 Offering to purchase interests in additional Properties and, to a lesser
extent, invest in Mortgage Loans or other permitted investments such as
investments in other real estate companies and partnerships. Additionally, the
Company intends to borrow money to acquire interests in additional Properties,
to invest in Mortgage Loans and to pay certain related fees. The Company intends
to encumber assets in connection with such borrowings. The Company currently has
a $96,725 Revolving LOC as described below. A total of approximately $72,646 was
available under the Revolving LOC as of December 31, 2002.
Redemptions
In October 1998, the Board of Directors elected to implement the Company's
redemption plan. Under the redemption plan, prior to such time, if any, as
Listing occurs, any stockholder who has held shares for at least one year may
present all or any portion equal to at least 25 percent of their shares to the
Company for redemption in accordance with the procedures outlined in the
redemption plan. Upon presentation, the Company may elect, at its discretion, to
redeem the shares, subject to certain conditions and limitations. However, at no
time during a 12 month period may the number of shares redeemed by the Company
exceed 5 percent of the number of shares of the Company's outstanding common
stock at the beginning of the 12 month period. During the years ended December
31, 2002, 2001 and 2000, 239 shares, 251 shares and 269 shares, respectively,
were redeemed at $9.20 per share (approximately $2,391, $2,313 and $2,503,
respectively), and retired from shares outstanding of common stock.
Borrowings
The Company's objectives and strategies with respect to long-term debt are
to (i) minimize the amount of interest incurred on permanent financing while
limiting the risk related to interest rate fluctuations through hedging
activities and (ii) maintain the ability to refinance existing debt. Because
some of the Company's mortgage notes bear interest at fixed rates, changes in
market interest rates during the term of such debt will not affect the Company's
operating results. The majority of the Company's fixed rate debt arrangements
allow for repayment earlier than the stated maturity date. These prepayment
rights may afford the Company the opportunity to mitigate the risk of
refinancing at maturity at higher rates by refinancing prior to maturity. The
weighted average effective interest rate on mortgages and other notes payable
was approximately seven percent as of December 31, 2002.
The Company's Revolving LOC is used to fund acquisition and development of
Properties and investments in Mortgage Loans. The Company is able to receive
cash advances of up to approximately $96,725 until September 2006. Interest
payments are due monthly with principal payments of $1 due at the end of each
loan year. Advances under the line of credit bear interest at an annual rate of
225 basis points above 30-day LIBOR (3.63 percent as of December 31, 2002) and
are collateralized by certain hotel Properties. As of December 31, 2002, the
Company had approximately $24,079, including accrued interest of approximately
$79, outstanding under the Revolving LOC.
In September 2002, the Company paid down approximately $50,292 that had
previously been borrowed on two construction loan facilities for the
construction of two Properties. An existing construction loan facility (the
"Construction LOC") was renegotiated resulting in an increased total borrowing
capacity of $64,000. This Construction LOC expires in December 2005 and bears
interest at a floating rate with a floor of 6.75 percent. Approximately $21,280
was outstanding on the Construction LOC as of December 31, 2002.
On October 31, 2002, the Company obtained a loan in the amount of $90,700
collateralized by eight of its hotel Properties. The loan has a term of five
years and bears interest at 6.53 percent per annum. Payments of interest only
are due monthly for the first two years of the loan, and monthly payments of
principal and interest are due thereafter, calculated on a 20-year amortization
schedule through maturity. At closing the Company borrowed approximately $9,070
which was outstanding as of December 31, 2002, with the remainder expected to be
funded in 2003.
On November 25, 2002, the Company obtained a loan in the amount of $31,000
collateralized by one of its hotel Properties. The loan has a term of five years
and bears interest at 5.84 percent per annum. Payments of interest only are due
monthly for the first two years of the loan, and monthly payments of principal
and interest are due thereafter, calculated on a 25-year amortization schedule
through maturity. The full $31,082, including accrued interest of approximately
$82, was outstanding as of December 31, 2002.
As of December 31, 2002, the Company's fixed and variable rate debt instruments,
excluding debt of unconsolidated partnerships, were as follows:
Principal and Fixed Rate Interest
Accrued Maturity Per Year Variable Rate Payments Due
Loan Description Interest Balance
- ------------------------ -------------------- ------------------ ---------------- ----------------- --------------
Three Properties in Lake
Buena Vista, FL $ 50,348 December 2007 8.335% -- Monthly
Seven Properties owned by Monthly
Hotel Investors 84,638 July 2009 7.67%* --
Property in Philadelphia,
PA 32,069 December 2007 8.29% -- Monthly
Tax Incremental Financing
Note ("TIF Note") on
Property in Philadelphia,
PA 8,458 June 2018 12.85%**** -- Monthly
Portfolio of Eight
Marriott Properties
located throughout the
United States 9,070 November 2007 6.53% -- Monthly
One Property located in
New Jersey 31,082 December 2007 5.84% -- Monthly
Two development
Properties, one in
California and one in LIBOR + 275
Florida 21,280 December 2005 -- bps*** Monthly
-- LIBOR + 225
Line of credit** 24,079 September 2006 -- bps Monthly
* Average interest rate as the loans bear interest ranging from 7.50 percent
to 7.75 percent.
** Revolving LOC.
*** The Construction LOC has an interest rate floor of 6.75 percent.
****Tax Incremental Financing which is paid down with incremental real estate
taxes resulting in an interest rate of 12.85%.
With respect to certain of its Properties, the Company has received various
credit enhancement guarantees from third-party managers who have guaranteed a
certain level of performance for Properties they manage which are leased to TRS
entities. When provided, these guarantees are typically in effect during the
stabilization period for the hotel Property or Properties being guaranteed.
These guarantees normally expire (i) when a predefined operating performance
threshold is achieved for twelve consecutive months, (ii) after a specified
period (typically three to five years) or (iii) when maximum allowable funding
under that guarantee has been received, whichever occurs first. Operating
results of several Properties may be "pooled" in order to measure operating
performance for purposes of determining guarantee funding. Additionally, all or
a portion of the amounts funded under these guarantees may be earned back by the
guarantor, with a specified return, as an incentive fee under the management
contract. Such incentive fee amounts will be paid only to the extent Property
operating profits exceed a predetermined operating threshold. In situations
where the guarantor has the opportunity to earn back funding from these
guarantees, the funds received under the guarantees are recorded as other
liabilities in the accompanying consolidated balance sheets. As of December 31,
2002 and December 31, 2001, the Company did not have any outstanding liabilities
from its credit enhancement guarantees. Additionally, as of December 31, 2002
and December 31, 2001, the Company had approximately $37,515 and $50,000,
respectively, which remained available for funding under these types of
guarantees, should such funding be necessary. Additional amounts of available
funding under these types of credit enhancements are available separately for
several of the partnerships in which the Company has invested. There is no
assurance that market conditions will allow the Company to continue to obtain
credit enhancements in the future.
The Company has amended the agreements relating to one of its credit
enhancements with Marriott. Marriott is obligated to fund guarantee payments of
certain minimum returns to TRS entities of the Company, however, the management
contracts on the hotels subject to the credit enhancement were amended to
provide that the first incentive management fee is payable up to a predefined
amount rather than paying the fee primarily based on the amounts previously
funded under the guarantee. The Company has recognized other income of
approximately $10,280 during the fourth quarter of 2002 equal to the amounts
previously funded under the credit enhancement through December 31, 2002, which
Marriott has agreed will not be subject to repayment provisions. Additionally,
the Company will recognize income in the future, rather than liabilities,
whenever amounts are funded by Marriott under the arrangement. The Company will
recognize incentive management fee expense if and when such incentive management
fees are earned by Marriott. These amendments are not expected to have a
significant effect on the Company's cash available for distribution to
stockholders.
In connection with the lease assumptions on nine Properties, the Company
assumed a liquidity facility loan in the amount of approximately $3,600. A total
of approximately $10,170 is available under the facility. The facility was
provided by the manager of the Properties to fund Property operating shortfalls
for the aggregate rent due on a pooled basis for the nine portfolio Properties.
The facility is available until the earlier of (i) expiration of the agreement
on December 31, 2004, (ii) the minimum rent coverage of the pooled Properties
equals or exceeds a predefined threshold for 13 consecutive accounting periods
or (iii) total liquidity facility funding equals or exceeds 10 percent of the
total purchase price for all nine Properties at the end of any fiscal year. As
of December 31, 2002, approximately $5,632 was outstanding and approximately
$4,538 was available for future draws under the liquidity facility loan. Amounts
advanced under the liquidity facility loan are repaid only out of excess cash
flow after payment of rent.
The following is a schedule of the Company's fixed and variable rate debt
maturities and principal payments, including the Revolving LOC, for each of the
next five years, and thereafter:
Fixed Rate
Mortgages
Payable Variable Rate Total Mortgages
and Accrued Other Notes and Other Notes
Interest Payable Payable
------------------- ------------------- -------------------
2003 $ 3,489 $ 153 $ 3,642
2004 2,676 -- 2,676
2005 3,456 21,208 24,664
2006 3,701 23,999 27,700
2007 53,954 -- 53,954
Thereafter 154,020 -- 154,020
------------------- ------------------- -------------------
$ 221,296 $ 45,360 $ 266,656
=================== =================== ===================
Market Risk
The Company is subject to interest rate risk through outstanding balances
on its variable rate debt, as described in the "Borrowings" section above. The
Company may mitigate this risk by paying down additional outstanding balances on
its variable rate loans from offering proceeds, refinancing with fixed rate
permanent debt or obtaining cash flow hedges should interest rates rise
substantially. At December 31, 2002, approximately $45,360 in variable rate debt
was outstanding.
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 its fixed
rate mortgages payable and notes payable under permanent financing arrangements
at December 31, 2002, approximated the outstanding principal amount.
Property Acquisitions and Completed Development Properties
During 2002, the Company made the following additional acquisitions:
Brand Affiliation Property Location Purchase Date
------------------------------------- ------------------------ ----------------------
SpringHill Suites(TM) by Marriott(R) Manhattan Beach, CA January 18, 2002
TownePlace Suites(TM) by Marriott(R) Manhattan Beach, CA January 18, 2002
SpringHill Suites(TM) by Marriott(R) Plymouth Meeting, PA January 18, 2002
Courtyard(R) by Marriott(R) Basking Ridge, NJ March 1, 2002
Marriott(R) Hotel Bridgewater, NJ June 14, 2002
Courtyard(R) by Marriott(R) Foothill Ranch, CA July 3, 2002*
Courtyard(R) by Marriott(R) Newark, CA October 25, 2002
Residence Inn by Marriott(R) Newark, CA November 15, 2002
Doubletree(R) Crystal City Arlington, VA December 19, 2002
* Land purchased for development on which a hotel Property is being constructed.
Additionally, the Company completed construction and opened the following
Properties during 2002:
Brand Affiliation Property Location Opening Date
------------------------------------- ------------------------ ----------------------
Residence Inn by Marriott(R) Orlando, FL February 14, 2002
Courtyard(R) by Marriott(R) Weston, FL February 14, 2002
Courtyard(R) by Marriott(R) Edison, NJ November 4, 2002
All of the Properties acquired or completed during 2002 are leased to the
Company's TRS entities and are operated by third-party hotel managers. See
Schedule III, "Real Estate and Accumulated Depreciation," for a listing of all
Properties owned by the Company.
Investments in Unconsolidated Subsidiaries
Desert Ridge Partnership. The Company owns 44 percent of Desert Ridge
Resort Partners, LLC (the "Desert Ridge Partnership") at a cost of $25,000 as of
December 31, 2002. The Desert Ridge Partnership owns a resort which was under
construction during the majority of 2002 and all of 2001. The resort opened for
business on November 30, 2002. Limited golf course operations are included in
consolidated operations of the Company until the resort opened in late 2002. The
final costs of construction will be paid in early 2003. Upon completion, the
estimated total cost of the resort is expected to be $304,000.
Waikiki Partnership. The Company owns 49 percent of WB Resort Partners, LP
(the "Waikiki Partnership") at a cost of $42,000 as of December 31, 2002. The
Waikiki Partnership owns the Waikiki Beach Marriott in Honolulu, Hawaii, which
was undergoing significant renovations for the majority of 2002, and was
substantially complete as of December 31, 2002. The total cost of the resort is
approximately $215,000.
Hilton Partnership. The Company owns 70 percent of CNL HHC Partners, LP
(the "Hilton Partnership"), which owns four Properties, one each in Miami,
Florida, Costa Mesa, California, Auburn Hills, Michigan and Portland, Oregon,.
The total cost of the four Properties acquired by the Hilton Partnership was
approximately $215,929.
Interstate Partnership. In September 2002, the Company acquired an 85
percent interest in a Hampton Inn Property located in Houston, Texas in return
for an equity contribution of approximately $4,890. This Property was acquired
by a partnership between the Company and Interstate Hotels and Resorts that was
originally formed in November 2001. The total purchase price of the Houston
Property was $14,300. In connection with this purchase, the Interstate
Partnership assumed a loan of approximately $9,300, which is secured by the
Property. This partnership also owns two other Properties located in Manchester,
Connecticut.
Mobil Travel Guide. In January 2002, the Company acquired a 25 percent
interest in a partnership with Publications International, Ltd. ("PIL"), Hilton,
and Marriott that owns a 77.5 percent interest in a partnership with Exxon Mobil
Corporation and PIL ("EMTG"). EMTG owns the licensing rights to the Mobil Travel
Guide. The licensing rights entitle EMTG to assemble, edit, publish and sell the
Mobil Travel Guide and use such rights to generate additional products using the
Mobil Travel Guide brand. The Company's required total capital contribution was
approximately $3,600. EMTG has engaged Dustin/Massagli LLC, a company in which
one of the Company's directors is president, a director and principal
stockholder, to manage its business. In September 2002, the Company approved a
plan to contribute an additional $894 to the partnership that owns EMTG. This
contribution, which increased the Company's ownership in the partnership from 25
percent to 31.25 percent, was made in December 2002.
Office Building. In May 2002, the Company acquired a 10 percent interest in
CNL Plaza, Ltd., a limited partnership that owns an office building located in
Orlando, Florida, in which the Advisor and its affiliates lease office space,
for $300. The remaining interest in the limited partnership is owned by several
affiliates of the Advisor. In connection with this acquisition, the Company has
severally guaranteed a 16.67 percent share, or approximately $2,600, of a
$15,500 unsecured promissory note of the limited partnership.
San Francisco Partnership. In June 2002, the Company acquired a 50 percent
interest in CY-SF Hotel Parent, LP (the "San Francisco Partnership"), a
partnership with an affiliate of Marriott. The San Francisco Partnership
purchased a Courtyard by Marriott in downtown San Francisco for approximately
$82,000. The purchase was financed with equity investments of $13,000 each from
the Company and Marriott as well as $56,000 in borrowings consisting of two
loans from a third-party lender.
Hilton 2 Partnership. On December 13, 2002, the Company formed a
partnership (the "Hilton 2 Partnership") with Hilton of which the Company owns a
75 percent interest and Hilton owns a 25 percent interest. On December 24, 2002,
the Hilton 2 Partnership acquired a Doubletree hotel located in Dallas, Texas
(the "Doubletree Lincoln Centre Property") and the Sheraton El Conquistador
Resort and Country Club located in Tucson, Arizona. The Sheraton El Conquistador
Resort and Country Club was immediately converted to a Hilton Hotel (the "Hilton
El Conquistador Resort Property"). The Hilton 2 Partnership expects to convert
the Doubletree Lincoln Centre Property into a Hilton hotel during the first half
of 2003. The total purchase price of the Properties was approximately $121,000.
Commitments and Contingencies
From time to time the Company may be exposed to litigation arising from the
operation of its business. At this time, management does not believe that
resolution of these matters will have a material adverse effect on the Company's
financial condition or results of operations.
As of February 21, 2003, the Company has commitments to (i) acquire or
develop three hotel Properties for an anticipated aggregate purchase price of
approximately $227,100, (ii) complete construction on one Property, with an
estimated additional cost of approximately $13,000 and (iii) fund approximately
$10,000 for property improvements in three existing partnerships. The Company
also has committed to fund its pro rata share of working capital shortfalls and
construction commitments for its partnerships, if shortfalls arise, and has
guaranteed the debt service for several of its subsidiaries and partnerships.
The acquisition of additional Properties is subject to the fulfillment of
certain conditions. There can be no assurance that any or all of the conditions
will be satisfied or, if satisfied, that these transactions will be entered into
by the Company. In order to enter into these and other transactions, the Company
must obtain additional funds through the receipt of additional offering proceeds
and/or advances on the Revolving LOC and permanent financing.
The Company has entered into an agreement whereby if certain conditions are
met, nine Properties currently leased to third-party tenants on a triple-net
basis, must be assumed by the Company on or before March 31, 2004. In order for
this to occur, the Properties must have operating results above a certain
minimum threshold. If these conditions are met and the assumption of these
leases does not occur by the stated deadline, the Company has agreed to return
security deposits it holds on three of the Properties which total approximately
$3,200. Both parties have agreed that should the conversion occur, the Company
would not be obligated to pay any additional consideration for the leasehold
position and that the manager would participate, through incentive fees, in any
additional earnings above what was otherwise the minimum rent. Additionally, the
Company would not be obligated to return the security deposits it holds on these
three Properties.
In addition to its commitments to lenders under its loan agreements and
obligations to fund Property acquisitions and development, the Company is a
party to certain contracts which may result in future obligations to third
parties.
The following table represents the Company's contractual cash obligations
and related payment periods as of December 31, 2002:
Contractual Cash Less than
Obligations 1 Year 2-3 Years 4-5 Years Thereafter Total
- ------------------------- --------------- --------------- --------------- --------------- ---------------
Mortgages and other notes
payable (including
Revolving LOC and
other liabilities) $ 3,642 $ 27,340 $ 81,654 $ 154,020 $ 266,656
Refundable tenant
security deposits -- -- -- 12,883 12,883
--------------- --------------- --------------- --------------- ---------------
Total $ 3,642 $ 27,340 $ 81,654 $ 166,903 $ 279,539
=============== =============== =============== =============== ===============
The following table represents the Company's future potential commitments
and contingencies and guarantees, which can be assigned a monetary value, and
the related estimated expiration periods as of December 31, 2002:
Commitments and
Contingencies and Less than
Guarantees 1 Year 2-3 Years 4-5 Years Thereafter Total
- ------------------------- --------------- --------------- --------------- --------------- ---------------
Guarantee of unsecured
promissory note of
unconsolidated
subsidiary $ -- $ 2,583 $ -- $ -- $ 2,583
Earnout provision -- 2,472 -- -- 2,472
Marriott put option -- -- -- 11,050 11,050
Irrevocable letter of
credit -- -- -- 775 775
Pending investments 250,100 -- -- -- 250,100
--------------- --------------- --------------- --------------- ---------------
Total $ 250,100 $ 5,055 $ -- $ 11,825 $ 266,980
=============== =============== =============== =============== ===============
The Company does not anticipate being required to fund any of the potential
commitments in the above table except for the pending investments, which are
subject to the completion of due diligence procedures and other factors. The
following paragraphs briefly describe the nature of some of the above
commitments and contractual cash obligations.
Earnout Provisions on Property Acquisitions - The Company is currently
subject to earnout provisions on two of its Properties, whereby if the operating
performance of the two Properties exceeds a certain pre-defined threshold,
additional consideration will be due to the prior owner. The earnout provision
will terminate on May 31, 2004, at which time the Company will have no further
liability. The maximum amount of consideration that the Company may be obligated
to pay is approximately $2,472.
Guarantee of Debt on Behalf of Unconsolidated Subsidiaries - The Company
has severally guaranteed 16.67% of a $15,500 note payable on behalf of a
subsidiary of CNL Plaza, Ltd. The maximum obligation to the Company is $2,583,
plus interest. Interest accrues at a rate of LIBOR plus 200 basis point per
annum on the unpaid principal amount. This guarantee shall continue through the
loan maturity in November 2004.
Guarantee of Other Obligations on Behalf of Unconsolidated Subsidiaries -
The Company has generally guaranteed, in connection with loans to certain
unconsolidated subsidiaries, the payment of certain obligations that may arise
out of fraud or misconduct of the subsidiary borrower. This guarantee will be in
effect until the loans have been paid in full.
Irrevocable Letter of Credit - The Company has obtained an irrevocable
letter of credit for the benefit of a lender in the amount of $775. The letter
of credit is automatically extended each fiscal year until November 10, 2007.
Refundable Tenant Security Deposits - The Company is obligated to return
security deposits to unrelated third-party tenants at the end of the lease terms
in accordance with the lease agreements. The Company has recorded a liability
for such security deposits totaling approximately $12,883 as of December 31,
2002.
Marriott Put Option - Marriott has the right on certain partnerships with
the Company to require the Company to buy-out a portion of Marriott's ownership.
These rights are available if certain predefined operating results are obtained.
Should such conditions be met, the Company may be obligated to buy interests
valued at approximately $11,050.
Subsequent Events
On February 20, 2003, the Company contributed the Doubletree Crystal City,
and Hilton contributed a Hilton located in Rye, New York (the "Hilton Rye Town
Property"), to the Hilton 2 Partnership. Additionally, on the same day, the
Hilton 2 Partnership acquired three Embassy Suite Properties. The Hilton 2
Partnership obtained permanent financing of approximately $145,000, which was
allocated among these five Properties. The loan bears interest at 5.95 percent
per annum and matures on March 1, 2010. Payments of interest only are due
monthly until maturity.
On February 20, 2003, the Company acquired the Hyatt Regency Coral Gables,
located in Miami, Florida, for approximately $36,000. This property is leased to
a TRS of the Company and is managed by a subsidiary of Hyatt Hotels Corporation.
During the period January 1, 2003 through February 21, 2003, the Company
received subscription proceeds for an additional 8,966 shares ($89,656) of
common stock.
On January 1, 2003 and February 1, 2003, the Company declared distributions
totaling approximately $8,152 and $8,490, respectively, or $0.064583 per share
of common stock, payable by March 31, 2003, to stockholders of record on January
1, 2003 and February 1, 2003, respectively.
On February 7, 2003, at a meeting of the Board of Directors of the Company,
John A. Griswold tendered his resignation as an independent director of the
Company's Board, effective immediately, and the Board accepted Mr. Griswold's
resignation. Mr. Griswold stated that his reason for resigning as an independent
director was not due to any dispute or disagreement with the Company or the
Board on any matter. The Company's Articles of Incorporation provide that a
majority of the Board of Directors be independent directors. In order to
maintain the Board's independence, Robert A. Bourne tendered his resignation as
a member of the Board and the Board accepted his resignation. As a result of
each of Mr. Griswold and Mr. Bourne's resignations, the Board anticipates that
it will nominate a new Independent Director and ask Mr. Bourne to rejoin the
Board in connection with the Board elections to be held at the Company's
upcoming annual meeting of stockholders.
In addition, Thomas J. Hutchison III has been appointed Co-Chief Executive
Officer of both the Company and the Advisor, effective February 14, 2003. Mr.
Hutchison will tender his resignation as President of both the Company and the
Advisor, effective March 17, 2003, and Mr. Griswold will be appointed President
of the Company, effective March 17, 2003, as well as President and a Director of
the Advisor, also effective March 17, 2003.
The Company currently is seeking additional Properties or other permitted
real estate related investment opportunities, such as investments into other
real estate companies or partnerships.
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
which management believes to have appropriate safety of principal. This
investment strategy provides high liquidity in order to facilitate the Company's
use of these funds to acquire Properties, and to fund Mortgage Loans or other
permitted investments. At December 31, 2002, the Company had approximately
$48,993 invested in such short-term investments as compared to $44,825 at
December 31, 2001. A portion of this represented operating cash held at the
Company's hotels. The increase in the amount invested in short-term investments
was primarily attributable to cash received from the sale of common stock offset
by the acquisition of Properties during 2002.
Liquidity Requirements
The Company expects to meet its liquidity requirements, including payment
of offering expenses, Property acquisitions and development, investments in
Mortgage Loans and repayment of debt with proceeds from its offerings, advances
under its Revolving LOC, cash flows from operations and refinancing of debt.
Management believes that the Company has obtained reasonably adequate
insurance coverage. However, certain types of losses, such as from terrorist
attacks, may be either uninsurable, too difficult to obtain or too expensive to
justify insuring against. 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 that a tenant or
manager's insurance policy lapses or is insufficient to cover a claim relating
to a Property and covers the Company's interest in all Properties (with the
exception of the Desert Ridge Resort Property, in which the Company owns a 44
percent interest, and the Waikiki Beach Property in which the Company owns a 49%
interest).
Distributions
During the years ended December 31, 2002, 2001 and 2000, the Company
generated cash from operations of $70,340, $52,937, and $43,651 respectively.
The Company declared and paid distributions to its stockholders of approximately
$74,217, $48,409 and $28,082 during the years ended December 31, 2002, 2001 and
2000, respectively. In addition, on January 1, 2003 and February 1, 2003, the
Company declared distributions to stockholders of record on January 1, 2003 and
February 1, 2003, totaling approximately $8,152 and $8,490, respectively, or
$0.064583 per share, payable by March 31, 2003. The increase in distributions
was due to the increased cash flows resulting from the additional Properties
acquired during the year.
For the years ended December 31, 2002, 2001 and 2000, approximately 51
percent, 52 percent and 63 percent, respectively, of the distributions received
by stockholders were considered to be ordinary income and approximately 49
percent, 48 percent and 37 percent, respectively, were considered a return of
capital for federal income tax purposes. No amounts distributed to the
stockholders for the years ended December 31, 2002, 2001 and 2000 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
Certain directors and officers of the Company hold similar positions with
the Advisor and its affiliates, including the managing dealer, CNL Securities
Corp. These affiliates are by contract entitled to receive fees and compensation
for services provided in connection with common stock offerings, and the
acquisition, development, management and sale of the Company's assets.
Amounts incurred relating to these transactions with affiliates were as
follows for the years ended December 31:
2002 2001
------------ ------------
CNL Securities Corp.:
Selling commissions (the majority of which was
reallowed to unaffiliated broker-dealer firms) $ 37,003 $ 21,804
Marketing support fee and due diligence expense
reimbursements* 2,448 1,351
------------ ------------
39,451 23,155
------------ ------------
Advisor and its affiliates:
Acquisition fees 29,464 21,057
Development fees 1,896 2,107
Asset management fees 6,696 3,327
------------ ------------
38,056 26,491
------------ ------------
$ 77,507 $ 49,646
============ ============
* The majority of these fees and reimbursements were reallowed to unaffiliated broker-dealer firms.
Of these amounts, approximately $1,916 and $1,026 is included in due to
related parties in the accompanying consolidated balance sheets as of December
31, 2002 and December 31, 2001, respectively.
The Advisor and its affiliates provide various administrative services to
the Company, including services related to accounting; financial, tax and
regulatory compliance reporting; stockholder distributions and reporting; due
diligence and marketing; and investor relations (including administrative
services in connection with the offerings), on a day-to-day basis. The expenses
incurred for these services were classified as follows for the years ended
December 31:
2002 2001
-------------- --------------
Stock issuance costs $ 3,128 $ 4,705
General operating and administrative expenses 1,128 1,092
-------------- --------------
$ 4,256 $ 5,797
============== ==============
The Company maintains 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 bank was approximately
$14,861 and $6,928 at December 31, 2002 and 2001, respectively.
EMTG, a partnership in which the Company has a 31.3 percent interest,
engaged Dustin/Massagli LLC, a company in which one of the Company's directors
is president, a director and a principal stockholder, to manage its business.
Critical Accounting Policies
Management reviews its Properties and investments in unconsolidated
subsidiaries periodically (no less than once per year) for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through operations. Management determines whether
impairment in value has occurred by comparing the estimated future undiscounted
cash flows, including the residual value of the Property, with the carrying cost
of the individual Property.
The Company's leases have been accounted for as operating leases.
Management estimates the economic life of the leased property, the residual
value of the leased property and the present value of minimum lease payments to
be received from the tenant.
The Company accounts for its unconsolidated partnerships using the equity
method of accounting. Under generally accepted accounting principles, the equity
method of accounting is appropriate for subsidiaries that are partially owned by
the Company, but for which operations of the investee are controlled by, or
control is shared with, an unrelated third-party. If consolidation was required,
amounts reported for net income and total stockholders' equity would be the same
as what would be reported under the equity method of accounting.
Acquisition costs that are directly identifiable with Properties that are
probable of being acquired are capitalized and included in other assets. Upon
the purchase of a Property, the costs that are directly identifiable with that
Property or investment are reclassified to land, building and equipment. In the
event a Property is not acquired or, is no longer expected to be acquired, any
costs are charged to expense.
In accordance with Staff Accounting Bulletin No. 101, the Company records
FF&E reserve income for cash transferred by third-party tenants into restricted
FF&E accounts during the years ended December 31, 2002, 2001 and 2000. The funds
in the FF&E Accounts are maintained in a restricted cash account that the tenant
is expected to use for purposes specified in the lease. Cash is restricted
because the funds may only be expended with regard to the specific property to
which the funds related during the period of the lease. The cash in the FF&E
accounts, any interest earned thereon, and any property purchases therewith
remain, during and after the term of the lease, the property of the Company. To
the extent that funds in the FF&E Accounts are insufficient to maintain the
Properties in good working condition and repair, the Company may make
expenditures, in which case annual minimum rent is increased. FF&E reserve
income is not generated from hotels leased by TRS entities and operated by
third-party managers; however, cash is restricted by the Company for the
purposes stated above. As the Company's business shifts from leasing Properties
to acting as tenant for these Properties and engaging third parties to manage
operations, the amount of FF&E reserve income is expected to decline. For the
years ended December 31, 2002, 2001 and 2000, FF&E reserve income totaled
approximately $4,236, $5,787 and $2,509, respectively. FF&E reserve funds of
approximately $17,822 and $8,493 were classified as restricted cash as of
December 31, 2002 and 2001, respectively.
In connection with the assumption of certain third-party leases, the
Company has incurred certain costs. These costs have been expensed as lease
termination payments. Additionally, the third-party tenants agreed to forfeit
their rights to certain security deposits. These amounts have been recognized as
other income during 2002.
Results of Operations
---------------------
Comparison of year ended December 31, 2002 to year ended December 31, 2001
Revenue
During the years ended December 31, 2002 and 2001, the Company earned hotel
operating revenues of approximately $101,005 and $1,151, respectively. The
Company earned rental income from operating leases and FF&E Reserve income of
approximately $41,577 and $66,818 for the years ended December 31, 2002 and
2001, respectively. The increase in hotel revenue and the decrease in rental
income and FF&E Reserve income was due to the Company investing in new
Properties and leasing to TRS entities, as well as taking assignment of leases
on 18 existing Properties and engaging third-party managers to operate these
Properties during the year ended December 31, 2002. For these Properties, rental
income from operating leases that was recorded in the past has been replaced
with hotel operating revenues and expenses as of the time that the lease
assumption occurred. Additionally, two Properties that were acquired at the end
of 2001 and all of the new Properties acquired in 2002 are leased to TRS
entities of the Company or of its partnerships and operated using third-party
managers. Because of the additional acquisitions in 2002 and the additional
Property acquisitions that are expected to occur, results of operations are not
expected to be indicative of future periods.
Interest and Other Income
During the years ended December 31, 2002 and 2001, the Company earned
approximately $1,529 and $3,494, respectively, in interest income from
investments in money market accounts and other short-term, highly liquid
investments and from other income. The decrease in interest income was primarily
attributable to a decrease in the average dollar amount invested in short-term
liquid investments, a decrease in average interest rate earned and the period
the funds were invested during 2002 as compared to 2001. As net offering
proceeds are invested in long term assets, the percentage of the Company's total
revenues from interest income will vary depending on the amount of offering
proceeds, the timing of investments and interest rates in effect.
The increase in other income during 2002 was primarily due to Marriott's
one time forgiveness of the amounts previously funded under certain credit
enhancements, which resulted in other income of approximately $10,397 being
recorded during the fourth quarter of 2002. Additionally, in June 2002, the
Company recognized other income of approximately $1,900, representing the net of
the release of the Company's obligation to repay approximately $5,500 in
security deposits resulting from the assumption of leases on 11 of its existing
Properties offset by the assumption of a liquidity facility loan of
approximately $3,600.
Operating Expenses
Operating expenses, including amortization and depreciation, interest
expenses and hotel expenses of consolidated subsidiaries, were approximately
$124,170 and $43,893 for the years ended December 31, 2002 and 2001,
respectively (79% and 61%, respectively, of total revenues). The increase in
operating expenses during the year ended December 31, 2002, as compared to 2001,
was the result of the Company owning interests in 55 operating Properties during
2002 compared to 39 Properties in 2001. Additionally, during the years ended
December 31, 2002 and 2001, the Company incurred hotel expenses of approximately
$65,601 and $1,516, respectively. Additionally, interest expense increased from
$14,653 for 2001 to $18,330 for 2002, primarily due to increased borrowing on
the Revolving LOC and proceeds from permanent financing. Operating expenses are
expected to increase as the Company acquires interests in additional Properties
and invests in Mortgage Loans or other permitted investments. However, general
operating and administrative expenses, exclusive of interest expense, as a
percentage of total revenues is expected to decrease as the Company makes
additional investments. Asset management fees increased from $3,327 to $6,696
for the years ended December 31, 2001 and 2002, respectively, due to the
additional fees on newly acquired Properties.
Losses from Unconsolidated Subsidiaries
Equity in losses of unconsolidated subsidiaries of approximately $16,164
and $7,093 for the years ended December 31, 2002 and 2001, respectively, were
primarily due to pre-opening and marketing expenses incurred during the
construction of a resort owned through a partnership, losses at a resort owned
through a partnership which was open but undergoing significant renovations and
losses at a startup partnership which owns the licensing rights to the Mobil
Travel Guide. Losses are expected to moderate, but continue in 2003 as these
properties establish market presence and capture market share.
Net Earnings
The decrease in earnings from the prior years was in part due to the effect
of the current economic downturn on the U.S. economy, particularly the travel
and lodging industry, and the events of September 11, 2001, offset by other
income from the forgiveness of the amounts previously funded under certain
credit enhancements and other income recognized from the assumption of
third-party leases during 2002, as discussed above. Net income recognized under
the TRS structure for leases assumed from third parties is less than the rental
income received from these Properties during the year ended December 31, 2001.
This trend may continue until economic stabilization occurs. Because revenues
have been supported by credit enhancements, net income may further decrease
after credit enhancements expire if the Company's hotel operations do not
stabilize prior to that time.
Comparison of year ended December 31, 2001 to year ended December 31, 2000
Revenues
During the years ended December 31, 2001 and 2000, the Company earned
rental income from operating leases, contingent rental income and FF&E Reserve
revenue of $66,818 and $26,682, respectively. The increase in rental income,
contingent rental income and FF&E Reserve income was due to the Company directly
owning 35 Properties during the year ended December 31, 2001, as compared to 29
Properties during the year ended December 31, 2000. In addition, several of the
Properties which were owned for only a portion of 2000 were owned for a full
year in 2001.
Interest and Other Income
During the years ended December 31, 2001 and 2000, the Company earned
$3,494 and $6,637, respectively, in interest income from investments in money
market accounts and other short-term, highly liquid investments and other
income. The decrease in interest income was primarily attributable to a decrease
in the average dollar amount invested during the year 2001 as compared to 2000.
As net offering proceeds are invested in long-term assets, the percentage of the
Company's total revenues from interest income is expected to remain constant or
decrease.
Operating Expenses
Operating expenses were $43,893 and $13,526 for the years ended December
31, 2001 and 2000, respectively (61% and 37%, respectively, of total revenues).
The increase in operating expenses during the year ended December 31, 2001, as
compared to 2000, was the result of the Company directly owning 35 Properties in
2001 compared to 29 Properties during 2000. Additionally, interest expense
increased from $2,384 for the year ended December 31, 2000 to $14,653 for the
year ended December 31, 2001, as a result of securing financing.
Losses from Unconsolidated Subsidiaries
Equity in loss of unconsolidated subsidiaries were $7,093 and $387 for the
years ended December 31, 2001 and 2000, respectively. The increase in the loss
from unconsolidated subsidiaries during the year ended December 31, 2001, was
due primarily to pre-opening and marketing expenses incurred by the Desert Ridge
Partnership during the year ended December 31, 2001 and operating losses at the
Waikiki Beach Property which occurred as a result of a significant portion of
the Waikiki Beach Property being closed for renovations. Additional pre-opening
and marketing expenses were incurred during 2002 by the Desert Ridge Partnership
in preparation for the opening of the Desert Ridge Property in November 2002.
Operating losses at the Waikiki Beach Property will likely continue until
expected renovations are completed and international tourism rebounds from the
events of September 11, 2001.
Concentration of Risk
A significant portion of the Company's rental income and hotel revenues
were earned from properties operating as various Marriott and Hilton brands.
Additionally, the Company relies on Marriott to provide credit enhancements for
certain of its Properties. Although the Company intends to acquire Properties in
various states and regions, carefully screens its managers and tenants and has
obtained interests in non-Marriott and non-Hilton branded Properties, failure of
the Company's hotels or the Marriott or Hilton brands could significantly impact
the results of operations of the Company. Management believes that the risk of
such a default will be reduced through future acquisitions and diversification,
and through the initial and continuing due diligence procedures performed by the
Company.
Current Economic Conditions
Early in 2001, the U.S. economy was negatively impacted by a general
slowdown in business activity, which began to affect the hotel industry. In
addition to the general decline in business activity, the attacks on the World
Trade Center and the Pentagon on September 11, 2001 further adversely impacted
economic activity during the months following the attacks, particularly
affecting the travel, airline and lodging industries. The economic slowdown has
continued through 2002 and is currently expected by management to continue
throughout 2003. As a result of these conditions, most of our hotel operators
and managers have reported declines in the operating performance of our hotels.
Many of our leases and operating agreements contain features such as guarantees
which are intended to require payment of minimum returns to the Company despite
operating declines at our hotels. However, there is no assurance that the
existence of credit enhancements will provide the Company with uninterrupted
cash flows to the extent that the recovery is prolonged. Additionally, if our
tenants, hotel managers or guarantors default in their obligations to us, the
Company's revenues and cash flows may decline or remain at reduced levels for
extended periods. Any U.S. participation in a war with Iraq or other significant
military activity could have additional adverse effects on the economy,
including the travel and lodging industries.
An uninsured loss or a loss in excess of insured limits could have a
material adverse impact on the operating results of the Company. Management
feels that the Company has obtained reasonably adequate insurance coverage on
its Properties. However, certain types of losses, such as from terrorist
attacks, may be either uninsurable, too difficult to obtain or too expensive to
justify insuring against.
From time to time the Company may be exposed to litigation arising from the
operation of its business. Management does not believe that resolutions of these
matters will have a material adverse effect on the Company's financial condition
or results of operations.
Management of the Company currently knows of no other trends that will have
a material adverse effect on liquidity, capital resources or results of
operations.
Hotel Operating Statistics
Management regularly reviews operating statistics such as revenue per
available room ("REVPAR"), average daily rate ("ADR") and occupancy at the
Company's Properties in order to gauge how well they are performing as compared
with the industry and past results. Out of the 55 total Properties owned as of
December 31, 2002, the Company has year-to-year comparative data on 26 of the
Properties. The Company did not operate or have interests in all of the 26
Properties used in the table below during the year ended December 31, 2001;
however, the operating results for these Properties were used for comparative
purposes and analysis of performance.
The following table summarizes REVPAR, ADR and occupancy for these
Properties for the years ended December 31, 2002 and 2001.
Year Ended
December 31,
2002 2001 Variance
---- ---- --------
North America (26 hotels)
REVPAR $61.22 $62.54 -2.1%
ADR $90.41 $98.13 -7.9%
Occupancy 67.7% 63.7% 6.2%
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
(in thousands, except per share data)
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
(in thousands, except per share data)
The following table presents selected unaudited quarterly financial data
for each full quarter during the years ended December 31, 2002 and 2001:
2002 Quarter First Second Third Fourth Year
- ---------------------- -------------- -------------- -------------- -------------- --------------
Revenues $ 27,147 $ 32,306 $ 46,276 $ 50,679 $ 156,408
Net income 3,651 4,757 2,343 5,059 15,810
Earning per share:
Basic 0.05 0.05 0.02 0.04 0.16
Diluted 0.05 0.05 0.02 0.04 0.16
2001 Quarter First Second Third Fourth Year
- ---------------------- -------------- -------------- -------------- -------------- --------------
Revenues $ 16,713 $ 18,202 $ 19,029 $ 17,519 $ 71,463
Net income 5,529 7,058 3,890 2,851 19,328
Earning per share:
Basic 0.11 0.12 0.06 0.01 0.30
Diluted 0.11 0.12 0.06 0.01 0.30
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONTENTS
--------
Page
Report of Independent Certified Public Accountants 30
Financial Statements:
Consolidated Balance Sheets 31
Consolidated Statements of Earnings 32
Consolidated Statements of Stockholders' Equity 33
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 39
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
CNL Hospitality Properties, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CNL
Hospitality Propertie