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 Properties, Inc. and its subsidiaries at December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS, LLP
Orlando, Florida
February 21, 2003
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
2002 2001
------------ ------------
ASSETS
Land, buildings and equipment, less accumulated depreciation
of $56,408 and $29,182, respectively $ 988,646 $ 699,240
Investment in unconsolidated subsidiaries 202,554 135,271
Cash and cash equivalents 48,993 44,825
Restricted cash 18,822 8,493
Receivables 11,382 672
Due from related parties 3,164 2,006
Prepaid expenses and other assets 25,177 6,796
Loan costs, less accumulated amortization of $2,131 and
$980, respectively 5,122 4,103
------------ ------------
$ 1,303,860 $ 901,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages payable and accrued interest $ 207,206 $ 168,884
Other notes payable 29,739 57,572
Line of credit 24,079 7,500
Other liabilities 5,632 --
Accounts payable and accrued expenses 9,256 8,269
Distributions payable 106 88
Due to related parties 2,460 1,026
Security deposits 12,883 19,455
Rents paid in advance -- 736
------------ ------------
Total liabilities 291,361 263,530
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000 shares -- --
Excess shares, $.01 par
value per share.
Authorized and unissued 63,000 shares -- --
Common stock, $.01 par value per share. Authorized
450,000 and 150,000 shares, respectively; issued
126,802 and 77,891 shares, respectively;
outstanding 126,030 and 77,358 shares,
respectively 1,260 773
Capital in excess of par value 1,115,745 681,152
Accumulated distributions in excess of net earnings (98,366) (39,959)
Accumulated other comprehensive loss (4,316) (1,190)
Minority interest distributions in excess of contributions
and accumulated earnings (1,824) (2,900)
------------ ------------
Total stockholders' equity 1,012,499 637,876
------------ ------------
$ 1,303,860 $ 901,406
============ ============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Year Ended December 31,
2002 2001 2000
------------- ------------- -------------
Revenues:
Hotel revenues $ 101,005 $ 1,151 $ --
Rental income from operating leases 37,341 61,031 24,173
FF&E reserve income 4,236 5,787 2,509
Dividend income -- -- 2,780
Interest and other income 13,826 3,494 6,637
------------- ------------- -------------
156,408 71,463 36,099
------------- ------------- -------------
Expenses:
Hotel expenses 65,601 1,516 --
Interest and loan cost amortization 18,330 14,653 2,384
General operating and administrative 5,667 4,648 1,977
Asset management fees to related
parties 6,696 3,327 1,335
Depreciation and amortization 27,876 19,749 7,830
------------- ------------- -------------
124,170 43,893 13,526
------------- ------------- -------------
Earnings before equity in loss of
unconsolidated subsidiaries and
minority interest 32,238 27,570 22,573
Equity in loss of unconsolidated
subsidiaries (16,164) (7,093) (387)
Minority interest (264) (1,149) (1,516)
------------- ------------- -------------
Net earnings $ 15,810 $ 19,328 $ 20,670
============= ============= =============
Earnings per share of common stock:
Basic $ 0.16 $ 0.30 $ 0.53
============= ============= =============
Diluted $ 0.16 $ 0.30 $ 0.53
============= ============= =============
Weighted average number of shares of common stock
outstanding:
Basic 97,874 64,458 38,698
============= ============= =============
Diluted 97,874 64,458 45,886
============= ============= =============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years Ended December 31,2002, 2001 and 2000
(in thousands, except per share data)
Minority
interest
distribu-
Accumulated tions in
Common Stock distribu- Accumulated excess of
----------------------- Capital in tions in other contr. and
Number of Par excess of excess of comprehen- accum.
shares value par value net earnings sive loss earnings Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 28,903 $ 289 $ 256,232 $ (3,466) $ -- $ -- $ 253,055
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 20,368 203 203,480 -- -- -- 203,683
Retirement of common stock (269) (2) (2,501) -- -- -- (2,503)
Stock issuance costs -- -- (24,808) -- -- -- (24,808)
Net earnings -- -- -- 20,670 -- -- 20,670
Minority interest distributions in
excess of contributions and
accumulated earnings -- -- -- -- -- (2,726) (2,726)
Current period adjustments to
recognize value of cash flow
hedges of equity investees -- -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- -- --
Distributions declared and paid
($.74 per share) -- -- -- (28,082) -- -- (28,082)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 49,002 $ 490 $ 432,403 $ (10,878) $ -- $ (2,726) $ 419,289
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
Minority
interest
distribu-
Accumulated tions in
Common Stock distribu- Accumulated excess of
----------------------- Capital in tions in other contr. and
Number of Par excess of excess of comprehen- accum. Comprehen-
shares value par value net earnings sive loss earnings Total sive income
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 49,002 $ 490 $ 432,403 $ (10,878) $ -- $ (2,726) $ 419,289 $ --
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 28,607 286 285,783 -- -- -- 286,069 --
Retirement of common stock (251) (3) (2,310) -- -- -- (2,313) --
Stock issuance costs -- -- (34,724) -- -- -- (34,724) --
Net earnings -- -- -- 19,328 -- -- 19,328 19,328
Minority interest distribu-
tions in excess of contri-
butions and accumulated
earnings -- -- -- -- -- (174) (174) --
Current period adjustments to
recognize value of cash
flow hedges of equity
investees -- -- -- -- (1,190) -- (1,190) (1,190)
----------
Total comprehensive income -- -- -- -- -- -- -- $ 18,138
==========
Distributions declared and
paid ($.77 per share) -- -- -- (48,409) -- -- (48,409)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 77,358 $ 773 $681,152 $ (39,959) $ (1,190) $ (2,900) $ 637,876
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
Minority
interest
distribu-
Accumulated tions in
Common Stock distribu- Accumulated excess of
----------------------- Capital in tions in other contr. and
Number of Par excess of excess of comprehen- accum. Comprehen-
shares value par value net earnings sive loss earnings Total sive income
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 2001 77,358 $ 773 $ 681,152 $ (39,959) $ (1,190) $ (2,900) $ 637,876 $ --
Subscriptions received for
common stock through public
offerings and distribution
reinvestment plan 48,911 489 488,622 -- -- -- 489,111 --
Retirement of common stock (239) (2) (2,389) -- -- -- (2,391) --
Stock issuance costs -- -- (51,640) -- -- -- (51,640) --
Net earnings -- -- -- 15,810 -- -- 15,810 15,810
Minority interest distribu-
tions in excess of contribu-
tions and accumulated
earnings -- -- -- -- -- 1,076 1,076 --
Current period adjustments to
recognize value of cash flow
hedges of equity investees -- -- -- -- (3,126) -- (3,126) (3,126)
----------
Total comprehensive income -- -- -- -- -- -- -- $ 12,684
==========
Distributions declared and paid
($.78 per share) -- -- -- (74,217) -- -- (74,217)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 126,030 $ 1,260 $1,115,745 $ (98,366) $ (4,316) $ (1,824) $1,012,499
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities:
Net earnings $ 15,810 $ 19,328 $ 20,670
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 27,876 19,749 7,830
Amortization 1,151 1,181 66
Distributions from investment in
unconsolidated subsidiaries, net of
equity in earnings/losses 30,728 9,277 1,124
Minority interest 264 1,149 1,516
Changes in operating assets and liabilities:
Dividends receivable -- -- 1,216
Receivables (10,710) (257) (813)
Due from related parties (1,158) -- --
Prepaid expenses (623) (23) 20
Accrued rental income 306 (8) (124)
Accounts payable and accrued expenses 6,920 374 861
Due to related parties - operating expenses 1,434 (333) 361
Credit enhancements 2,056 -- --
Security deposits (2,978) 4,036 10,377
Rents paid in advance (736) (1,536) 547
------------- ------------- -------------
Net cash provided by operating
activities 70,340 52,937 43,651
------------- ------------- -------------
Cash flows from investing activities:
Additions to hotel Properties (307,447) (117,233) (310,712)
Investment in unconsolidated subsidiaries (95,026) (129,033) (10,174)
Acquisition of additional interest in Hotel
Investors, net of Hotel Investors' cash -- (32,884) (17,873)
Deposit on Property and other Investments (10,300) -- --
Increase in certificate of deposit -- -- 5,000
Increase in restricted cash (10,329) (5,230) (2,988)
Increase (decrease) in other assets (29,643) (11,611) 2,510
------------- ------------- -------------
Net cash used in investing activities (452,745) (295,991) (334,237)
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Years Ended December 31,
2002 2001 2000
------------- ------------- -------------
Cash flows from financing activities:
Proceeds, net of repayments, from borrowings
on line of credit 16,579 7,500 --
Payment of loan costs (2,170) (2,954) (1,343)
Proceeds from mortgage loans and other
notes payable 40,070 37,990 102,082
Principal payments on mortgage loans (1,748) (1,171) --
Payments on other notes (26,607) -- --
Subscriptions received from stockholders 489,111 286,069 203,683
Distributions to stockholders (74,217) (48,409) (28,082)
Due from related parties - offering expenses -- (1,411) --
Distributions to minority interest (414) (2,896) (10,218)
Retirement of common stock (2,391) (2,313) (2,503)
Payment of stock issuance costs (51,640) (34,724) (24,808)
------------- ------------- -------------
Net cash provided by financing activities 386,573 237,681 238,811
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents 4,168 (5,373) (51,775)
Cash and cash equivalents at beginning of year 44,825 50,198 101,973
------------- ------------- -------------
Cash and cash equivalents at end of year $ 48,993 $ 44,825 $ 50,198
============= ============= =============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Years Ended December 31,
2002 2001 2000
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 16,854 $ 15,248 $ 1,802
============= ============= =============
Supplemental schedule of non-cash investing activities:
Amounts incurred but not paid for
construction in progress $ 668 $ 6,601 $ 833
============= ============= =============
Allocation of acquisition fees included in
other assets to investment in hotel
subsidiaries and operating leases $ 21,879 $ 10,657 $ 16,182
Properties and unconsolidated ============= ============= =============
Supplemental schedule of non-cash financing activities:
Non-cash reduction in TIF Note $ 1,227 $ -- $ 315
============= ============= =============
Assumption of other liabilities with
Crestline lease assumption $ 3,576 $ -- $ --
============= ============= =============
Distributions declared not paid to minority
interest at year end $ 106 $ 88 $ 1,089
============= ============= =============
See accompanying notes to consolidated financial statements.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
1. Organization:
------------
CNL Hospitality Properties, Inc., (the "Company"), was organized pursuant
to the laws of the State of Maryland on June 12, 1996. 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 wholly
owned subsidiaries are utilized to hold or develop hotel properties. The
Company operates for federal income tax purposes as a real estate
investment trust (a "REIT") and is engaged in the acquisition and ownership
of hotel properties ("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. 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 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 during 2002 and additional leases may be assumed by the Company in
the future. With respect to certain of its Properties, the Company has
received various credit enhancement guarantees from third-party managers
who, subject to certain limitations, have guaranteed a certain level of
performance for Properties they manage.
2. Summary of Significant Accounting Policies:
------------------------------------------
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of CNL Hospitality Properties, Inc., and
each of its wholly owned and majority controlled subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Interests of unaffiliated third parties are reflected as
minority interest for less than 100 percent owned and majority controlled
entities.
Lease Accounting - 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.
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 Property operating expenses, including property taxes,
insurance, maintenance and repairs. Rental income from these operating
leases is included in the Company's consolidated results of operations for
these Properties.
Third-party Property leases are accounted for using the operating method.
When minimum lease payments vary during the lease term, income is
recognized on a straight-line basis so as to produce a constant periodic
rent over the lease term. Accrued rental income, included in other assets,
represents the aggregate amount of income recognized on a straight-line
basis in excess of scheduled payments to date.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2. Summary of Significant Accounting Policies - Continued:
------------------------------------------------------
The Company's leases also require the establishment of separate bank
accounts for the replacement of furniture, fixtures, and equipment and
routine capital items ("FF&E Accounts"). Deposits into the FF&E Accounts
established for the Properties leased to third-party tenants are owned by
the Company and have been reported as additional rent ("FF&E Reserve
Revenue") for the years ended December 31, 2002, 2001 and 2000. For the
years ended December 31, 2002, 2001 and 2000, revenues from the FF&E
Reserve Revenue totaled approximately $4,236, $5,787, and $2,509,
respectively. For these Properties, the funds in the FF&E Accounts are
maintained in a restricted cash account, funded by the tenant, which 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. FF&E Reserve Revenue is not generated
from Properties leased by TRS entities and operated by third-party
managers; however, with respect to Properties leased by TRS entities, cash
is restricted by the Company for the purposes stated above. 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 and minimum returns are increased.
Hotel Properties - Hotel Properties are comprised of land, buildings, and
equipment and are recorded at historical cost. The cost of improvements and
betterments and any interest incurred during the construction or renovation
periods for hotel construction projects are capitalized. Costs of repairs
and maintenance are expensed as incurred. During the years ended December
31, 2002 and 2001, approximately $642 and $1,552 in interest was
capitalized, respectively.
Buildings and equipment are depreciated on the straight-line method over
their estimated useful lives of 40 and seven years, respectively. When the
Properties or equipment are sold, the related cost and accumulated
depreciation will be removed from the accounts and any gain or loss from
sale will be reflected as income.
Impairment of Long-Lived Assets - Effective January 1, 2002 the Company
adopted Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets". This statement requires
that a long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset. The assessment is based
on the carrying amount of the asset at the date it is tested for
recoverability. An impairment loss is recognized when the carrying amount
of a long-lived asset exceeds its fair value. If an impairment is
recognized, the adjusted carrying amount of a long-lived asset is its new
cost basis. The statement also requires that the results of operations of a
component of an entity that either has been disposed of or is classified as
held for sale be reported as a discontinued operation.
Investment in Unconsolidated Subsidiaries - Investments in unconsolidated
subsidiaries are accounted for under the equity method of accounting since
the decision making authority and control is shared. All major decisions
are subject to approval of both parties concerning all aspects of the
entities' operations. In the event of a disagreement among the parties,
binding arbitration is generally used to settle disagreements. At December
31, 2002, the difference between the Company's carrying amount of its
investments in unconsolidated subsidiaries and the underlying equity in the
net assets of the subsidiaries was approximately $22,829 due to acquisition
fees and expenses which have been allocated to the Company's investment.
These amounts are being amortized over the estimated lives of the buildings
and equipment commencing when the hotel begins operations.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents consist of demand deposits at
commercial banks and money market funds (some of which are backed by
government securities). Cash equivalents are stated at cost plus accrued
interest, which approximates market value. Cash accounts maintained on
behalf of the Company in demand deposits at commercial banks and money
market funds may exceed federally insured levels; however, the Company has
not experienced any losses in such accounts. Management believes the
Company is not exposed to any significant credit risk on cash and cash
equivalents.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2. Summary of Significant Accounting Policies - Continued:
------------------------------------------------------
Certain amounts of cash are restricted for maintenance and replacement of
furniture, fixtures, and equipment at the Company's various hotel
Properties. These amounts have been separately classified as restricted
cash in the accompanying consolidated balance sheets. In addition, $1,000
has been restricted to be used for capital improvements on one Property.
Loan Costs - Loan costs incurred in connection with securing financing of
the Company's various acquisitions and developments have been capitalized
and are being amortized over the terms of the loans using the straight-line
method, which approximates the effective interest method.
Earnings Per Share - Basic earnings per share ("EPS") is calculated based
upon the weighted average number of shares of common stock outstanding
during each year, and diluted earnings per share is calculated based upon
weighted average number of common shares outstanding plus potentially
dilutive common shares.
Reclassification - Certain items in the prior years' consolidated financial
statements have been reclassified to conform with the 2002 presentation.
These reclassifications had no effect on stockholders' equity or net
earnings.
Income Taxes - Under the provisions of the Internal Revenue Code and
applicable state laws, each TRS entity of the Company is subject to
taxation of income on the profits and losses from its tenant operations.
The Company accounts for federal and state income taxes with respect to its
TRS subsidiaries using the asset and liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the consolidated financial statements carrying
amounts of existing assets and liabilities and respective tax bases and
operating losses and tax-credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized.
Segment Information - The Company derives all significant revenues from a
single line of business, hotel real estate ownership.
Recent Accounting Pronouncements - In January 2003, FASB issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities" to expand upon and strengthen existing accounting guidance that
addresses when a company should include the assets, liabilities and
activities of another entity in its financial statements. To improve
financial reporting by companies involved with variable interest entities
(more commonly referred to as special-purpose entities or off-balance sheet
structures), FIN 46 requires that a variable interest entity be considered
by a company if that company is subject to a majority risk of loss from the
variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Consolidation of variable
interest entities will provide more complete information about the
resources, obligations, risks and opportunities of the consolidated
company. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003, and to older
entities in the first fiscal year or interim period beginning after June
15, 2003. As of December 31, 2002, the Company is evaluating the effect of
FIN 46. It is reasonably possible that some or all of the unconsolidated
subsidiaries in Note 4, "Investments in Unconsolidated Subsidiaries" may be
required to be consolidated or may require additional disclosures when this
interpretation becomes effective. See Note 4 for a discussion of the
purpose, size, and activities of these entities. Under the terms of the
entities' formation agreements, the Company is required to fund its prorata
share of losses of these entities in order to maintain its current
ownership share. The Company has also guaranteed a portion of the debt on
CNL Plaza, Ltd.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2. Summary of Significant Accounting Policies - Continued:
------------------------------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The disclosure requirements of FIN 45 are effective for all
fiscal years ending after December 15, 2002. The Company has implemented
the interpretation for the year ended December 31, 2002, and all required
disclosures have been included in these consolidated financial statements.
In June 2002, the FASB issued FASB Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The statement requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. Examples of costs covered by the statement include lease
termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing, or other exit
or disposal activity. The statement is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. The adoption of
this statement is not expected to have a significant impact on the
financial position or results of operations of the Company.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." This
statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statement
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This statement also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." This statement amends
FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this statement
related to the rescission of FASB Statement No. 4 are applicable in fiscal
years beginning after May 15, 2002. The provisions of this statement
related to FASB Statement No. 13 are effective for transactions occurring
after May 15, 2002. All other provisions of this statement are effective
for financial statements issued on or after May 15, 2002. The provisions of
this statement, excluding those related to the rescission of FASB Statement
No. 4, did not have a significant impact on the financial position or
results of operations of the Company. The provisions of this statement
related to the rescission of FASB Statement No. 4 are not expected to have
a significant impact on the financial position or results of operations of
the Company.
Use of Estimates - Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Fair Value of Financial Instruments - The estimated fair value of cash and
cash equivalents, accounts receivable and accounts payable, accrued
expenses and variable rate debt approximates carrying value because of
short maturities. The estimated fair value of long-term borrowings
approximates carrying value as interest rates on the borrowings approximate
current market rates.
Derivative Instruments and Hedging Activities - Effective January 1, 2001,
derivatives are recorded at fair value in the balance sheet. Gains or
losses resulting from changes in the fair value of derivatives are
recognized in earnings or recorded in other comprehensive income, and
recognized in the statement of earnings when the hedged item affects
earnings, depending on the purpose of the derivatives and whether they
quality for hedging accounting treatment. The Company does not enter into
or hold derivatives for trading or speculative purposes. The Company
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2. Summary of Significant Accounting Policies - Continued:
------------------------------------------------------
has invested in two partnerships, accounted for under the equity method,
that have entered into interest rate hedges on variable rate debt. The
Company's partnerships have treated these hedges as cash flow hedges. At
January 1, 2001, the fair value of the interest rate hedges was zero. The
Company's portion of the increased obligation under cash flow hedges
reduced the carrying amount of the Company's investment in unconsolidated
subsidiaries by approximately $4,316 and has been reflected in accumulated
other comprehensive loss as of December 31, 2002.
Advertising and Promotional Costs - The costs of advertising, promotional
and marketing programs are charged to operations in the year incurred and
are included in hotel expense in the accompanying consolidated statement of
operations. Advertising, promotional and marketing costs totaled $6,330 for
the year ended December 31, 2002. No significant advertising, promotional
and marketing costs were incurred in any prior years.
3. Assumption of Third-Party Leases:
--------------------------------
Western International Leases
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 International, Inc. ("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.
Crestline MI-3 Leases
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 being leased by a TRS of the Company
and 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 gave 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. These transactions resulted in net other income of approximately
$400 being recognized by the Company during the year ended December 31,
2002. See Note 13, "Commitments and Contingencies," for a summary of the
terms of the loan that was assumed by the Company.
Crestline Atlanta Leases
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 being leased by a TRS of the Company
and 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.
4. Investments in Unconsolidated Subsidiaries:
------------------------------------------
Desert Ridge Partnership
During 2002, the Company contributed an additional $16,200 into Desert
Ridge Resort Partners, LLC (the "Desert Ridge Partnership"), an existing
partnership in which the Company owns 44%. The Company's total investment
in the Desert Ridge Partnership was $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 have been included in the
consolidated results of 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
approximately $304,000.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
4. Investments in Unconsolidated Subsidiaries - Continued:
------------------------------------------------------
Waikiki Partnership
During 2002, the Company contributed an additional $8,700 into WB Resort
Partners, LP (the "Waikiki Partnership"), an existing partnership in which
the Company owns 49%. The Company's total investment in the Waikiki
Partnership was $42,000 as of December 31, 2002. The Waikiki Partnership
owns the Waikiki Beach Marriott in Honolulu, Hawaii (the "Waikiki
Property"), which was undergoing significant renovations for the majority
of 2002, and was substantially completed as of December 31, 2002. The total
cost of the resort is expected to be approximately $215,000.
Mobil Travel Guide
In January 2002, the Company acquired a 25 percent interest in a
partnership with Publications International, Ltd. ("PIL"), Hilton Hotels
Corporation ("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 December 2002, the Company contributed an
additional $894 to the partnership that owns EMTG, thereby increasing the
Company's ownership in the partnership from 25 percent to 31.25 percent.
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 "San
Francisco Downtown Property"). 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.
One of the loans was in the amount of $41,000 and requires interest
payments equal to the greater of one-month LIBOR plus 3.25 percent, or 6.25
percent. The other loan was in the amount of $15,000 and requires interest
payments equal to a base rate plus 7 percent. The base rate equals the
greater of (a) the lesser of (i) one-month LIBOR or (ii) 9 percent, or (b)
3 percent. Both loans mature in August 2007 and require monthly payments of
interest only through July 1, 2004, at which time monthly payments of
principal and interest are due with the remaining principal balances and
any unpaid interest due at maturity. The lessee of the San Francisco
Downtown Property is a wholly owned subsidiary of the San Francisco
Partnership and the Property is managed by a subsidiary of Marriott.
Interstate Partnership
In September 2002, the Company acquired an 85 percent interest in a Hampton
Inn Property located in Houston, Texas (the "Hampton Inn Property") in
return for an equity contribution of $4,890. The Hampton Inn Property was
acquired through an existing partnership with Interstate Hotels and Resorts
that was originally formed in November 2001 (the "Interstate Partnership").
The total purchase price of the Hampton Inn Property was $14,300. All
characteristics of the Interstate Partnership other than the acquisition of
the Hampton Inn Property remain unchanged. In connection with this
purchase, the Interstate Partnership assumed a loan of approximately
$9,300, which is secured by the Property. The loan bears interest at a rate
of 7.78 percent per annum. Monthly payments of principal and interest of
$76 are due on the first day of each month through December 1, 2007, at
which time the entire remaining principal balance is due.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
4. Investments in Unconsolidated Subsidiaries - Continued:
-------------------------------------------------------
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 a 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. In connection with this purchase, the Hilton 2
Partnership obtained mortgage financing in the amount of $33,800 for the
Doubletree Lincoln Centre Property and $44,850 for the Hilton El
Conquistador Resort Property. These loans bear interest at a rate equal to
5.67 percent. Monthly payments of interest only are due monthly for the
first two years of the loans, with monthly payments of interest and
principal due thereafter until maturity in December 2007.
- Intentionally Left Blank -
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
4. Investments in Unconsolidated Subsidiaries - Continued:
-------------------------------------------------------
The Company has investments in several other joint ventures and
partnerships with third parties who share the decision-making and control
for these entities. The borrowers on the loans are legally separate
entities, having separate assets and liabilities from the Company and,
therefore, the assets and credit of the respective partnerships may not be
available to satisfy the debts and other obligations of the Company.
Likewise, the assets and credit of the Company may not be available to
satisfy the debts and other obligations of the borrowers on the loans of
the partnerships. The following presents unaudited condensed financial
information for these investments as of and for the year ended December 31,
2002:
Desert
Ridge CY-SF
Resort WB Resort CNL HHC CNL IHC Hotel CTM CNL CNL HHC
Partners, Partners, Partners, Partners, Parent, Partners, Plaza, Partners II,
LLC LP LP LP* LP LLC Ltd. LP Total
-------- -------- ---------- --------- --------- --------- -------- ---------- ---------
Hotel Properties $269,925 $198,140 $ 218,268 $ 35,073 $ 80,374 $ -- $ -- $ 122,493 $ 924,273
Other assets 20,543 22,091 9,439 2,995 3,733 12,623 63,735 5,291 140,450
Mortgages and other notes
payable 230,176 157,798 100,000 15,909 57,160 2,247 64,061 78,650 706,001
Other liabilities 41,065 15,834 7,075 814 3,725 220 398 5,673 74,804
Partners' capital 19,227 46,599 120,632 21,345 23,222 10,156 (724) 43,461 283,918
Revenues 7,344 46,667 61,598 6,825 8,564 1,400 6,088 694 139,180
Cost of sales 7,016 20,407 25,809 1,800 2,899 3,941 1,946 386 64,204
Expenses 15,680 44,657 34,990 4,114 7,011 1,604 4,086 549 112,673
Net income (loss) (15,352) (18,397) 799 911 (1,346) (4,145) 56 (241) (37,697)
Income (loss) allocable to
the Company (6,527) (9,006) 560 713 (673) (1,056) 6 (181) (16,164)
Other comprehensive
income (loss) allocable
to the Company (2,572) -- (554) -- -- -- -- -- (3,126)
Difference between
carrying amount of
investment and
Company's share of
partners' capital 3,642 3,503 7,302 2,050 1,831 -- -- 4,501 22,829
Company's ownership
interest at end of period 44.0% 49.0% 70.0% 85.0% 50.0% 31.3% 9.9% 75.0% --
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
4. Investments in Unconsolidated Subsidiaries - Continued:
------------------------------------------------------
The following presents unaudited condensed financial information for these
joint ventures and partnerships as of and for the year ended December 31,
2001:
Desert
Ridge CY-SF
Resort WB Resort CNL HHC CNL IHC Hotel CTM CNL CNL HHC
Partners, Partners, Partners, Partners, Parent, Partners, Plaza, Partners II,
LLC LP LP LP* LP** LLC** Ltd.** LP** Total
-------- -------- ---------- --------- --------- --------- -------- ---------- ---------
Hotel Properties $133,500 $186,885 $213,279 $ 21,049 $ -- $ -- $ -- $ -- $554,713
Other assets 82,644 9,070 10,573 571 -- -- -- -- 102,858
Mortgages and other
notes payable 181,885 137,750 100,000 6,723 -- -- -- -- 426,358
Other liabilities 26,970 18,197 4,940 250 -- -- -- -- 50,357
Partners' capital 7,289 40,008 118,912 14,647 -- -- -- -- 180,856
Revenues 8,154 10,167 17,564 511 -- -- -- -- 36,396
Cost of sales 2,235 5,508 7,095 175 -- -- -- -- 15,013
Expenses 13,830 13,989 9,219 409 -- -- -- -- 37,447
Net income (loss) (7,911) (9,330) 1,250 (73) -- -- -- -- (16,064)
Income (loss)
allocable to the
Company (3,396) (4,572) 875 -- -- -- -- -- (7,093)
Other comprehensive
income (loss)
allocable to the
Company (1,370) -- 180 -- -- -- -- -- (1,190)
Difference between
carrying amount of
investment and
Company's share of
partners' capital 3,197 3,623 7,651 870 -- -- -- -- 15,341
Company's ownership
interest at end of
period 42.33% 49.00% 70.00% 85.00% -- -- -- -- --
* A portion of the net income for the year ended December 31, 2002 was allocated to the other partner to restore
the deficit created by losses during the year ended December 31, 2001 in accordance with the partnership
agreement.
**These entities were not formed until 2002 and therefore are not presented for the year ended December 31, 2001.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
4. Investment in Unconsolidated Subsidiaries - Continued:
-----------------------------------------------------
The difference between the carrying amount of the investments in the above
partnerships and the Company's share of partners' capital results from
various acquisition costs and fees which are not shared by the
co-venturers. These amounts are amortized over 36 years.
The Company earned distributions from the following partnerships during the
years ended December 31, 2002 and 2001, which reduce the carrying value of
the investment:
2002 2001
------------- -----------
Desert Ridge Resort Partners, LLC $ 1,432 $ 968
WB Resort Partners, LP 4,136 854
CNL HHC Partners, LP 4,753 2,390
CNL IHC Partners, LP 973 --
CY-SF Hotel Parent, LP 716 --
CNL Plaza, Ltd. 164 --
------------- -----------
Total $ 12,174 $ 4,212
============= ===========
As of December 31, 2002 and December 31, 2001, the Company had
approximately $2,695 and $1,411, respectively, in distributions receivable
from the above partnerships, which are included in due from related parties
in the accompanying consolidated balance sheets.
5. Hotel Properties:
----------------
During the year ended December 31, 2002, the Company acquired direct
interests in eight Properties throughout the United States and purchased
one parcel of land on which a hotel is being developed, resulting in a
total of 55 Properties currently operating, 42 wholly-owned and 13 held
indirectly through partnerships. Substantially all of the Properties
directly owned by the Company are pledged as collateral to secure mortgages
or other long-term financing.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
5. Hotel Properties - Continued:
----------------------------
During the year ended December 31, 2002, the Company acquired the following
Properties (See Schedule III, "Real Estate and Accumulated Depreciation,"
for a listing of all Properties owned by the Company.):
Brand Affiliation Property Location Date of Acquisition Purchase Price
--------------------------------------- ------------------------ ----------------------- ------------------
SpringHill Suites(TM) by Marriott(R) Manhattan Beach, CA January 18, 2002 $20,000
TownPlace Suites(TM) by Marriott(R) Manhattan Beach, CA January 18, 2002 $15,000
SpringHill Suites(TM) by Marriott(R) Plymouth Meeting, PA January 18, 2002 $27,000
Courtyard(R) by Marriott(R) Basking Ridge, NJ March 1, 2002 $35,750
Marriott(R) Hotel Bridgewater, NJ June 14, 2002 $61,500
Courtyard(R) by Marriott(R) Foothill Ranch, CA July 3, 2002* $18,300
Courtyard(R) by Marriott(R) Newark, CA October 25, 2002 $25,500
Residence Inn by Marriott(R) Newark, CA November 15, 2002 $27,300
Doubletree(R) Crystal City Arlington, VA December 19, 2002 $71,000
* 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
These hotel Properties, with the exception of the Doubletree Crystal City,
are newly constructed and accordingly the pro forma impact is not
significant. All of these Properties are leased to the Company's TRS
entities and are operated by third-party managers. The Properties were
recorded at cost and allocated to land, buildings and equipment using
appraisal data. The results of operations of the Properties are included in
the consolidated results of operations.
Hotel Properties are generally encumbered by debt and consist of the
following at December 31:
2002 2001
-------------- --------------
Land $ 145,719 $ 106,174
Buildings 816,184 521,230
Equipment 82,232 59,937
-------------- --------------
1,044,135 687,341
Less accumulated depreciation (56,408) (29,182)
Construction in progress 919 41,081
-------------- --------------
$ 988,646 $ 699,240
============== ==============
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
5. Hotel Properties - Continued:
----------------------------
Properties with a net book value of approximately $295,000 are leased to
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. During the
years ended December 31, 2002, 2001, and 2000, these third-party tenants
paid approximately $4,073, $7,350, and $4,156, respectively, in property
taxes for Properties which the Company leases on a triple-net basis.
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases with third parties at December 31,
2002:
2003 $ 31,276
2004 31,276
2005 31,276
2006 31,276
2007 31,276
Thereafter 240,047
----------
$ 396,427
==========
6. Prepaid Expenses and Other Assets:
---------------------------------
Other assets as of December 31, 2002 and 2001 were approximately $25,177
and $6,796, respectively, and consist primarily of deposits and acquisition
fees and expenses relating to Properties the Company intends to acquire.
- Intentionally Left Blank -
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
7. Indebtedness:
-------------
At December 31, 2002 and 2001, indebtedness collateralized by Properties,
consisted of the following as of December 31:
2002 2001
--------- ---------
Mortgages payable, bearing interest rates ranging from 7.50
percent to 7.75 percent, with total monthly principal and
interest payments of $666, maturing July 31, 2009 $ 84,638 $ 86,152
Mortgages payable, bearing interest of 8.335 percent, with
monthly interest only payments of approximately $347,
maturing December 1, 2007 50,348 50,000
Mortgage payable, bearing interest of 8.29 percent, with
monthly principal and interest payments of $257, maturing
December 1, 2007 32,069 32,732
Mortgage payable, bearing interest of 5.84 percent, with
monthly interest only payments through December 2004 and
thereafter principal and interest payments calculated on a
25-year amortization through maturity on December 1, 2007
31,082 31,082 --
Mortgage payable, bearing interest of 6.53 percent, with
monthly interest only through December 2004 and thereafter
principal and interest payments calculated on a 25-year
amortization through maturity on November 1, 2007 9,070 --
Construction loan facility for up to $64,000 in borrowings,
bearing interest of London Interbank Offered Rate ("LIBOR")
plus 275 percent, with monthly payments of interest only,
maturing December 1, 2005 21,280 42,119
Construction loan for up to $17,000 in borrowings, bearing
interest of LIBOR plus 300 basis points, with monthly
payments of interest only, maturing September 15, 2003 -- 5,768
Tax Incremental Financing Note, bearing interest of 12.85
percent, with principal and interest payments made by
incremental property tax payments paid by tenant, maturing
June 1, 2018 8,458 9,685
--------- ---------
$236,945 $226,456
========= =========
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
7. Indebtedness - Continued:
------------------------
The Company has a revolving line of credit (the "Revolving LOC") to fund
acquisition and development of Properties and investments in Mortgage Loans
and other permitted investments. Under the terms of the Revolving LOC, the
Company is entitled to receive cash advances of up to approximately $96,700
for a five-year period. Interest payments are due monthly with principal
payments of $1 due at the end of each loan year. Advances under the
Revolving LOC 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. At December 31, 2002, approximately $24,079
was outstanding under the Revolving LOC.
Debt arrangements allow for repayments earlier than the stated maturity
date. The weighted average effective interest rate on mortgages and other
notes payable was approximately 7 percent as of December 31, 2002. The
amount of debt reported in the accompanying consolidated balance sheets
approximates the fair value of such debt as of December 31, 2002 and 2001.
The following is a schedule of maturities for all long-term borrowings at
December 31, 2002:
2003 $ 3,562
2004 2,676
2005 24,664
2006 3,701
2007 53,954
Thereafter 154,020
------------
Total $ 242,577
============
In connection with the lease assumptions on nine Properties as discussed in
Note 3, "Assignment of Third-Party Leases," 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.
8. Taxes:
------
The components of the deferred taxes recognized in the accompanying
consolidated balance sheet at December 31, 2002 are as follows:
2002
-------------
Deferred tax assets:
Net operating loss $ 1,587
Deferred tax liabilities:
Valuation allowance (1,587)
-------------
$ --
=============
The types of temporary differences between the tax basis of assets and
liabilities and their consolidated financial statement reporting amounts
are attributable principally to net operating losses. The TRS tenant had
net operating loss carryforwards for federal and state purposes of
approximately $4,218 as of December 31, 2002, which is available to offset
future operating income. The net operating loss carryforward expires in
2021. The Company has not recorded this potential future benefit because
its TRS subsidiaries do not have sufficient historical earnings on which to
base a potential future benefit. There were no differences between the tax
basis of assets and liabilities and their consolidated financial reporting
amounts for the year ended December 31, 2001.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
9. 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 condensed 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
============== ==============
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
9. Related Party Transactions - Continued:
--------------------------------------
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 December 31,
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.
10. 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.
11. Earnings Per Share:
-------------------
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if other contracts to issue common
stock were exercised and shared in the earnings of the Company. For the
year ended December 31, 2000, approximately 7,188 shares were considered
dilutive after the application of the "if converted method" and were
included in the denominator of the diluted EPS calculation. For the year
ended December 31, 2001, approximately 1,800 shares relating to potentially
dilutive securities were anti-dilutive and were excluded from the
calculation. There were no potentially dilutive items in 2002.
-Intentionally Left Blank-
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
11. Earnings Per Share - Continued:
------------------------------
The following represents the calculation of earnings per share and the
weighted average number of shares of potentially dilutive common stock for
the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
-------------- ------------- --------------
Basic Earnings Per Share:
Net earnings $ 15,810 $ 19,328 $ 20,670
============== ============= ==============
Weighted average number of shares outstanding 97,874 64,458 38,698
============== ============= ==============
Basic earnings per share $ 0.16 $ 0.30 $ 0.53
============== ============= ==============
Diluted Earnings Per Share:
Net earnings $ 15,810 $ 19,328 $ 20,670
Additional income attributable to investment in
unconsolidated subsidiary assuming all
Preferred Shares were converted -- -- 3,564
-------------- ------------- --------------
Adjusted net earnings assuming dilution $ 15,810 $ 19,328 $ 24,234
============== ============= ==============
Weighted average number of shares outstanding 97,874 64,458 38,698
Assumed conversion of Preferred Stock -- -- 7,188
-------------- ------------- --------------
Adjusted weighted average number of
shares outstanding 97,874 64,458 45,886
============== ============= ==============
Diluted earnings per share $ 0.16 $ 0.30 $ 0.53
============== ============= ==============
12. Stockholders' Equity:
--------------------
On April 22, 2002, the Company commenced its fourth offering of up to
45,000 shares of common stock ($450,000) (the "2002 Offering"). Of the
45,000 shares of common stock offered, up to 5,000 were available to
stockholders purchasing shares through the reinvestment plan. Since its
formation through December 31, 2002, the Company has received an initial
$200 contribution from its Advisor and subscription proceeds of
approximately $1,267,821 (126,782 shares), including approximately $7,639
(764 shares) received pursuant to the Company's reinvestment plan. CNL
Securities Corp., an affiliate of the Advisor, is the managing dealer for
the Company's equity offerings. The Company has received approximately
$392,750 (39,275 shares) in gross offering proceeds from the 2002 Offering,
from its inception through December 31, 2002.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
12. Stockholders' Equity - Continued:
--------------------------------
On August 13, 2002, the Company filed a registration statement on Form S-11
with the Commission in connection with the proposed sale by the Company of
up to an additional 175,000 shares of common stock ($1,750,000) (the "2003
Offering"). The 2003 Offering commenced immediately following the
completion of the 2002 Offering on February 4, 2003. Of the 175,000 shares
of common stock to be offered, up to 25,000 are 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 2002
Offering. CNL Securities Corp., an affiliate of the Advisor, is the
managing dealer for the Company's equity offerings.
Under the redemption plan, the Company may elect, at its discretion, to
redeem shares, subject to certain conditions and limitations. During the
years ended December 31, 2002, 2001 and 2000, 239 shares, 251 shares and
269 shares, respectively, were redeemed at approximately $2,391, $2,313 and
$2,503, respectively, and retired from shares outstanding of common stock.
Shares were redeemed for $9.20 per share.
For the years ended December 31, 2002, 2001 and 2000, approximately 51
percent, 52 percent and 63 percent, respectively, of the distributions paid
to stockholders were considered ordinary income and approximately 49
percent, 48 percent and 37 percent, respectively, were considered a return
of capital to stockholders for federal income tax purposes. No amounts
distributed to the stockholders for the years ended December 31, 2002, 2001
and 2000 are required to be or have been treated by the Company as a return
of capital for purposes of calculating the stockholders' return on their
invested capital.
13. 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) construct or complete construction on one
Property, with an estimated cost of approximately $13,000 and (iii) fund
the remaining total of 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 are 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 deadline, the Company
has agreed to return approximately $3,200 in security deposits it holds on
three of the Properties. If conversion occurs, the Company is not obligated
to pay any additional consideration for the leasehold position and that the
manager will 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.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
13. Commitments and Contingencies - Continued:
-----------------------------------------
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.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
13. Commitments and Contingencies - Continued:
-----------------------------------------
The Company is a party to certain contracts, which may result in future
obligations to third parties. See description of obligations below.
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 from the Company to the
prior owner of such Properties. The earnout provision period terminates on
May 31, 2004, at which time the Company will have no further liability
under this provision. 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 guaranteed 16.67% of a $15,500 note payable on behalf of a subsidiary
of CNL Plaza, Ltd. The total liability of the Company under this
arrangement is capped at $2,583, plus interest on such amount. 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. The Company could be liable to the extent that drawings under the
letter of credit occur.
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.
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
14. Selected Quarterly Financial 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
Earnings 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
Earnings per share:
Basic 0.11 0.12 0.06 0.01 0.30
Diluted 0.11 0.12 0.06 0.01 0.30
15. 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 located in
Orlando, Florida, Arlington, Virginia, and Santa Clara, California. At the
time of acquisition/contribution, the Hilton 2 Partnership obtained
permanent financing of approximately $145,000, which was allocated between
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
through 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.
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
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.
On February 14, 2003, an Annual Statement of Beneficial Ownership of
Securities on Form 5 was not filed by Mr. Kaplan (a director of the Company) on
behalf of an LLC (of which he has been appointed a manager) with respect to a
single transaction related to shares as to which he disclaims beneficial
ownership. Such Form was required to be filed by Section 16(a) of the Exchange
Act and the rules and regulation adopted thereunder, and was subsequently filed.
Other information required by this Item is incorporated by reference to the
Company's Definitive Proxy Statement to be filed with the Commission no later
than April 30, 2003.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
Company's Definitive Proxy Statement to be filed with the Commission no later
than April 30, 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
Company's Definitive Proxy Statement to be filed with the Commission no later
than April 30, 2003.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
Company's Definitive Proxy Statement to be filed with the Commission no later
than April 30, 2003.
Item 14. Controls and Procedures
As required by Rule 15d-15 under the Exchange Act, within the 90 days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's principal
executive and financial officers. Based upon that evaluation, the Company's
principal executive and financial officers concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's principal executive officers
and the Company's principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(Amounts contained herein are in thousands, unless otherwise noted, except for
per share data.)
(a) The following documents are filed as part of this report.
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 2002 and 2001
Consolidated Statements of Earnings for the years ended December 31,
2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation at December
31, 2002
Notes to Schedule III - Real Estate and Accumulated Depreciation at
December 31, 2002
All other Schedules are omitted as the required information is
inapplicable or is presented in the financial statements or notes
thereto.
3. Exhibits
3.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-9943) (the "1996
Form S-11") and incorporated herein by reference.)
3.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996 Form
S-11 (Registration No. 333-9943) (the "1996 Form S-11") and
incorporated herein by reference.)
3.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 to the 1996 Form S-11 and incorporated herein by
reference.)
3.4 CNL American Realty Fund, Inc. Articles of Amendment to the
Amended and Restated Articles of Incorporation dated June 3, 1998
(Previously filed as Exhibit 3.4 to the 1996 Form S-11 and
incorporated herein by reference.)
3.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated May 26,
1999 (Previously filed as Exhibit 3.5 to the Registrant's
Registration Statement on Form S-11 (Registration No. 333-67787)
(the "1998 Form S-11") and incorporated herein by reference.)
3.6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated June 27,
2000 (Previously filed as Exhibit 3.6 to the Registrant's
Registration Statement on Form S-11 (File No. 333-89691) (the
"1999 Form S-11") and incorporated by reference).
3.7 Amendment No. 1 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.7 to the 1999 Form S-11 and
incorporated herein by reference.)
3.8 Amendment No. 2 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.8 to the 1999 Form S-11 and
incorporated herein by reference.)
3.9 Amendment No. 3 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.9 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-67124)(the "2002
Form S-11") and incorporated herein by reference.)
3.10 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated November
15, 2002 (Previously filed as Exhibit 3.10 to the 2002 Form S-11
and incorporated herein by reference).
4.1 CNL American Realty Fund, Inc. Articles of Incorporation
(Previously filed as Exhibit 3.1 to the 1996 Form S-11 and
incorporated herein by reference).
4.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996 Form
S-11 and incorporated herein by reference.)
4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as
Exhibit 3.3 to the 1996 Form S-11 and incorporated herein by
reference.)
4.4 Form of Reinvestment Plan (Included as Exhibit 4.4 to the
Registrant's Registration Statement on Form S-11 (Registration
No. 333-98047)(the "2003 Form S-11")in the Prospectus as Appendix
A and incorporated herein by reference).
4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3,
1998 (Previously filed as Exhibit 3.4 to the 1996 Form S-11 and
incorporated herein by reference.)
4.6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated May 26,
1999 (Previously filed as Exhibit 3.5 to the 1998 Form S-11 and
incorporated herein by reference.)
4.7 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated June 27,
2000 (Previously filed as Exhibit 3.6 to the 1999 Form S-11 and
incorporated herein by reference.)
4.8 Amendment No. 1 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.7 to the 1999 Form S-11 and
incorporated herein by reference.)
4.9 Amendment No. 2 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.8 to the 1999 Form S-11 and
incorporated herein by reference.)
4.10 Amendment No. 3 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed an Exhibit 3.9 to the 2002 Form S-11 and
incorporated herein by reference.)
4.11 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated November
15, 2002 (Previously filed as Exhibit 3.10 to the 2002 Form S-11
and incorporated herein by reference).
10.1 Form of Advisory Agreement between CNL Hospitality Properties,
Inc. and CNL Hospitality Corp. (Included as Exhibit 10.2 to the
2003 Form S-11).
10.2 Indemnification Agreement between CNL Hospitality Properties,
Inc. and Lawrence A. Dustin dated February 24, 1999. Each of the
following directors and/or officers has signed a substantially
similar agreement as follows: James M. Seneff, Jr., Robert A.
Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard C.
Huseman, Charles A. Muller, Jeanne A. Wall and Lynn E. Rose,
dated July 9, 1997; C. Brian Strickland dated October 31, 1998;
John A. Griswold, dated January 7, 1999; Charles E. Adams and
Craig M. McAllaster, dated February 10, 1999; Matthew W. Kaplan
dated February 24, 1999; and Thomas J. Hutchison III dated May
16, 2000 (Previously filed as Exhibit 10.2 to the Form 10-Q filed
on May 17, 1999 and incorporated herein by reference.)
10.3 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Previously filed as Exhibit 10.10 to the 1996 Form S-11 and
incorporated herein by reference.)
10.4 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Gwinnett Residence Associates, LLC, relating
to the Residence Inn - Gwinnett Place (Previously filed as
Exhibit 10.11 to the 1996 Form S-11 and incorporated herein by
reference.)
10.5 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.12
to the 1996 Form S-11 and incorporated herein by reference.)
10.6 Hotel Purchase and Sale Contract between CNL Real Estate
Advisors, Inc. and Buckhead Residence Associates, LLC, relating
to the Residence Inn - Buckhead (Lenox Park) (Previously filed as
Exhibit 10.13 to the 1996 Form S-11 and incorporated herein by
reference.)
10.7 Assignment and Assumption Agreement between CNL Real Estate
Advisors, Inc. and CNL Hospitality Partners, LP, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as
Exhibit 10.14 to the 1996 Form S-11 and incorporated herein by
reference.)
10.8 Lease Agreement between CNL Hospitality Partners, LP and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Gwinnett Place (Previously filed as Exhibit 10.15
to the 1996 Form S-11 and incorporated herein by reference.)
10.9 Lease Agreement between CNL Hospitality Partners, LP and STC
Leasing Associates, LLC, dated August 1, 1998, relating to the
Residence Inn - Buckhead (Lenox Park) (Previously filed as
Exhibit 10.16 to the 1996 Form S-11 and incorporated herein by
reference.)
10.10 Master Revolving Line of Credit Loan Agreement with CNL
Hospitality Properties, Inc., CNL Hospitality Partners, LP and
Colonial Bank, dated July 31, 1998 (Previously filed as Exhibit
10.17 to the 1996 Form S-11 and incorporated herein by
reference.)
10.11 Master Loan Agreement by and between CNL Hotel Investors, Inc.
and Jefferson-Pilot Life Insurance Company, dated February 24,
1999 (Previously filed as Exhibit 10.18 to the 1996 Form S-11 and
incorporated herein by reference.)
10.12 Securities Purchase Agreement between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II L.L.C.,
dated February 24, 1999 (Previously filed as Exhibit 10.19 to the
1996 Form S-11 and incorporated herein by reference.)
10.13 Subscription and Stockholders' Agreement among CNL Hotel
Investors, Inc., Five Arrows Realty Securities II L.L.C., CNL
Hospitality Partners, LP and CNL Hospitality Properties, Inc.,
dated February 24, 1999 (Previously filed as Exhibit 10.20 to the
1996 Form S-11 and incorporated herein by reference.)
10.14 Registration Rights Agreement by and between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II L.L.C.,
dated February 24, 1999 (Previously filed as Exhibit 10.21 to the
1996 Form S-11 and incorporated herein by reference.)
10.15 First Amendment to Lease Agreement between CNL Hospitality
Partners, LP and STC Leasing Associates, LLC, dated August 1,
1998, related to the Residence Inn - Gwinnett Place, (amends
Exhibit 10.8 above) and the First Amendment to Agreement of
Guaranty, dated August 1, 1998 (amends Agreement of Guaranty
attached as Exhibit I to 10.8 above) (Previously filed as Exhibit
10.8 to the Form 10-Q filed on November 10, 1999 and incorporated
herein by reference.)
10.16 First Amendment to Lease Agreement between CNL Hospitality
Partners, LP and STC Leasing Associates, LLC, dated August 1,
1998, related to the Residence Inn - Buckhead (Lenox Park)
(amends Exhibit 10.9 above) and the First Amendment to Agreement
of Guaranty, dated August 1, 1998 (amends Agreement of Guaranty
attached as Exhibit I to 10.9 above) (Previously filed as Exhibit
10.9 to the Form 10-Q filed on November 10, 1999 and incorporated
herein by reference.)
10.17 Lease Agreement between Courtyard Annex, L.L.C. and City Center
Annex Tenant Corporation, dated November 15, 1999, relating to
the Courtyard - Philadelphia (Previously filed as Exhibit 10.22
to the 1998 Form S-11 and incorporated herein by reference.)
10.18 First Amended and Restated Limited Liability Company Agreement
of Courtyard Annex, L.L.C., relating to the Courtyard -
Philadelphia (Previously filed as Exhibit 10.23 to the 1998 Form
S-11 and incorporated herein by reference.)
10.19 Purchase and Sale Agreement between Marriott International,
Inc., CBM Annex, Inc., Courtyard Annex, Inc., as Sellers, and CNL
Hospitality Partners, LP, as Purchaser, dated November 15, 1999,
relating to the Courtyard - Philadelphia (Previously filed as
Exhibit 10.24 to the 1998 Form S-11 and incorporated herein by
reference.)
10.20 Lease Agreement between CNL Hospitality Partners, LP, and RST4
Tenant LLC, dated December 10, 1999, relating to the Residence
Inn - Mira Mesa (Previously filed as Exhibit 10.25 to the 1998
Form S-11 and incorporated herein by reference.)
10.21 Purchase and Sale Agreement between Marriott International,
Inc., TownePlace Management Corporation and Residence Inn by
Marriott, Inc., as Sellers, and CNL Hospitality Partners, LP, as
Purchaser, dated November 24, 1999, relating to the Residence Inn
- Mira Mesa and the TownePlace Suites - Newark (Previously filed
as Exhibit 10.26 to the 1998 Form S-11 and incorporated herein by
reference.)
10.22 Lease Agreement between CNL Hospitality Partners, LP and WYN
Orlando Lessee, LLC, dated May 31, 2000, relating to the Wyndham
Denver Tech Center (Previously filed as Exhibit 10.29 to the 1998
Form S-11 and incorporated herein by reference.)
10.23 Lease Agreement between CNL Hospitality Partners, LP and WYN
Orlando Lessee, LLC, dated May 31, 2000, relating to the Wyndham
Billerica (Previously filed as Exhibit 10.30 to the 1998 Form
S-11 and incorporated herein by reference.)
10.24 Purchase and Sale Agreement between CNL Hospitality Corp., as
Buyer, and WII Denver Tech, LLC and PAH Billerica Realty Company,
LLC, as Sellers, and Wyndham International, Inc., relating to the
Wyndham Denver Tech Center and the Wyndham Billerica (Previously
filed as Exhibit 10.31 to the 1998 Form S-11 and incorporated
herein by reference.)
10.25 Lease Agreement between CNL Hospitality Partners, LP and RST4
Tenant LLC, dated June 17, 2000, relating to the Courtyard - Palm
Desert and the Residence Inn - Palm Desert (Previously filed as
Exhibit 10.32 to the 1999 Form S-11 and incorporated by
reference).
10.26 Purchase and Sale Agreement between PDH Associates LLC, as
Seller, and CNL Hospitality Corp., as Buyer, dated January 19,
2000, relating to the Courtyard - Palm Desert and the Residence
Inn - Palm Desert (Previously filed as Exhibit 10.33 to the 1999
Form S-11 and incorporated by reference).
10.27 Amendment to Purchase and Sale Agreement between PDH Associates
LLC and CNL Hospitality Corp., dated January 19, 2000, relating
to Courtyard - Palm Desert and the Residence Inn - Palm Desert
(amends Exhibit 10.26 above) (Previously filed as Exhibit 10.34
to the 1999 Form S-11 and incorporated by reference).
10.28 Assignment Agreement between CNL Hospitality Corp. and CNL
Hospitality Partners, LP, relating to the Courtyard - Palm Desert
and the Residence Inn - Palm Desert (Previously filed as Exhibit
10.35 to the 1999 Form S-11 and incorporated by reference).
10.29 Lease Agreement between CNL Hospitality Partners, LP and RST4
Tenant LLC, dated July 28, 2000, relating to the SpringHill
Suites - Gaithersburg (Previously filed as Exhibit 10.36 to the
1999 Form S-11 and incorporated by reference).
10.30 Purchase and Sale Agreement between SpringHill SMC Corporation,
as Seller, and CNL Hospitality Partners, LP, as Purchaser, and
joined in by Marriott International, Inc., dated June 30, 2000,
relating to the SpringHill Suites - Gaithersburg (Previously
filed as Exhibit 10.37 to the 1999 Form S-11 and incorporated by
reference).
10.31 Lease Agreement between CNL Hospitality Partners, LP and RST4
Tenant LLC, dated July 28, 2000, relating to the Residence Inn -
Merrifield (Previously filed as Exhibit 10.38 to the 1999 Form
S-11 and incorporated by reference).
10.32 Purchase and Sale Agreement between TownePlace Management
Corporation and Residence Inn by Marriott, Inc., as Sellers, and
CNL Hospitality Partners, LP, as Purchaser, and joined in by
Marriott International, Inc., dated November 24, 1999, relating
to the Residence Inn - Merrifield (Previously filed as Exhibit
10.39 to the 1999 Form S-11 and incorporated by reference).
10.33 First Amendment to Purchase and Sale Agreement between
TownePlace Management Corporation and Residence Inn by Marriott,
as Sellers, and CNL Hospitality Partners, LP, as Purchaser, and
joined in by Marriott International, Inc., dated November 24,
1999, relating to the Residence Inn - Mira Mesa, SpringHill
Suites - Gaithersburg, Residence Inn - Merrifield, and TownePlace
Suites - Newark (amends Exhibits 10.21, 10.30, and 10.32 above)
(Previously filed as Exhibit 10.40 to the 1999 Form S-11 and
incorporated by reference).
10.34 Lease Agreement between CNL Hospitality Partners, LP and CCCL
Leasing LLC, dated August 18, 2000, relating to the Courtyard -
Alpharetta (Previously filed as Exhibit 10.41 to the 1999 Form
S-11 and incorporated by reference).
10.35 Lease Agreement between CNL Hospitality Partners, LP and CCCL
Leasing LLC, dated August 18, 2000, relating to the Residence Inn
- Cottonwood (Previously filed as Exhibit 10.42 to the 1999 Form
S-11 and incorporated by reference).
10.36 Lease Agreement between CNL Hospitality Partners, LP and CCCL
Leasing LLC, dated August 18, 2000, relating to the TownePlace
Suites - Mt. Laurel (Previously filed as Exhibit 10.43 to the
1999 Form S-11 and incorporated by reference).
10.37 Lease Agreement between CNL Hospitality Partners, LP and CCCL
Leasing LLC, dated August 18, 2000, relating to the TownePlace
Suites - Scarborough (Previously filed as Exhibit 10.44 to the
1999 Form S-11 and incorporated by reference).
10.38 Lease Agreement between CNL Hospitality Partners, LP and CCCL
Leasing LLC, dated August 18, 2000, relating to the TownePlace
Suites - Tewksbury (Previously filed as Exhibit 10.45 to the 1999
Form S-11 and incorporated by reference).
10.39 Purchase and Sale Agreement between Residence Inn by Marriott,
Inc., Courtyard Management Corporation, SpringHill SMC
Corporation and TownePlace Management Corporation, as Sellers,
CNL Hospitality Partners, LP, as Purchaser, CCCL Leasing LLC, as
Tenant, Crestline Capital Corporation, Marriott International,
Inc., and joined in by CNL Hospitality Properties, Inc., dated
August 18, 2000, relating to the Residence Inn - Cottonwood,
Courtyard - Alpharetta and Overland Park SpringHill Suites -
Raleigh, and TownePlace Suites - Mt. Laurel, Scarborough and
Tewksbury (Previously filed as Exhibit 10.46 to the 1999 Form
S-11 and incorporated by reference).
10.40 First Amendment to Purchase and Sale Agreement between Residence
Inn by Marriott, Inc., Courtyard Management Corporation,
SpringHill SMC Corporation and TownePlace Management Corporation,
as Sellers, CNL Hospitality Partners, LP, as Purchaser, CCCL
Leasing LLC, as tenant, Crestline Capital Corporation, and
Marriott International, Inc., dated August 18, 2000, relating to
the Residence Inn - Cottonwood, Courtyard - Alpharetta, and
Overland Park SpringHill Suites - Raleigh and TownePlace Suites -
Mt. Laurel, Scarborough and Tewksbury (Previously filed as
Exhibit 10.47 to the 1999 Form S-11 and incorporated by
reference).
10.41 Lease Agreement between CNL Hospitality Partners, LP and RST4
Tenant LLC, dated November 4, 2000, relating to the TownePlace
Suites - Newark (Previously filed as Exhibit 10.48 to the 1999
Form S-11 and incorporated herein by reference.)
10.42 Lease Agreement between LLB C-Hotel, L.L.C. and LLB Tenant
Corporation, dated October 12, 2000, relating to the Courtyard -
Little Lake Bryan (Previously filed as Exhibit 10.49 to the 1999
Form S-11 and incorporated herein by reference.)
10.43 Lease Agreement between LLB F-Inn, L.L.C. and LLB Tenant
Corporation, dated October 12, 2000, relating to the Fairfield
Inn - Little Lake Bryan (Previously filed as Exhibit 10.50 to the
1999 Form S-11 and incorporated herein by reference.)
10.44 First Amendment to Lease Agreement between LLB C-Hotel, L.L.C.
and LLB Tenant Corporation, dated November 17, 2000, relating to
the Courtyard - Little Lake Bryan (amends Exhibit 10.42 above)
(Previously filed as Exhibit 10.51 to the 1999 Form S-11 and
incorporated herein by reference.)
10.45 First Amendment to Lease Agreement between LLB F-Inn, L.L.C. and
LLB Tenant Corporation, dated November 17, 2000, relating to the
Fairfield Inn - Little Lake Bryan (amends Exhibit 10.43 above)
(Previously filed as Exhibit 10.52 to the 1999 Form S-11 and
incorporated herein by reference.)
10.46 Purchase and Sale Agreement between Marriott International,
Inc., as Seller, and CNL Hospitality Partners, LP, as Purchaser,
dated September 17, 1998, relating to the Courtyard - Little Lake
Bryan, the Fairfield Inn - Little Lake Bryan and the SpringHill
Suites - Little Lake Bryan (Previously filed as Exhibit 10.53 to
the 1999 Form S-11 and incorporated herein by reference.)
10.47 Second Amendment to Lease Agreement between CNL LLB C-Hotel
Management, LP (formerly LLB C-Hotel, L.L.C.) and LLB Tenant
Corporation, dated December 15, 2000, relating to the Courtyard -
Little Lake Bryan (amends Exhibits 10.42 and 10.44 above)
(Previously filed as Exhibit 10.54 to the 1999 Form S-11 and
incorporated herein by reference.)
10.48 Second Amendment to Lease Agreement between CNL LLB F-Inn
Management, LP (formerly LLB F-Inn L.L.C.) and LLB Tenant
Corporation, dated December 15, 2000, relating to the Fairfield
Inn - Little Lake Bryan (amends Exhibits 10.43 and 10.45 above)
(Previously filed as Exhibit 10.55 to the 1999 Form S-11 and
incorporated herein by reference.)
10.49 Indenture Agreement among Desert Ridge Resort, LLC, as Issuer;
Bank One, National Association, as Trustee; and Financial
Structures Limited, as Insurer, dated December 15, 2000, relating
to the Desert Ridge Property (Previously filed as Exhibit 10.56
to the 1999 Form S-11 and incorporated herein by reference.)
10.50 Form of Lease Agreement including Memorandum of Lease (Previously
filed as Exhibit 10.7 to the 2003 Form S-11 and incorporated
herein by reference).
10.51 Form of Escrow Agreement between CNL Hospitality Properties,
Inc. and SouthTrust Bank (Previously filed as Exhibit 10.1 to the
2003 Form S-11 and incorporated herein by reference).
10.52 Form of Joint Venture Agreement (Previously filed as Exhibit
10.3 to the 1998 Form S-11 and incorporated herein by reference).
10.53 Form of Indemnification and Put Agreement (Previously filed as
Exhibit 10.4 to the 1996 Form S-11 and incorporated herein by
reference).
10.54 Form of Unconditional Guaranty of Payment and Performance
(Previously filed as Exhibit 10.5 to the 1996 Form S-11 and
incorporated herein by reference).
10.55 Form of Purchase Agreement (Previously filed as Exhibit 10.6 to
the 1996 Form S-11 and incorporated herein by reference).
10.56 Form of Lease Agreement including Memorandum of Lease
(Previously filed as Exhibit 10.7 to the 2003 Form S-11 and
incorporated herein by reference).
21 Subsidiaries of the Registrant (Filed herewith.)
99.1 Certification of the Co-Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002 (filed herewith).
99.2 Certification of the Co-Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002 (filed herewith).
99.3 Certification of the Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002 (filed herewith).
(b) The Company filed the following reports during the quarter ended
December 31, 2002, on Form 8-K:
On December 31, 2002, the Company filed a report on Form 8-K to
disclose a press release, dated December 30, 2002, describing the
formation of a partnership between the Company and Hilton Hotels
Corporation.
(d) Other Financial Information
The Company is required to file audited consolidated financial
statements of Desert Ridge Resort Partners, LLC and WB Resort
Partners, LP due to the significance of the results of operations
for these unconsolidated subsidiaries.
The Company is required to file audited financial information of
a guarantor, Marriott International, Inc. ("Marriott"), of
several of its tenants as a result of Marriott guaranteeing lease
and loan payments for several of the Company's tenants which
leased more than 20 percent of the Company's total assets for the
year ended December 31, 2002.
Desert Ridge Resort Partners, LLC and Subsidiaries
Consolidated Financial Statements
As of and for the years ended December 31, 2002 and 2001
Report of Independent Certified Public Accountants
To the Members of
Desert Ridge Resort Partners, LLC
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of operations, of members' capital and
comprehensive loss and of cash flows present fairly, in all material respects,
the financial position of Desert Ridge Resort Partners, LLC and its subsidiaries
at December 31, 2002 and 2001 and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS, LLP
Orlando, Florida
February 17, 2003
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2002 AND 2001
December 31,
2002 2001
--------------- ---------------
Assets
Current assets
Cash and cash equivalents $ 7,564,395 $ 4,378,754
Accounts receivable 2,023,040 236,573
Due from affiliate 3,320,900 52,443
Prepaid expenses and other current assets 731,964 183,962
--------------- ---------------
Total current assets 13,640,299 4,851,732
Restricted cash 51,397 69,208,932
Property, construction in progress and equipment, net of
accumulated depreciation of $2,786,920 and $449,167 269,925,397 134,596,034
Loan costs, net of accumulated amortization of
$2,453,184 and $1,254,312 5,939,243 7,027,539
Other assets 1,556,115 1,556,115
--------------- ---------------
Total assets $291,112,451 $217,240,352
=============== ===============
Liabilities and Members' Capital
Current liabilities
Accounts payable and accrued expenses $ 8,860,837 $ 1,564,543
Due to affiliate 5,159,727 1,060,934
Construction costs payable, including retainage payable
of $7,259,224 and $4,615,373 17,172,419 22,531,663
Obligation under cash flow hedge 9,724,228 3,191,238
Current portion of obligation under capital lease 41,188 41,188
--------------- ---------------
Total current liabilities 40,958,399 28,389,566
Mortgage note payable 179,000,000 179,000,000
Other notes payable 51,175,811 2,289,421
Distributions payable 1,604,923 -
Obligation under capital lease 131,728 172,916
--------------- ---------------
Total liabilities 272,870,861 209,851,903
Commitments and contingencies
Members' capital 18,241,590 7,388,449
--------------- ---------------
Total liabilities and members' capital $291,112,451 $217,240,352
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Years Ended December 31,
2002 2002
--------------- ---------------
Revenues:
Golf course operations $ 3,196,404 $ 2,658,777
Room 1,411,216 -
Food and beverage 1,655,655 279,837
Interest 356,167 5,214,701
Other income 724,990 637
--------------- ---------------
Total revenue 7,344,432 8,153,952
Cost of sales and other expenses:
Golf course operations 3,185,750 2,050,168
Room 776,563 -
Food and beverage 2,227,158 185,140
Other operating departments 826,282 -
Interest expense and loan cost amortization 3,655,114 10,117,860
Pre-opening expenses 6,547,778 2,587,318
Depreciation 2,337,753 449,167
Property operations and maintenance 1,427,877 366,428
General and administrative 1,055,077 175,741
Sales and marketing 446,670 94,615
Management fees 209,649 88,120
--------------- ---------------
Total cost of sales and other expenses 22,695,671 16,114,557
---------------- ---------------
Net loss $(15,351,239) $(7,960,605)
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL & COMPREHENSIVE LOSS
DECEMBER 31, 2002 AND 2001
Accumulated Other
Comprehensive Comprehensive
Class A Members Class B Members Loss Total Loss
-------------- -------------- -------------- -------------- ---------------
Balance at December 31, 2000 $ 10,167,424 $ 5,695,933 $ - $ 15,863,357 $ -
Capital contributions 10,488,635 - - 10,488,635 -
Return of capital - (5,613,400) - (5,613,400) -
Distributions (1,725,463) (472,837) - (2,198,300) -
Net loss (6,286,490) (1,674,115) - (7,960,605) (7,960,605)
Current period adjustment to
recognize fair value of cash
flow hedge - - (3,191,238) (3,191,238) (3,191,238)
-------------- -------------- -------------- -------------- ---------------
Balance at December 31, 2001 12,644,106 (2,064,419) (3,191,238) 7,388,449 (11,151,843)
Capital contributions 30,642,956 5,703,991 36,346,947
Distributions (3,441,402) (168,175) (3,609,577)
Net loss (14,911,887) (439,352) (15,351,239) (15,351,239)
Current period adjustment to recognize
fair value of cash flow hedge - - (6,532,990) (6,532,990) (6,532,990)
-------------- -------------- -------------- -------------- ---------------
Balance at December 31, 2002 $ 24,933,773 $ 3,032,045 $ (9,724,228) $ 18,241,590 $ (21,884,229)
============== ============== ============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Years Ended December 31,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (15,351,239) $ (7,960,605)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 2,337,753 449,167
Amortization of loan costs 1,198,872 1,254,312
Changes in Operating assets and liabilities:
Accounts receivable (1,787,464) (119,095)
Due from affiliate (3,267,460) (52,573)
Prepaid expenses and other current assets (548,002) (83,465)
Accounts payable and accrued expenses 7,296,294 214,467
Due to affiliate 4,098,793 1,060,934
-------------- --------------
Net cash used in operating activities (6,022,453) (5,236,858)
-------------- --------------
Cash flows from investing activities:
Additions to property and equipment (143,026,360) (101,330,789)
Decrease in restricted cash 69,157,535 108,180,058
-------------- --------------
Net cash (used in) provided by investing
activities (73,868,825) 6,849,269
-------------- --------------
Cash flows from financing activities:
Borrowings, net of repayments, from other notes
payable 48,886,390 (1,795,660)
Principal payments on capital lease obligations (41,188) --
Capital contributions from members 36,346,947 10,488,635
Return of capital to member -- (5,613,400)
Distributions to members (2,004,654) (2,198,300)
Payment of loan costs (110,576) (462,893)
-------------- --------------
Net cash provided by financing activities 83,076,919 418,382
-------------- --------------
Net increase in cash and cash equivalents 3,185,641 2,030,793
Cash and cash equivalents, beginning of period 4,378,754 2,347,961
-------------- --------------
Cash and cash equivalents, end of period $ 7,564,395 $ 4,378,754
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Years Ended December 31,
2002 2001
-------------- --------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of $14,979,037 and $7,486,263 in
capitalized interest $ 685,653 $ 8,863,548
============== ==============
Supplemental disclosure of non-cash transactions
Increase in obligations related to value of cash
flow hedge $ 6,532,990 $ 3,191,238
============== ==============
Assumed obligation under capital lease $ - $ 214,104
============== ==============
Distributions declared but not paid to Partners $ 1,604,923 $ -
============== ==============
Construction costs payable included in construction
in progress $ 17,172,419 $ 22,531,663
============== ==============
Ground rental capitalized to construction cost $ 515,246 $ 783,432
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
1. Business
Organization
Desert Ridge Resort Partners, LLC (the "LLC" or the "Company") was
organized pursuant to the laws of the State of Delaware on December 21,
2000. Desert Ridge Resort, LLC and DRR Tenant Corporation are wholly owned
subsidiaries of the LLC. The LLC's Class A members are CNL DRR Investor, LP
and CNL Desert Ridge Resort, Ltd. (collectively, the "Class A Members") and
Marriott International, Inc. is the Class B Member ("Marriott"). The
managing member is CNL DRR Investor, LP. Both classes of members share in
major decisions and there is substantially no difference between the rights
and obligations of Class A Members and Class B Members.
The LLC was formed to own and operate a 950-room luxury resort located in
Phoenix, Arizona (the "Property"). The Property includes two championship
golf courses, a 25,500 square foot spa and 78,000 square feet of meeting
space. Affiliates of the members managed the construction activity under
development agreements throughout the construction period. Construction was
completed on November 30, 2002 (the "Opening Date"), at which time the
Property opened to the public. The Property's day-to-day activities are
managed by an affiliate of Marriott, however, all members must agree on key
decisions affecting the Property.
The structure of the LLC is designed to allow its managing member's parent
to continue to qualify as a real estate investment trust, which is
generally not subject to federal income taxes. In keeping with this goal,
the LLC operates its Property through a taxable REIT subsidiary ("TRS"), as
permitted by the REIT Modernization Act of 1999.
The LLC relies on capital contributions from the Class A Members and
Marriott and borrowings under loans to fund capital expenditures, operating
losses and negative cash flows. Cash flow deficits are possible in the
future, which may require additional funding. The Members are committed to
fund such shortfalls if they arise.
In accordance with the LLC agreement (the "Agreement"), (i) each members'
account is credited with capital contributions, share of profits and (ii)
each members' account is charged for amounts distributed to each member.
The Class A Members and Class B Members hold an 89.8% and 10.2% interest,
respectively in the Company as a result of $51,330,009 and $5,803,991 in
capital contributions since its formation.
Allocations and Distributions
Net operating profits are allocated (i)first, to the members who received
allocations of losses for earlier fiscal years, pro rata, in proportion to
the cumulative amount of losses previously allocated to them, until those
members have received cumulative allocation of profits equal to the
cumulative losses; (ii) next, to members, pro rata, in proportion to the
cumulative distributions made to them, until those members have received
cumulative allocation of profits equal to the cumulative amount of such
distributions; and (iii) thereafter, to the members, pro rata, in
proportion to their respective percentage interests.
Net operating losses are allocated (i) first, to the members who received
allocations of profits for earlier fiscal years, pro rata, in proportion to
the cumulative amount of profits previously allocated to them, until those
members have received cumulative allocation of losses equal to the
cumulative profits; (ii) next, to members who have positive capital
accounts, pro rata, in proportion to the respective amounts of their
positive capital accounts, until the capital accounts of those members is
reduced to zero; and (iii) thereafter, to the members, pro rata, in
proportion to their respective percentage interests.
In accordance with the LLC Agreement, the Company was required to pay each
member a return, computed at the rate of 11 percent per annum on the daily
average outstanding balance of the members' unreturned capital prior to the
Opening Date, as defined above. After the Opening Date of the Property, the
per annum distribution rate to members increased to 11.5 percent. These
cash distributions are made based on cash available for distribution within
thirty days of the end of each calendar quarter, as defined in the
Agreement. As of December 31, 2002, the Company had distributions payable
totaling $1,604,923. As of December 31, 2001, all distributions had been
paid.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
2. Summary of Significant Accounting Policies
A summary of significant accounting principles and practices used in the
preparation of the consolidated financial statements follows:
Basis of Financial Statement Presentation
The LLC prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America.
These principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Desert Ridge Resort Partners, LLC and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Reclassification
Certain items in the prior year's consolidated financial statements have
been reclassified to conform with the 2002 presentation. These
reclassifications had no effect on Members' Capital or results of
operations.
Cash and Cash Equivalents
The LLC considers all amounts held in highly liquid instruments with
original purchased maturities of three months or less to be cash
equivalents. Cash and cash equivalents consist primarily of demand deposit
accounts. Management believes the credit risk associated with cash and cash
equivalents to be low due to the quality of the financial institutions in
which these assets are held.
Certain amounts of cash were restricted for construction activities and are
classified as restricted cash in the accompanying consolidated statements
of financial position as of December 31, 2001. These amounts were used in
2002 and beginning on the Opening Date, certain amounts of cash were
restricted for maintenance and replacement of furniture, fixtures, and
equipment. These amounts are calculated as a certain percentage of Gross
Revenues in accordance with the hotel management agreement. The
accompanying consolidated statement of financial position as of December
31, 2002 includes $51,397, which has been restricted for maintenance and
replacements.
Inventory
Inventory consists primarily of food and beverage inventory, merchandise
and operating supplies and is accounted for using the first in, first out
method and is stated at the lower of cost or market. Inventory is recorded
in prepaid expenses and other current assets in the accompanying
consolidated statements of financial position.
Property, Construction in Progress and Equipment
Property, construction in progress and equipment is stated at cost and
includes building, construction in progress, lease and land improvements
and furniture, fixtures and equipment ("FF&E"). Land improvements and FF&E
are depreciated on the straight-line method over the assets' estimated
useful lives of 15 and 7 years, respectively. Buildings are depreciated
over 40 years.
Major renewals and betterments are capitalized and depreciated over the
related assets' estimated useful lives. Expenditures for repairs and
maintenance are expensed when incurred. Construction in progress includes
amounts paid or due to third parties under construction contracts,
capitalized interest, real estate taxes and development fees. Interest,
ground rents and real estate taxes incurred relating to development of the
resort and amenities are capitalized to construction in progress during the
active development period.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Deferred Loan Costs
Deferred loan costs, primarily loan origination and related fees, are
capitalized and are being amortized over the term of the loan using the
effective interest method.
Leases
The Company has entered into capital and operating leases for equipment
used at its Properties. Equipment leased under capital leases are recorded
as equipment under capital leases along with a liability for the offsetting
obligation under capital leases. Equipment under capital leases is
depreciated over the lease term and the obligation is reduced as monthly
lease payments are made. Payments under operating leases are recorded as
rent expense each month as lease payments are made.
Income Taxes
Under the provisions of the Internal Code and applicable state laws, the
LLC is only subject to taxation of income on the profits and losses from
the TRS tenant operations. The tax consequences of other LLC revenues and
expenses, unrelated to the operation of the Property, will accrue to the
Members. Certain of these other revenues and expenses may be treated
differently in the LLC's income tax return than in the accompanying
consolidated financial statements. Therefore, amounts reported in the
consolidated financial statements may not be the same as reported in the
Members' income tax returns.
The LLC accounts for federal and state income taxes on its TRS tenant using
the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the consolidated financial statements carrying amounts of existing
assets and liabilities and their respective tax bases and operating losses
and tax-credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Revenue Recognition
Revenues are recognized as the services are provided. Cash received from
customers for events occurring after December 31, 2002 have been recorded
as deposits and is included in accounts payable and accrued expenses in the
accompanying consolidated statement of financial position. Advanced
deposits of approximately $1,082,000 and $0 are included in the
accompanying consolidated statements of financial position as of December
31, 2002 and 2001, respectively.
Advertising and Promotion Costs
The costs of advertising, promotional and marketing programs are charged to
operations in the year incurred and are included as sales and marketing
expenses in the accompanying consolidated statement of operations.
Advertising, promotional and marketing costs totaled $446,670 and $94,615
for the years ended December 31, 2002 and 2001, respectively.
Derivative Financial Instruments
The LLC follows FAS 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. FAS 133 established accounting and reporting
standards for derivative instruments and for hedging activities by
requiring all derivatives to be measured at fair value and recognized in
the consolidated statement of financial position. Gains or losses resulting
from changes in fair value of derivatives are recognized in earnings or
recorded in other comprehensive income, and recognized in the consolidated
statement of operations when the hedged item affects earnings, depending on
the purpose of the derivatives and whether they qualify for hedging
accounting treatment (the ineffective portion, if any, of all hedges is
recognized in current prior earnings). The LLC does not enter into or hold
derivatives for trading or speculative purposes.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Impairment of Long-Lived Assets
Effective January 1, 2002 the Company adopted Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement requires that a long-lived asset be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. The assessment is based on the carrying amount of
the asset at the date it is tested for recoverability. An impairment loss
is recognized when the carrying amount of a long-lived asset exceeds its
fair value. If an impairment is recognized, the adjusted carrying amount of
a long-lived asset is its new cost basis. The statement also requires that
the results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a discontinued
operation.
3. Property, Construction in Progress and Equipment
Property, construction in progress and equipment consist of the following at
December 31, 2002 and 2001:
2002 2001
-------------- --------------
Land and land improvements $ 63,466,377 $ 26,106,831
Buildings 162,147,269 --
Furniture, fixtures and equipment 46,884,567 344,709
Equipment under capital leases 214,104 214,104
-------------- --------------
272,712,317 26,665,644
Less: accumulated depreciation (2,786,920) (449,167)
Construction in progress -- 108,379,557
-------------- --------------
$ 269,925,397 $ 134,596,034
============== ==============
Accumulated depreciation for equipment under capital leases was $71,368 and
$49,244 for the year and period ended December 31, 2002 and 2001,
respectively.
4. Mortgage Note Payable
In December 2000, the LLC entered into a $179,000,000 construction loan
with an institutional lender to finance construction costs. The
construction loan is secured by a first mortgage and lien on the Property
and all other LLC assets. The construction loan has a seven-year term and
is due on December 15, 2007. Interest only payments are due quarterly on
each of March 15, July 15, September 15, and December 15 with the entire
principal balance due at maturity. The amount of debt reported in the
accompanying consolidated statements of financial position approximates the
fair value of such debt as of December 31, 2002 and 2001.
A portion of the construction loan bears interest at an annual rate of 185
basis points above three-month London Interbank Offered Rate (the "LIBOR").
The LLC has entered into a seven-year interest rate swap agreement (the
"Swap") to effectively convert the variable rate portion of this mortgage
to a fixed interest rate of 6.025% per annum. The LLC designates the Swap a
hedge of specific debt instruments and recognizes interest differentials as
adjustments to interest expense as the differentials occur. The
counterparty to this agreement is a major financial institution. For the
period ended December 31, 2002 and 2001, the LLC recorded $9,724,228 and
$3,191,238, respectively, in other comprehensive loss related to the fair
value of the Swap. The blended interest rate on the aggregate principal
amount of the $179,000,000 mortgage notes, including interest rate, swap
costs, premiums for a debt service insurance policy, and amortization of
loan costs is approximately 10.13% per annum.
5. Other Notes Payable
The LLC and Marriott entered into a series of agreements whereby Marriott
International Capital Corporation has agreed to make four loans to the LLC:
mezzanine loan A (the "Mezzanine Loan"); mezzanine loan B (the "Liquidity
Facility Loan"); mezzanine loan C (the "Project Cost Facility Loan") and
mezzanine loan D (the "Senior Loan Guaranty Loan").
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
A description of each loan is as follows:
Maximum
Loan Purpose of Loan Capacity Term Interest Rate
-------------- ------------------------------- ------------------------ ------------ --------------------------
Mezzanine Loan Fund contributions of $57,134,000 Seven years Election of either a
Marriott to allow Marriott to floating rate or a fixed
pay a portion of development rate (not to exceed
13.5%)*
Liquidity Fund priority shortfalls from Lesser of $32,500,000 Seven years Election of either a
Facility Loan the operations of the Property and 50% of Class A floating rate or a fixed
Members Contributions rate (not to exceed
cumulative priority 13.5%) *
shortfalls
Project Cost Fund renovation costs in $30,000,000 Seven years 8% per annum
Facility Loan excess of project budget
Senior Loan Fund any deficiency in the No Limit ** Seven years 8% per annum
Guaranty Loan payment of monthly debt
service payments under the
Mortgage Loan
* The managing member had the option to elect either the floating or fixed
interest rate at the time of the initial advance. The floating rate is
equal to one-month LIBOR plus 700 basis points and the fixed rate is equal
to US Treasury Security, with a maturity closest to the Mezzanine Loan and
the Liquidity Facility Loan maturity date, plus 700 basis points. Based on
this election, these loans bear interest at an annual rate of 8.876%.
** The Senior Loan Guaranty Loan has no limit on the amount that can be
borrowed until such time as the debt service coverage ratio achieves 1.125
percent. Once the debt service coverage ratio reaches 1.125 percent, future
fundings under the Senior Loan Guaranty Loan are limited to $15 million.
At December 31, 2002 and 2001, $5,445,863 and $2,289,421, respectively,
were outstanding under the Liquidity Facility Loan and $45,729,948 and $0,
respectively, were outstanding under the Mezzanine Loan. No amounts were
outstanding under the Project Cost Facility Loan or the Senior Loan
Guarantee Loan at December 31, 2002 or 2001. Collateral for these loans is
restricted to assets relating to construction accounts, as defined by the
Security Agreement. Each of the loans are due in December 2007.
Marriott International Capital Corporation has agreed to loan up to
$2,321,000 to the LLC for additional improvements relating to the future
occupancy of Marriott Vacation Club (see Note 7). The loan will bear
interest at 8% per annum, with the principal due on December 15, 2008. As
of December 31, 2002, the Company had not received this amount, however,
the Company expects funding to occur in early 2003.
6. Leases
The LLC is a lessee of various types of equipment used in operating the
Property. The LLC's leases are categorized as operating or capital leases
based upon the terms in the lease agreements.
The LLC leases two parcels of land from the State of Arizona under two
separate lease agreements, on which the luxury resort and the two golf
courses are located. These operating leases are effective until July 2092
and require escalating base rents. Rental payments are due annually. Total
rent expense under all operating leases, including the land leases, for the
years ended December 31, 2002 and 2001, was $647,193 and $62,707,
respectively. These amounts have been included in property operations and
maintenance in the accompanying consolidated statements of operations for
the years ended December 31, 2002 and 2001.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Future minimum rental payments required under capital leases together with
the present value of the net minimum lease payments as of December 31,
2002:
2003 $ 57,600
2004 57,600
2005 80,000
---------------
Total future minimum
lease payments 195,200
Less: interest (22,284)
---------------
Present value of net
minimum lease payments 172,916
Less: current portion (41,188)
---------------
$ 131,728
===============
Future minimum lease rental payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess of one year
as of December 31, 2002:
2003 $ 405,424
2004 405,424
2005 405,424
2006 405,424
2007 405,424
Thereafter 77,325,015
--------------
Total $ 79,352,135
==============
7. Transactions with Related Parties
Hotel Management Agreement
--------------------------
The Company entered into an agreement with an affiliate of Marriott
International, Inc. (the "Manager") to manage the Property. Under terms of
the agreement, the Manager operates the Property in return for a fixed
management fee of 3 percent of gross revenues. The Manager also earns an
incentive management fee ranging from 20 percent to 50 percent of operating
cash flow. The LLC incurred management fees of $209,649 and $88,120 during
the years ended December 31, 2002 and 2001, respectively.
Development Agreements
----------------------
The Company entered into agreements for $9 million with affiliates of the
managing member and Marriott to manage the construction of the Property.
Under these agreements, approximately $3.0 and $5.8 million has been paid
during the years ended December 31, 2002 and 2001, respectively. These
amounts have been capitalized to the cost of property and equipment in the
accompanying consolidated statements of financial position.
DESERT RIDGE RESORT PARTNERS, LLC AND SUBSIDIARIES - CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
Other
-----
In connection with the development of a Marriott Vacation Club resort (the
"MVC Resort") within close proximity to the Property, the LLC has committed
to lease office and lobby space to the MVC Resort for the purposes of the
establishment of a gallery and the promotion of Marriott Vacation Club
International. The term of the lease is eight years from the Opening Date
of the Property and will result in annual rental income of approximately
$389,000. During the years ended December 31, 2002 and 2001, the Company
received $32,435 and $0 in connection with this lease.
The LLC has entered into various other agreements with Marriott, or
subsidiaries thereof, to provide services such as marketing support,
reservation services, and other services customary to the operation of a
national brand hotel concept. Amounts incurred for the year and period
ended December 31, 2002 and 2001 were $51,570 and $0, respectively, and
have been included in cost of sales for rooms, food and beverage, and other
operating departments in the accompanying consolidated statements of
operations.
As of December 31, 2002 and 2001, amounts due to Marriott and affiliates
was $5,159,727 and $1,060,934, respectively and is included in due to
affiliate in the accompanying consolidated statements of financial
position.
As of December 31, 2002 and 2001, amounts due to Marriott were $3,320,900
and $52,443, respectively. These amounts are primarily due for pre-opneing
expense reimbursements.
8. Income Taxes
The components of the deferred taxes recognized in the accompanying
consolidated statements of financial position at December 31, 2002 and 2001
are as follows:
2002 2001
--------------- ---------------
Deferred tax asset:
Net operating loss $ 2,821,000 $ 163,500
Deferred tax liability:
Tax over book depreciation (514,000) (2,000)
Valuation allowance (2,307,000) (161,500)
--------------- ---------------
$ -- $ --
=============== ===============
The types of temporary differences between the tax bases of assets and
liabilities and their financial statement reporting amounts are
attributable principally to depreciation and net operating losses. The TRS
tenant has net operating loss carry-forwards for federal and state purposes
of approximately $5,971,000 and $480,000 as of December 31, 2002 and 2001,
respectively, which is available to offset future taxable income. The net
operating loss carry-forwards expire in 2021. The Company has not recorded
this potential future benefit because its TRS subsidiary does not have
sufficient historical earnings on which to base a potential future benefit.
9. Commitments and Contingencies
From time to time the Company may be exposed to litigation arising from
operations of its business in the ordinary course of business. Management
does not believe that resolution of these matters will have a material
adverse impact on the Company's financial condition or results of
operations.
* * * * *
WB Resort Partners, L.P. and Subsidiaries
Consolidated Financial Statements
As of and for the year ended December 31, 2002
and the period from July 27, 2001 (inception)
through December 31, 2001
Report of Independent Certified Public Accountants
To the Partners of
WB Resort Partners, L.P.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of partners' capital and of cash flows
present fairly, in all material respects, the financial position of WB Resort
Partners, L.P. and its subsidiaries at December 31, 2002 and 2001 and the
results of their operations and their cash flows for the year ended December 31,
2002 and the period from July 27, 2001 (inception) through December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS, LLP
Orlando, Florida
February 14, 2003
WB RESORT PARTNERS, LP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,2002 AND 2001
December 31,
2002 2001
--------------- ---------------
Assets
Current assets
Cash and cash equivalents $ 3,309,558 $ 2,865,747
Accounts receivable, net of allowance for doubtful accounts of 3,986,276 1,208,991
$72,508 and $78,413
Prepaid expenses and other current assets 861,371 1,567,735
--------------- ---------------
Total current assets 8,851,377 5,642,473
Restricted cash 11,662,018 77,010
Property, construction and progress and equipment, less
accumulated depreciation of $12,012,790 and $2,671,883 198,140,180 188,519,031
Loan costs, less accumulated amortization of $860,569 and $236,659 2,271,970 2,789,808
--------------- ---------------
Total assets $ 220,231,373 $ 197,028,322
=============== ===============
Liabilities and Partners' Capital
Current liabilities
Accounts payable and accrued expenses $ 9,814,084 $ 5,428,103
Construction costs payable, including retainage payable
of $112,758 and $1,856,537 1,716,283 10,222,873
Distribution payable 2,463,838 1,213,418
Current portion of capital lease obligation 1,081,799 1,010,766
--------------- ---------------
Total current liabilities 15,076,004 17,875,160
Mortgage note payable 130,000,000 130,000,000
Other notes payable 27,798,189 7,749,752
Capital lease obligation 757,851 1,875,187
--------------- ---------------
Total liabilities 173,632,044 157,500,099
Commitments and contingencies
Partners' capital 46,599,329 39,528,223
--------------- --------------
Total liabilities and partners' capital $ 220,231,373 $ 197,028,322
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,2002 AND THE PERIOD
FROM JULY 27, 2001 (INCEPTION) TO DECEMEBER 31, 2001
2002 2001
--------------- ---------------
Revenues:
Rooms $ 35,776,082 $ 7,323,321
Food and beverage 7,427,279 1,778,843
Other operating departments 3,463,235 1,064,677
--------------- ---------------
Total revenue 46,666,596 10,166,841
Cost of sales and other expenses:
Rooms 11,741,511 3,007,678
Food and beverage 7,665,138 2,211,960
Other operating departments 1,000,286 288,779
Property operations and maintenance 14,527,007 4,379,115
Depreciation 9,340,907 2,671,883
Interest and loan cost amortization 10,381,823 3,035,605
General and administrative 3,938,931 2,780,902
Sales and marketing 5,070,257 1,297,073
Management fees 1,398,192 304,321
--------------- ---------------
Total costs and expenses 65,064,052 19,977,316
--------------- ---------------
Net loss $ (18,397,456) $ (9,810,475)
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
DECEMBER 31,2002 AND 2001
General Partner Limited Partners Total
--------------- --------------- ----------------
Balance, July 27, 2001 (inception) $ 51,077 $ 51,025,423 $ 51,076,500
Distributions (1,738) (1,736,064) (1,737,802)
Net loss (9,810) (9,800,665) (9,810,475)
--------------- --------------- ----------------
Balance, December 31, 2001 $ 39,529 $ 39,488,694 $ 39,528,223
=============== =============== ================
Contributions $ 33,924 $ 33,889,576 $ 33,923,500
Distributions (8,455) (8,446,483) (8,454,938)
Net loss (18,397) (18,379,059) (18,397,456)
--------------- --------------- ----------------
Balance, December 31, 2002 $ 46,601 $ 46,552,728 $ 46,599,329
=============== =============== ================
The accompanying notes are an integral part of these consolidated financial statements.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,2002 AND THE
PERIOD FROM JULY 27, 2001 (INCEPTION) TO DECEMBER 31, 2001
2002 2001
--------------- ---------------
Cash flows from operating activities:
Net Loss $ (18,397,456) $ (9,810,475)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation 9,340,907 2,671,883
Amortization of loan costs 623,910 236,659
Bad debt expense 80,802 -
Changes in operating assets and liabilities:
Accounts receivable (2,858,087) 1,842,000
prepaid expenses and other current assets 706,364 717,867
Accounts payable and accrued expenses 4,385,981 1,303,341
--------------- ---------------
Net cash used in operating activities (6,117,579) (3,038,725)
--------------- ---------------
Cash flows from investing activities:
Additions to property and equipment (27,468,646) (178,913,348)
Increase in restricted cash (11,585,008) (77,010)
--------------- ---------------
Net cash used in investing activities (39,053,654) (178,990,358)
--------------- ---------------
Cash flows from financing activities:
Proceeds from mortgage loan - 130,000,000
Proceeds from other notes payable 20,048,437 7,749,752
Principal payments on capital lease obligations (1,046,303) (380,571)
Capital contributions from partners 33,923,500 51,076,500
Distributions to partners (7,204,518) (524,384)
Payment of loan costs (106,072) (3,026,467)
--------------- ---------------
Net cash provided by financing activities 45,615,044 184,894,831
--------------- ---------------
Net increase in cash and cash equivalents at end of period 443,811 2,865,747
Cash, beginning of period 2,865,747 -
--------------- ---------------
Cash, end of period $ 3,309,558 $ 2,865,747
=============== ===============
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest, net of capitalized interest of $5,431,858
and $2,227,403 $ 8,772,225 $ 3,035,605
=============== ===============
Supplementary disclosure of non-cash transactions:
Equipment acquired under capital lease obligations $ - $ 3,266,527
=============== ===============
Distributions declared but not paid to Partners $ 2,463,838 $ 1,213,419
=============== ===============
Construction costs payable included in property and equipment $ 1,716,283 $ 10,222,873
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,2002 AND 2001
1. Business
Organization
WB Resort Partners, L.P. (the "Partnership") was organized pursuant to the
laws of the State of Delaware on July 27, 2001. WBM Resort, L.P., WBR
Parent, LLC and WBR Tenant Corporation are wholly owned subsidiaries of the
Partnership. The Partnership's general partner is CNL WBR GP Corp. (the
"General Partner") and the limited partners are CNL WBR Investor, L.P.,
Marriott International, Inc. ("Marriott") and Waikiki Beach Resort, Ltd.
(collectively, the "Limited Partners").
The Partnership was formed to own and operate a resort located in Honolulu,
Hawaii (the "Property"). The Partnership negotiated a fixed fee agreement
with a contractor for $65 million to renovate the Property. As of December
31, 2002, renovations were almost complete. The Property's day-to-day
activities are managed by an affiliate of Marriott, however, all partners
must agree to key decisions affecting the Property.
The structure of the Partnership and its subsidiaries is designed to allow
the parent of its majority owner to continue to qualify as a real estate
investment trust, which is generally not subject to federal income taxes.
In keeping with this objective, the Partnership operates its Property
through a taxable REIT subsidiary ("TRS"), as permitted by the REIT
Modernization Act of 1999.
The General Partner and Limited Partners hold a 0.1% and 99.9% interest,
respectively, in the Partnership and contributed $33,924 and $33,889,577,
respectively, during 2002, and $51,077 and $51,025,424, respectively,
during 2001, in order to obtain the following percentage interests:
Partner Percentage Interest
General Partner 0.1%
CNL WBR Investor, LP 48.9%
Waikiki Beach Resort, Ltd. 36.0%
Marriott 15.0%
The Partnership relies on capital contributions from the General Partner
and Limited Partners and borrowings under loans to fund renovations,
capital expenditures, operating losses and negative cash flows. Cash flow
deficits are possible in the future, which may require additional funding.
The Partners are committed to fund such shortfalls if they arise.
Allocations and Distributions
Net operating profits and net operating losses are allocated to the General
and Limited Partners in accordance with their respective ownership
interests.
In addition, the General Partner and Limited Partners are entitled to a
return of 11.5% per annum (the "11.5% Preferred Return"). The 11.5%
cumulative Preferred Return is to be paid quarterly to each partner based
on the capital accounts of each partner during the quarter. As of December
31, 2002 and 2001, the Partnership had distributions payable totaling
$2,463,838 and $1,213,418, respectively.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,2002 AND 2001
2. Summary of Significant Accounting Policies
A summary of significant accounting principles and practices used in the
preparation of the financial statements follows:
Basis of Financial Statement Presentation
The Partnership prepares its financial statements in conformity with
accounting principles generally accepted in the United States of America.
These principles require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
WB Resort Partners, L.P. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Reclassification
Certain items in the prior year's consolidated financial statements have
been reclassified to conform with the 2002 presentation. These
reclassifications had no effect on Members' Capital or results of
operations.
Cash and Cash Equivalents
The Partnership considers all amounts held in highly liquid instruments
with original purchased maturities of three months or less to be cash
equivalents. Cash and cash equivalents consist primarily of demand deposit
accounts. Management of the Partnership believes the credit risk associated
with cash and cash equivalents to be low due to the quality of the
financial institutions in which these assets are held.
Certain amounts of cash are restricted for maintenance and replacement of
furniture, fixtures, and equipment at the Partnership's Property of which
$694,172 is classified as restricted cash in the accompanying consolidated
balance sheet. These amounts are calculated as a certain percentage of
sales in accordance with the hotel management agreement. The remaining
amount of restricted cash represents cash which is restricted for budgeted
renovations of December 31, 2002.
Inventory
Inventory consists primarily of food and beverage inventory and operating
supplies and is accounted for using the first in, first out method and is
stated at the lower of cost or market. Inventory is recorded in prepaid
expenses and other current assets in the accompanying consolidated balance
sheet.
Property, Construction in Progress and Equipment
Property and Equipment is stated at cost and includes building, land
improvements and furniture, fixtures and equipment. Building, land
improvements and equipment is depreciated on the straight-line method over
the assets' estimated useful lives of 40, 15 and 7 years, respectively.
Expenditures for major renewals and betterments are capitalized and
depreciated over the related assets' estimated useful lives. Expenditures
for repairs and maintenance are expensed when incurred. Interest and real
estate taxes incurred relating to renovation of the resort and amenities
are capitalized to construction in progress during the active renovation
period.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,2002 AND 2001
Deferred Loan Costs
Loan costs, primarily loan origination and related fees, are capitalized
and are being amortized over the term of the loan using the effective
interest method.
Revenue Recognition
Revenues are recognized as the services are provided. Cash received from
customers for events occurring after each year end have been recorded as
deposits in the accompanying consolidated balance sheets. Advanced deposits
of approximately $668,315 and $399,864 are included in the accompanying
consolidated balance sheet as of December 31, 2002 and 2001, respectively.
Advertising and Promotion Costs
The costs of advertising, promotional and marketing programs are charged to
operations in the year incurred and are included as sales and marketing
expenses in the accompanying statement of operations. Advertising,
promotional and marketing costs totaled $5,070,257 and $1,297,073 for the
year and period ended December 31, 2002 and 2001, respectively.
Leases The Partnership has entered into capital and operating leases for
land and equipment used at the Property. Equipment leased under capital
leases is recorded as equipment on the accompanying consolidated balance
sheet with a liability for the corresponding obligation under the lease
agreement. Equipment under capital leases are depreciated over the useful
life of the equipment and the obligation is reduced as monthly lease
payments are made. Payments under operating leases are recorded as rent
expense as lease payments are made.
Income Taxes
Under the provisions of the Internal Revenue Code and applicable state
laws, the Partnership is only subject to taxation of income on the profits
and losses from the TRS tenant operations. The tax consequences of other
Partnership revenues and expenses, unrelated to the operation of the
Property, will accrue to the partners. Certain of these other revenues and
expenses may be treated differently in the Partnership's income tax return
than in the accompanying consolidated financial statements. Therefore,
amounts reported in the consolidated financial statements may not be the
same as reported in the Partners' income tax returns.
The Partnership accounts for federal and state income taxes on its TRS
tenant using the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statements carrying amounts
of existing assets and liabilities and respective tax bases and operating
losses and tax-credit carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,2002 AND 2001
Impairment of Long-Lived Assets
Effective January 1, 2002 the Partnership adopted Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". This statement requires that a long-lived asset be
tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. The assessment is based on the carrying amount of
the asset at the date it is tested for recoverability. An impairment loss
is recognized when the carrying amount of a long-lived asset exceeds its
fair value. If an impairment is recognized, the adjusted carrying amount of
a long-lived asset is its new cost basis. The statement also requires that
the results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a discontinued
operation.
3. Property, Construction in Progress and Equipment
Property, construction in progress and equipment consist of the following
at December 31, 2002 and 2001:
2002 2001
--------------- ---------------
Building $ 121,436,927 $ 121,436,927
Land improvements 2,265,081 2,265,132
Furniture, fixtures and equipment 23,546,112 20,856,769
Equipment under capital leases 3,234,183 2,885,955
--------------- ---------------
150,482,303 147,444,783
Less: accumulated depreciation (12,012,790) (2,671,883)
Construction in progress 59,670,667 43,746,131
--------------- ---------------
$ 198,140,180 $ 188,519,031
=============== ===============
Accumulated depreciation for equipment under capital leases was $1,492,397
and $380,572 as of December 31, 2002 and 2001, respectively.
4. Mortgage Note Payable
In July 2001, the Partnership entered into a $130,000,000 mortgage loan
with an institutional lender to finance a portion of the Property acquired
and future renovation costs. The mortgage is secured by a first mortgage
and lien on the building and all other assets. The loan bears interest at
8.53% per annum and matures on August 15, 2006. Interest only payments are
due monthly through maturity. For the year and period ended December 31,
2002 and 2001, the Partnership incurred $9,621,688 and $2,798,946,
respectively in interest expense. The amount of debt reported in the
accompanying consolidated balance sheets approximates the fair value of
such debt as of December 31, 2002 and 2001.
- Intentionally Left Blank -
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,2002 AND 2001
5. Other Notes Payable
On July 27, 2001, the Partnership and Marriott entered into a loan
agreement whereby Marriott has agreed to provide three loans to the
Partnership: a liquidity facility loan ("Mezz Loan A"); a senior loan
guaranty ("Mezz Loan B"); and a cost overrun loan ("Mezz Loan C"). A
description of each loan is as follows:
Maximum
Loan Purpose of Loan Capacity Term Interest Rate
------------------ --------------------------- ---------------- -------------- ---------------------
Mezz Loan A Fund priority shortfalls $20,000,000 Five years LIBOR plus 700
from the operations of the basis points (not
Property to exceed 13.5%)
Mezz Loan B Fund any deficiency in the No limit Five years LIBOR plus 700
payment of monthly debt basis points (not
service payments under the to exceed 13.5%)
Mortgage Loan
Mezz Loan C Fund renovation costs in $5,000,000 Five years LIBOR plus 700
excess of project budget basis points (not
to exceed 13.5%)
Each of the three loans are due July 2006. At December 31, 2002,
$12,969,406, $14,828,783 and $0 were outstanding under the Mezz Loan A,
Mezz Loan B and Mezz Loan C, respectively. As of December 31, 2001,
$3,258,258, $4,491,494 and $0 were outstanding under the Mezz Loan A, Mezz
Loan B and Mezz Loan C, respectively. The interest rate on the Mezz Loan A
and Mezz Loan B was 8.382 percent and 8.876 percent at December 31, 2002
and 2001, respectively.
6. Leases
The Partnership is a lessee of various types of equipment used in operating
the Property. Leases are categorized as operating or capital leases based
upon the terms in the lease agreements.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,2002 AND 2001
The following is a schedule by years of future minimum rental payments
required under capital lease obligations together with the present value of
the net minimum lease payments as of December 31, 2002:
2003 $ 1,203,292
2004 759,944
2005 16,832
---------------
Total future minimum lease payments 1,980,068
Less: interest (140,418)
---------------
Present value of net minimum
lease payments 1,839,650
Less: current portion (1,081,799)
---------------
$ 757,851
===============
The Partnership leases two parcels of land under ground leases, on which
the Property is currently being renovated. These operating leases are
effective until 2080 and 2050, respectively. One of the land leases has
escalating base rents from 2001 to 2008. The base rents from 2008 through
2080 and 2050, respectively, will never be less than the 2008 base rent and
will increase every five years by the consumer price index. The minimum
annual rental expense has been straight-lined over the life of these
leases. Both leases contain percentage rent calculations based on
percentages of gross revenues, as defined. Rent expense, including accrued
rental expense and lease taxes for the year ended December 31, 2002 was
$4,699,049. Rent expense, including accrued rental expense for the period
ended December 31, 2001 was $2,289,952. Percentage rent for the year and
period ended December 31, 2002 and 2001 was $128,447 and $4,781,
respectively. These amounts have been included in property operations and
maintenance in the accompanying consolidated statements of operations as of
the year and period ended December 31, 2002 and 2001, respectively.
Future minimum lease rental payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year
as of December 31, 2002 are as follows:
2003 $ 3,784,000
2004 4,794,000
2005 4,794,000
2006 4,794,000
2007 4,794,000
Thereafter 342,042,000
---------------
$ 365,002,000
===============
7. Transactions with Related Parties
Hotel Management Agreement
The Partnership entered into an agreement with an affiliate of Marriott
International, Inc. (the "Manager") to manage the Property. Under terms of
the agreement, the Manager operates the Property in return for a fixed
management fee of 3 percent of gross revenues. The Manager also earns an
incentive management fee equal up to 50 percent of operating profits in
excess of certain payment thresholds. The Partnership incurred management
fees of $1,398,192 and $304,321 during the year and period ended December
31, 2002 and 2001, respectively.
WB RESORT PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31,2002 AND 2001
Development Agreements
The Partnership entered into agreements with affiliates of the General
Partner and Marriott to manage the renovation of the Property for $5
million. All amounts were paid under these agreements as of December 31,
2001 and no additional amounts were incurred during 2002.
Other
The Partnership has entered into various other agreements with related
parties to provide services such as marketing support, reservation
services, and other services customary to the operation of a national brand
hotel concept. Amounts incurred for the year and period ended December 31,
2002 and 2001 were $740,874 and $188,078, respectively, and have been
included in cost of sales for room, food and beverage, and other operating
departments in the accompanying consolidated statement of operations.
As of December 31, 2002 and 2001, amounts due from Marriott and affiliates
were $0 and $898,117.
8. Income Taxes
The components of the deferred taxes recognized in the accompanying
consolidated balance sheet at December 31, 2002 and 2001 are as follows:
2002 2001
--------------- ---------------
Deferred tax assets:
Net operating loss $ 6,583,000 $ 1,376,000
Accrued rent 562,000 179,000
Deferred tax liabilities:
Tax over book depreciation (1,921,000) --
Valuation allowance (5,224,000) (1,555,000)
--------------- ---------------
$ -- $ --
=============== ===============
The types of temporary differences between the tax basis of assets and
liabilities and their consolidated financial statement reporting amounts
are attributable principally to depreciation differences, accrued expenses
and net operating losses. The TRS tenant had net operating loss
carryforwards for federal and state purposes of approximately $11,250,000
and $4,050,000 as of December 31, 2002 and 2001, respectively, which is
available to offset future operating income. The net operating loss
carryforward expires in 2021. The Partnership has not recorded this
potential future benefit because its TRS subsidiary does not have
sufficient historical earnings on which to base a potential future benefit.
9. Commitments and Contingencies
From time to time the Partnership may be exposed to litigation arising from
operations of its business in the ordinary course of business. Management
does not believe that resolution of these matters will have a material
adverse impact on the Partnership's financial condition or results of
operations.
* * * * *
The following summarized financial information is filed as part of this
report as a result of Marriott guaranteeing lease and loan payments for
several of the Company's tenants whose aggregate carrying value represents
more than 20 percent of the Company's total assets for the year ended
December 31, 2002. The summarized financial information presented for
Marriott as of January 3, 2003 and December 28, 2001, and for each of the
years ended January 3, 2003, December 28, 2001 and December 29, 2000, was
obtained from the Form 10-K filed by Marriott with the Commission for the
year ended January 3, 2003.
Marriott International, Inc. and Subsidiaries
Selected Financial Data
(in Millions, except per share data)
Consolidated Balance Sheets Data:
--------------------------------
January 3, December 28,
2003 2001
--------------- ---------------
Current Assets $ 1,744 $ 2,747
Noncurrent Assets 6,552 6,360
Current Liabilities 2,207 1,970
Noncurrent Liabilities 2,516 3,659
Stockholders' Equity 3,573 3,478
Consolidated Statements of Income Data:
--------------------------------------
Fiscal Year Fiscal Year Fiscal Year
Ended, Ended, Ended,
January 3, December 28, December 29,
2003 2001 2000
--------------- ---------------- ---------------
Gross revenues $ 8,441 $ 7,786 $ 7,911
Costs and expenses (including income tax expense) 8,164 7,550 7,432
--------------- ---------------- ---------------
Net income $ 277 $ 236 $ 479
=============== ================ ===============
Basic earnings per share $ 1.15 $ 0.97 $ 1.99
=============== ================ ===============
Diluted earnings per share $ 1.10 $ 0.92 $ 1.89
================ ================ ===============
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 6th day of
March, 2003.
CNL HOSPITALITY PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
----------------------------------
JAMES M. SENEFF, JR.
Chairman of the Board and
Co-Chief Executive Officer
(Principal Executive Officer)
By: /s/ Thomas J. Hutchison, III
----------------------------------
THOMAS J. HUTCHISON, III
President and Co-Chief Executive Officer
(Principal Executive Officer)
By: /s/ C. Brian Strickland
----------------------------------
C. BRIAN STRICKLAND
Executive Vice President
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ James M. Seneff, Jr. Chairman of the Board and March 6, 2003
------------------------------ Co-Chief Executive Officer
JAMES M. SENEFF, JR. (Principal Executive Officer)
/s/ Robert A. Bourne Treasurer March 6, 2003
------------------------------
ROBERT A. BOURNE
/s/ Thomas J. Hutchison, III President and Co- March 6, 2003
------------------------------ Chief Executive Officer
THOMAS J. HUTCHISON, III (Principal Executive Officer)
/s/ C. Brian Strickland Executive Vice President, March 6, 2003
------------------------------ (Principal Financial and
C. BRIAN STRICKLAND Accounting Officer)
/s/ Matthew W. Kaplan Director March 6, 2003
------------------------------
MATTHEW W. KAPLAN
/s/ Charles E. Adams Independent Director March 6, 2003
------------------------------
CHARLES E. ADAMS
/s/ Lawrence A. Dustin Independent Director March 6, 2003
------------------------------
LAWRENCE A. DUSTIN
/s/ Craig M. McAllaster Independent Director March 6, 2003
------------------------------
CRAIG M. MCALLASTER
CNL Hospitality Properties, Inc.
CERTIFICATIONS
--------------
I, James M Seneff, Jr, certify that:
1. I have reviewed this annual report on Form 10-K of CNL Hospitality
Properties, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 6, 2003
/s/ James M. Seneff, Jr
- -----------------------
James M. Seneff, Jr.
Chairman of the Board and Co-Chief Executive Officer
(Principal Executive Officer)
CNL Hospitality Properties, Inc.
CERTIFICATIONS
--------------
I, Thomas J. Hutchison, III certify that:
1. I have reviewed this annual report on Form 10-K of CNL Hospitality
Properties, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 6, 2003
/s/ Thomas J. Hutchison, III
- ------------------------------------
Thomas J. Hutchison, III
President and Co-Chief Executive Officer
(Principal Executive Officer)
CNL Hospitality Properties, Inc.
CERTIFICATIONS
--------------
I, C. Brian Strickland certify that:
1. I have reviewed this annual report on Form 10-K of CNL Hospitality
Properties, Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
e) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
f) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
e) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
f) any fraud, whether or not material, that involves management or other
employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 6, 2003
/s/ C. Brian Strickland
- ------------------------------
C. Brian Strickland
Executive Vice President
(Principal Financial and Accounting Officer)
CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (amounts in thousands)
December 31, 2002
Properties the Company
has Invested in Under
Operating Leases:
Costs Capitalized
Initial Costs Subsequent to Acquisition
------------------------------------------ ---------------------------
Carrying
Encumbrances Land Buildings Equipment Improvements Costs
------------ ------------ ------------ ------------ ------------ ------------
Residence Inn by Marriott:
Atlanta, Georgia $ -- $ 1,907 $ 13,459 $ 1,270 $ 178 $ --
Duluth, Georgia -- 1,019 10,017 1,141 137 --
Orlando, Florida -- 3,533 -- -- 31,346 --
Merrifield, Virginia -- 2,621 15,499 2,011 (78) --
Palm Desert, California -- 2,187 14,212 1,375 37 --
Las Vegas, Nevada 16,997 3,784 27,651 954 3,636 --
Plano, Texas 5,654 1,409 9,478 494 1,373 --
Phoenix, Arizona 10,121 2,215 18,061 852 2,191 --
Salt Lake City, Utah -- 2,330 11,659 1,480 13 --
San Diego, California -- 2,002 12,924 1,701 29 --
Newark, California 1,365 3,871 23,883 1,034 --
Courtyard by Marriott:
Alpharetta, Georgia -- 2,460 10,916 1,392 18 --
Edison, New Jersey -- 2,770 -- -- 13,457 --
Oakland, California 1,025 3,239 17,471 1,125 17 --
Orlando, Florida 17,426 9,025 24,583 4,285 61 --
Overland Park, Kansas -- 1,419 13,014 2,317 22 --
Palm Desert, California -- 1,489 11,269 1,599 78 --
Philadelphia, Pennsylvania 40,527 7,409 55,820 5,160 412 --
Plano, Texas 6,394 1,687 10,088 552 1,487 --
Scottsdale, Arizona 10,465 2,869 15,936 745 2,062 --
Seattle, Washington 18,058 7,552 27,621 1,145 3,854 --
Weston, Florida 16,441 1,810 -- -- 14,274 --
Basking Ridge, New Jersey 1,788 3,946 31,987 1,892 -- --
Newark, California 1,275 3,787 21,273 1,878 -- --
Foothill Ranch, California 4,839 3,446 -- -- 919 --
Doubletree:
Arlington, Virginia -- 7,854 57,979 4,509 3,783 --
Marriott Suites:
Dallas, Texas 16,948 2,778 27,739 1,404 3,742 --
Marriott Hotel:
Bridgewater, New Jersey 31,082 3,821 55,249 5,207 -- --
SpringHill Suites:
Centreville, Virginia -- 1,482 9,432 1,223 12 --
Charlotte, North Carolina -- 1,603 9,307 1,588 (138) --
Durham, North Carolina -- 1,040 6,925 1,401 13 --
Gaithersburg, Maryland -- 2,592 11,931 1,683 (61) --
Orlando, Florida 17,863 8,750 26,381 3,717 20 --
Richmond, Virginia 518 845 9,368 831 (44) --
Manhattan Beach, California 1,000 3,889 16,288 998 -- --
Plymouth Meeting, Pennsylvania 1,350 3,606 23,874 1,237 -- --
TownePlace Suites:
Mount Laurel, New Jersey -- 1,224 6,395 623 2 --
Newark, California -- 2,305 10,828 1,353 25 --
Scarborough, Maine -- 919 6,109 612 20 --
Tewksbury, Massachusetts -- 1,060 7,982 591 17 --
Manhattan Beach, California 750 3,399 11,831 621 -- --
Wyndham:
Billerica, Massachusetts -- 3,838 20,471 2,255 -- --
Denver, Colorado -- 3,883 13,436 2,094 -- --
Fairfield Inn:
Orlando, Florida 15,059 9,077 20,318 3,366 9 --
------------ ------------ ------------ ------------ ------------ ------------
$ 236,945 $ 143,751 $ 748,665 $ 69,715 $ 82,923 $ --
============ ============ ============ ============ ============ ============
Gross Amount at Which Carried
at Close of Period
----------------------------------------------
Accumulated Date of Date
Land Buildings Equipment Total Depreciation Construction Acquired
------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 1,913 $ 13,504 $ 1,397 $ 16,814 $ 2,486 1997 Aug-98
1,022 10,051 1,241 12,314 1,861 1997 Aug-98
4,995 25,932 3,952 34,879 1,201 2002 Feb-02
2,610 15,431 2,012 20,053 1,625 2000 Jul-00
2,187 14,212 1,412 17,811 1,382 1999 Jun-00
4,035 30,224 1,765 36,024 2,122 1998 Feb-99
1,495 10,400 859 12,754 879 1998 Feb-99
2,384 19,564 1,371 23,319 1,522 1999 Jun-99
2,330 11,659 1,493 15,482 1,174 1999 Aug-00
2,002 12,924 1,730 16,656 1,751 1999 Dec-99
3,871 23,883 1,034 28,788 93 2002 Nov-02
2,461 10,917 1,408 14,786 1,105 2000 Aug-00
4,092 10,747 1,388 16,227 93 2002 Nov-02
3,239 17,471 1,142 21,852 598 2001 Dec-01
9,025 24,583 4,346 37,954 2,573 2000 Nov-00
1,419 13,014 2,339 16,772 1,259 2000 Feb-01
1,489 11,315 1,631 14,435 1,283 1999 Jun-00
4,416 58,823 5,561 68,800 6,960 1999 Nov-99
1,774 11,103 938 13,815 954 1998 Feb-99
2,994 17,401 1,218 21,613 1,341 1999 Jun-99
7,699 30,536 1,938 40,173 2,258 1999 Jun-99
2,711 11,884 1,490 16,085 518 2002 Feb-02
3,946 31,987 1,892 37,825 891 2001 Mar-02
3,787 21,273 1,878 26,938 133 2002 Oct-02
3,446 919 -- 4,365 -- -- --
8,232 61,006 4,887 74,125 65 1972 Dec-02
3,064 30,228 2,372 35,664 2,525 1998 Feb-99
3,821 55,247 5,207 64,275 1,240 2002 Jun=02
1,482 9,432 1,235 12,149 720 2000 Mar-01
1,458 9,307 1,595 12,360 807 2001 Mar-01
1,040 6,925 1,414 9,379 718 2000 Feb-01
2,581 11,879 1,685 16,145 1,298 2000 Jul-00
8,750 26,381 3,737 38,868 2,381 2000 Dec-00
845 9,319 836 11,000 352 2001 Dec-01
3,889 16,288 998 21,175 504 2001 Jan-02
3,606 23,874 1,237 28,717 709 2001 Jan-02
1,224 6,397 623 8,244 581 1999 Aug-00
2,305 10,828 1,378 14,511 1,008 2000 Nov-00
823 6,197 640 7,660 571 1999 Aug-00
1,060 7,982 608 9,650 661 1999 Aug-00
3,399 11,831 621 15,851 352 2001 Jan-02
3,838 20,471 2,255 26,564 2,154 1999 Jun-00
3,883 13,436 2,094 19,413 1,641 1999 Jun-00
9,077 20,318 3,375 32,770 2,059 2000 Nov-00
------------ ------------ ------------ ------------ ------------
$ 145,719 $ 817,103 $ 82,232 $1,045,054 $ 56,408
============ ============ ============ ============ ============
(1) Transactions in real estate and accumulated depreciation during 2002, 2001
and 2000 are summarized as follows:
Accumulated
Cost (2) (4) Depreciation
-------------- --------------
Properties the Company has Invested
in Under Operating Leases:
Balance, December 31, 1999 $ 113,831 $ 1,603
Acquisitions 477,131 --
Depreciation expense (3) -- 7,830
-------------- --------------
Balance, December 31, 2000 590,962 9,433
Acquisitions 137,460 --
Depreciation expense (3) -- 19,749
-------------- --------------
Balance, December 31, 2001 728,422 29,182
Acquisitions 316,632 --
Depreciation expense (3) -- 27,226
-------------- --------------
Balance, December 31, 2002 $ 1,045,054 $ 56,408
============== ==============
(2) As of December 31, 2002, 2001 and 2000, the aggregate cost of the
Properties owned by the Company and its subsidiaries for federal income tax
purposes was $1,045,054, $728,422 and $590,962, respectively. All of the
leases are treated as operating leases for federal income tax purposes.
(3) Depreciation expense is computed for buildings and equipment based upon
estimated lives of 40 and seven years, respectively.
(4) During the years ended December 31, 2002, 2001 and 2000 the Company
incurred acquisition fees totaling $3,784, $5,473 and $16,182,
respectively, paid to the Advisor. Acquisition fees are included in land
and buildings on operating leases at December 31, 2002, 2001 and 2000.
EXHIBIT INDEX
Exhibit Number
3.1 CNL American Realty Fund, Inc. Articles of Incorporation (Previously
filed as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-11 (Registration No. 333-9943) (the "1996 Form S-11") and
incorporated herein by reference.)
3.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996 Form S-11
(Registration No. 333-9943) (the "1996 Form S-11") and incorporated
herein by reference.)
3.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit 3.3
to the 1996 Form S-11 and incorporated herein by reference.)
3.4 CNL American Realty Fund, Inc. Articles of Amendment to the Amended
and Restated Articles of Incorporation dated June 3, 1998 (Previously
filed as Exhibit 3.4 to the 1996 Form S-11 and incorporated herein by
reference.)
3.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated May 26, 1999
(Previously filed as Exhibit 3.5 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-67787) (the "1998 Form
S-11") and incorporated herein by reference.)
3.6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated June 27, 2000
(Previously filed as Exhibit 3.6 to the Registrant's Registration
Statement on Form S-11 (File No. 333-89691) (the "1999 Form S-11") and
incorporated by reference).
3.7 Amendment No. 1 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.7 to the 1999 Form S-11 and
incorporated herein by reference.)
3.8 Amendment No. 2 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.8 to the 1999 Form S-11 and
incorporated herein by reference.)
3.9 Amendment No. 3 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.9 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-67124)(the "2002 Form
S-11") and incorporated herein by reference.)
3.10 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated November 15,
2002 (Previously filed as Exhibit 3.10 to the 2002 Form S-11
(Registration No. 333-67124) (the "2002 Form S-11") and incorporated
herein by reference).
4.1 CNL American Realty Fund, Inc. Articles of Incorporation (Previously
filed as Exhibit 3.1 to the 1996 Form S-11 and incorporated herein by
reference).
4.2 CNL American Realty Fund, Inc. Amended and Restated Articles of
Incorporation (Previously filed as Exhibit 3.2 to the 1996 Form S-11
and incorporated herein by reference.)
4.3 CNL American Realty Fund, Inc. Bylaws (Previously filed as Exhibit 3.3
to the 1996 Form S-11 and incorporated herein by reference.)
4.4 Form of Reinvestment Plan (Included as Exhibit 4.4 to the Registrant's
Registration Statement on Form S-11 (Registration No. 333-98047)(the
"2003 Form S-11")in the Prospectus as Appendix A and incorporated
herein by reference).
4.5 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL American Realty Fund, Inc. dated June 3, 1998
(Previously filed as Exhibit 3.4 to the 1996 Form S-11 and
incorporated herein by reference.)
4.6 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated May 26, 1999
(Previously filed as Exhibit 3.5 to the 1998 Form S-11 and
incorporated herein by reference.)
4.7 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated June 27, 2000
(Previously filed as Exhibit 3.6 to the 1999 Form S-11 and
incorporated herein by reference.)
4.8 Amendment No. 1 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.7 to the 1999 Form S-11 and
incorporated herein by reference.)
4.9 Amendment No. 2 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.8 to the 1999 Form S-11 and
incorporated herein by reference.)
4.10 Amendment No. 3 to the Bylaws of CNL Hospitality Properties, Inc.
(Previously filed as Exhibit 3.9 to the 2002 Form S-11 and
incorporated herein by reference.)
4.11 Articles of Amendment to the Amended and Restated Articles of
Incorporation of CNL Hospitality Properties, Inc. dated November 15,
2002 (Previously filed as Exhibit 3.10 to the 2002 Form S-11 and
incorporated herein by reference).
10.1 Form of Advisory Agreement between CNL Hospitality Properties, Inc.
and CNL Hospitality Corp. (Included as Exhibit 10.2 to the 2003 Form
S-11).
10.2 Indemnification Agreement between CNL Hospitality Properties, Inc. and
Lawrence A. Dustin dated February 24, 1999. Each of the following
directors and/or officers has signed a substantially similar agreement
as follows: James M. Seneff, Jr., Robert A. Bourne, G. Richard
Hostetter, J. Joseph Kruse, Richard C. Huseman, Charles A. Muller,
Jeanne A. Wall and Lynn E. Rose, dated July 9, 1997; C. Brian
Strickland dated October 31, 1998; John A. Griswold, dated January 7,
1999; Charles E. Adams and Craig M. McAllaster, dated February 10,
1999; Matthew W. Kaplan dated February 24, 1999; and Thomas J.
Hutchison III dated May 16, 2000 (Previously filed as Exhibit 10.2 to
the Form 10-Q filed on May 17, 1999 and incorporated herein by
reference.)
10.3 Agreement of Limited Partnership of CNL Hospitality Partners, LP
(Previously filed as Exhibit 10.10 to the 1996 Form S-11 and
incorporated herein by reference.)
10.4 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Gwinnett Residence Associates, LLC, relating to the Residence
Inn - Gwinnett Place (Previously filed as Exhibit 10.11 to the 1996
Form S-11 and incorporated herein by reference.)
10.5 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Gwinnett Place (Previously filed as Exhibit 10.12 to the 1996 Form
S-11 and incorporated herein by reference.)
10.6 Hotel Purchase and Sale Contract between CNL Real Estate Advisors,
Inc. and Buckhead Residence Associates, LLC, relating to the Residence
Inn - Buckhead (Lenox Park) (Previously filed as Exhibit 10.13 to the
1996 Form S-11 and incorporated herein by reference.)
10.7 Assignment and Assumption Agreement between CNL Real Estate Advisors,
Inc. and CNL Hospitality Partners, LP, relating to the Residence Inn -
Buckhead (Lenox Park) (Previously filed as Exhibit 10.14 to the 1996
Form S-11 and incorporated herein by reference.)
10.8 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
Gwinnett Place (Previously filed as Exhibit 10.15 to the 1996 Form
S-11 and incorporated herein by reference.)
10.9 Lease Agreement between CNL Hospitality Partners, LP and STC Leasing
Associates, LLC, dated August 1, 1998, relating to the Residence Inn -
Buckhead (Lenox Park) (Previously filed as Exhibit 10.16 to the 1996
Form S-11 and incorporated herein by reference.)
10.10 Master Revolving Line of Credit Loan Agreement with CNL Hospitality
Properties, Inc., CNL Hospitality Partners, LP and Colonial Bank,
dated July 31, 1998 (Previously filed as Exhibit 10.17 to the 1996
Form S-11 and incorporated herein by reference.)
10.11 Master Loan Agreement by and between CNL Hotel Investors, Inc. and
Jefferson-Pilot Life Insurance Company, dated February 24, 1999
(Previously filed as Exhibit 10.18 to the 1996 Form S-11 and
incorporated herein by reference.)
10.12 Securities Purchase Agreement between CNL Hospitality Properties,
Inc. and Five Arrows Realty Securities II L.L.C., dated February 24,
1999 (Previously filed as Exhibit 10.19 to the 1996 Form S-11 and
incorporated herein by reference.)
10.13 Subscription and Stockholders' Agreement among CNL Hotel Investors,
Inc., Five Arrows Realty Securities II L.L.C., CNL Hospitality
Partners, LP and CNL Hospitality Properties, Inc., dated February 24,
1999 (Previously filed as Exhibit 10.20 to the 1996 Form S-11 and
incorporated herein by reference.)
10.14 Registration Rights Agreement by and between CNL Hospitality
Properties, Inc. and Five Arrows Realty Securities II L.L.C., dated
February 24, 1999 (Previously filed as Exhibit 10.21 to the 1996 Form
S-11 and incorporated herein by reference.)
10.15 First Amendment to Lease Agreement between CNL Hospitality Partners,
LP and STC Leasing Associates, LLC, dated August 1, 1998, related to
the Residence Inn - Gwinnett Place, (amends Exhibit 10.8 above) and
the First Amendment to Agreement of Guaranty, dated August 1, 1998
(amends Agreement of Guaranty attached as Exhibit I to 10.8 above)
(Previously filed as Exhibit 10.8 to the Form 10-Q filed on November
10, 1999 and incorporated herein by reference.)
10.16 First Amendment to Lease Agreement between CNL Hospitality Partners,
LP and STC Leasing Associates, LLC, dated August 1, 1998, related to
the Residence Inn - Buckhead (Lenox Park) (amends Exhibit 10.9 above)
and the First Amendment to Agreement of Guaranty, dated August 1, 1998
(amends Agreement of Guaranty attached as Exhibit I to 10.9 above)
(Previously filed as Exhibit 10.9 to the Form 10-Q filed on November
10, 1999 and incorporated herein by reference.)
10.17 Lease Agreement between Courtyard Annex, L.L.C. and City Center Annex
Tenant Corporation, dated November 15, 1999, relating to the Courtyard
- Philadelphia (Previously filed as Exhibit 10.22 to the 1998 Form
S-11 and incorporated herein by reference.)
10.18 First Amended and Restated Limited Liability Company Agreement of
Courtyard Annex, L.L.C., relating to the Courtyard - Philadelphia
(Previously filed as Exhibit 10.23 to the 1998 Form S-11 and
incorporated herein by reference.)
10.19 Purchase and Sale Agreement between Marriott International, Inc., CBM
Annex, Inc., Courtyard Annex, Inc., as Sellers, and CNL Hospitality
Partners, LP, as Purchaser, dated November 15, 1999, relating to the
Courtyard - Philadelphia (Previously filed as Exhibit 10.24 to the
1998 Form S-11 and incorporated herein by reference.)
10.20 Lease Agreement between CNL Hospitality Partners, LP, and RST4 Tenant
LLC, dated December 10, 1999, relating to the Residence Inn - Mira
Mesa (Previously filed as Exhibit 10.25 to the 1998 Form S-11 and
incorporated herein by reference.)
10.21 Purchase and Sale Agreement between Marriott International, Inc.,
TownePlace Management Corporation and Residence Inn by Marriott, Inc.,
as Sellers, and CNL Hospitality Partners, LP, as Purchaser, dated
November 24, 1999, relating to the Residence Inn - Mira Mesa and the
TownePlace Suites - Newark (Previously filed as Exhibit 10.26 to the
1998 Form S-11 and incorporated herein by reference.)
10.22 Lease Agreement between CNL Hospitality Partners, LP and WYN Orlando
Lessee, LLC, dated May 31, 2000, relating to the Wyndham Denver Tech
Center (Previously filed as Exhibit 10.29 to the 1998 Form S-11 and
incorporated herein by reference.)
10.23 Lease Agreement between CNL Hospitality Partners, LP and WYN Orlando
Lessee, LLC, dated May 31, 2000, relating to the Wyndham Billerica
(Previously filed as Exhibit 10.30 to the 1998 Form S-11 and
incorporated herein by reference.)
10.24 Purchase and Sale Agreement between CNL Hospitality Corp., as Buyer,
and WII Denver Tech, LLC and PAH Billerica Realty Company, LLC, as
Sellers, and Wyndham International, Inc., relating to the Wyndham
Denver Tech Center and the Wyndham Billerica (Previously filed as
Exhibit 10.31 to the 1998 Form S-11 and incorporated herein by
reference.)
10.25 Lease Agreement between CNL Hospitality Partners, LP and RST4 Tenant
LLC, dated June 17, 2000, relating to the Courtyard - Palm Desert and
the Residence Inn - Palm Desert (Previously filed as Exhibit 10.32 to
the 1999 Form S-11 and incorporated by reference).
10.26 Purchase and Sale Agreement between PDH Associates LLC, as Seller,
and CNL Hospitality Corp., as Buyer, dated January 19, 2000, relating
to the Courtyard - Palm Desert and the Residence Inn - Palm Desert
(Previously filed as Exhibit 10.33 to the 1999 Form S-11 and
incorporated by reference).
10.27 Amendment to Purchase and Sale Agreement between PDH Associates LLC
and CNL Hospitality Corp., dated January 19, 2000, relating to
Courtyard - Palm Desert and the Residence Inn - Palm Desert (amends
Exhibit 10.26 above) (Previously filed as Exhibit 10.34 to the 1999
Form S-11 and incorporated by reference).
10.28 Assignment Agreement between CNL Hospitality Corp. and CNL
Hospitality Partners, LP, relating to the Courtyard - Palm Desert and
the Residence Inn - Palm Desert (Previously filed as Exhibit 10.35 to
the 1999 Form S-11 and incorporated by reference).
10.29 Lease Agreement between CNL Hospitality Partners, LP and RST4 Tenant
LLC, dated July 28, 2000, relating to the SpringHill Suites -
Gaithersburg (Previously filed as Exhibit 10.36 to the 1999 Form S-11
and incorporated by reference).
10.30 Purchase and Sale Agreement between SpringHill SMC Corporation, as
Seller, and CNL Hospitality Partners, LP, as Purchaser, and joined in
by Marriott International, Inc., dated June 30, 2000, relating to the
SpringHill Suites - Gaithersburg (Previously filed as Exhibit 10.37 to
the 1999 Form S-11 and incorporated by reference).
10.31 Lease Agreement between CNL Hospitality Partners, LP and RST4 Tenant
LLC, dated July 28, 2000, relating to the Residence Inn - Merrifield
(Previously filed as Exhibit 10.38 to the 1999 Form S-11 and
incorporated by reference).
10.32 Purchase and Sale Agreement between TownePlace Management Corporation
and Residence Inn by Marriott, Inc., as Sellers, and CNL Hospitality
Partners, LP, as Purchaser, and joined in by Marriott International,
Inc., dated November 24, 1999, relating to the Residence Inn -
Merrifield (Previously filed as Exhibit 10.39 to the 1999 Form S-11
and incorporated by reference).
10.33 First Amendment to Purchase and Sale Agreement between TownePlace
Management Corporation and Residence Inn by Marriott, as Sellers, and
CNL Hospitality Partners, LP, as Purchaser, and joined in by Marriott
International, Inc., dated November 24, 1999, relating to the
Residence Inn - Mira Mesa, SpringHill Suites - Gaithersburg, Residence
Inn - Merrifield, and TownePlace Suites - Newark (amends Exhibits
10.21, 10.30, and 10.32 above) (Previously filed as Exhibit 10.40 to
the 1999 Form S-11 and incorporated by reference).
10.34 Lease Agreement between CNL Hospitality Partners, LP and CCCL Leasing
LLC, dated August 18, 2000, relating to the Courtyard - Alpharetta
(Previously filed as Exhibit 10.41 to the 1999 Form S-11 and
incorporated by reference).
10.35 Lease Agreement between CNL Hospitality Partners, LP and CCCL Leasing
LLC, dated August 18, 2000, relating to the Residence Inn - Cottonwood
(Previously filed as Exhibit 10.42 to the 1999 Form S-11 and
incorporated by reference).
10.36 Lease Agreement between CNL Hospitality Partners, LP and CCCL Leasing
LLC, dated August 18, 2000, relating to the TownePlace Suites - Mt.
Laurel (Previously filed as Exhibit 10.43 to the 1999 Form S-11 and
incorporated by reference).
10.37 Lease Agreement between CNL Hospitality Partners, LP and CCCL Leasing
LLC, dated August 18, 2000, relating to the TownePlace Suites -
Scarborough (Previously filed as Exhibit 10.44 to the 1999 Form S-11
and incorporated by reference).
10.38 Lease Agreement between CNL Hospitality Partners, LP and CCCL Leasing
LLC, dated August 18, 2000, relating to the TownePlace Suites -
Tewksbury (Previously filed as Exhibit 10.45 to the 1999 Form S-11 and
incorporated by reference).
10.39 Purchase and Sale Agreement between Residence Inn by Marriott, Inc.,
Courtyard Management Corporation, SpringHill SMC Corporation and
TownePlace Management Corporation, as Sellers, CNL Hospitality
Partners, LP, as Purchaser, CCCL Leasing LLC, as Tenant, Crestline
Capital Corporation, Marriott International, Inc., and joined in by
CNL Hospitality Properties, Inc., dated August 18, 2000, relating to
the Residence Inn - Cottonwood, Courtyard - Alpharetta and Overland
Park SpringHill Suites - Raleigh, and TownePlace Suites - Mt. Laurel,
Scarborough and Tewksbury (Previously filed as Exhibit 10.46 to the
1999 Form S-11 and incorporated by reference).
10.40 First Amendment to Purchase and Sale Agreement between Residence Inn
by Marriott, Inc., Courtyard Management Corporation, SpringHill SMC
Corporation and TownePlace Management Corporation, as Sellers, CNL
Hospitality Partners, LP, as Purchaser, CCCL Leasing LLC, as tenant,
Crestline Capital Corporation, and Marriott International, Inc., dated
August 18, 2000, relating to the Residence Inn - Cottonwood, Courtyard
- Alpharetta, and Overland Park SpringHill Suites - Raleigh and
TownePlace Suites - Mt. Laurel, Scarborough and Tewksbury (Previously
filed as Exhibit 10.47 to the 1999 Form S-11 and incorporated by
reference).
10.41 Lease Agreement between CNL Hospitality Partners, LP and RST4 Tenant
LLC, dated November 4, 2000, relating to the TownePlace Suites -
Newark (Previously filed as Exhibit 10.48 to the 1999 Form S-11 and
incorporated herein by reference.)
10.42 Lease Agreement between LLB C-Hotel, L.L.C. and LLB Tenant
Corporation, dated October 12, 2000, relating to the Courtyard -
Little Lake Bryan (Previously filed as Exhibit 10.49 to the 1999 Form
S-11 and incorporated herein by reference.)
10.43 Lease Agreement between LLB F-Inn, L.L.C. and LLB Tenant Corporation,
dated October 12, 2000, relating to the Fairfield Inn - Little Lake
Bryan (Previously filed as Exhibit 10.50 to the 1999 Form S-11 and
incorporated herein by reference.)
10.44 First Amendment to Lease Agreement between LLB C-Hotel, L.L.C. and
LLB Tenant Corporation, dated November 17, 2000, relating to the
Courtyard - Little Lake Bryan (amends Exhibit 10.42 above) (Previously
filed as Exhibit 10.51 to the 1999 Form S-11 and incorporated herein
by reference.)
10.45 First Amendment to Lease Agreement between LLB F-Inn, L.L.C. and LLB
Tenant Corporation, dated November 17, 2000, relating to the Fairfield
Inn - Little Lake Bryan (amends Exhibit 10.43 above) (Previously filed
as Exhibit 10.52 to the 1999 Form S-11 and incorporated herein by
reference.)
10.46 Purchase and Sale Agreement between Marriott International, Inc., as
Seller, and CNL Hospitality Partners, LP, as Purchaser, dated
September 17, 1998, relating to the Courtyard - Little Lake Bryan, the
Fairfield Inn - Little Lake Bryan and the SpringHill Suites - Little
Lake Bryan (Previously filed as Exhibit 10.53 to the 1999 Form S-11
and incorporated herein by reference.)
10.47 Second Amendment to Lease Agreement between CNL LLB C-Hotel
Management, LP (formerly LLB C-Hotel, L.L.C.) and LLB Tenant
Corporation, dated December 15, 2000, relating to the Courtyard -
Little Lake Bryan (amends Exhibits 10.42 and 10.44 above) (Previously
filed as Exhibit 10.54 to the 1999 Form S-11 and incorporated herein
by reference.)
10.48 Second Amendment to Lease Agreement between CNL LLB F-Inn Management,
LP (formerly LLB F-Inn L.L.C.) and LLB Tenant Corporation, dated
December 15, 2000, relating to the Fairfield Inn - Little Lake Bryan
(amends Exhibits 10.43 and 10.45 above) (Previously filed as Exhibit
10.55 to the 1999 Form S-11 and incorporated herein by reference.)
10.49 Indenture Agreement among Desert Ridge Resort, LLC, as Issuer; Bank
One, National Association, as Trustee; and Financial Structures
Limited, as Insurer, dated December 15, 2000, relating to the Desert
Ridge Property (Previously filed as Exhibit 10.56 to the 1999 Form
S-11 and incorporated herein by reference.)
10.50 Form of Lease Agreement including Memorandum of Lease (Previously
filed as Exhibit 10.7 to the 2003 Form S-11 and incorporated herein by
reference).
10.51 Form of Escrow Agreement between CNL Hospitality Properties, Inc. and
SouthTrust Bank (Previously filed as Exhibit 10.1 to the 2003 Form
S-11 and incorporated herein by reference).
10.52 Form of Joint Venture Agreement (Previously filed as Exhibit 10.3 to
the 1998 Form S-11 and incorporated herein by reference).
10.53 Form of Indemnification and Put Agreement (Previously filed as
Exhibit 10.4 to the 1996 Form S-11 and incorporated herein by
reference).
10.54 Form of Unconditional Guaranty of Payment and Performance (Previously
filed as Exhibit 10.5 to the 1996 Form S-11 and incorporated herein by
reference).
10.55 Form of Purchase Agreement (Previously filed as Exhibit 10.6 to the
1996 Form S-11 and incorporated herein by reference).
10.56 Form of Lease Agreement including Memorandum of Lease (Previously
filed as Exhibit 10.7 to the 2003 Form S-11 and incorporated herein by
reference).
21 Subsidiaries of the Registrant (Filed herewith.)
99.1 Certification of Co-Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
99.2 Certification of Co-Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
99.3 Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (Filed herewith.)
CNL HOSPITALITY PROPERTIES, INC.
AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of the subsidiaries of the registrant and the state of
incorporation for each:
Name of Subsidiary State of Incorporation
------------------ ----------------------
CNL Hospitality GP Corp. Delaware
CNL Hospitality LP Corp. Delaware
CNL Hospitality Partners, LP Delaware
CNL Hotel Investors, Inc. Maryland
CNL Philadelphia Annex, LLC Delaware
CNL Philadelphia Hospitality Management, Inc. Delaware
CNL LLB LP Holding, Ltd. Florida
CNL LLB SHS Management, LP Delaware
CNL LLB F-Inn Management, LP Delaware
CNL LLB C-Hotel Management, LP Delaware
CNL LLB SHS Management Corp. Delaware
CNL LLB F-Inn Management Corp. Delaware
CNL C-Hotel Management Corp. Delaware
CNL LLB GP Holding Corp. Florida
CNL Phoenix GP Corp. Delaware
CNL DRR Investor, LP Delaware
CNL WBR GP Corp. Delaware
CNL WBR Investor, L.P. Delaware
CNL CY-Edison, LLC Delaware
CNL Hotel CY-Edison, LP Delaware
CNL CY-Weston, LLC Florida
CNL Hotel CY-Weston, Ltd. Florida
CNL RI-Orlando, LLC Florida
CNL Hotel RI-Orlando, Ltd. Florida
CNL MI-4, LLC Delaware
CNL Hotel MI-4, LP Delaware
CNL Hospitality Leasing Corp. Delaware
CNL HHC, LLC Delaware
CNL IHC, LLC Delaware
CNL HHC II, LLC Delaware
CNL Hospitality Services, Inc. Delaware
CNL Foothill GP Corp. Delaware
CNL Foothill Hotel Partnership, LP Delaware
CNL Foothill Tenant Corp. Delaware
CNL Bridgewater GP Corp. Delaware
CNL Bridgewater Hotel Partnership, LP Delaware
CNL Bridgewater Tenant Corp. Delaware
CNL 2 Tree GP, LLC Delaware
CNL 2 Tree Hotel Partners, LP Delaware
CC 2 Tree Tenant Corp. Delaware
CNL San Francisco, LLC Delaware
CNL CY-San Francisco GP Corp. Delaware
CNL Hotel CY San Francisco, LP Delaware
CNL Travel Services, Inc. Delaware
CNL Hotel Tenant Corp. Delaware
CNL GA Tenant Corp. Delaware
EXHIBIT 99.1
Certification of Co-Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Annual
Report of CNL Hospitality Properties, Inc. (the "Company") on Form 10-K for the
period ended December 31, 2002, as filed with the Securities and Exchange
Commission on the date hereof (this "Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and (2) the information contained in this Report fairly presents, in
all material respects, the financial condition of the Company as of December 31,
2002 and 2001 and its results of operations for the three year period ended
December 31, 2002.
/s/ James M. Seneff, Jr.
---------------------------------------
Date: March 6, 2003 Name: James M. Seneff, Jr.
Title: Co-Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 99.2
Certification of Co-Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Annual
Report of CNL Hospitality Properties, Inc. (the "Company") on Form 10-K for the
period ended December 31, 2002, as filed with the Securities and Exchange
Commission on the date hereof (this "Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and (2) the information contained in this Report fairly presents, in
all material respects, the financial condition of the Company as of December 31,
2002 and 2001 and its results of operations for the three year period ended
December 31, 2002.
/s/ Thomas J. Hutchison, III
---------------------------------
Date: March 6, 2003 Name: Thomas J. Hutchison, III
Title: Co-Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 99.3
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Annual
Report of CNL Hospitality Properties, Inc. (the "Company") on Form 10-K for the
period ended December 31, 2002, as filed with the Securities and Exchange
Commission on the date hereof (this "Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and (2) the information contained in this Report fairly presents, in
all material respects, the financial condition of the Company as of December 31,
2002 and 2001 and its results of operations for the three year period ended
December 31, 2002.
/s/ C. Brian Strickland
------------------------------------------
Date: March 6, 2003 Name: C. Brian Strickland
Title: Executive Vice President (Principal
Financial and Accounting Officer)