-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WhVuA7RCcJP7POd5H7MbhDIVlk9LZSVC2aOk06FgPMIi2ZZDpxV1jxNN0xd5RabC gO9dvH68RLx1PLiwf9R5wQ== 0001047469-03-011172.txt : 20030331 0001047469-03-011172.hdr.sgml : 20030331 20030331132621 ACCESSION NUMBER: 0001047469-03-011172 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOSPITALITY PROPERTIES TRUST CENTRAL INDEX KEY: 0000945394 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043262075 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11527 FILM NUMBER: 03628910 BUSINESS ADDRESS: STREET 1: 400 CENTRE ST CITY: NEWTON STATE: MA ZIP: 02158 BUSINESS PHONE: 6179648389 MAIL ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02158 10-K 1 a2106714z10-k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K /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 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-11527 HOSPITALITY PROPERTIES TRUST Maryland 04-3262075 - ------------------------------------ ---------------------------------------- (State of organization) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 617-964-8389 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on which registered - ----------------------------------------------------- ----------------------------------------- Common Shares of Beneficial Interest New York Stock Exchange Series A Cumulative Redeemable Preferred Shares of New York Stock Exchange Beneficial Interest Series B Cumulative Redeemable Preferred Shares of New York Stock Exchange Beneficial Interest
Securities to be registered pursuant to Section 12(g) of the Act: None 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 for 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. /X/ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes /X/ No / / The aggregate market value of the voting shares of the registrant held by non-affiliates was $2,122 million based on the $36.50 closing price per common share on the New York Stock Exchange on June 28, 2002. For purposes of this calculation, 4,000,000 Common Shares of Beneficial Interest, $0.01 par value ("Common Shares") held by HRPT Properties Trust, and an aggregate of 417,012 Common Shares held by the Trustees and officers of the registrant have been included in the number of shares held by affiliates. Number of the registrant's Common Shares outstanding as of March 14, 2003: 62,566,076 References in this Annual Report on Form 10-K to the "Company", "HPT", "we", "us" or "our" include consolidated subsidiaries unless the context indicates otherwise. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is to be incorporated herein by reference from our definitive Proxy Statement for the annual meeting of shareholders currently scheduled for May 6, 2003. WARNING CONCERNING FORWARD LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND FEDERAL SECURITIES LAWS. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS FORM 10-K AND INCLUDE STATEMENTS REGARDING OUR INTENT, BELIEF OR EXPECTATION, OR THE INTENT, BELIEF OR EXPECTATION OF OUR TRUSTEES OR OUR OFFICERS WITH RESPECT TO OUR TENANTS' OR OPERATORS' ABILITY TO PAY RENT OR RETURNS TO US, OUR ABILITY TO PURCHASE ADDITIONAL PROPERTIES, OUR ABILITY TO PAY INTEREST AND DEBT PRINCIPAL AND MAKE DISTRIBUTIONS, OUR POLICIES AND PLANS REGARDING INVESTMENTS AND FINANCINGS, OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST, OUR ABILITY TO APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO RAISE CAPITAL AND OTHER MATTERS. ALSO, WHENEVER WE USE WORDS SUCH AS "BELIEVE", "EXPECT", "ANTICIPATE", "INTEND", "PLAN", "ESTIMATE" OR SIMILAR EXPRESSIONS, WE ARE MAKING FORWARD LOOKING STATEMENTS. HOWEVER, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE FORWARD LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. SUCH FACTORS INCLUDE, WITHOUT LIMITATION, THE IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING PREVAILING INTEREST RATES) ON US AND OUR TENANTS, COMPLIANCE WITH AND CHANGES TO REGULATIONS AND PAYMENT POLICIES WITHIN THE REAL ESTATE AND HOTEL INDUSTRIES, CHANGES IN FINANCING TERMS, COMPETITION WITHIN THE REAL ESTATE AND HOTEL INDUSTRIES AND CHANGES IN FEDERAL, STATE AND LOCAL LEGISLATION. FOR EXAMPLE, A WAR OR TERRORIST ACTIVITIES COULD CAUSE A DECLINE IN TRAVEL RELATED ACTIVITIES WHICH ADVERSELY AFFECTS THE FINANCIAL RESULTS OF OUR TENANTS AND OPERATORS, AS A RESULT, OUR TENANTS AND OPERATORS MAY OTHERWISE EXPERIENCE LOSSES AND BECOME UNABLE TO PAY OUR RENTS OR RETURNS, WE MAY BE UNABLE TO IDENTIFY PROPERTIES WHICH WE WANT TO BUY OR TO NEGOTIATE ACCEPTABLE PURCHASE PRICES OR LEASE TERMS FOR NEW PROPERTIES. THESE UNEXPECTED RESULTS COULD OCCUR DUE TO MANY DIFFERENT CIRCUMSTANCES, SOME OF WHICH, SUCH AS CHANGES IN OUR TENANTS' COSTS OR REVENUES OR CHANGES IN CAPITAL MARKETS OR THE ECONOMY GENERALLY, ARE BEYOND OUR CONTROL. THE INFORMATION CONTAINED IN THIS FORM 10-K, INCLUDING THE INFORMATION UNDER THE HEADINGS "BUSINESS", "PROPERTIES" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IDENTIFIES OTHER IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. FORWARD LOOKING STATEMENTS ARE ONLY EXPRESSIONS OF OUR PRESENT EXPECTATIONS AND INTENTIONS. FORWARD LOOKING STATEMENTS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR. YOU SHOULD NOT PLACE UNDUE RELIANCE UPON FORWARD LOOKING STATEMENTS. STATEMENT CONCERNING LIMITED LIABILITY THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HOSPITALITY PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HOSPITALITY PROPERTIES TRUST. ALL PERSONS DEALING WITH HOSPITALITY PROPERTIES TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HOSPITALITY PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. HOSPITALITY PROPERTIES TRUST 2002 FORM 10-K ANNUAL REPORT Table of Contents
Page Part I Item 1. Business......................................................................... 1 Item 2. Properties....................................................................... 22 Item 3. Legal Proceedings................................................................ 23 Item 4. Submission of Matters to a Vote of Security Holders.............................. 23 Part II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters........ 24 Item 6. Selected Financial Data.......................................................... 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................... 36 Item 8. Financial Statements and Supplementary Data...................................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................................................... 37 Part III Item 10. Directors and Executive Officers of the Registrant............................... * Item 11. Executive Compensation........................................................... * Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.............................................................. 38 Item 13. Certain Relationships and Related Party Transactions............................. * Item 14. Controls and Procedures.......................................................... 38 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................. 39
* Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 6, 2003, to be filed pursuant to Regulation 14A. PART I ITEM 1. BUSINESS THE COMPANY. We are a real estate investment trust, or REIT, formed in 1995 under the laws of the State of Maryland to buy and own hotels which are leased to or operated by unaffiliated hotel companies. As of December 31, 2002, we owned 251 hotels with 34,284 rooms or suites located in 37 states in the U.S., which cost approximately $2.8 billion. Our principal place of business is 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 964-8389. Our external growth strategy is to expand our investments in hotels and to set minimum rents or returns which produce income in excess of our operating and capital costs. We seek to provide capital to unaffiliated hotel operators who wish to divest their properties while remaining in the hotel business. Our internal growth strategy is to participate through percentage rents in increases in total hotel sales (including gross revenues from room rentals, food and beverage sales and other services) at our hotels. Our investment policies are established by our board of trustees and may be changed by our board of trustees at any time without shareholder approval. Our hotels are currently operated as Marriott Hotels and Resorts(R), Courtyard by Marriott(R), Residence Inn by Marriott(R), Wyndham Garden(R), Wyndham(R), Summerfield Suites by Wyndham(R), AmeriSuites(R), Candlewood Suites(R), Homestead Studio Suites(R), TownePlace Suites by Marriott(R) or SpringHill Suites by Marriott(R). The average age of our hotels is approximately 7.9 years at December 31, 2002. COURTYARD BY MARRIOTT(R) hotels are designed to attract both business and leisure travelers. A typical Courtyard by Marriott(R) hotel has 145 guest rooms. The guest rooms are larger than those in most other moderately priced hotels and predominately offer king size beds. Most Courtyard by Marriott(R) hotels are situated on well landscaped grounds and typically are built with a courtyard containing a patio, pool and socializing area that may be enclosed depending upon location. Many of these hotels have lounges, meeting rooms, an exercise room, a guest laundry and a restaurant. Generally, the guest rooms are similar in size and furnishings to guest rooms in full service Marriott(R) hotels. In addition, many of the same amenities as would be available in full service Marriott(R) hotels are available in Courtyard by Marriott(R) hotels, except that restaurants may be open only for breakfast buffets or serve limited menus, room service may not be available and meeting and function rooms are limited in size and number. According to Marriott, as of December 2002, 553 Courtyard by Marriott(R) hotels were open and operating in the United States and internationally. We believe that the Courtyard by Marriott(R) brand is a leading brand in the upscale, limited service segment of the United States hotel industry. We have invested a total of $772 million in 71 Courtyard by Marriott(R) hotels which have 10,280 rooms. RESIDENCE INN BY MARRIOTT(R) hotels are designed to attract business, governmental and family travelers who stay several consecutive nights. Residence Inn by Marriott(R) hotels generally have between 80 and 130 studio, one-bedroom and two-bedroom suites. Most Residence Inn by Marriott(R) hotels are designed as residential style buildings with landscaped walkways, courtyards and recreational areas. Residence Inn by Marriott(R) hotels do not have restaurants. All offer complimentary continental breakfast and a complimentary evening hospitality hour. In addition, each suite contains a fully equipped kitchen and many have fireplaces. Most Residence Inn by Marriott(R) hotels also have swimming pools, exercise rooms, sports courts and guest laundries. According to Marriott, as of December 2002, 392 Residence Inn by Marriott(R) hotels were open and operating in the United States, Mexico and Canada. We believe that the Residence Inn by Marriott(R) brand is the leading brand in the extended stay segment of the United States hotel industry. We have invested a total of $422 million in 37 Residence Inn by Marriott(R) hotels which have 4,695 suites. WYNDHAM(R) HOTELS Our Wyndham(R) hotels include the Wyndham(R) and Wyndham Garden(R) brands. Wyndham Garden(R) hotels are upscale, mid-sized, full service hotels located primarily near suburban business centers and airports, and are designed to attract business travelers and small business groups. Each of our Wyndham(R) hotels contains between 140 and 381 rooms. Amenities and services include large desks, room service and access to 24-hour telecopy and mail/package service. The meeting facilities at Wyndham(R) and Wyndham Garden(R) hotels generally can accommodate groups of between 10 and 200 people in a flexible meeting room design with audiovisual equipment. Most Wyndham(R) hotels also feature a lobby lounge, a swimming pool, exercise facilities, and one or more restaurants. According to Wyndham, as of December 2002 there were 69 Wyndham(R) and Wyndham Garden(R) hotels open and operating in the United States. We have invested a total of $183 million in 12 Wyndham(R) and Wyndham Garden(R) hotels which have 2,321 rooms. SUMMERFIELD SUITES BY WYNDHAM(R) hotels are upscale, all suite extended stay hotels which offer guests separate living and sleeping areas, full kitchens, large work areas, complimentary breakfasts and evening social hours. Private voice mail, video players, on site convenience stores and "room service" contracted from area restaurants also are generally available. Summerfield Suites by Wyndham(R) offers a large number of two bedroom, two bathroom suites designed for equal-status business travelers in training classes 1 or attending meetings and for families. According to Wyndham, there were 27 Summerfield Suites by Wyndham(R) open and operating in the United States as of December 2002. We have invested a total of $240 million in 15 Summerfield Suites by Wyndham(R) hotels which contain 1,822 suites (2,766 rooms). AMERISUITES(R) hotels are all-suite hotels designed to attract value-oriented business travelers. AmeriSuites(R) hotels compete in the all-suite segment of the lodging industry with such brands as Embassy Suites(R), SpringHill Suites(R) and Hampton Inn & Suites(R). Each AmeriSuites(R) guest room offers an efficient space for working which includes two phones with data ports and voice mail, a living area which includes a coffee maker, microwave, mini-refrigerator, sleeper-sofa and 25-inch television, and a separate bedroom area with either one king or two double beds. Each AmeriSuites(R) hotel has a lobby lounge where free continental breakfast is provided in the mornings and cocktails are generally available in the evening. In addition, all AmeriSuites(R) hotels have meeting rooms that can accommodate up to 150 persons, fitness facilities and a pool. AmeriSuites(R) hotels are generally high-rise hotels of six or seven stories and are of masonry construction. According to Prime Hospitality, there were 144 AmeriSuites(R) hotels open and operating across the United States as of December 2002. We have invested $243 million in our 24 AmeriSuites(R) hotels with a total of 2,929 suites. CANDLEWOOD SUITES(R) hotels are mid-priced extended stay hotels which offer studio and one bedroom suites designed for business travelers expecting to stay five or more nights. Candlewood Suites(R) hotels compete in the mid-priced extended stay segment of the lodging industry against such other brands as Sierra Suites(R), TownePlace Suites by Marriott(R) and MainStay Suites(R). Each Candlewood Suites(R) suite contains a fully equipped kitchen area, a combination living and work area and a sleeping area. The kitchen includes a full-size microwave, full-size refrigerator, stove, dishwasher and coffee maker. The living area contains a convertible sofa or recliner, 25-inch television, videocassette player and compact disc player. The work area includes a large desk and executive chair, two phone lines, voice mail and a speaker phone. Each Candlewood Suites(R) suite contains a king size bed. Other amenities offered at each Candlewood Suites(R) hotel include a fitness center, free guest laundry facilities, and a Candlewood Cupboard(R) area where guests can purchase light meals, snacks and other refreshments. According to Candlewood, there were approximately 103 Candlewood Suites(R) hotels open and operating across the United States as of December 2002. We have invested $435 million in 57 Candlewood Suites(R) hotels with a total of 6,887 suites. HOMESTEAD STUDIO SUITES(R) hotels are extended stay hotels designed for value-oriented business travelers. Each Homestead Studio Suites(R) room features a kitchen with a full-size refrigerator, stovetop, microwave, coffee maker, utensils and dishes. A work area is provided with a well-lit desktop and a computer data port. Complimentary local phone calls, fax service, copy service and personalized voice-mail are also available to guests. On-site laundry and other personal care items are available. Housekeeping services are provided on a twice-weekly basis. According to BRE / Homestead, there were 112 Homestead Studio Suites(R) hotels open as of December 2002. We have invested $145 million in 18 Homestead Studio Suites(R) hotels with a total of 2,399 suites. TOWNEPLACE SUITES(R) are extended-stay hotels offering studio, one bedroom and two-bedroom suites for business and family travelers. TownePlace Suites(R) compete in the mid-priced extended-stay segment of the lodging industry. Each suite offers a fully equipped kitchen, a bedroom and separate living and work areas. Other amenities offered include voice mail, data lines, on-site business services, guest laundry facilities and a fitness center. According to Marriott, there were nearly 100 TownePlace Suites(R) open as of December 2002. We have invested $102 million in 12 TownePlace Suites(R) with a total of 1,331 suites. SPRINGHILL SUITES(R) are value focused suites for business and family travelers. SpringHill Suites(R) compete in the mid-priced all-suite segment of the lodging industry. Each suite offers separate sleeping, living and work areas, a mini-refrigerator, a microwave and coffee service. Other amenities offered include a pull-out sofa bed, complimentary breakfast buffet, weekday newspaper, two line phones with data port and voice mail, on-site business services, guest laundry facilities and a fitness center. According to Marriott, there were over 84 SpringHill Suites(R) open as of December 2002. We have invested $21 million in two SpringHill Suites(R) with a total of 264 suites. We have invested $105 million in three Marriott Hotels and Resorts(R) with a total of 1,356 guest rooms, including: THE KAUAI MARRIOTT RESORT & BEACH CLUB is a 356 room, 10 floor hotel with 50,000 square feet of meeting space, five restaurants and an on-the-beach lounge. The resort includes a 26,000-square-foot pool, multiple acres of Hawaiian gardens and waterfalls, tennis courts, sauna, whirlpool, exercise and spa facilities and beauty and massage salons. THE MARRIOTT ST. LOUIS AIRPORT is a 601 room hotel located in Missouri on approximately 12 acres of land at the I-70 exit for Lambert International Airport, across the street from the airport entrance. The hotel has two nine floor towers and three low rise buildings which create a courtyard for the hotel's pool and gardens. The property includes 20 meeting rooms totaling approximately 18,000 square feet of space, three restaurants and a concierge floor. THE MARRIOTT NASHVILLE AIRPORT is a 399 room, 17 floor hotel located in Tennessee on 17 acres of land in High Ridge Business 2 Park across I-40 from the Nashville Airport and a short drive from downtown Nashville. The property includes 14 meeting rooms totaling approximately 17,000 square feet of space, a restaurant and a concierge floor. PRINCIPAL LEASE OR MANAGEMENT AGREEMENT FEATURES As of December 31, 2002, all of our hotels are leased to or managed by unrelated third-parties. Each hotel we own is leased or operated as part of a combination of hotels, as described below. The principal features of the lease and management agreements for our 251 hotels are as follows: - - MINIMUM RENT OR RETURNS. All of our agreements require minimum annual rent or returns equal to between 10% and 12% of our investment in our hotels. - - PERCENTAGE RENT OR RETURNS. All of our agreements require percentage rent or returns equal to between 5% and 10% of increases in gross hotel revenues over threshold amounts. - - LONG TERM. All of the agreements for our hotels expire after 2010. The weighted average term remaining for our hotels as of December 31, 2002, is 13.6 years. - - POOLED AGREEMENTS. Each of our hotels is part of a combination of hotels. The tenant or manager obligations to us with respect to each hotel in a combination are subject to cross default with the obligations with respect to all the other hotels in the same combination. The smallest combination includes 12 hotels with 2,321 rooms in which we have invested $183 million; the largest combination includes 57 hotels with 6,887 rooms in which we have invested $435 million. - - GEOGRAPHIC DIVERSIFICATION. Each combination of hotels is geographically diversified. In addition, our hotels are located in the vicinity of major demand generators such as large suburban office parks, airports, medical or educational facilities or major tourist attractions. - - ALL OR NONE RENEWALS. All renewal options for each combination of our hotels may only be exercised on an all or none basis and not for separate hotels. - - SECURITY DEPOSITS. All of our agreements require security deposits, generally equal to one year's minimum rent or minimum investment return. - - FF&E RESERVES. All of our agreements require the deposit of 5-6% of gross hotel revenues into escrow to fund periodic renovations (the "FF&E reserve") in addition to minimum rents or returns. For hotels which were open for at least one year prior to 2002 (247 hotels) the FF&E reserve contributions in 2002 totaled $41 million, an average of $1,183 per room. - - SUBORDINATED FEES. Some or all of the management fees for our hotels are subordinated to minimum amounts due to us. - - GUARANTEES FOR NEW HOTELS. When we purchase recently built hotels, we require that payments to us be guaranteed generally until the operations of the hotels achieve negotiated levels. As of December 31, 2002, five of our nine hotel pools, including 153 hotels, have minimum rent or returns due to us which are subject to full or limited guarantees. These hotels represent 58.2% of our total investments, at cost. At December 31, 2002, 10 of our hotels were on leased land. In January 2003, we purchased the land related to one of these hotels from an unrelated party for $6.5 million. For the other nine hotels, in each case, the remaining term of the ground lease (including renewal options) is in excess of 56 years, and the ground lessors are unrelated to us. Ground rent payable under the nine remaining ground leases is generally calculated as a percentage of hotel revenues. Seven of the nine ground leases require minimum annual rent ranging from approximately $102,406 to $255,760 per year; rent under two ground leases has been pre-paid. If a ground lease terminates, the lease with respect to the hotel on such ground-leased land will also terminate. Generally payment of ground lease obligations are made by our tenant or manager. However, if a tenant or manager did not perform obligations under a ground lease or elected not to renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected hotel. Any pledge of our interests in a ground lease may also require the consent of the applicable ground lessor and its lenders. We have no current requirement to make any pledge of our ground lease interests. 3 INVESTMENT AND OPERATING POLICIES We provide capital to hotel owners and operators who wish to divest their properties while remaining in the hotel business. Many other public hotel REITs seek to control the operations of hotels in which they invest and generally design their affiliated leases to capture substantially all net operating revenues from their hotels as rent. We do not operate any hotels. Our agreements with our unaffiliated tenants and operators are designed with the expectation that over their term net operating revenues from our hotels will exceed minimum amounts due to us by considerable coverage margins. We believe that these differences in operating philosophy afford us a competitive advantage over other hotel REITs in finding high quality hotel investment opportunities on attractive terms and increase the dependability of our cash flows used to pay distributions. Our investment objectives include increasing per share distributions and cash available for distribution, or CAD, from dependable and diverse resources. To achieve these objectives, we seek to operate as follows: maintain a strong capital base of shareholders' equity; invest in high quality properties operated by unaffiliated hotel operating companies; use moderate debt leverage to fund additional investments which increase CAD per share because of positive spreads between our cost of investment capital and investment yields; structure investments which generate a minimum return and provide an opportunity to participate in a percentage of operating growth at our hotels; when market conditions permit, refinance debt with additional equity or long term debt; and pursue diversification so that our CAD is received from diverse properties and operators. In order to benefit from potential property appreciation, we prefer to own properties rather than make mortgage investments. We may invest in real estate joint ventures if we conclude that we may benefit from the participation of co-venturers or that the opportunity to participate in the investment is contingent on the use of a joint venture structure. We may invest in participating, convertible or other types of mortgages if we conclude that we may benefit from the cash flow or appreciation in the value of the mortgaged property. Convertible mortgages are similar to equity participation because they permit the lender to either participate in increasing revenues from the property or convert some or all of that mortgage into equity ownership interests. At December 31, 2002, we owned no mortgages or joint venture interests. Because we are a REIT, generally, we may not operate hotels. We or our tenants have entered into arrangements for operation of our hotels. Our agreements require the lessee or operator to pay all operating expenses, including taxes, insurance and capital reserves and to pay to us minimum returns plus percentage returns based upon increases in gross revenues at the hotels. As described elsewhere in this Form 10-K, tax law changes known as the REIT Modernization Act, or RMA, were enacted and became effective January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to a so-called "taxable REIT subsidiary" if the hotel is managed by an independent third party. We entered into our first transaction using a taxable REIT subsidiary on June 15, 2001. Any income realized by our taxable REIT subsidiary in excess of the rent paid to us by our subsidiary will be subject to income tax at customary corporate rates. As and if the financial performance of the hotels operated for the account of our taxable REIT subsidiary improves, these taxes may become material, but the anticipated taxes are not material to our consolidated financial results at this time. We may enter new leases with taxable REIT subsidiaries, but we currently expect to do so only to the extent such new arrangements are reasonably consistent with the investment and operating policies set forth above. ACQUISITION POLICIES We intend to pursue growth through the acquisition of additional hotels. Generally, we prefer to purchase multiple hotels in one transaction because we believe a single agreement, cross default covenants and all or none renewal rights for multiple hotels in diverse locations enhance the credit characteristics and the security of our investments. In implementing our acquisition strategy, we consider a range of factors relating to proposed hotel purchases including: (i) historical and projected cash flows; (ii) the competitive market environment and the current or potential market position of each hotel; (iii) the availability of a qualified lessee or operator; (iv) the hotel's design, physical condition and age; (v) the estimated replacement cost and proposed acquisition price of the hotel; (vi) the price segment in which the hotel is operated; (vii) the reputation of the particular hotel management organization, if any, with which the hotel is or may become affiliated; (viii) the level of services and amenities offered at the hotel; (ix) the proposed lease terms; and (x) the hotel brand under which the hotel operates or is expected to operate. In determining the competitive position of a hotel, we examine the proximity of the hotel to business, retail, academic and tourist attractions and transportation routes, the number and characteristics of competitive hotels within the hotel's market area and the existence of barriers to entry within that market, including site availability, and zoning restrictions. While we have historically focused on the acquisition of upscale limited service, extended stay and full service hotel properties, we consider acquisitions in all segments of the hospitality industry. An important part of our acquisition strategy is to identify and select qualified and experienced hotel operators. We intend to continue to select hotels for acquisition which will enhance the diversity of our portfolio with respect to location, brand name, and lessee or operator. However, we have no policies which specifically limit the percentage of our assets which may be invested in any individual property, in any one type of property, in properties leased to any one tenant or in properties leased to an affiliated group of tenants. 4 In the past, we have considered the possibility of entering mergers or strategic combinations with other companies. No such mergers or strategic combinations are under active consideration at this time. However, we may undertake such considerations in the future. A principal goal of any such transaction will be to expand our investments and diversify our revenue sources. DISPOSITION POLICIES We have no current intention to dispose of any hotels, although we may do so. We currently anticipate that disposition decisions, if any, will be based on factors including but not limited to the following: (i) potential opportunities to increase revenues and property values by reinvesting sale proceeds; (ii) the proposed sale price; (iii) the strategic fit of the hotel with the rest of our portfolio; (iv) our tenant's desire to cease operation of the hotel; and (v) the existence of alternative sources, uses or needs for capital. FINANCING POLICIES We currently intend to employ conservative financing policies in pursuit of our growth strategies. Although there are no limitations in our organizational documents on the amount of indebtedness we may incur, our $350 million unsecured revolving credit facility and our senior note indenture and its supplements contain financial covenants which, among other things, restrict our ability to incur indebtedness and require us to maintain financial ratios and minimum net worth. We currently intend to pursue our growth strategies while maintaining debt not in excess of 50% of our total capitalization. We may from time to time re-evaluate and modify our financing policies in light of then current economic conditions, relative availability and costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors and may increase or decrease our ratio of debt to total capitalization accordingly. Our board of trustees may determine to obtain a replacement for our current credit facilities or to seek additional capital through equity offerings, debt financings, or retention of cash flows in excess of distributions to shareholders, or a combination of these methods. None of our properties are encumbered by mortgages. To the extent that the board of trustees decides to obtain additional debt financing, we may do so on an unsecured basis (or a secured basis, subject to limitations present in existing financing or other arrangements) and may seek to obtain other lines of credit or to issue securities senior to our common and/or preferred shares, including preferred shares of beneficial interest and debt securities, either of which may be convertible into common shares or be accompanied by warrants to purchase common shares, or to engage in transactions which may involve a sale or other conveyance of hotels to subsidiaries or to unaffiliated entities. We may finance acquisitions through an exchange of properties or through the issuance of additional common shares or other securities. The proceeds from any of our financings may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions and expansions of existing or new properties. INVESTMENT MANAGER. Our day-to-day operations are conducted by Reit Management & Research LLC ("RMR"), our investment manager. RMR originates and presents investment opportunities to our board of trustees. RMR is a Delaware limited liability company beneficially owned by Barry M. Portnoy and Gerard M. Martin, who are our managing trustees. RMR has a principal place of business at 400 Centre Street, Newton, Massachusetts 02458; and its telephone number is (617) 928-1300. RMR acts as the investment manager to HRPT Properties Trust, the holder of 4,000,000 of our common shares and Senior Housing Properties Trust and has other business interests. The directors of RMR are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The executive officers of RMR are David J. Hegarty, President and Secretary; John G. Murray, Executive Vice President; Evrett W. Benton, Vice President; Ethan S. Bornstein, Vice President; Jennifer B. Clark, Vice President; John R. Hoadley, Vice President; Mark L. Kleifges, Vice President; David M. Lepore, Vice President; Bruce J. Mackey Jr., Vice President; John A. Mannix, Vice President; Thomas M. O'Brien, Vice President; and John C. Popeo, Vice President and Treasurer. Messrs. Murray, O'Brien, Kleifges and Bornstein are also our officers. EMPLOYEES. We have no employees. Services which would otherwise be provided by employees are provided by RMR and by our Managing Trustees and officers. As of March 14, 2003, RMR had approximately 280 full-time employees. COMPETITION. The hotel industry is highly competitive. Each of our hotels is located in an area that includes other hotels. Increases in the number of hotels in a particular area could have a material adverse effect on the occupancy and daily room rates at our hotels located in that area. Agreements with the operators of our hotels restrict the right of each operator and its affiliates for a limited period of time to own, build, operate, franchise or manage other hotels of the same brand within various specified areas around our hotels. Under these agreements neither the operators nor their affiliates are restricted from operating other brands of hotels in the market areas of any of our hotels, and after such limited period of time, the operators and their affiliates may also compete with our hotels by opening, managing or franchising additional hotels under the same brand name in direct competition with our hotels. We expect to compete for hotel acquisition and financing opportunities with entities which may have substantially greater financial resources than us, including, without limitation, other REITs, hotel operating companies, banks, insurance companies, pension plans 5 and public and private partnerships. These entities may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of hotel operators. Such competition may reduce the number of suitable hotel acquisition or financing opportunities available to us or increase the bargaining power of hotel owners seeking to sell or finance their properties. ENVIRONMENTAL MATTERS. Under various laws, owners of real estate may be required to investigate and clean up hazardous substances present at a property, and may be held liable for property damage or personal injuries that result from such contamination. These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with the contamination. We reviewed environmental surveys of the facilities we own prior to their purchase. Based upon those surveys we do not believe that any of our properties are subject to material environmental contamination. However, no assurances can be given that environmental liabilities are not present in our properties or that costs we incur to remediate contamination will not have a material adverse effect on our business or financial condition. INTERNET WEBSITE. Our internet address is www.hptreit.com. We make available, free of charge, on our internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished under Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after these forms are electronically filed with the SEC. SEGMENT INFORMATION. We have one operating segment, hotel investments. FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax considerations is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under federal income tax law, for example if you are: - a bank, life insurance company, regulated investment company, or other financial institution; - a broker or dealer in securities or foreign currency; - a person who has a functional currency other than the U.S. dollar; - a person who acquires our shares in connection with employment or other performance of services; - a person subject to alternative minimum tax; - a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, constructive ownership transaction, or conversion transaction; or - except as specifically described in the following summary, a tax-exempt entity or a foreign person. The Internal Revenue Code sections that govern federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable Internal Revenue Code provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. For example, President Bush has recently proposed eliminating federal tax on dividends to the extent the dividends are derived from previously taxed income. Federal income taxation of REIT dividends would not change under this proposal because REITs generally do not pay federal income tax on their net income. As a result of the general exemption from federal income tax, under existing law REITs may enjoy a relative value advantage over dividend-paying corporations that are not REITs. If legislation is enacted which eliminates or reduces federal tax on 6 corporate dividends but not REIT dividends, the market price of our shares may decline. We have not received a ruling from the IRS with respect to any matter described in this summary, and we cannot assure you that the IRS or a court will agree with the statements made in this summary. In addition, this summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences. For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Our intentions and beliefs described in this summary are based upon our understanding of applicable laws and regulations which are in effect as of the date of this Form 10-K. If new laws or regulations are enacted which impact us directly or indirectly, we may change our intentions or beliefs. Your federal income tax consequences may differ depending on whether or not you are a "U.S. shareholder." For purposes of this summary, a "U.S. shareholder" for federal income tax purposes is: - a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws; - an entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations; - an estate the income of which is subject to federal income taxation regardless of its source; or - a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996, to the extent provided in Treasury regulations; whose status as a U.S. shareholder is not overridden by an applicable tax treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares who is not a U.S. shareholder. TAXATION AS A REIT We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 1995. Our REIT election, assuming continuing compliance with the qualification tests summarized below, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that we are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the Internal Revenue Code as a REIT. As a REIT, we generally are not subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally are included in their income as dividends to the extent of our current or accumulated earnings and profits. A portion of these dividends may be treated as capital gain dividends, as explained below. No portion of any dividends are eligible for the dividends received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits generally are treated for federal income tax purposes as return of capital to the extent of a recipient shareholder's basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits are generally allocated first to distributions made on our preferred shares, and thereafter to distributions made on our common shares. Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the Internal Revenue Code for our 1995 through 2002 taxable years, and that our current investments and plan of operation enable us to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. Our qualification and taxation as a REIT will depend upon our compliance with various qualification tests imposed under the Internal Revenue Code and summarized below. While we believe that we will satisfy these tests, our counsel has not reviewed and will not review compliance with these tests on a continuing basis. If we fail to qualify as a REIT, we will be subject to federal income taxation as if we were a C corporation and our shareholders will be 7 taxed like shareholders of C corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated. If we qualify as a REIT and meet the tests described below, we generally will not pay federal income tax on amounts we distribute to our shareholders. However, even if we qualify as a REIT, we may be subject to federal tax in the following circumstances: - We will be taxed at regular corporate rates on any undistributed "real estate investment trust taxable income," including our undistributed net capital gains. - If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference. - If we have net income from the disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or other nonqualifying income from foreclosure property, we will be subject to tax on this income at the highest regular corporate rate, currently 35%. - If we have net income from prohibited transactions, including dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate. - If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability. - If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed. - If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation's basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain recognized in the disposition. - If we acquire a corporation, to preserve our status as a REIT we must generally distribute all of the C corporation earnings and profits inherited in that acquisition, if any, not later than the end of the taxable year of the acquisition. However, if we fail to do so, relief provisions would allow us to maintain our status as a REIT provided we distribute any subsequently discovered C corporation earnings and profits and pay an interest charge in respect of the period of delayed distribution. - As summarized below, REITs are permitted within limits to own stock and securities of a "taxable REIT subsidiary." A taxable REIT subsidiary is separately taxed on its net income as a C corporation, and is subject to limitations on the deductibility of interest expense paid to its REIT parent. In addition, its REIT parent is subject to a 100% tax on the difference between amounts charged and redetermined rents and deductions, including excess interest. 8 If we invest in properties in foreign countries, our profits from those investments will generally be subject to tax in those countries. If we continue to operate as we currently do, then we will distribute our taxable income to our shareholders and we will generally not pay federal income tax. As a result, the cost of foreign taxes imposed on our foreign investments cannot be recovered by claiming foreign tax credits against our federal income tax liability. Also, we cannot pass through to our shareholders any foreign tax credits. If we fail to qualify or elect not to qualify as a REIT, we will be subject to federal income tax in the same manner as a C corporation. Distributions to our shareholders if we do not qualify as a REIT will not be deductible by us nor will distributions be required under the Internal Revenue Code. In that event, distributions to our shareholders will generally be taxable as ordinary dividends and, subject to limitations in the Internal Revenue Code, will be eligible for the dividends received deduction for corporate shareholders. Also, we will generally be disqualified from qualification as a REIT for the four taxable years following disqualification. If we do not qualify as a REIT for even one year, this could result in reduction or elimination of distributions to our shareholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. REIT QUALIFICATION REQUIREMENTS GENERAL REQUIREMENTS. Section 856(a) of the Internal Revenue Code defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the Internal Revenue Code, as a C corporation; (4) that is not a financial institution or an insurance company subject to special provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) that is not "closely held" as defined under the personal holding company stock ownership test, as described below; and (7) that meets other tests regarding income, assets and distributions, all as described below. Section 856(b) of the Internal Revenue Code provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the Internal Revenue Code provides that neither condition (5) nor (6) need be met for our first taxable year as a REIT. We believe that we have met conditions (1) through (7) during each of the requisite periods ending on or before December 31, 2002, and that we can continue to meet these conditions in future taxable years. There can, however, be no assurance in this regard. By reason of condition (6), we will fail to qualify as a REIT for a taxable year if at any time during the last half of a year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust restricts transfers of our shares. In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as having met condition (6). However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these regulations, and to 9 request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. For purposes of condition (6), REIT shares held by a pension trust are treated as held directly by the pension trust's beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity's federal income tax qualification as a REIT. However, as discussed below, if a REIT is a "pension-held REIT," each pension trust owning more than 10% of the REIT's shares by value generally may be taxed on a portion of the dividends it receives from the REIT. OUR WHOLLY-OWNED SUBSIDIARIES AND OUR INVESTMENTS THROUGH PARTNERSHIPS. Except in respect of taxable REIT subsidiaries as discussed below, Section 856(i) of the Internal Revenue Code provides that any corporation, 100% of whose stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT's. We believe that each of our direct and indirect wholly-owned subsidiaries, other than the taxable REIT subsidiaries discussed below, will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue Code, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the Internal Revenue Code. Thus, except for the taxable REIT subsidiaries discussed below, in applying all the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly-owned subsidiaries are treated as ours. We may invest in real estate through one or more limited or general partnerships or limited liability companies that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, regulations under the Internal Revenue Code provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT's proportionate capital interest in the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner is treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our share of the partnership's income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the Internal Revenue Code. TAXABLE REIT SUBSIDIARIES. We are permitted to own any or all of the securities of a "taxable REIT subsidiary" as defined in Section 856(l) of the Internal Revenue Code, provided that no more than 20% of our assets, at the close of each quarter, is comprised of our investments in the stock or securities of our taxable REIT subsidiaries. Among other requirements, a taxable REIT subsidiary must: (1) be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares; (2) join with us in making a taxable REIT subsidiary election; (3) not directly or indirectly operate or manage a lodging facility or a health care facility; and (4) not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility. In addition, a corporation other than a REIT in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a taxable REIT subsidiary. Subject to the discussion below, we believe that we and each of our taxable REIT subsidiaries have complied with, and will continue to comply with, the requirements for taxable REIT subsidiary 10 status during all times each subsidiary's taxable REIT subsidiary election remains in effect, and we believe that the same will be true for any taxable REIT subsidiary that we later form or acquire. Our ownership of stock and securities in taxable REIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed below, taxable REIT subsidiaries can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% or 95% gross income tests discussed below. Moreover, because taxable REIT subsidiaries are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit are not imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, taxable REIT subsidiaries can generally undertake third-party management and development activities and activities not related to real estate. Finally, a REIT can earn qualifying rental income from the lease of a qualified lodging facility to a taxable REIT subsidiary, so long as the taxable REIT subsidiary hires an eligible independent contractor to operate the facility, as discussed more fully below. Restrictions are imposed on taxable REIT subsidiaries to ensure that they will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the taxable REIT subsidiary's adjusted taxable income for that year. However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year's 50% adjusted taxable income limitation. In addition, if a taxable REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm's length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Finally, if in comparison to an arm's length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiary for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment. There can be no assurance that arrangements involving our taxable REIT subsidiaries will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions. INCOME TESTS. There are two gross income requirements for qualification as a REIT under the Internal Revenue Code: - At least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including "rents from real property" as defined under Section 856 of the Internal Revenue Code, mortgages on real property, or shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% test. - At least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of items of real property income that satisfy the 75% test described above, dividends, interest, payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments, and gains from the sale or disposition of stock, securities, or real property. For purposes of these two requirements, income derived from a "shared appreciation provision" in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type which satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard. In order to qualify as "rents from real property" under Section 856 of the Internal Revenue Code, several requirements must be met: - The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales. 11 - Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. For example, an unaffiliated third party's ownership directly or by attribution of 10% or more by value of our shares, as well as 10% or more by vote or value of the stock of one of our tenants, would result in that tenant's rents not qualifying as rents from real property. Our declaration of trust restricts transfers or purported acquisitions, directly or by attribution, of our shares to the extent necessary to maintain our REIT status under the Internal Revenue Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent our REIT status from being jeopardized under the 10% affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code's attribution rules. - For our 2001 taxable year and thereafter, there is a limited exception to the above prohibition on earning "rents from real property" from a 10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If at least 90% of the leased space of a property is leased to tenants other than taxable REIT subsidiaries and 10% affiliated tenants, and if the taxable REIT subsidiary's rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants. - For our 2001 taxable year and thereafter, there is a second exception to the above prohibition on earning "rents from real property" from a 10% affiliated tenant. For this second exception to apply, a real property interest in a "qualified lodging facility" must be leased by the REIT to its taxable REIT subsidiary, and the facility must be operated on behalf of the taxable REIT subsidiary by a person who is an "eligible independent contractor." Qualified lodging facilities are defined as hotels, motels, or other establishments where more than half of the dwelling units are used on a transient basis, provided that legally authorized wagering or gambling activities are not conducted at or in connection with such facilities. Also included in the definition are the qualified lodging facility's customary amenities and facilities. An eligible independent contractor with respect to a qualified lodging facility is defined as an independent contractor if, at the time the contractor enters into the agreement with the taxable REIT subsidiary to operate the qualified lodging facility, that contractor or any person related to that contractor is actively engaged in the trade or business of operating qualified lodging facilities for persons unrelated to the taxable REIT subsidiary or its affiliated REIT. For these purposes, an otherwise qualifying independent contractor is not disqualified from that status on account of the taxable REIT subsidiary bearing the expenses for the operation of the qualified lodging facility, the taxable REIT subsidiary receiving the revenues from the operation of the qualified lodging facility, net of expenses for that operation and fees payable to the independent contractor, or the REIT receiving income from the independent contractor pursuant to a preexisting or otherwise grandfathered lease of another property. Also, as explained above, we will be subject to a 100% excise tax if the IRS successfully asserts that the rents paid by our taxable REIT subsidiary to us exceed an arm's length rental rate. In June 2001, we acquired 4 hotels and agreed to lease these hotels, along with 31 other hotels then currently leased to tenants unaffiliated with us, to a taxable REIT subsidiary. Our taxable REIT subsidiary engaged independent managers to operate these 35 hotels. To date, 22 hotels are leased and managed in this fashion, and the remaining 13 hotels will begin to be leased and managed in this manner prior to June 30, 2004. Although there is no clear precedent to distinguish for federal income tax purposes among leases, management contracts, partnerships, financings, and other contractual arrangements, we believe that our leases and our taxable REIT subsidiary's management agreements will be respected for purposes of the requirements of the Internal Revenue Code discussed above. Accordingly, we expect that the rental income from our current and future taxable REIT subsidiaries will qualify favorably as "rents from real property," and that the 100% excise tax on excessive rents from a taxable REIT subsidiary will not apply. - In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or, for our 2001 taxable year and thereafter, through one of our taxable REIT subsidiaries. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of "unrelated business taxable income" as defined in Section 512(b)(3) of the Internal Revenue Code. In addition, a DE MINIMIS amount of noncustomary services will not disqualify income as "rents from real property" so long as the value of the impermissible services does not exceed 1% of the gross income from the property. 12 - If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as "rents from real property"; if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. For our taxable years through December 31, 2000, the portion of rental income treated as attributable to personal property was determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property which is rented. For our 2001 taxable year and thereafter, the ratio is determined by reference to fair market values rather than tax bases. We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the Internal Revenue Code. In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value, at the time the loan is made, at least equal to the amount of the loan. If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan. Any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may adversely affect our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. However, we believe that dispositions of assets that we have made or that we might make in the future will not be subject to the 100% penalty tax, because we intend to: - own our assets for investment with a view to long-term income production and capital appreciation; - engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and - make occasional dispositions of our assets consistent with our long-term investment objectives. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if: - our failure to meet the test was due to reasonable cause and not due to willful neglect; - we report the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return; and - any incorrect information on the schedule was not due to fraud with intent to evade tax. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply, a special tax equal to 100% is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, with adjustments, multiplied by a fraction intended to reflect our profitability. ASSET TESTS. At the close of each quarter of each taxable year, we must also satisfy these asset percentage tests in order to qualify as a REIT for federal income tax purposes: 13 - At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and stock or debt instruments purchased with proceeds of a stock offering or an offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds. - Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test. - Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer's securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer's outstanding voting securities. For our 2001 taxable year and thereafter, we may not own more than 10% of the vote or value of any one non-REIT issuer's outstanding securities, unless that issuer is our taxable REIT subsidiary or the securities are straight debt securities. - For our 2001 taxable year and thereafter, our stock and securities in a taxable REIT subsidiary are exempted from the preceding 10% and 5% asset tests. However, no more than 20% of our total assets may be represented by stock or securities of taxable REIT subsidiaries. When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. We intend to maintain records of the value of our assets to document our compliance with the above asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter. ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify for taxation as a REIT under the Internal Revenue Code, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of: (A) the sum of 90% of our "real estate investment trust taxable income," as defined in Section 857 of the Internal Revenue Code, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and 90% of our net income after tax, if any, from property received in foreclosure, over (B) the sum of our qualifying noncash income, E.G., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges. Prior to our 2001 taxable year, the preceding 90% percentages were 95%. The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. If a dividend is declared in October, November, or December to shareholders of record during one of those months, and is paid during the following January, then for federal income tax purposes the dividend will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements. Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts. In addition, we will be subject to a 4% excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the "grossed up required distribution" for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term "grossed up required distribution" for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. 14 If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, we may find it necessary and desirable to arrange for new debt or equity financing to provide funds for required distributions in order to maintain our REIT status. We can provide no assurance that financing would be available for these purposes on favorable terms. We may be able to rectify a failure to pay sufficient dividends for any year by paying "deficiency dividends" to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above. In addition to the other distribution requirements above, to preserve our status as a REIT we are required to timely distribute C corporation earnings and profits that we inherit from acquired corporations. DEPRECIATION AND FEDERAL INCOME TAX TREATMENT OF LEASES Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over 9 years. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions. We are entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case. In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of a leased property, at the time of purchase, exceeded the purchase price for that property. While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions. TAXATION OF U.S. SHAREHOLDERS As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend will be treated as an ordinary income dividend to the extent of our current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the Internal Revenue Code. In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case: (1) we will be taxed at regular corporate capital gains tax rates on retained amounts; (2) each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend; (3) each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay; 15 (4) each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay; and (5) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year. For noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 20% or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property. If for any taxable year we designate capital gain dividends for U.S. shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 20% or 25% so that the designations will be proportionate among all classes of our shares. Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder's adjusted tax basis in the shareholder's shares, but will reduce the shareholder's basis in those shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder's shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses. Dividends that we declare in October, November or December of a taxable year to U.S. shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim. A U.S. shareholder will recognize gain or loss equal to the difference between the amount realized and the shareholder's adjusted basis in our shares which are sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder's holding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period. Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the Internal Revenue Code, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor's net investment income. A U.S. shareholder's net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the shareholder's basis will not enter into the computation of net investment income. TAXATION OF TAX-EXEMPT SHAREHOLDERS In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees' pension trust did not constitute "unrelated business taxable income," even though the REIT may have financed some its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and 16 conclusion of Revenue Ruling 66-106, our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, unless the shareholder has financed its acquisition of our shares with "acquisition indebtedness" within the meaning of the Internal Revenue Code. Tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, that own more than 10% by value of a "pension-held REIT" at any time during a taxable year may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of: (1) the pension-held REIT's gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to (2) the pension-held REIT's gross income from all sources, less direct expenses related to that income, except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if: - the REIT is "predominantly held" by tax-exempt pension trusts; and - the REIT would fail to satisfy the "closely held" ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries. A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT's stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT's stock or beneficial interests, own in the aggregate more than 50% by value of the REIT's stock or beneficial interests. Because of the share ownership concentration restrictions in our declaration of trust, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT. TAXATION OF NON-U.S. SHAREHOLDERS The rules governing the United States federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares. In general, a non-U.S. shareholder will be subject to regular United States federal income tax in the same manner as a U.S. shareholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder's conduct of a trade or business in the United States. In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the Internal Revenue Code, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion of the United States federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States. A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. A distribution of this type will generally be subject to United States federal 17 income tax and withholding at the rate of 30%, or lower rate if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder's adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below. A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits. For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; the non-U.S. shareholder will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and corporate non-U.S. shareholders may owe the 30% branch profits tax under Section 884 of the Internal Revenue Code in respect of these amounts. We will be required to withhold from distributions to non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder's United States federal income tax liability, and any amount of tax withheld in excess of that tax liability may be refunded if an appropriate claim for refund is filed with the IRS. If for any taxable year we designate capital gain dividends for our shareholders, then the portion of the capital gain dividends we designate will be allocated to the holders of a particular class of shares on a percentage basis equal to the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT. You must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld by us with respect to a distribution to a non-U.S. shareholder exceeds the shareholder's United States federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. The 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 20% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. If our shares are not "United States real property interests" within the meaning of Section 897 of the Internal Revenue Code, a non-U.S. shareholder's gain on sale of these shares generally will not be subject to United States federal income taxation, except that a nonresident alien individual who was in the United States for 183 days or more during the taxable year will be subject to a 30% tax on this gain. Our shares will not constitute a United States real property interest if we are a "domestically controlled REIT." A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons. We believe that we are and will be a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation. However, because our shares are publicly traded, we can provide no assurance that we will be a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation as a sale of a United States real property interest, if that class of shares is "regularly traded," as defined by applicable Treasury regulations, on an established securities market like the New York Stock Exchange, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of shares. If the gain on the sale of our shares were subject to United States federal income taxation, the non-U.S. shareholder will generally be subject to the same treatment as a U.S. shareholder with respect to its gain, will be required to file a United States federal income tax return reporting that gain, and a corporate non-U.S. shareholder might owe branch profits tax under Section 884 of the Internal Revenue Code. A purchaser of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. 18 Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS. BACKUP WITHHOLDING AND INFORMATION REPORTING Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below. The backup withholding rate is currently 30%, but this rate is scheduled to fall to 28% over the next several years. Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against the REIT shareholder's federal income tax liability. A U.S. shareholder will be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes, or has previously properly executed, under penalties of perjury an IRS Form W-9 or substantially similar form that: - provides the U.S. shareholder's correct taxpayer identification number; and - certifies that the U.S. shareholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding. If the U.S. shareholder has not and does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS and the REIT or other withholding agent may have to withhold a portion of any capital gain distributions paid to it. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it is a corporation or comes within another exempt category, distributions on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS. Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our shares may be subject to backup withholding, unless the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form in the manner described above. Similarly, information reporting and backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker's foreign office. OTHER TAX CONSEQUENCES Our and our shareholders' federal income tax treatment may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued frequently. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions or the direct or indirect effect on us and our shareholders. Revisions to federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares. We and our shareholders may also be subject to taxation by state or local jurisdictions, including those in which we or our shareholders transact business or reside. State and local tax consequences may not be comparable to the federal income tax consequences discussed above. 19 ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS GENERAL FIDUCIARY OBLIGATIONS Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, ERISA, must consider whether: - their investment in our shares satisfies the diversification requirements of ERISA; - the investment is prudent in light of possible limitations on the marketability of our shares; - they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and - the investment is otherwise consistent with their fiduciary responsibilities. Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified retirement plan not subject to Title I of ERISA, referred to as "non-ERISA plans," should consider that a plan may only make investments that are authorized by the appropriate governing instrument. Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria. PROHIBITED TRANSACTIONS Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should consider the application of the prohibited transaction provisions of ERISA and the Internal Revenue Code in making their investment decision. Sales and other transactions between an ERISA or non-ERISA plan, and persons related to it, are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA plan or non-ERISA plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans, may also result in the imposition of an excise tax under the Internal Revenue Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction, but no excise tax will be imposed. Fiduciary shareholders should consult their own legal advisors as to whether the ownership of our shares involves a prohibited transaction. "PLAN ASSETS" CONSIDERATIONS The Department of Labor, which has administrative responsibility over ERISA plans as well as non-ERISA plans, has issued a regulation defining "plan assets." The regulation generally provides that when an ERISA or non-ERISA plan acquires a security that is an equity interest in an entity and that security is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA plan's or non-ERISA plan's assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant. 20 Each class of our shares (that is, our common shares and any class of preferred shares that we have issued or may issue) must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a publicly offered security as a security that is "widely held," "freely transferable" and either part of a class of securities registered under the Securities Exchange Act of 1934, or sold under an effective registration statement under the Securities Act of 1933, provided the securities are registered under the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year of the issuer during which the offering occurred. All our outstanding shares have been registered under the Securities Exchange Act of 1934. The regulation provides that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. Our common shares and our preferred shares have been widely held and we expect our common shares and our preferred shares to continue to be widely held. We expect the same to be true of any additional class of preferred stock that we may issue, but we can give no assurance in that regard. The regulation provides that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include: - any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order; - any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence; - any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and - any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer. We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be "freely transferable." Furthermore, we believe that there exist no other facts or circumstances limiting the transferability of our shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions. Assuming that each class of our shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of these shares, we have received an opinion of our counsel Sullivan & Worcester LLP that our shares will not fail to be "freely transferable" for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and that under the regulation the shares are publicly offered securities and our assets will not be deemed to be "plan assets" of any ERISA plan or non-ERISA plan that invests in our shares. 21 ITEM 2. PROPERTIES At December 31, 2002, we had real estate investments totaling approximately $2.8 billion, at cost, in 251 hotels that were leased or managed by third parties. The following table summarizes certain information about our properties as of December 31, 2002.
Number of Undepreciated Depreciated Location of Properties by State Properties Carrying Value Carrying Value - ------------------------------- ---------- -------------- -------------- (in thousands) (in thousands) Alabama 4 $ 33,297 $ 27,216 Arizona 15 144,834 117,846 California 24 353,212 304,093 Colorado 3 25,521 21,783 Delaware 1 12,949 10,819 Florida 17 171,197 146,118 Georgia 19 178,230 147,939 Hawaii 1 41,525 39,621 Iowa 2 15,240 12,305 Illinois 12 136,690 120,369 Indiana 3 29,061 24,500 Kansas 3 21,063 17,857 Kentucky 1 4,980 4,153 Louisiana 1 28,192 24,158 Massachusetts 10 98,345 80,086 Maryland 7 74,346 62,054 Michigan 8 69,769 60,983 Minnesota 3 29,291 23,746 Montana 6 77,781 64,048 North Carolina 12 106,689 90,130 Nebraska 1 6,279 5,091 New Jersey 9 117,872 99,617 New Mexico 2 22,580 18,486 Nevada 3 44,635 40,633 New York 3 34,281 26,450 Ohio 5 39,179 34,044 Oklahoma 2 16,731 14,635 Pennsylvania 9 104,286 84,254 Rhode Island 1 11,028 8,804 South Carolina 2 16,852 14,162 Tennessee 8 107,622 90,947 Texas 23 229,814 193,984 Utah 3 61,933 51,692 Virginia 21 215,168 183,914 Washington 5 64,322 54,823 Wisconsin 1 9,065 7,375 West Virginia 1 8,463 7,677 ---------- ------------ ------------ Total 251 $ 2,762,322 $ 2,336,412 ========== ============ ============
At December 31, 2002, other than 10 of our hotels that were on leased land, we had a fee simple interest in all our properties. In January 2003, we purchased the land related to one of the hotels subject to a ground lease from an unrelated party for $6.5 million. For the other nine hotels subject to a ground lease, in each case, the remaining term of the ground lease (including renewal options) is in excess of 56 years, and the ground lessors are unrelated to us. 22 ITEM 3. LEGAL PROCEEDINGS Although in the ordinary course of business we may become involved in ordinary routine litigation incidental to our business, we are not aware of any material pending or threatened legal proceeding affecting us or any of our properties for which we might become liable or the outcome of which we expect to have a material impact on us. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 23 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common shares are traded on the New York Stock Exchange (symbol: HPT). The following table sets forth for the periods indicated the high and low closing sale prices for our common shares as reported in the New York Stock Exchange Composite Transactions reports:
2001 High Low ---- ---- --- First Quarter $ 26.96 $ 22.75 Second Quarter $ 29.65 $ 25.35 Third Quarter $ 29.40 $ 20.95 Fourth Quarter $ 30.00 $ 24.35 2002 High Low ---- ---- --- First Quarter $ 34.80 $ 29.07 Second Quarter $ 36.50 $ 33.09 Third Quarter $ 36.36 $ 28.02 Fourth Quarter $ 35.20 $ 30.30
The closing price of our common shares on the New York Stock Exchange on March 14, 2003, was $29.98 per share. As of March 14, 2003, there were 1,192 shareholders of record, and we estimate that as of such date there was in excess of 73,000 beneficial owners of our common shares. Information about distributions paid to common shareholders is summarized in the table below. Common share distributions are generally paid in the quarter following the quarter to which they relate.
Distributions Per Common Share ---------------- 2001 2002 ---- ---- First Quarter $ 0.70 $ 0.71 Second Quarter $ 0.71 $ 0.72 Third Quarter $ 0.71 $ 0.72 Fourth Quarter $ 0.71 $ 0.72 ------ ------ Total $ 2.83 $ 2.87
All common distributions shown in the table above have been paid. We currently intend to continue to declare and pay common share distributions on a quarterly basis. However, distributions are made at the discretion of our board of trustees and depend on our earnings, cash available for distribution, financial condition, capital market conditions, growth prospects and other factors as our board of trustees deems relevant. 24 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data for the five years ended December 31, 2002. This data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------------- ---------------- ---------------- ---------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues: Rental income.................. $ 247,488 $ 240,290 $ 234,377 $ 212,669 $ 157,223 Hotel operating revenues....... 79,328 37,982 -- -- -- FF&E reserve income............ 21,600 24,652 25,753 20,931 16,108 Interest income................ 290 953 2,893 3,618 1,630 ---------------- ---------------- ---------------- ---------------- --------------- Total revenues.............. 348,706 303,877 263,023 237,218 174,961 Expenses: Hotel operating expenses....... 50,515 24,375 -- -- -- Interest....................... 42,424 41,312 37,682 37,352 21,751 Depreciation and amortization.. 96,474 91,395 84,303 74,707 54,757 General and administrative..... 15,491 14,839 14,767 13,230 10,471 ---------------- ---------------- ---------------- ---------------- --------------- Total expenses.............. 204,904 171,921 136,752 125,289 86,979 ---------------- ---------------- ---------------- ---------------- --------------- Net income before.............. 143,802 131,956 126,271 111,929 87,982 extraordinary item Extraordinary loss from early extinguishment of debt........................ 1,600 -- -- -- 6,641 ---------------- ---------------- ---------------- ---------------- --------------- Net income....................... 142,202 131,956 126,271 111,929 81,341 Preferred distributions.......... 7,572 7,125 7,125 5,106 -- ---------------- ---------------- ---------------- ---------------- --------------- Net income available for common shareholders............ $ 134,630 $ 124,831 $ 119,146 $ 106,823 $ 81,341 ================ ================ ================ ================ =============== Common distributions declared.... $ 178,856 $ 163,592 $ 156,404 $ 108,925 $ 113,220 Weighted average common shares outstanding.................... 62,538 58,986 56,466 52,566 42,317 PER COMMON SHARE DATA: Net income available for common shareholders before extraordinary item............. $ 2.18 $ 2.12 $ 2.11 $ 2.03 $ 2.08 Net income available for common shareholders............ $ 2.15 $ 2.12 $ 2.11 $ 2.03 $ 1.92 Distributions per common share... $ 2.87 $ 2.83 $ 2.78 $ 2.75 $ 2.62 BALANCE SHEET DATA (AS OF DECEMBER 31): Real estate properties, at cost.. $ 2,762,322 $ 2,629,153 $ 2,429,421 $ 2,270,630 $ 1,887,735 Real estate properties, net...... 2,336,412 2,265,824 2,157,487 2,082,999 1,774,811 Total assets..................... 2,403,756 2,354,964 2,220,909 2,194,852 1,837,638 Debt, net of discount............ 473,965 464,781 464,748 414,780 414,753 Shareholders' equity............. 1,645,020 1,604,519 1,482,940 1,519,715 1,173,857
25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following information should be read in conjunction with the financial statements and the notes thereto included in this Annual Report. This discussion includes references to cash available for distribution, or CAD. We compute CAD as net income available for common shareholders plus depreciation and amortization expense, plus non-cash expenses (including only amortization of deferred financing costs and administrative expenses to be settled in our common shares), minus those deposits made into FF&E Escrow accounts which are owned by us but which are restricted to use for improvements at our properties. Our method of calculating CAD may not be comparable to CAD which may be reported by other REITs that define this term differently. We consider CAD to be an appropriate measure of performance for HPT, along with cash flow from operating activities, investing activities and financing activities, because it provides investors with an indication of HPT's operating performance and our ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Our CAD is an important factor considered by our board of trustees in determining the amount of our distributions to shareholders. CAD does not represent cash generated by operating activities in accordance with generally accepted accounting principles and should not be considered as an alternative to net income or cash flow from operating activities as a measure of financial performance or liquidity. CURRENT EVENTS As a result of the terrorist attacks on the United States on September 11, 2001, concerns regarding a war with Iraq or other countries or another terrorist attack, and the impact of a recessionary economy, the U.S. hotel industry has experienced significant declines versus the comparable prior periods in occupancy, revenues and profitability. These declines primarily arise from reduced business travel and, during 2002, most of our hotel operators reported declines in the operating performance of our hotels versus the prior year. As of December 31, 2002, all of our rent payments are current. As described below, our leases and operating agreements contain security features, such as guarantees, which are intended to protect payment of minimum rents and returns to us in accordance with our leases and agreements regardless of hotel performance. However, the effectiveness of various security features to provide uninterrupted payments to us is not assured, particularly if travel patterns continue at depressed levels for extended periods. If our tenants, hotel managers or guarantors default in their payment obligations to us, our revenues will decline. LEASES AND OPERATING AGREEMENTS Each of our 251 hotels is included in one of nine groups of hotels of between 12 and 57 properties. These groups are each operated under a pooled agreement by a third party as tenant or manager for an initial term expiring between 2010 and 2019. The agreements contain renewal options for all, but not less than all, of the properties in the same group, and the renewal terms total 20-48 years. Each agreement requires the lessee or operator to: (i) pay all operating costs associated with the hotels; (ii) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels ("FF&E reserves"); (iii) make payments to us of minimum rents or returns; and (iv) make payments to us of additional returns equal to 5%-10% of increases in total hotel sales over sales during a specified base year. Each third party has posted a security or performance deposit with us generally equal to one year's minimum rent or return. One of the nine groups discussed above contains 35 hotels. As of December 31, 2002, 18 of these hotels are operated by subsidiaries of Marriott International, Inc. ("Marriott") under long-term management contracts and leased to our 100% owned taxable REIT subsidiary, or TRS, as allowed by the tax laws applicable to REITs. On June 15, 2001, we purchased four hotels managed by Marriott and our TRS began to lease an additional six hotels which we own. On September 7, 2001 and September 6, 2002, our TRS began to lease six and two hotels, respectively, which we own. Also as of December 31, 2002, the remaining 17 hotels in this group are leased to and operated by subsidiaries of Marriott. Marriott's obligation to pay rents and returns to us for all 35 of these hotels is combined for all purposes under these agreements. An additional four hotels of the 17 leased to Marriott began to be leased to our TRS in January 2003. From time to time prior to June 30, 2004, each of the remaining 13 hotels leased to Marriott are expected to begin to be leased to our TRS and managed by Marriott. Our TRS does not operate any hotels. Instead, after our TRS begins to lease each hotel, Marriott continues to operate the hotel as manager and our TRS begins to pay rent and FF&E reserves to our other subsidiaries. Because our TRS is consolidated with us, our consolidated statement of income does not show rental income or FF&E reserve income paid by our TRS to our other subsidiaries; instead, our consolidated statement of income shows hotel operating revenues and hotel operating expenses for these hotels. Historically, upon the transfer to us of hotel leasehold interests, the net of hotel operating revenues and hotel operating expenses has generally been equal to the rental income and FF&E reserve income previously attributable to that hotel, a condition we expect will continue as transfers occur under current market conditions. 26 RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001 Total revenues were $348,706 for 2002, a 14.8% increase over revenues of $303,877 for 2001. This increase is primarily due to activities of our TRS and our hotel acquisitions. Rental income was $247,488 for 2002, a 3.0% increase from $240,290 for 2001. This increase is a result of our acquisition of 21 hotels in April 2002, partially offset by minimum rental income recognized in 2001 for hotels which subsequently began to be leased to our TRS. FF&E reserve income represents amounts paid by our tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total sales at our hotels. The FF&E reserve income was $21,600 for 2002, a 12.4% decrease from FF&E reserve income of $24,652 for 2001. This decrease is due primarily to reduced levels of hotel sales attributable to the general slowdown of business travel across the United States described above, offset somewhat by a scheduled increase in the applicable percentage used to calculate FF&E reserves at some of our hotels. Part of this decrease is also due to activities related to the 18 hotels which began to be leased by our TRS at various times from June 2001, as discussed above. The revenues which are escrowed as FF&E reserves for hotels leased by our TRS are not separately stated in our consolidated statements of income. Our TRS's activities have given rise to hotel operating revenues of $79,328 for 2002, a 108.9% increase over hotel operating revenues of $37,982 in 2001. Our TRS's activities have also given rise to hotel operating expenses of $50,515 for 2002, a 107.2% increase over hotel operating expenses of $24,375 in 2001. The increases in hotel operating revenues and expenses were caused by activities at the 18 hotels that began to be leased by our TRS, at various times, from June 2001. The hotels leased to our TRS generated net operating results that were $5,822 in 2002 and $1,957 in 2001 less than the minimum returns due to us. These amounts have been reflected in our statement of income as a net reduction to hotel operating expenses in each year because they were funded by Marriott. We expect hotel operating revenues and hotel operating expenses to increase in the future as 17 hotels currently leased by Marriott begin to be leased to our TRS and operated by Marriott from time to time prior to June 30, 2004, including four hotels beginning in January 2003. Interest income was $290 for 2002, a 69.6% decrease from interest income of $953 for 2001. This decrease was due to a lower average cash balance and a lower average interest rate during 2002. Total expenses were $204,904 for 2002, a 19.2% increase over total expenses of $171,921 for 2001. The increase is due primarily to our recognition of hotel operating expenses for a larger number of hotels leased to our TRS in 2002 than in 2001, and increases in other expenses arising from our additional hotel investments during 2001 and 2002. Interest expense for 2002 was $42,424, a 2.7% increase over interest expense of $41,312 for 2001. The increase was primarily due to higher average borrowings partially offset by a lower weighted average interest rate during 2002. Depreciation and amortization expense was $96,474 for 2002, a 5.6% increase over depreciation and amortization expense of $91,395 for 2001. This increase was due principally to the impact of the depreciation of 21 hotels acquired in April 2002, and the impact of the purchase of depreciable assets during 2001 and 2002 with funds from FF&E reserve accounts owned by us. General and administrative expense was $15,491 for 2002, a 4.4% increase from general and administrative expense of $14,839 in 2001. This increase is due principally to the impact of additional hotel investments during 2001 and 2002. Net income before extraordinary item was $143,802 for 2002, a 9.0% increase over net income before extraordinary item of $131,956 for 2001. The increase was primarily due to increased rental income from new investments partially offset by a decrease in FF&E reserve income and increases in interest and depreciation expenses. In 2002, we recognized an extraordinary loss of $1,600 to write-off the unamortized deferred financing costs associated with $115,000 of senior notes we redeemed on July 18, 2002. Net income available for common shareholders was $134,630 for 2002, or $2.15 per share, a 7.8% increase, or 1.4% on a per share basis, over net income available for common shareholders of $124,831, or $2.12 per share, for 2001. This increase resulted from the investment and operating activity discussed above. Cash Available for Distribution, or CAD, for 2002 and 2001 is derived as follows: 27
2002 2001 ---------- ---------- Net income available for common shareholders $ 134,630 $ 124,831 Add: Depreciation and amortization 96,474 91,395 Extraordinary item 1,600 - Non-cash expenses, primarily amortization of deferred financing costs 3,900 3,313 Less: FF&E reserves(1) 25,710 26,540 ---------- ---------- Cash Available for Distribution $ 210,894 $ 192,999 ========== ==========
(1) All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding expected capital expenditures at our hotels. Our net income includes $21,600 and $24,652 for 2002 and 2001, respectively, of tenant deposits into FF&E reserve escrow accounts owned by us, which are subtracted from net income in determining CAD because these amounts are not available to us for distributions to shareholders. The FF&E reserves amounts shown here also include $4,110 and $1,888 for 2002 and 2001 respectively, of our hotel operating revenues, which we have escrowed for routine capital improvements for the hotels leased to our TRS and operated by Marriott under a long-term management agreement. Hotel revenues which are escrowed as FF&E reserves for our hotels leased by our TRS are not separately stated in our consolidated statements of income. Some of our leases provide that FF&E reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2002 and 2001 periods totaled $14,840 and $14,355, respectively, and are not removed here because they are not included in our income. CAD was $210,894 for 2002, a 9.3% increase over CAD of $192,999 for 2001. This increase was due to the impact of our acquisition of 21 hotels during April 2002, offset by increases in interest and general and administrative expenses, and a decrease in interest income. CAD does not represent cash flows from operating activities as determined in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indicator of our financial performance or to cash flows from operating activities as a measure of liquidity. Cash flow from operations was $210.2 million in 2002, a 2.4% increase from $205.4 million in 2001 primarily due to the impact of new hotel investments in 2001 and 2002. Cash used in investing activities was $142.3 million in 2002, a 20.6% decrease from $179.2 million in 2001, primarily because fewer hotel acquisitions were completed in 2002. Cash used in financing activities was $99.6 million in 2002, a 744.1% increase over $11.8 million in 2001, primarily because of lower equity issuances in 2002 and increased distributions on common shares. YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000 Total revenues were $303,877 for 2001, a 15.5% increase over revenues of $263,023 for 2000. This increase is primarily due to our TRS's activities and our hotel acquisitions. Rental income was $240,290 for 2001, a 2.5 % increase from $234,377 for 2000 as a result of our acquisition of 8 hotels in 2001, which was partially offset by minimum rental income recognized in 2000 for hotels which subsequently began to be leased to our TRS. FF&E reserve income represents amounts paid by our tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total sales at our hotels. The FF&E reserve income was $24,652 for 2001, a 4.3% decrease from FF&E reserve income of $25,753 for 2000. This decrease is due primarily to reduced levels of hotel sales attributable to the events of September 11, 2001, and modest declines which began to affect the hotel industry earlier in 2001 as a result of the recessionary economy, offset somewhat by a scheduled increase in the applicable percentage used to calculate FF&E reserves at some of our hotels. Part of this decrease is also due to activities related to the 16 hotels which began to be leased by our TRS at various times from June 2001, as discussed above, the revenues which are escrowed as FF&E reserves for hotels leased by our TRS are not separately stated in our consolidated statements of income. 28 Our TRS's activities gave rise to hotel operating revenues of $37,982 and hotel operating expenses of $24,375 in 2001. Hotel operating expenses were reduced by payments of $1,957 from Marriott in 2001 under the terms of its guarantee to us. There are no comparable amounts in the 2000 period because all of our hotels were operated under third party leases. Interest income was $953 for 2001, a 67.1% decrease from interest income of $2,893 for 2000. This decrease was due to a lower average cash balance and a lower average interest rate during 2001. Total expenses were $171,921 for 2001, a 25.7% increase over total expenses of $136,752 for 2000. The increase is due primarily to our recognition of hotel operating expenses for 16 hotels which began to be leased to our TRS at various times starting June 2001 and increases in other expenses arising from our additional hotel investments during 2000 and 2001. Interest expense was $41,312 for 2001, a 9.6% increase over interest expense of $37,682 for 2000. The increase was primarily due to higher average borrowings partially offset by a lower weighted average interest rate during 2001. Depreciation and amortization expense was $91,395 for 2001, a 8.4% increase over depreciation and amortization expense of $84,303 for 2000. This increase was principally due to the impact of the depreciation of eight hotels acquired in 2001 and the impact of the purchase of depreciable assets during 2000 and 2001 with funds from FF&E reserve accounts owned by us. General and administrative expense was $14,839 for 2001, a 0.5% increase from general and administrative expense of $14,767 in 2001. This increase is due principally to the impact of additional hotel investments during 2001. Net income was $131,956 for 2001, a 4.5% increase over net income of $126,271 for 2000. The increase was primarily due to increased rental income from new investments partially offset by a decrease in FF&E reserve income and increases in interest and depreciation expenses. Net income available for common shareholders was $124,831 for 2001, or $2.12 per share, a 4.8% increase, or 0.5% on a per share basis, over net income available for common shareholders of $119,146, or $2.11 per share, for 2000. This increase resulted from the investment and operating activity discussed above. Cash Available for Distribution, or CAD, for 2001 and 2000 is derived as follows:
2001 2000 ---------- ---------- Net income available for common shareholders $ 124,831 $ 119,146 Add: Depreciation and amortization 91,395 84,303 Non-cash expenses, primarily amortization of deferred financing costs 3,313 3,067 Less: FF&E reserves(1) 26,540 25,753 ---------- ---------- Cash Available for Distribution $ 192,999 $ 180,763 ========== ==========
(1) All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding expected capital expenditures at our hotels. Our net income includes $24,652 and $25,753 for 2001 and 2000, respectively, of tenant deposits into FF&E reserve escrow accounts owned by us, which are subtracted from net income in determining CAD because these amounts are not available to us for distributions to shareholders. The FF&E reserves amounts shown here also include $1,888 and zero for 2001 and 2000 respectively, of our hotel operating revenues, which we have escrowed for routine capital improvements for the hotels leased to our TRS and operated by Marriott under a long-term management agreement. Hotel revenues which are escrowed as FF&E reserves for our hotels leased by our TRS are not separately stated in our consolidated statements of income. Some of our leases provide that FF&E reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2001 and 2000 periods totaled $14,355 and $15,284, respectively, and are not removed here because they are not included in our income. CAD was $192,999 for 2001, a 6.8% increase over CAD of $180,763 for 2000. This increase was due to the impact of our acquisition of eight hotels during 2001, offset by increases in interest and general and administrative expenses, and a decrease in interest income. 29 CAD does not represent cash flows from operating activities as determined in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indicator of our financial performance or to cash flows from operating activities as a measure of liquidity. Cash flow from operations was $205.4 million in 2001, a 9.0% increase from $188.3 million in 2000 primarily due to the impact of new hotel investments in 2000 and 2001. Cash used in investing activities was $179.2 million in 2001, a 45.5% increase from $123.2 million in 2000, primarily because of larger investments in hotels purchased in 2001 versus hotels in 2000. Cash used in financing activities was $11.8 million in 2001 a 89.7% decrease from $114.1 million in 2000, primarily because of our equity issuance in 2001 offset somewhat by increased distributions on common shares; we issued no equity in 2000. LIQUIDITY AND CAPITAL RESOURCES - --OUR TENANTS AND OPERATORS All of our hotels are leased to or operated by third parties. We do not operate hotels. All costs of operating and maintaining our hotels are paid by these third parties for their own account or as agent for us. These third parties derive their funding for hotel operating expenses, reserves for renovations, or FF&E reserves, and rents and returns due us generally from hotel operating revenues. We define coverage for each of our nine grouped hotel leases or operating agreement as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions, divided by the aggregate minimum payments to us. More detail regarding coverage, guarantees and other security features is presented in the table on pages 33 and 34. Eight of nine of our hotel pools, representing 227 hotels, generated coverage of at least 1.0x during 2001, and three hotel pools, representing 89 hotels generated coverage of at least 1.0x during 2002. If a hotel pool does not generate coverage of at least 1.0x, our tenant or operator must supplement hotel operating results to make the minimum payments due to us to prevent default under the lease or operating agreement. In addition, 153 hotels we own in five pools, 58.2% of our total investments, at cost, are operated under leases or management agreements which are subject to full or limited guarantees. These guarantees may provide us with continued payments if combined total hotel sales less total hotel expenses and required FF&E reserve payments fail to equal or exceed amounts due to us. Our tenants and managers or their affiliates may also supplement cash flow from our hotels in order to make payments to us and preserve their rights to continue operating our hotels. Guarantee or supplemental payments to us, if any, made under any of our leases or management agreements, do not subject us to repayment obligations. As of December 31, 2002, all payments due, including those payments due under leases or operating agreements whose hotels have generated less than 1.0x coverage during 2002, are current. However, the effectiveness of various security features to provide uninterrupted payments to us is not assured, particularly if travel patterns continue at depressed levels for extended periods. Some of our leases and guarantees require our tenants, subtenants and guarantors to maintain minimum net worths, as defined in the documents. At December 31, 2002, it appears that the Barcelo Crestline subtenants and Candlewood guarantor, as described in charts on pages 33 and 34, respectively, may have lesser net worths than are required by our sublease and guaranty documents. We have granted limited waivers of these net worth requirements while we negotiate with these subtenants and the guarantor regarding these matters. If our tenants, hotel managers or guarantors default in their payment obligations to us, our revenues will decline. - --OUR OPERATING LIQUIDITY AND RESOURCES Our principal source of funds for current expenses and distributions to shareholders is our operations, primarily rents from leasing and the excess of hotel operating revenues over hotel operating expenses for hotels leased to our TRS. Minimum rents and minimum returns are received from our tenants and managers monthly in advance and percentage rents and returns are received either monthly or quarterly in arrears. This flow of funds has historically been sufficient for us to pay our operating expenses, including interest, and distributions. We believe that our operating cash flow will be sufficient to meet our operating expenses, including interest, and distribution payments for the foreseeable future. We have maintained our status as a REIT under the Internal Revenue Code, by meeting certain requirements, including the distribution of our taxable income to our shareholders. As a REIT, we do not expect to pay federal income taxes on the majority of our income. In 1999 federal legislation known as the REIT Modernization Act, or RMA, was enacted and became effective on January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to a TRS if the hotel is managed by an independent third party. We entered our first transaction using a TRS on June 15, 2001. The income realized by our TRS in excess of the rent it pays to us will be subject to income tax at customary corporate rates. As and if the financial performance of the hotels operated for the account of our TRS improves, these taxes may become material, but the anticipated taxes are not material to our consolidated financial results at this time. 30 - -- OUR INVESTMENT AND FINANCING LIQUIDITY AND RESOURCES (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Various percentages of total sales at all of our hotels are escrowed as reserves for future renovations and refurbishment, or FF&E reserves, as discussed above. As of December 31, 2002, there was approximately $64,270 on deposit in these escrow accounts, of which $46,807 was held directly by us and reflected on our balance sheet as restricted cash. The remaining $17,463 is held in accounts owned by our tenants and is not reflected on our balance sheet. We have security and remainder interests in the accounts owned by our tenants. During 2002, $40,550 was contributed to these accounts and $29,149 was spent from these accounts to renovate and refurbish our hotels. In order to fund acquisitions and to accommodate occasional cash needs that may result from timing differences between the receipt of rents and the need to make distributions or pay operating expenses, we maintain a revolving credit facility with a group of commercial banks. The credit facility in effect at the beginning of 2002 expired in March 2002. Our new facility matures in June 2005 and may be extended at our option to June 2006 upon our payment of an extension fee. The new facility permits borrowing up to $350,000 and includes a feature under which the maximum draw may expand to $700,000, in certain circumstances. Drawings under our credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility is payable at a spread above LIBOR. At December 31, 2002, we had $7,337 of cash and cash equivalents and all $350,000 available on our revolving credit facility. We expect to use existing cash balances, borrowings under our credit facility or other lines of credit and net proceeds of offerings of equity or debt securities to fund future property acquisitions. At December 31, 2002, we had no commitments to purchase additional properties. However, we expect to make improvements and undertake a modernization program at 36 of our Courtyard by Marriott(R) hotels. These hotels contain 5,228 rooms, representing 51% of the total Courtyard by Marriott(R) rooms which we own. Approximately $25,700 of the estimated $58,200 cost for this project is expected to be funded by amounts on deposit in FF&E reserve accounts. We plan to fund the remaining $32,500 of costs with existing cash balances or borrowings under our credit facility. Upon funding, our minimum annual rent related to these hotels will increase by 10% of the amount funded. Our funding is expected to take place before the end of the 2003 second quarter. In January 2003, we issued $175,000 of 6.75% senior notes, due 2013. Net proceeds after underwriting and other offering expenses were $172,555. In February 2003, we redeemed at par plus accrued interest, all $150,000 of our outstanding 8.5% senior notes due 2009. Our debts have maturities, as adjusted for January 2003 and February 2003 transactions, as follows: $150,000 in 2008; $50,000 in 2010; $125,000 in 2012 and $175,000 in 2013. None of these debt obligations require principal or sinking fund payments prior to their maturity date. To the extent amounts are outstanding on our credit facility and, as the maturity dates of our credit facility and term debt approach over the longer term, we will explore alternatives for the repayment of amounts due. Such alternatives in the short term and long term may include incurring additional long term debt and issuing new equity securities. In March 2002, our shelf registration statement was declared effective by the Securities and Exchange Commission. As of December 31, 2002, we had $2,558,750 available on our shelf registration. An effective shelf registration allows us to issue public securities on an expedited basis, but it does not assure that there will be buyers for securities offered by us. Although there can be no assurance that we will consummate any debt or equity security offerings or other financings, we believe we will have access to various types of financing, including investment grade debt or equity securities offerings, with which to finance future acquisitions and to pay our debt and other obligations. On January 6, 2003, a distribution of $0.72 per common share was declared with respect to fourth quarter 2002 results and was paid to shareholders on February 20, 2003, using cash on hand. - -- DEBT COVENANTS Our debt obligations at December 31, 2002, were limited to our revolving credit facility and our $475 million of public debt. Each issue of our public debt is governed by an indenture. This indenture and its supplements and our credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain a minimum net worth, as defined, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios, as defined. During the period from our incurrence of these debts through December 31, 2002, we were in compliance with all of our covenants under our indenture and its supplements and our credit agreement. 31 Neither our indenture and its supplements nor our bank credit facility contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement, our senior debt rating is used to determine the fees and interest rate applied to borrowings. Our public debt indenture and its supplements contain cross default provisions to any other debts of $20 million or more. Similarly, a default on our public indenture would constitute a default on our credit agreement. As of December 31, 2002, we had no commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or partnerships. As of December 31, 2002, we had no secured debt obligations. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade. We have no "off balance sheet" liabilities. - -- RELATED PARTY TRANSACTIONS We have an agreement with Reit Management & Research LLC, or RMR. RMR provides investment, management and administrative services to us. RMR is owned by Barry M. Portnoy and Gerard M. Martin, each a managing trustee and member of our board of trustees. Each of our executive officers are also officers of RMR. Our independent trustees, including all of our trustees other than Messrs. Portnoy and Martin, review our contract with RMR at least annually and make determinations regarding its negotiation, renewal or termination. Any termination of our contract with RMR would cause a default under our bank credit facility, if not approved by a majority of lenders. Our current contract term with RMR expires on December 31, 2003. RMR is compensated at an annual rate equal to 0.7% of our average real estate investments, as defined, up to the first $250 million of such investments and 0.5% thereafter plus an incentive fee based upon increases in cash available for distribution per share, as defined. The incentive fee payable to RMR is paid in our common shares. CRITICAL ACCOUNTING POLICIES Our most critical accounting policies involve our investments in real property. These policies affect our: - allocation of purchase price between various asset categories and the related impact on our recognition of depreciation expense; - assessment of the carrying value of long-lived assets; and - classification of our leases. These policies involve significant judgments based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability of our tenants and operators to perform their obligations to us, and the current and likely future operating and competitive environment in which our properties are located. In the future we may need to revise our assessments to incorporate information which is not now known and such revisions could increase or decrease our depreciation expense related to properties we own, which could result in the classification of new leases as other than operating leases or could decrease the net carrying value of our assets. PROPERTY LEASES, OPERATING AGREEMENTS AND TENANT OPERATING STATISTICS As of December 31, 2002, we owned 251 hotels which are grouped into nine combinations and leased to or managed by separate affiliates of hotel operating companies including Marriott International, Inc., Host Marriott Corporation, Barcelo Crestline Corporation, Wyndham International, Inc., Prime Hospitality Corporation, Candlewood Hotel Company, Inc. and BRE/Homestead Village LLC. The tables on the following pages summarize the key terms of our leases and operating agreements at December 31, 2002, and include statistics reported directly to us or derived from statistics reported to us by our tenants and operators. These statistics include occupancy, average daily rate, or ADR, revenue per available room, or RevPAR, and coverage. Although we consider these statistics, along with the lease or operating agreement security features also presented in the tables on the following pages, to be important measures of our tenants' and operators' success in operating our hotels and their ability to make continued payments to us, none of the third party reported information is a direct measure of our financial performance. 32
Marriott(R)/Residence Inn by Marriott(R)/ Courtyard by Marriott(R)/ TownePlace Suites by Courtyard by Residence Inn by Marriott(R)/SpringHill Hotel Brand Marriott(R) Marriott(R) Suites by Marriott(R)(1) - --------------------------------------------------------------------------------------------------------------------- PROPERTY LEASES AND OPERATING AGREEMENTS Number of Hotels 53 18 35 Number of Rooms/Suites 7,610 2,178 5,382 Number of States 24 14 15 Tenant Subsidiary of Subsidiary of Host Subsidiary of Host Subleased to Marriott/Subsidiary Subleased to Subsidiary of of Hospitality Subsidiary of Barcelo Crestline Properties Trust Barcelo Crestline Manager Subsidiary of Subsidiary of Subsidiary of Marriott Marriott Marriott Investment at December 31, 2002 (000s)(2) $514,803 $179,386 $453,955 Security Deposit (000s) $50,540 $17,220 $36,204 End of Current Term 2012 2010 2019 Renewal Options(3) 3 for 12 years 1 for 10 years, 2 for 15 years each each 2 for 15 years each Current Annual Minimum Rent/Return (000s) $51,480 $17,914 $48,288 Percentage Rent/Return(4) 5.0% 7.5% 7.0% TENANT OPERATING STATISTICS(5) Rent/Return Coverage(5)(6): Year ended 12/31/01 1.7x 1.4x 1.1x Year ended 12/31/02 1.5x 1.2x 0.9x Other Security Features HPT controlled HPT controlled lockbox Limited guarantee lockbox with with minimum balance provided by Marriott. minimum balance maintenance Crestline and maintenance requirement; subtenant Marriott. requirement; and subtenant parent subtenant and minimum net worth subtenant parent requirement. minimum net worth requirement. Residence Inn by Marriott(R)/Courtyard by Marriott(R)/ TownePlace Suites by Marriott(R)/SpringHill Hotel Brand Suites by Marriott(R) Wyndham(R) - ----------------------------------------------------------------------------------------- PROPERTY LEASES AND OPERATING AGREEMENTS Number of Hotels 19 12 Number of Rooms/Suites 2,756 2,321 Number of States 14 8 Tenant Subsidiary of Subsidiary of Barcelo Crestline Wyndham Manager Subsidiary of Subsidiary of Marriott Wyndham Investment at December 31, 2002 (000s)(2) $274,222 $182,570 Security Deposit (000s) $28,509 $18,325 End of Current Term 2015 2014 Renewal Options(3) 2 for 10 years each 4 for 12 years each Current Annual Minimum Rent/Return (000s) $28,508 $18,325 Percentage Rent/Return(4) 7.0% 8.0% TENANT OPERATING STATISTICS(5) Rent/Return Coverage(5)(6): Year ended 12/31/01 1.0x 1.0x Year ended 12/31/02 0.9x 0.8x Other Security Features Limited guarantees Wyndham parent provided by Barcelo minimum net worth Crestline and requirement. Marriott.
(1) At December 31, 2002, 17 of the 35 hotels in this combination were leased to and operated by subsidiaries of Marriott. The remaining 18 hotels were operated by subsidiaries of Marriott under a management contract with our TRS. Marriott's obligations under the lease and the management contracts are subject to cross-default provisions and Marriott has provided us with a limited guarantee of its lease and management obligations, including the obligation to pay minimum rents and returns to us. (2) Excludes expenditures made from FF&E reserves subsequent to our initial purchase. (3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within each combination of hotels. (4) Each lease or management contract provides for payment to HPT of a percentage of increases in total hotel sales over base year levels as additional rent or return. (5) We define coverage as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions (which data is provided to us by our tenants or operators), divided by the minimum rent or return payments due to us. (6) Represents data for the fiscal year ended December 28, 2001, and January 3, 2003, respectively, for the hotels managed by Marriott. 33
Total/ Summerfield Range/ Suites by Candlewood Homestead Average Hotel Brand Wyndham(R) AmeriSuites(R) Suites(R) Studio Suites(R) (all investments) - ----------------------------------------------------------------------------------------------------------------------------------- PROPERTY LEASES AND OPERATING AGREEMENTS Number of Hotels 15 24 57 18 251 Number of Rooms/Suites 1,822 2,929 6,887 2,399 34,284 Number of States 8 14 23 5 37 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood BRE/Homestead Village LLC Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood BRE/Homestead Village LLC Investment at December 31, 2002 (000s)(1) $240,000 $243,350 $434,750 $145,000 $2,668,036 Security Deposit (000s) $15,000 $25,575(2) $46,085 $15,960 $253,418 End of Current Term 2017 2013 2018 2015 2010-2019 (average 13.6 years) Renewal Options(3) 4 for 12 3 for 15 3 for 15 2 for 15 years each years each years each years each Current Annual Minimum Rent/Return (000s) $25,000 $23,795 $44,389 $15,960 $273,659 Percentage Rent/Return(4) 7.5% 8.0% 10.0% 10.0% 5%-10% TENANT OPERATING STATISTICS(5) Rent/Return Coverage(5)(6): Year ended 12/31/01 1.1x 0.6x 1.1x 1.2x 0.6x -1.7x Year ended 12/31/02 0.7x 0.6x 0.9x 1.0x 0.6x -1.5x Other Security Features Wyndham parent Limited Candlewood Homestead minimum net guarantee parent guarantee parent worth secured by $16.5 and minimum net guarantee and requirement. million cash worth minimum net deposit. requirement. worth requirement.
(1) Excludes expenditures made from FF&E reserves subsequent to our initial purchase. (2) Excludes deposit of approximately $16.5 million retained by us to secure guarantee obligations to us. (3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within each combination of hotels. (4) Each lease or management contract provides for payment to HPT of a percentage of increases in total hotel sales over base year levels as additional rent or return. (5) We define coverage as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E reserve contributions (which data is provided to us by our tenants or operators), divided by the minimum rent or return payments due to us. (6) Represents data for the fiscal year ended December 28, 2001, and January 3, 2003, respectively, for the hotels managed by Marriott. 34 The following tables summarize the operating statistics, including occupancy, ADR, and RevPAR, reported to us by our third party tenants and managers by lease or operating agreement for the periods indicated for the 247 hotels we own which were open for at least one full year as of January 1, 2002:
No. of No. of Lease Hotels Rooms/Suites 2002(1) 2001(1) Change - ----- -------- ------------ --------- --------- -------- ADR Host (lease no. 1) 53 7,610 $ 97.10 $ 102.12 -4.9% Host (lease no. 2) 18 2,178 $ 95.31 $ 103.65 -8.0% Marriott 35 5,382 $ 90.53 $ 94.48 -4.2% Barcelo Crestline 18 2,604 $ 90.82 $ 97.58 -6.9% Wyndham (lease no. 1) 12 2,321 $ 81.74 $ 90.23 -9.4% Wyndham (lease no. 2) 15 1,822 $ 101.40 $ 120.56 -15.9% Prime 21 2,556 $ 68.39 $ 72.05 -5.1% Candlewood 57 6,887 $ 52.70 $ 56.20 -6.2% Homestead 18 2,399 $ 48.73 $ 52.76 -7.6% -------------------- --------------------------------- Total/Average 247 33,759 $ 79.84 $ 85.70 -6.8% OCCUPANCY Host (lease no. 1) 53 7,610 69.30% 73.20% -5.3% Host (lease no. 2) 18 2,178 76.10% 77.60% -1.9% Marriott 35 5,382 72.30% 72.50% -0.3% Barcelo Crestline 18 2,604 68.80% 69.30% -0.7% Wyndham (lease no. 1) 12 2,321 71.10% 67.00% 6.1% Wyndham (lease no. 2) 15 1,822 79.20% 75.80% 4.5% Prime 21 2,556 62.10% 61.90% 0.3% Candlewood 57 6,887 75.30% 74.50% 1.1% Homestead 18 2,399 74.80% 74.80% - -------------------- --------------------------------- Total/Average 247 33,759 71.90% 72.30% -0.6% RevPAR Host (lease no. 1) 53 7,610 $ 67.29 $ 74.75 -10.0% Host (lease no. 2) 18 2,178 $ 72.53 $ 80.43 -9.8% Marriott 35 5,382 $ 65.45 $ 68.50 -4.4% Barcelo Crestline 18 2,604 $ 62.48 $ 67.62 -7.6% Wyndham (lease no. 1) 12 2,321 $ 58.11 $ 60.43 -3.8% Wyndham (lease no. 2) 15 1,822 $ 80.33 $ 91.41 -12.1% Prime 21 2,556 $ 42.34 $ 44.61 -5.1% Candlewood 57 6,887 $ 39.68 $ 41.87 -5.2% Homestead 18 2,399 $ 36.45 $ 39.46 -7.6% -------------------- --------------------------------- Total/Average 247 33,759 $ 57.40 $ 61.96 -7.3%
(1) Includes data for the calendar year indicated, except for our Courtyard by Marriott(R), Residence Inn by Marriott(R), Marriott Hotels Resorts and Suites(R), TownePlace Suites by Marriott(R), and SpringHill Suites by Marriott(R) branded hotels, which include data for the 52 and 53 week peroids ended January 3, 2003 and December 28, 2001, respectively. 35 SEASONALITY Our hotels have historically experienced seasonal differences typical of the U.S. hotel industry with higher revenues in the second and third quarters of calendar years compared with the first and fourth quarters. This seasonality is not expected to cause material fluctuations in our income because our contractual lease and operating agreement require our tenants/managers to make the substantial portion of our rents and return payments to us in equal amounts throughout a year. Seasonality may affect our hotel operating revenues, but we do not expect seasonal variations to have a material impact upon our financial results of operations or upon our tenants' or operators' ability to meet their contractual obligations to us. INFLATION We believe that inflation should not have a material adverse effect on us. Although increases in the rate of inflation may tend to increase interest rates which we may pay for borrowed funds, our floating rate borrowings are not expected to be outstanding for extended periods, and if we believe they will be outstanding for extended periods we may purchase interest rate caps to protect us from interest rate increases. In addition, our leases provide for the payment of percentage rent to us based on increases in total sales, and such rent may increase with inflation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring our available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 2001. Other than as described below we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future. In January 2003 we issued $175 million of 6.75% senior notes due 2013 and in February 2003 we prepaid $150 million of 8.5% senior notes due 2009. Including the impact of these two transactions, at March 14, 2003, our total outstanding debt consisted of four issues of fixed rate, senior unsecured notes:
Annual Annual Principal Balance Interest Rate Interest Expense Maturity Interest Payments Due ----------------- ------------- ---------------- -------- --------------------- $ 150.0 million 7.000% $ 10.5 million 2008 Semi-Annually 50.0 million 9.125% 4.6 million 2010 Semi-Annually 125.0 million 6.850% 8.6 million 2012 Semi-Annually 175.0 million 6.750% 11.8 million 2013 Semi-Annually --------------- --------------- $ 500.0 million $ 35.5 million
No principal repayments are due under these notes until maturity. Because these notes bear interest at fixed rates, changes in market interest rates during the term of this debt will not effect our operating results. If at maturity these notes were refinanced at interest rates which are 10% higher than shown above, our per annum interest cost would increase by approximately $3.5 million. Changes in the interest rate also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt while decreases in market interest rates increase the fair value of our fixed rate debt. A hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debt obligations in the table above by approximately $13.6 million. Each of our fixed rate debt arrangements allows us to make repayments earlier than the stated maturity date. We are generally allowed to make prepayments only at face value plus a premium equal to a make-whole amount, as defined, generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing prior to maturity. Our revolving credit facility bears interest at floating rates and matures in 2005. As of December 31, 2002, there was zero outstanding and the full amount of $350 million was available. The credit facility has a feature that will allow us to expand borrowings up to $700 million, in certain cases. Our revolving credit facility is available to finance acquisitions and for general business purposes. Repayments under the revolving credit facility may be made at any time without penalty. Our exposure to fluctuations in interest rates may in the future increase if we incur debt to fund future acquisitions or otherwise. A change in interest rates would not affect the value of our floating rate debt obligations, but would affect the interest which we must pay on this debt. The interest rate market which has an impact upon us is the U.S. dollar interest rate market for corporate obligations, including floating rate LIBOR based obligations and fixed rate obligations. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and financial statement schedule begin on Page F-1 (see index in Item 15(a)). One of our tenants, HMH HPT Courtyard LLC, a subsidiary of Host Marriott Corporation, leases 53 hotels from us which represent 19% (20% at December 31, 2001) of our investments, at cost at December 31, 2002. During 1999, with our consent, HMH HPT Courtyard LLC began to sublease these 53 properties to CCMH Courtyard I LLC, a subsidiary of Barcelo Crestline Corporation. The financial statements for HMH HPT CBM LLC as of December 31, 2002, and December 31, 2001, and for the three fiscal years ended December 31, 2002, begin on page F-17. The financial statements of CCMH Courtyard I LLC as of January 3, 2003, and December 28, 2001, and for the three fiscal years ended January 3, 2003, begin on page F-28. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Arthur Andersen LLP audited our consolidated balance sheet as of December 31, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 2001. On June 15, 2002, Arthur Andersen LLP was convicted of obstruction of justice by a federal jury in Houston, Texas. On September 15, 2002, a federal judge upheld this conviction. Arthur Andersen LLP ceased its audit practice before the SEC on August 31, 2002. Upon unanimous recommendation of our audit committee, our board of trustees dismissed Arthur Andersen LLP as our independent auditor effective June 28, 2002, and engaged Ernst & Young LLP to serve as our independent auditor for the year ending December 31, 2002. The change was not the result of any disagreement between us and Arthur Andersen LLP on any matter. Because of the circumstances currently affecting Arthur Andersen LLP, it may not be able to satisfy any claims arising from the provision of auditing services to us, including claims investors and purchasers of our securities may have that are available to security holders under the federal and state securities laws. We have no disagreements with our accountants on accounting and financial disclosure. 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference to our definitive Proxy Statement, which will be filed no later than 120 days after the end of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS EQUITY COMPENSATION PLAN INFORMATION. Under our 1995 Incentive Share Award Plan, we grant common shares to our officers and other employees of RMR, subject to vesting requirements, based on annual performance reviews. In addition, under this plan, our independent trustees receive 300 shares per year each as part of their annual compensation for serving as trustees. Payments by us to RMR are described in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Related Party Transactions". The following table provides a summary as of December 31, 2002, our 1995 Incentive Share Award Plan.
Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-average equity compensation exercise of exercise price of plans (excluding outstanding options, outstanding options, securities reflected in warrants and rights warrants and rights column (a)) (a) (b) (c) ------------------------ ------------------------- ------------------------- Equity compensation plans approved by security holders None. None. 41,000 Equity compensation plans not approved by security holders None. None. None. Total None. None. 41,000
The remainder of the information required by Item 12 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information required by Item 13 is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year. ITEM 14. CONTROLS AND PROCEDURES a) Within the 90 days prior to the date of this report, our management carried out an evaluation, under the supervision and with the participation of our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 and 15d-14. Based upon that evaluation, our Managing Trustees, President and Chief Operating Officer and Treasurer and Chief Financial Officer 38 concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. b) There have been no significant changes in our internal controls or in other factors that could significantly affect those controls since our evaluation of these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following audited consolidated financial statements and schedule of Hospitality Properties Trust are included on the pages indicated:
Page ---- Report of Independent Auditors.................................................... F-1 Report of Independent Public Accountants.......................................... F-2 Consolidated Balance Sheet as of December 31, 2002 and 2001....................... F-3 Consolidated Statement of Income for the three years ended December 31, 2002...... F-4 Consolidated Statement of Shareholders' Equity for the three years ended December 31, 2002................................................................. F-5 Consolidated Statement of Cash Flows for the three years ended December 31, 2002................................................................. F-6 Notes to Consolidated Financial Statements........................................ F-7 Report of Independent Auditors on Schedule........................................ F-13 Report of Independent Public Accountants on Schedule.............................. F-14 Schedule III - Real Estate and Accumulated Depreciation........................... F-15
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. The following audited financial statements of HMH HPT CBM LLC, a subsidiary of Host Marriott Corporation and the lessee of 53 of our Courtyard by Marriott(R) hotels are included on the pages indicated:
Page ---- Introduction to Supplementary Financial Statements of HMH HPT CBM LLC................................................................ F-17 Independent Auditors Report....................................................... F-18 Report of Independent Public Accountants.......................................... F-19 Balance Sheets as of December 31, 2002 and December 31, 2001...................... F-20 Statements of Operations for the fiscal years ended December 31, 2002, December 31, 2001 and December 31, 2000........................................... F-21 Statements of Changes in Member's Equity for the fiscal years ended December 31, 2002, December 31, 2001 and December 31, 2000........................ F-22
39 Statements of Cash Flows for the fiscal years ended December 31, 2002, December 31, 2001 and December 31, 2000........................................... F-23 Notes to Financial Statements..................................................... F-24
The following audited financial statements of CCMH Courtyard I LLC, a subsidiary of Barcelo Crestline Corporation, and the sublessee of the 53 Courtyard by Marriott(R) hotels leased to HMH HPT CBM LLC, are included on the pages indicated. These assets are subleased by CCMH Courtyard I LLC from HMH HPT CBM LLC, a subsidiary of Host Marriott Corporation, whose audited financial statements appear on the pages indicated above.
Page ---- Introduction to Supplementary Financial Statements of CCMH Courtyard I LLC........................................................... F-28 Report of Independent Public Auditors............................................. F-29 Report of Independent Public Accountants.......................................... F-30 Balance Sheets as of January 3, 2003 and December 28, 2001........................ F-31 Statements of Operations for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000........................................... F-32 Statements of Member's Equity for the fiscal years ended January 3, 2003, December 28, 2001 and December 29, 2000........................................... F-33 Statements of Cash Flows for the fiscal years ended January 3, 2003, December 28, 2001, and December 29, 2000.......................................... F-34 Notes to Financial Statements..................................................... F-35
(b) REPORTS ON FORM 8-K During the fourth quarter of 2002, we filed the following Current Reports on Form 8-K as follows: 1. On October 3, 2002, the Company filed a Current Report on Form 8-K to announce a press release issued by the Company on October 1, 2002, regarding the issuance of a quarterly common dividend and the election of officers. 2. On December 5, 2002, the Company filed a Current Report on Form 8-K to announce the issuance of 8.875% series B cumulative redeemable preferred shares in a public offering and filed as exhibits: (i) Underwriting Agreement, dated as of December 5, 2002 by and among Hospitality Properties Trust and the several underwriters named therein relating to 8.875% series B cumulative redeemable preferred shares, (ii) Form of Articles Supplementary relating to the 8.875% series B cumulative redeemable preferred shares, (iii) Form of temporary 8.875% series B cumulative redeemable preferred share certificate, (iv) Opinion of Sullivan & Worcester LLP re: tax matters, (v) Computation of ratio of earnings to fixed charges, (vi) Computation of ratio of earnings to combined fixed charges and preferred distributions and (vii) Consent of Sullivan & Worcester LLP (contained in Exhibit 8.1). EXHIBITS 3.1 Composite copy of Amended and Restated Declaration of Trust dated August 21, 1995, as amended to date. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998) 3.2 Articles Supplementary dated June 2, 1997. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) 40 3.3 Articles Supplementary dated April 8, 1999. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) 3.4 Articles Supplementary dated May 16, 2000. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) 3.5 Articles Supplementary dated December 9, 2002. (FILED HEREWITH) 3.6 Amended and Restated Bylaws of the Company, as amended. (FILED HEREWITH) 4.1 Form of Common Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY'S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) 4.2 Form of 9-1/2% Series A Cumulative Redeemable Preferred Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999) 4.3 Rights Agreement, dated as of May 20, 1997, between the Company and State Street Bank and Trust Company, as Rights Agent. (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED MAY 29, 1997) 4.4 Indenture, dated as of February 25, 1998, between the Company and State Street Bank and Trust Company. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) 4.5 Supplemental Indenture No. 1, dated as of February 25, 1998, between the Company and State Street Bank and Trust Company, relating to the Company's 7.00% Senior Notes due 2008, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997) 4.6 Supplemental Indenture No. 4 dated as of July 14, 2000, between the Company and State Street Bank and Trust Company, relating to the Company's 9.125% Senior Notes due 2010, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) 4.7 Supplemental Indenture No. 5, dated as of July 28, 2000, between the Company and State Street Bank and Trust Company, relating to the Company's 9.125% Senior Notes due 2010, including form thereof. (INCORPORATED BY REFERENCE TO THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000) 4.8 Form of 8.875% Series B Cumulative Redeemable Preferred Share Certificate. (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED DECEMBER 6, 2002) 4.9 Supplemental Indenture No. 6 dated as of July 8, 2002 between the Company and State Street Bank and Trust Company, including form of 6.85% Senior Notes due 2012. (INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM 10- Q FOR THE QUARTER ENDED JUNE 30, 2002) 4.10 Supplemental Indenture No. 7 dated as of January 24, 2003 between the Company and U.S. Bank National Association, as successor trustee, relating to the Company's 63/4% Senior Notes due 2013, including form of thereof. (FILED HEREWITH) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters. (FILED HEREWITH) 10.1 Advisory Agreement, dated January 1, 1998, by and between REIT Management & Research, Inc. and the Company (+). (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED FEBRUARY 11, 1998) 10.2 The Company's 1995 Incentive Share Award Plan (+). (INCORPORATED BY REFERENCE TO THE COMPANY'S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) 10.3 Form of Courtyard Management Agreement between HMH Courtyard Properties, Inc., d/b/a/ HMH Properties, Inc. and Courtyard Management Corporation. (INCORPORATED BY REFERENCE TO THE COMPANY'S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) 41 10.4 Form of First Amendment to Courtyard Management Agreement between Courtyard Management Corporation and the Company and Consolidation Letter Agreement by and between Courtyard Management Corporation and the Company. (INCORPORATED BY REFERENCE TO THE COMPANY'S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) 10.5 Form of Lease Agreement between the Company and HMH HPT Courtyard, Inc. (INCORPORATED BY REFERENCE TO THE COMPANY'S REGISTRATION STATEMENT ON FORM S-11 (FILE NO. 33-92330)) 10.6 Amended and Restated Master Lease Agreement, dated as of December 23, 1999, by and between HPTSHC Properties Trust and Summerfield HPT Lease Company, L.P. (INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999) 10.7 Master Lease Agreement, dated as of April 30, 1999, by and among the Company, HPTCY Properties Trust and HMH HPT Courtyard LLC. (INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999) 10.8 Agreement to Assign, Release, Franchise and Manage, dated as of June 15, 2001, by and among HPT, HPTMI Properties Trust ("HPTMI"), HPTMI Hawaii, Inc. ("HPTMI Hawaii"), HPT TRS MI-135, Inc. ("TRS"), Marriott International, Inc. ("MI"), CR14 Tenant Corporation ("CR14"), CRTM17 Tenant Corporation ("CRTM17"), Courtyard Marriott Corporation ("Courtyard"), Marriott Hotel Services, Inc. ("Full Service Manager"), Residence Inn by Marriott, Inc. ("Residence Inn"), SpringHill SMC Corporation ("SpringHill") and TownePlace Management Corporation, ("TownePlace"). (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001) 10.9 Form of Management Agreement by and between Courtyard and TRS. (INCORPORATED BY REFERENCE TO THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001) 10.10 Pooling Agreement, dated as of June 15, 2001, by and among MI, Full Service Manager, Residence Inn, Courtyard, SpringHill, TownePlace and TRS. (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001) 10.11 Amended and Restated Limited Rent Guaranty, dated as of June 15, 2001, made by MI in favor of HPTMI. (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001) 10.12 Guaranty, dated as of June 15, 2001, made by MI in favor of TRS. (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001) 10.13 Holdback and Security Agreement, dated as of June 15, 2001, by and among MI, St. Louis Airport, L.L.C., Nashville Airport, L.L.C., Residence Inn, Courtyard, SpringHill, TownePlace, Full Service Manager, CR14, CRTM17, TRS, HPTMI Hawaii and HPTMI. (INCORPORATED BY REFERENCE TO THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED JULY 31, 2001) 10.14 Credit Agreement dated as of March 26, 2002 by and among the Company, First Union Securities, Inc., d/b/a Wachovia Securities, Dresdner Bank Real Estate, First Union National Bank, Dresdner Bank AG, New York and Grand Cayman Branches, ING Capital LLC, CIBC World Markets Corp., Societe Generale, and each of the Financial Institutions Initially a signatory thereto together with their Assignees. (INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001) 10.15 Second Amended and Restated Lease Agreement, dated April 12, 2002, by and between HPT CW Properties Trust and Candlewood Leasing No. 3, Inc. (INCORPORATED BY REFERENCE TO THE COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002) 12.1 Ratio of Earnings to Fixed Charges. (FILED HEREWITH) 12.2 Ratio of Earnings to Combined Fixed Charges and Preferred Distributions. (FILED HEREWITH) 21.1 Subsidiaries of the Registrant. (FILED HEREWITH) 23.1 Consent of Ernst & Young LLP. (FILED HEREWITH) 23.2 Consent of KPMG LLP. (FILED HEREWITH) 23.2.A Consent of KPMG LLP. (FILED HEREWITH) 42 23.3 Notice Regarding Consent of Arthur Andersen LLP. (FILED HEREWITH) 23.4 Consent of Sullivan & Worcester LLP. (INCLUDED IN EXHIBIT 8.1 TO THIS ANNUAL REPORT ON FORM 10-K) 99.1 Certification required by 18 U.S.C. Sec. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). (FILED HEREWITH) (+) Management contract or compensatory plan or agreement. 43 REPORT OF INDEPENDENT AUDITORS TO THE TRUSTEES AND SHAREHOLDERS OF HOSPITALITY PROPERTIES TRUST: We have audited the accompanying consolidated balance sheet of Hospitality Properties Trust and subsidiaries as of December 31, 2002, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. 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 audit. The consolidated financial statements of Hospitality Properties Trust and subsidiaries as of December 31, 2001, and for the two years then ended, were audited by other auditors who have ceased operations and whose report dated January 15, 2002, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hospitality Properties Trust and subsidiaries at December 31, 2002 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts February 18, 2003 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited the accompanying consolidated balance sheet of Hospitality Properties Trust and subsidiaries (a Maryland real estate investment trust) (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hospitality Properties Trust and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Vienna, Virginia January 15, 2002 Note: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Hospitality Properties Trust and subsidiaries filing on Form 10-K for the year ended December 31, 2001. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. F-2 HOSPITALITY PROPERTIES TRUST CONSOLIDATED BALANCE SHEET (dollars in thousands, except share data)
As of December 31, -------------------------- 2002 2001 ----------- ----------- ASSETS Real estate properties, at cost: Land................................................................... $ 376,089 $ 347,009 Buildings, improvements and equipment.................................. 2,386,233 2,282,144 ----------- ----------- 2,762,322 2,629,153 Accumulated depreciation............................................... (425,910) (363,329) ----------- ----------- 2,336,412 2,265,824 Cash and cash equivalents................................................. 7,337 38,962 Restricted cash (FF&E escrow)............................................. 46,807 39,913 Other assets, net......................................................... 13,200 10,265 ----------- ----------- $ 2,403,756 $ 2,354,964 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Revolving credit facility................................................. $ -- $ -- Senior notes, net of discounts............................................ 473,965 464,781 Security and other deposits............................................... 269,918 263,983 Accounts payable and other................................................ 12,742 19,964 Due to affiliate.......................................................... 2,111 1,717 ----------- ----------- Total liabilities.................................................. 758,736 750,445 ----------- ----------- Commitments and contingencies Shareholders' equity: Series A preferred shares; 9 1/2% cumulative redeemable; no par value; 3,000,000 shares issued and outstanding, aggregate liquidation preference $75,000...................................... 72,207 72,207 Series B preferred shares; 8 7/8% cumulative redeemable; no par value; 3,450,000 shares issued and outstanding, aggregate liquidation preference $86,250...................................... 83,306 -- Common shares of beneficial interest; $0.01 par value; 62,547,348 and 62,515,940 shares issued and outstanding, respectively........................................................ 625 625 Additional paid-in capital............................................ 1,668,230 1,667,256 Cumulative net income................................................. 715,865 573,663 Cumulative preferred distributions.................................... (26,481) (19,356) Cumulative common distributions....................................... (868,732) (689,876) ----------- ----------- Total shareholders' equity.......................................... 1,645,020 1,604,519 ----------- ----------- $ 2,403,756 $ 2,354,964 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data)
Year Ended December 31, ------------------------------------ 2002 2001 2000 ---------- ---------- ---------- REVENUES: Rental income: Minimum rent............................................... $ 245,197 $ 236,876 $ 228,733 Percentage rent............................................ 2,291 3,414 5,644 ---------- ---------- ---------- 247,488 240,290 234,377 Hotel operating revenues..................................... 79,328 37,982 -- FF&E reserve income.......................................... 21,600 24,652 25,753 Interest income.............................................. 290 953 2,893 ---------- ---------- ---------- Total revenues............................................. 348,706 303,877 263,023 ---------- ---------- ---------- EXPENSES: Hotel operating expenses..................................... 50,515 24,375 -- Interest (including amortization of deferred financing costs of $2,650, $2,417 and $2,068, respectively).............................................. 42,424 41,312 37,682 Depreciation and amortization................................ 96,474 91,395 84,303 General and administrative................................... 15,491 14,839 14,767 ---------- ---------- ---------- Total expenses............................................. 204,904 171,921 136,752 ---------- ---------- ---------- Net income before extraordinary item............................. 143,802 131,956 126,271 Extraordinary item - loss on early extinguishment of debt....................................................... 1,600 -- -- ---------- ---------- ---------- Net income................................................... 142,202 131,956 126,271 Preferred distributions...................................... 7,572 7,125 7,125 ---------- ---------- ---------- Net income available for common shareholders..................... $ 134,630 $ 124,831 $ 119,146 ========== ========== ========== Weighted average common shares outstanding....................... 62,538 58,986 56,466 ========== ========== ========== Basic and diluted earnings per common share: Net income available for common shareholders before extraordinary item........................................ $ 2.18 $ 2.12 $ 2.11 Extraordinary item - loss on early extinguishment of debt...................................................... 0.03 -- -- ---------- ---------- ---------- Net income available for common shareholders................... $ 2.15 $ 2.12 $ 2.11 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-4 HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands, except share data)
Preferred Shares --------------------------------------------------------------------- Series A Series B ------------------------- ------------------------- Cumulative Number of Preferred Number of Preferred Preferred Shares Shares Shares Shares Distributions ----------- ----------- ----------- ----------- ------------- Balance at December 31, 1999................... 3,000,000 $ 72,207 -- -- $ (5,106) Common share grants...... -- -- -- -- -- Net income............... -- -- -- -- -- Distributions............ -- -- -- -- (7,125) ----------- ----------- ----------- ----------- ------------- Balance at December 31, 2000................... 3,000,000 72,207 -- -- (12,231) Issuance of shares, net.. -- -- -- -- -- Common share grants...... -- -- -- -- -- Net income............... -- -- -- -- -- Distributions............ -- -- -- -- (7,125) ----------- ----------- ----------- ----------- ------------- Balance at December 31, 2001................... 3,000,000 72,207 -- -- (19,356) Issuance of shares, net.. -- -- 3,450,000 83,306 -- Common share grants...... -- -- -- -- -- Net income............... -- -- -- -- -- Distributions............ -- -- -- -- (7,125) ----------- ----------- ----------- ----------- ------------- Balance at December 31, 2002................... 3,000,000 $ 72,207 3,450,000 $ 83,306 $ (26,481) =========== =========== =========== =========== ============= Common Shares ----------------------------------------- Additional Number of Preferred Preferred Paid-in Cumulative Shares Shares Distributions Capital Net Income Total ---------- ----------- ------------- ----------- ---------- ----------- Balance at December 31, 1999................... 56,449,743 $ 564 $ (369,880) $ 1,506,494 $ 315,436 $ 1,519,715 Common share grants ..... 22,769 1 -- 482 -- 483 Net income............... -- -- -- -- 126,271 126,271 Distributions............ -- -- (156,404) -- -- (163,529) ----------- ----------- ------------- ----------- ----------- ----------- Balance at December 31, 2000................... 56,472,512 565 (526,284) 1,506,976 441,707 1,482,940 Issuance of shares, net.. 6,000,000 60 -- 159,250 -- 159,310 Common share grants...... 43,428 -- -- 1,030 -- 1,030 Net income............... -- -- -- -- 131,956 131,956 Distributions............ -- -- (163,592) -- -- (170,717) ----------- ----------- ------------- ----------- ----------- ----------- Balance at December 31, 2001................... 62,515,940 625 (689,876) 1,667,256 573,663 1,604,519 Issuance of shares, net.. -- -- -- -- -- 83,306 Common share grants...... 31,408 -- -- 974 -- 974 Net income............... -- -- -- -- 142,202 142,202 Distributions............ -- -- (178,856) -- -- (185,981) ----------- ----------- ------------- ----------- ----------- ----------- Balance at December 31, 2002................... 62,547,348 $ 625 $ (868,732) $ 1,668,230 $ 715,865 $ 1,645,020 =========== =========== ============= =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-5 HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
Year Ended December 31, ------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................ $ 142,202 $ 131,956 $ 126,271 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ....................... 96,474 91,395 84,303 Amortization of deferred financing costs as interest 2,650 2,417 2,068 FF&E reserve income and deposits .................... (25,710) (26,540) (25,753) Extraordinary item - loss on early extinguishment of debt .............................................. 1,600 -- -- Changes in assets and liabilities: Increase in other assets .......................... (762) (498) (541) (Decrease) increase in accounts payable and other.. (7,222) 4,926 2,235 Increase (decrease) in due to affiliate ........... 1,013 1,706 (238) ------------ ------------ ------------ Cash provided by operating activities ............... 210,245 205,362 188,345 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions .............................. (148,246) (185,799) (134,353) Increase in security and other deposits ............... 5,935 6,606 16,410 Refund of other deposits .............................. -- -- (5,275) ------------ ------------ ------------ Cash used in investing activities ................... (142,311) (179,193) (123,218) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred shares, net ....... 83,306 -- -- Proceeds from issuance of common shares, net .......... -- 159,310 -- Debt issuance, net of discount ........................ 124,106 -- 49,938 Repayment of senior notes ............................. (115,000) -- -- Draws on revolving credit facility .................... 295,000 150,000 42,000 Repayments of revolving credit facility ............... (295,000) (150,000) (42,000) Deferred finance costs paid ........................... (5,990) (401) (489) Distributions to preferred shareholders ............... (7,125) (7,125) (7,125) Distributions to common shareholders .................. (178,856) (163,592) (156,404) ------------ ------------ ------------ Cash used in financing activities ................... (99,559) (11,808) (114,080) ------------ ------------ ------------ (Decrease) increase in cash and cash equivalents ........ (31,625) 14,361 (48,953) Cash and cash equivalents at beginning of period ........ 38,962 24,601 73,554 ------------ ------------ ------------ Cash and cash equivalents at end of period .............. $ 7,337 $ 38,962 $ 24,601 ============ ============ ============ SUPPLEMENTAL INFORMATION: Cash paid for interest ................................ $ 36,079 $ 39,025 $ 33,508 Non-cash investing and financing activities: Property managers deposits in FF&E reserve .......... 23,745 23,521 23,212 Purchases of fixed assets with FF&E reserve ......... (18,816) (14,102) (24,698) Real estate acquired in an exchange ................. (28,914) -- -- Real estate disposed of in an exchange .............. 28,914 -- --
The accompanying notes are an integral part of these financial statements. F-6 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 1. ORGANIZATION Hospitality Properties Trust ("HPT") is a real estate investment trust organized on February 7, 1995, under the laws of the State of Maryland, which invests in hotels. At December 31, 2002, HPT, directly and through subsidiaries, owned 251 properties. The properties of HPT and its subsidiaries (the "Company") are leased to or managed by subsidiaries (the "Lessees" and the "Managers") of companies unaffiliated with HPT: Host Marriott Corporation ("Host"); Marriott International, Inc. ("Marriott"); Barcelo Crestline Corporation ("Barcelo Crestline"); Wyndham International, Inc. ("Wyndham"); Prime Hospitality Corporation ("Prime"); Candlewood Hotel Company, Inc. ("Candlewood"); and BRE/Homestead Village LLC ("Homestead"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION. These consolidated financial statements include the accounts of HPT and its subsidiaries, all of which are 100% owned directly or indirectly by HPT. All intercompany transactions have been eliminated. REAL ESTATE PROPERTIES. Real estate properties are recorded at cost. Depreciation is provided for on a straight-line basis over estimated useful lives of 7 to 40 years. The Company periodically evaluates the carrying value of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 144. CASH AND CASH EQUIVALENTS. Highly liquid investments with original maturities of three months or less at date of purchase are considered to be cash equivalents. The carrying amount of cash and cash equivalents is equal to its fair value. DEFERRED FINANCING COSTS. Costs incurred to borrow are capitalized and amortized over the term of the related borrowing. Deferred financing costs were $8,445, $6,627 and $8,643 at December 31, 2002, 2001 and 2000, respectively, net of accumulated amortization of $3,980, $7,426 and $5,009, respectively. REVENUE RECOGNITION. Rental income from operating leases is recognized on a straight line basis over the life of the lease agreements. Percentage rent is recognized when all contingencies are met and rent is earned. Hotel operating revenues, consisting primarily of room sales and sales of food, beverages and telephone services are recognized when earned. Some of the Company's leases provide that FF&E reserve escrows are owned by the Company. All other leases provide that FF&E reserve escrows are owned by the tenant and the Company has a security and remainder interest in the escrow account. When the Company owns the escrow for leased properties, generally accepted accounting principles require that payments into the escrow be reported as additional rent. When the Company has a security and remainder interest in the escrow account, deposits are not included in revenue. PER COMMON SHARE AMOUNTS. Per common share amounts are computed using the weighted average number of common shares outstanding during the period. The Company has no common share equivalents, instruments convertible into common shares or other dilutive instruments. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. INCOME TAXES. The Company is a real estate investment trust under the Internal Revenue Code of 1986, as amended. The Company is not subject to Federal income taxes on its net income provided it distributes its taxable income to shareholders and meets certain other requirements. The characterization of the distributions paid in 2002, 2001 and 2000 was 74.5%, 85.9% and 85.1% ordinary income, respectively, and 25.5%, 14.1% and 14.9% return of capital, respectively. F-7 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) As permitted by the REIT Modernization Act, or RMA, during 2001 the Company formed a so-called "taxable REIT subsidiary," to act as lessee for some of its hotels. The hotels leased to this subsidiary are operated by subsidiaries of Marriott under a long-term operating agreement. For federal income tax purposes, this subsidiary is a taxable entity separate from the Company's other subsidiaries, which are generally not subject to federal taxes, as described above. During 2002 and 2001, the Company estimates that its taxable REIT subsidiary had zero taxable income, and accordingly made no provision for federal income taxes. As of December 31, 2002, the Company's taxable REIT subsidiary had no difference between the bases of its assets or liabilities under generally accepted accounting principles and their tax bases. NEW ACCOUNTING PRONOUNCEMENTS. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("FAS 145"). The provisions of this standard eliminate the requirement that a gain or loss from the extinguishment of debt be classified as an extraordinary item, unless it can be considered unusual in nature and infrequent in occurrence. The Company will be required to implement FAS 145 on January 1, 2003. Upon implementation, the Company will reclassify all extraordinary gains or losses from debt extinguishments in 2002 and prior as ordinary income/loss from operations. In 2001, the FASB issued Statement No. 142 "Goodwill and Other Intangible Assets" ("FAS 142") and Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), both of which were adopted by the Company on January 1, 2002. The adoption of FAS 142 and FAS 144 did not have a material impact on the Company's financial position or results of operations. 3. PREFERRED SHARES Each of the Company's 3,000,000 outstanding Series A cumulative redeemable preferred shares has a distribution rate of $2.375 per annum, payable in equal quarterly amounts, and a liquidation preference of $25 ($75,000 in aggregate). Series A preferred shares are redeemable at the Company's option for $25 each plus accrued and unpaid distributions at any time on or after April 12, 2004. In December 2002, the Company issued 3,450,000 Series B cumulative redeemable preferred shares, each with a distribution rate of $2.21875 per annum, payable in equal quarterly amounts, and a liquidation preference of $25 ($86,250 in aggregate). Series B preferred shares are redeemable at the Company's option for $25 each plus accrued and unpaid distributions at any time on or after December 10, 2007. 4. LEASES AND OPERATING AGREEMENTS Each of the Company's 251 hotel properties are leased to or operated by a third party under one of nine agreements. The Company's agreements have initial terms expiring between 2010 and 2019. Each of these agreements is for a combination or pool of between 12 and 57 of the Company's properties. The agreements contain renewal options for all, but not less than all, of the affected properties, and the renewal terms total 20 to 48 years. Each agreement requires the third party lessee or operator to: (i) pay all operating costs associated with the property; (ii) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of the Company's hotels ("FF&E reserves"); (iii) make payments to the Company of minimum rents or returns; and (iv) make payments to the Company of additional returns equal to 5%-10% of increases in total hotel sales over a base year threshold amount. Each third party has posted a security or performance deposit with the Company generally equal to one year's minimum rent or return. One agreement discussed above includes 35 hotels, which as of December 31, 2002, includes 18 hotels operated by affiliates of Marriott under long term management contracts and leased to the Company's taxable REIT subsidiary as of December 31, 2002. As a result, hotel operating revenues and expenses from these hotels are reflected in the Company's consolidated statement of income. These hotels are pooled with 17 other hotels that continue to be leased by Marriott until it elects to operate them under the management agreement. Each of these 17 hotels will F-8 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) begin to be leased to the Company's taxable REIT subsidiary and managed by Marriott prior to June 30, 2004. In January 2003, Marriott elected to operate four of the 17 hotels under the management agreement. The Company's leases and operating agreements provide for payments to be received by the Company during the remaining initial terms as follows:
Total Minimum Payments Under Total Minimum Lease Operating Payments from Agreements with from Third parties Third Parties Total --------------------------------------------------------- 2003 $ 243,298 $ 30,361 $ 273,659 2004 243,298 30,361 273,659 2005 243,298 30,361 273,659 2006 243,298 30,361 273,659 2007 243,298 30,361 273,659 Thereafter 1,656,520 364,334 2,020,854 ----------- --------- ----------- $ 2,873,010 $ 516,139 $ 3,389,149 =========== ========= ===========
As of December 31, 2002, the weighted average remaining initial terms of the Company's leases and operating agreements was approximately 13.6 years, and the weighted average remaining total term, including renewal options which may be exercised, was 53 years. As further described in Note 8, a number of the Company's leases and operating agreements are supported by guarantees. The guaranty of the Prime subsidiary lessee's obligation is secured by a cash guarantee deposit equal to $16.5 million. The Company will refund the guaranty deposit to Prime when the Prime subsidiary lessee achieves certain financial performance. While the Company retains the guaranty deposit the rent payments due from the Prime subsidiary tenant are reduced by $1,780 per year. 5. REAL ESTATE PROPERTIES The Company's real estate properties, at cost, consisted of land of $376,089, buildings and improvements of $2,086,787 and furniture, fixtures and equipment of $299,446, as of December 31, 2002, and land of $347,009, buildings and improvements of $1,984,287 and furniture, fixtures and equipment of $297,857, as of December 31, 2001. During 2002, 2001 and 2000, the Company purchased 21, 8, and 12 properties, respectively, for aggregate purchase prices of $145,000, $185,487 and $128,548 excluding closing costs, respectively. As of December 31, 2002, the Company owned and leased 251 hotel properties. During 2002, 2001, and 2000, the Company invested $3,274, $2,507 and $5,805, respectively, in its existing hotels in excess of amounts funded from FF&E reserves. As a result of these additional investments, tenant obligations to the Company for annual minimum lease payments increased $327, $251 and $581 in 2002, 2001 and 2000 respectively. At December 31, 2002, 10 of the Company's hotels were on leased land. In January 2003, the Company purchased the land related to one of the hotels from an unrelated party for $6.5 million. For the other nine hotels, in each case, the remaining term of the ground lease (including renewal options) is in excess of 56 years, and the ground lessors are unrelated to the Company. Ground rent payable under the nine remaining ground leases is generally calculated as a percentage of hotel revenues. Seven of the nine ground leases require minimum annual rent ranging from approximately $102 to $256 per year; minimum rent under two ground leases has been pre-paid. Under the terms of the Company's leases and operating agreements, payment of ground lease obligations are made by the Company's tenant or operator. Future minimum annual rent payments due under the ground leases are $1,119 for 2003-2007 and total $15,731 for all years thereafter. During 2002, the Company exchanged three of its hotels with one of its tenants for three different hotels at no cost. No gain or loss was recognized on these non-monetary exchanges. F-9 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 6. INDEBTEDNESS
As of December 31, ---------------------------- 2002 2001 ------------ ------------ Unsecured revolving credit facility ........................ $ -- $ -- 7% Senior Notes due 2008 ................................... 150,000 150,000 8.25% Senior Notes due 2005 ................................ -- 115,000 8.5% Senior Notes due 2009 ................................. 150,000 150,000 9.125% Senior Notes due 2010 ............................... 50,000 50,000 6.85% Senior Notes due 2012 ................................ 125,000 -- Unamortized discounts ...................................... (1,035) (219) ------------ ------------ $ 473,965 $ 464,781 ============ ============
On January 24, 2003, the Company issued $175,000 of 6.75% senior notes due 2013. Net proceeds after underwriting and other offering expenses, were $172,555. On February 18, 2003, the Company redeemed at par plus accrued interest, all of the outstanding 8.5% Senior Notes due 2009. In connection with this early repayment, the Company will recognize a charge to ordinary operations for the write off of unamortized debt issuance cost of approximately $2,582 in the first quarter of 2003. All of the Company's other senior notes are prepayable at any time prior to their maturity date at par generally plus a premium equal to a make-whole amount, as defined, generally designed to preserve a stated yield to the noteholder. Interest on all the Company's remaining notes is payable semi-annually in arrears. The Company negotiated a new revolving credit facility in March 2002. This new facility matures in June 2005 and may be extended at the Company's option to June 2006 upon payment of an extension fee. The new facility permits borrowing up to $350,000 and includes an accordion feature under which the maximum borrowing could expand to $700,000, in certain circumstances. Drawings under the credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility are payable at a spread above LIBOR. During 2002, 2001 and 2000, the weighted average interest rate on the amounts outstanding under revolving credit facilities was 3.0%, 5.5% and 8.3%, respectively. As of December 31, 2002, no amount was outstanding under the facility. The Company's credit agreement and note indenture and its supplements contain financial covenants which, among other things, restrict the ability of the Company to incur indebtedness and require the Company to maintain financial ratios and a minimum net worth. The Company was in compliance with these covenants during the periods presented. As of December 31, 2002, none of the Company's assets were pledged or mortgaged. The estimated aggregate market value of the Company's indebtedness based on a combination of their observable trading prices and quotations from financial institutions for similar obligations were:
As of December 31, ---------------------------- 2002 2001 ------------ ------------ 7% Senior Notes, due 2008 .................................. $ 167,392 $ 151,130 8.25% Senior Notes, due 2005 ............................... -- 122,293 8.5% Senior Notes, due 2009 ................................ 151,498 159,427 9.125% Senior Notes, due 2010 .............................. 59,365 56,356 6.85% Senior Notes, due 2012 ............................... 130,736 -- ------------ ------------ $ 508,991 $ 489,206 ============ ============
F-10 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) 7. TRANSACTIONS WITH AFFILIATES Reit Management & Research LLC ("RMR") provides investment, management and administrative services to the Company. The Company's contract with RMR for such services has a one-year term, and currently extends to December 31, 2003. RMR is compensated at an annual rate equal to 0.7% of the Company's average real estate investments, as defined, up to the first $250,000 of such investments and 0.5% thereafter plus an incentive fee based upon increases in cash available for distribution per share, as defined. Advisory fees excluding incentive fees earned for the years ended 2002, 2001, and 2000 were $13,601, $12,702 and $11,851, respectively. Incentive advisory fees are paid in restricted common shares based on a formula. The Company accrued $938, $619 and $762 in incentive fees during 2002, 2001 and 2000, respectively. The Company issued 21,658 and 33,828 restricted common shares in satisfaction of the 2001 and 2000 incentive fees, respectively. As of December 31, 2002, RMR and its affiliates owned 445,865 common shares of the Company. In March 2003, the Company will issue 27,577 restricted common shares in satisfaction of the 2002 incentive fee. RMR is owned by Gerard M. Martin and Barry M. Portnoy, who also serve as managing trustees of the Company. 8. CONCENTRATION At December 31, 2002, the Company's 251 hotels contained 34,284 rooms and were located in 37 states in the United States, with between 5% and 13% of its hotels, by investment, in each of California, Texas, Virginia, Georgia, Florida, and Arizona. All of the Company's third party tenants or operators are subsidiaries of other companies The percentage of the Company's minimum rent and return payments shown in Note 4 is approximately equal to the Company's percentage investment in each pool of hotels shown below as of December 31, 2002.
December 31, Lessee / Operator is a Number of 2002 % of Subsidiary of: Properties Investment Total -------------------------------------------------------------------- Host (lease no. 1) 53 $ 514,803 19% Host (lease no. 2) 18 179,386 7% Marriott 35 453,955 17% Barcelo Crestline 19 274,222 10% Wyndham (lease no. 1) 12 182,570 7% Wyndham (lease no. 2) 15 240,000 9% Homestead 18 145,000 6% Candlewood 57 434,750 16% Prime 24 243,350 9% --- ----------- --- Total 251 $ 2,668,036 100% === =========== ===
A number of the Company's leases and operating agreements are supported by guarantees. The guarantee provided to the Company from Marriott is limited, in the case of 35 hotels, to $48,300. The guarantee provided to the Company from Marriott and Barcelo Crestline is limited, in the case of 19 hotels, to $31,100. These guarantees expire in 2005, or earlier if and when the related hotels reach negotiated financial results. The guarantee provided to the Company in the case of the Prime lease is limited to $16,500 and expires if and when the leased hotels reach negotiated financial results. Guarantees provided to the Company from Homestead and Candlewood are unlimited as to amounts, and do not expire with the passage of time. The guarantees of the Homestead and Candlewood leases are also subject to release if and when the related hotels reach negotiated financial results, except that if the 18 Homestead hotels reach their negotiated financial results for three years, the guarantee from Homestead may be released only if F-11 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except share data) additional cash or a letter of credit is posted with the Company. Each of the Company's hotels is combined with other hotels as a part of a single lease or operating agreement, as outlined in the above table. As described in Note 4, the 35 hotel combination with Marriott includes 18 hotels leased to the Company's taxable REIT subsidiary and managed by Marriott and 17 hotels leased and operated by Marriott. The agreement with Marriott provides the Company with aggregate minimum rents and returns for all 35 hotels of $48,300 per annum. The aggregate net operating results of all 35 hotels were less than aggregate minimum return to the Company during 2002 and payments under the guarantee were due and paid by Marriott. The hotels leased to the Company's taxable REIT subsidiary generated net operating results that were $5,822 in 2002 and $1,957 in 2001 less than the minimum returns due to the Company. These amounts have been reflected in the accompanying statements of income as a net reduction to hotel operating expenses in each year because they were funded by Marriott. 9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2002 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- Revenues................................................ $ 81,934 $ 88,115 $ 89,821 $ 88,836 Net income available for common shareholders before extraordinary income.......................... 31,550 33,709 34,464 36,507 Net income available for common shareholders............ 31,550 33,709 32,864 36,507 Net income available for common shareholders before extraordinary income per share (1)............ .50 .54 .55 .58 Net income available for common shareholders per share.. .50 .54 .53 .58 Distributions per common share (2)...................... .71 .72 .72 .72
2001 ---------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ---------------------------------------------------------- Revenues................................................ $ 66,173 $ 70,139 $ 83,188 $ 84,377 Net income available for common shareholders............ 28,307 29,647 31,493 35,385 Net income available for common shareholders per share (1) .50 .52 .52 .57 Distributions per common share (2)...................... .70 .71 .71 .71
(1) The sum of per common share amounts for the four quarters differs from annual per share amounts due to the required method of computing weighted average number of shares in interim periods and rounding. (2) Amounts represent distributions declared with respect to the periods shown. F-12 REPORT OF INDEPENDENT AUDITORS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited the consolidated financial statements of Hospitality Properties Trust and subsidiaries as of December 31, 2002 and for the year then ended, and have issued our report thereon dated February 18, 2003 (included elsewhere in this Annual Report on Form 10-K). Our audit also included the financial statement schedule as of December 31, 2002 and for the year then ended listed in Item 15(a) of this Annual Report on Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. The financial statement schedule of Hospitality Properties Trust and subsidiaries as of December 31, 2001 and for the two years then ended was audited by other auditors who have ceased operations and whose report dated January 15, 2002, expressed an unqualified opinion on that schedule. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Boston, Massachusetts February 18, 2003 F-13 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Hospitality Properties Trust included in this Form 10-K, and have issued our report thereon dated January 15, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule and related notes on pages F-13 and F-14 are the responsibility of Hospitality Properties Trust's management and are presented for the purpose of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Vienna, Virginia January 15, 2002 NOTE: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Hospitality Properties Trust and subsidiaries on Form 10-K for the year ended December 31, 2001. The audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. F-14 HOSPITALITY PROPERTIES TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2002 (dollars in millions)
Costs Capitalized Initial Subsequent to Gross Amount at which Cost to Company Acquisition Carried at Close of Period --------------------- ------------- ---------------------------- Buildings & Buildings & Encumbrances Land Improvements Improvements Land Improvements Total 71 Courtyards $ -- $ 120 $ 589 $ 10 $ 120 $ 599 $ 719 57 Candlewood Hotels -- 61 336 61 336 397 37 Residence Inns -- 69 322 4 69 326 395 24 AmeriSuites -- 25 194 -- 25 194 219 18 Homestead Village -- 28 106 -- 28 106 134 15 Summerfield Suites -- 23 196 -- 23 196 219 12 Wyndham Hotels -- 16 154 1 16 155 171 3 Marriott Full Service -- 14 82 14 82 96 12 TownePlace Suites -- 17 78 -- 17 78 95 2 SpringHill Suites -- 3 15 -- 3 15 18 ---- ----- ------- ---- ----- ------- ------- Total (251 hotels) $ -- $ 376 $ 2,072 $ 15 $ 376 $ 2,087 $ 2,463 ==== ===== ======= ==== ===== ======= =======
Life on which Depreciation in Latest Income Accumulated Date of Date Statement is Depreciation Construction Acquired Computed ------------- ------------------- -------------------- -------------------- 71 Courtyards $ (91) 1987 through 2000 1995 through 2001 15 - 40 Years 57 Candlewood Hotels (29) 1996 through 2000 1997 through 2002 15 - 40 Years 37 Residence Inns (45) 1989 through 2001 1996 through 2001 15 - 40 Years 24 AmeriSuites (20) 1992 through 2000 1997 through 2002 15 - 40 Years 18 Homestead Village (12) 1996 through 1998 1999 15 - 40 Years 15 Summerfield Suites (25) 1989 through 1993 1998 15 - 40 Years 12 Wyndham Hotels (25) 1987 through 1990 1996 through 1997 15 - 40 Years 3 Marriott Full Service (8) 1972 through 1995 1998 through 2001 15 - 40 Years 12 TownePlace Suites (6) 1997 through 2000 1998 through 2001 15 - 40 Years 2 SpringHill Suites (1) 1997 through 2000 2000 through 2001 15 - 40 Years ------ Total (251 hotels) $ (262) ======
F-15 HOSPITALITY PROPERTIES TRUST NOTES TO SCHEDULE III DECEMBER 31, 2002 (dollars in thousands) (A) The change in accumulated depreciation for the period from January 1, 2000, to December 31, 2002, is as follows:
2002 2001 2000 ------------ ------------ ------------ Balance at beginning of period $ 210,439 $ 159,867 $ 112,321 Additions: depreciation expense 51,792 50,572 47,546 ------------ ------------ ------------ Balance at close of period $ 262,231 $ 210,439 $ 159,867 ============ ============ ============
(B) The change in total cost of properties for the period from January 1, 2000, to December 31, 2002, is as follows:
2002 2001 2000 ------------ ------------ ------------ Balance at beginning of period $ 2,331,296 $ 2,157,107 $ 2,035,934 Additions: hotel acquisitions and capital expenditures 131,580 174,189 121,173 ------------ ------------ ------------ Balance at close of period $ 2,462,876 $ 2,331,296 $ 2,157,107 ============ ============ ============
(C) The net tax basis for federal income tax purposes of the Company's real estate properties was $2,199,301 on December 31, 2002. F-16 INTRODUCTION TO SUPPLEMENTARY FINANCIAL STATEMENTS OF HMH HPT CBM LLC HMH HPT CBM LLC is the lessee of 20% of Hospitality Properties Trust's investments, at cost. HMH HPT CBM LLC is a subsidiary of Host Marriott Corporation and is not owned by Hospitality Properties Trust. The following financial statements of HMH HPT CBM LLC are presented to comply with applicable accounting regulations of the Securities and Exchange Commission and were prepared by HMH HPT CBM LLC's management. F-17 INDEPENDENT AUDITORS' REPORT To the Member HMH HPT CBM LLC: We have audited the accompanying balance sheet of HMH HPT CBM LLC as of December 31, 2002 and the related statement of operations, changes in member's equity and cash flows for the year then ended. 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 audit. The accompanying financial statements of HMH HPT CBM LLC as of December 31, 2001 and 2000 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those statements in their report dated March 20, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HMH HPT CBM LLC as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP McLean, Virginia March 17, 2003 F-18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HMH HPT Courtyard LLC: We have audited the accompanying balance sheets of HMH HPT Courtyard LLC as of December 31, 2001 and 2000, and the related statements of operations, changes in member's equity and cash flows for the years ended December 31, 2001, 2000 and 1999. 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 in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HMH HPT Courtyard LLC as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001, 2000 and 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Vienna, Virginia March 20, 2002 NOTE: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Hospitality Properties Trust and subsidiaries filing on Form 10-K for the year ended December 31, 2001. The audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. HMH HPT Courtyard LLC has been renamed HMH HPT CBM LLC. F-19 HMH HPT CBM LLC BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (IN THOUSANDS)
2002 2001 ------------ ------------ ASSETS Rent receivable from CCMH Courtyard I LLC .................. $ 3,522 $ 3,492 Prepaid rent ............................................... -- 3,947 Security deposit ........................................... 50,540 50,540 Note receivable from CCMH Courtyard I LLC .................. 5,100 5,100 Restricted cash ............................................ 8,161 4,145 ------------ ------------ Total assets ........................................ $ 67,323 $ 67,224 ============ ============ LIABILITIES AND MEMBER'S EQUITY Due to Host Marriott, L.P. ................................. $ 9,909 $ 9,040 Rent payable to Hospitality Properties Trust ............... 310 369 Due to CCMH Courtyard I LLC ................................ 1,972 1,967 Deferred gain .............................................. 22,285 25,162 ------------ ------------ Total liabilities ................................... 34,476 36,538 ------------ ------------ Member's equity ............................................ 32,847 30,686 ------------ ------------ Total liabilities and member's equity ............... $ 67,323 $ 67,224 ============ ============
See Notes to Financial Statements. F-20 HMH HPT CBM LLC STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ REVENUES Rental income from CCMH Courtyard I LLC ................ $ 53,829 $ 58,672 $ 62,632 Interest income ........................................ 301 369 416 Amortization of deferred gain .......................... 2,877 2,877 2,877 ------------ ------------ ------------ Total revenues .................................. 57,007 61,918 65,925 ------------ ------------ ------------ EXPENSES Rent expense to Hospitality Properties Trust ........... 52,614 53,901 55,366 Corporate expenses ..................................... 2,070 2,006 2,203 Other expenses ......................................... 162 182 100 ------------ ------------ ------------ Total expenses .................................. 54,846 56,089 57,669 ------------ ------------ ------------ NET INCOME ................................................. $ 2,161 $ 5,829 $ 8,256 ============ ============ ============
See Notes to Financial Statements. F-21 HMH HPT CBM LLC STATEMENTS OF CHANGES IN MEMBER'S EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS) Balance at December 31, 1999..................................... $ 24,149 Dividend to Host Marriott, L.P................................... (4,425) Net income....................................................... 8,256 ------------ Balance at December 31, 2000..................................... 27,980 Dividend to Host Marriott, L.P................................... (3,123) Net income ...................................................... 5,829 ------------ Balance at December 31, 2001..................................... 30,686 Net income....................................................... 2,161 ------------ Balance at December 31, 2002..................................... $ 32,847 ============
See Notes to Financial Statements. F-22 HMH HPT CBM LLC STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ OPERATING ACTIVITIES Net income ............................................... $ 2,161 $ 5,829 $ 8,256 Adjustments to reconcile net income to cash provided by operating activities: Amortization of deferred gain .......................... (2,877) (2,877) (2,877) Changes in operating accounts: Decrease (increase) in rent receivable from CCMH Courtyard I LLC ...................................... (30) 208 (42) Decrease (increase) in prepaid rent .................... 3,947 (3,947) -- Decrease in due to/from Hospitality Properties Trust ... (59) (494) 1,176 Decrease (increase) in restricted cash ................. (4,016) 4,635 (1,449) Increase (decrease) in due to Host Marriott, L.P. ...... 869 (192) (686) Increase (decrease) in due to CCMH Courtyard I LLC ..... 5 (39) 47 ------------ ------------ ------------ Cash provided by operating activities .............. -- 3,123 4,425 ------------ ------------ ------------ FINANCING ACTIVITIES Dividend to Host Marriott, L.P. .......................... -- (3,123) (4,425) ------------ ------------ ------------ Cash used in financing activities .................. -- (3,123) (4,425) ------------ ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS .................... -- -- -- CASH AND CASH EQUIVALENTS, beginning of year ............... -- -- -- ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year ..................... $ -- $ -- $ -- ============ ============ ============
See Notes to Financial Statements. F-23 HMH HPT CBM LLC NOTES TO FINANCIAL STATEMENTS NOTE 1. THE COMPANY HMH HPT Courtyard, Inc. was incorporated in Delaware on February 7, 1995 as a wholly-owned indirect subsidiary of Host Marriott Corporation. HMH HPT Courtyard, Inc. had no operations prior to March 24, 1995 (the "Commencement Date"). HMH HPT Courtyard, Inc. was subsequently merged into HMH HPT Courtyard LLC on December 23, 1998 and has been renamed HMH HPT CBM LLC (referred to as "we" or the "company"). On the Commencement Date, affiliates of Host Marriott Corporation ("Host Marriott") sold 21 Courtyard hotels to Hospitality Properties Trust ("HPT"). Subsequently, HPT purchased an additional 32 Courtyard hotels for a total of 53 Courtyard hotels. Host Marriott contributed the assets and liabilities related to the operations of such hotels to the company, including working capital advances to the manager, prepaid rent under leasing arrangements and rights to other assets as described in Note 2. Such assets have been accounted for at their historical cost. On various dates in 1995 and 1996, we leased back the 53 Courtyard hotels from HPT. We subleased the hotels and assigned our interest in the related hotel management agreement to CCMH Courtyard I LLC ("CCMH Courtyard"), a subsidiary of Crestline Capital Corporation, now Barcelo Crestline Corporation. See Notes 3 and 5. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING Our records are maintained on the accrual basis of accounting on a calendar year basis. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUES Revenues primarily represent sublease rental income from CCMH Courtyard. The rent due under the sublease is the greater of base rent or percentage rent, as defined and determined on an annual basis. Sublease percentage rent applicable to room, food and beverage and other types of hotel revenue varies by sublease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the sublease minimum rent and the revenue thresholds used in computing sublease percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index and the Labor Index, as defined. DUE TO HOST MARRIOTT, L.P. We operate as a unit of Host Marriott, L.P., or Host LP, utilizing Host LP's employees, centralized system for cash management, insurance and administrative services. We have no employees. All cash received by the company is commingled with Host LP's general corporate funds. Operating expenses and other cash requirements are paid by Host LP and charged directly or allocated to us. Certain general and administrative costs of Host LP are allocated to us, based on Host LP's specific identification of individual cost items when appropriate and otherwise based upon estimated levels of effort devoted by its general and administrative departments to individual entities. These expenses are included in corporate expenses on the accompanying statements of operations. In the opinion of management, the methods for allocating corporate, general and administrative expenses and other direct costs are reasonable. Accordingly, we have recorded a liability to Host LP of $9.9 million and $9.0 million at December 31, 2002 and 2001, respectively. Amounts are not interest-bearing and are due on demand. CONCENTRATION OF CREDIT RISK F-24 HMH HPT CBM LLC NOTES TO FINANCIAL STATEMENTS Our largest asset is the security deposit (see Note 4) which constitutes 75% of our total assets as of December 31, 2002. The security deposit is not collateralized and is due from HPT at the termination of the leases, which are described in Note 3. In addition, on January 1, 1999, CCMH Courtyard became the sublessees of all of the hotels, and as such, their rent payments were the primary source of our revenues for all periods presented. The rent payable under the subleases is guaranteed by the sublessees up to a maximum amount of $20 million. RESTRICTED CASH Restricted cash consists of cash and cash equivalents held in an interest-bearing deposit account pursuant to the Cash Management and Security Agreement between HPT, CCMH Courtyard, and Host LP. Base and percentage rents under our leases are collected and disbursed through the account, which is owned by us but controlled by HPT. CCMH Courtyard provided a portion of the initial funding required to establish the restricted cash account and is entitled to half of the interest earned on the account. This initial funding, as well as a portion of the interest earned on this account, is reflected as Due to CCMH Courtyard on the accompanying balance sheets. DEFERRED GAIN Deferred gains resulted from the sale-leaseback transactions of the Courtyard hotels with HPT. We are amortizing the deferred gain over the initial term of the Lease, as defined below. Accumulated amortization was $17.3 million and $14.4 million at December 31, 2002 and 2001, respectively. INCOME TAXES Provision for Federal and state income taxes has not been made in the accompanying financial statements since we do not pay income taxes but rather allocate profits and losses to Host LP. Significant differences exist between the net income for financial reporting purposes and the net income (loss) as reported in our tax return due to the timing of the recognition of the deferred gain for income tax purposes. NOTE 3. LEASE COMMITMENTS LEASES WITH HPT On various dates in 1995 and 1996, we entered into lease agreements for 53 Courtyard hotels with HPT (the "leases"). The initial term of the leases expire in 2012. Thereafter, the leases may be renewed for three consecutive twelve-year terms at our option. We are required to pay rents equal to aggregate minimum annual rent of $51,480,000 ("Base Rent") and percentage rent equal to 5% of the excess of total hotel sales over base year total hotel sales ("Percentage Rent"). A pro rata portion of Base Rent is due and payable in advance on the first day of thirteen predetermined accounting periods. Percentage Rent is due and payable quarterly in arrears. We are also required to provide Marriott International, Inc. (the "Manager") with working capital to meet the operating needs of the hotels. Under the sublease agreements discussed below, CCMH Courtyard is responsible for making the payments required under the leases when due on behalf of HPT for real estate taxes and other taxes, assessments and similar charges arising from or related to the hotels and their operation, utilities, premiums on required insurance coverage, rents due under ground and equipment leases and all amounts due under the terms of the management agreement. The ground leases relating to eight of the hotels are leased from third parties and have remaining terms (including all renewal options) expiring between 2039 and 2067. The leases also require us to escrow, or cause the Manager to escrow, an amount equal to 5% of the annual total hotel sales into an HPT-owned furniture, fixture and equipment reserve (the "FF&E Reserve"), which is available for the cost of required replacements and renovations. Any requirements for funds in excess of amounts in the FF&E Reserve shall be provided by HPT at our request. In the event we request such funds, Base Rent shall be adjusted upward by an amount equal to 10% of the amount provided. We are required to maintain a minimum net worth equal to one year's base rent. For purposes of this covenant, net worth is defined as member's equity plus the deferred gain. Net worth, as defined, was $55,132,000 and F-25 HMH HPT CBM LLC NOTES TO FINANCIAL STATEMENTS $55,848,000, respectively, at December 31, 2002 and 2001. As of December 31, 2002, future minimum annual rental commitments for the leases on the hotels are as follows (in thousands):
LEASE 2003.......................................... $ 51,480 2004.......................................... 51,480 2005.......................................... 51,480 2006.......................................... 51,480 2007.......................................... 51,480 Thereafter.................................... 257,402 ---------- Total minimum lease payments........... $ 514,802 ==========
Total minimum lease payments exclude percentage rent which was approximately $1,235,000, $2,582,000 and $4,129,000 for 2002, 2001 and 2000, respectively. SUBLEASES WITH CCMH COURTYARD We agreed to sublease the hotels to CCMH Courtyard, subject to the terms of the original leases with HPT. Under the subleases, we will receive aggregate minimum subrental income of $515 million, which is equal to the Company's minimum lease payment obligation described above. The terms of each sublease expire simultaneously with the expiration of the initial term of the leases to which it relates and automatically renews for the corresponding renewal term under the leases, unless either we elect not to renew the leases, or CCMH Courtyard elects not to renew the sublease at the expiration of the initial term provided, however, that neither party can elect to terminate fewer than all of the subleases. Rent under the subleases consisted of minimum rent of $51.4 million, $51.3 million and $51.2 million and additional percentage rent of $2.4 million, $7.4 million and $11.4 million in 2002, 2001 and 2000, respectively. The percentage rent from CCMH Courtyard is sufficient to cover the Percentage Rent due under the leases with HPT, with any excess being retained by us. The rent payable under the subleases are guaranteed by CCMH Courtyard up to a maximum amount of $20 million. CCMH Courtyard is responsible for paying all of the expenses of operating the applicable hotels, including all personnel costs, utility costs and general repair and maintenance of the hotels. CCMH Courtyard is also responsible for paying real estate taxes, personal property taxes (to the extent we own the personal property), casualty insurance on the structures, ground lease rent payments, required expenditures for furniture, fixtures and equipment (including maintaining the FF&E Reserve, to the extent such is required by the applicable management agreement) and other capital expenditures. CCMH Courtyard also is responsible for all fees payable to the Manager, including base and incentive management fees, chain services payments, and franchise or system fees, with respect to periods covered by the term of the subleases. We remain liable for any non-performance by CCMH Courtyard under each sublease and management agreement. NOTE 4. SECURITY DEPOSIT HPT holds $50,540,000 as a security deposit for our obligations under the leases. The security deposit is due upon termination of the leases. NOTE 5. MANAGEMENT AGREEMENT The rights and obligations under the management agreement for the hotels were transferred to HPT and then to us through the leases. Host Marriott subsequently assigned its rights and obligations under the agreement to CCMH Courtyard. The agreement has an initial term expiring in 2012 with options to extend the agreement on all of the hotels for up to 36 years. The agreement provides that the Manager be paid a system fee equal to 3% of hotel sales, a base management fee of 2% of hotel sales ("Base Management Fee") and an incentive management fee equal to 50% F-26 HMH HPT CBM LLC NOTES TO FINANCIAL STATEMENTS of available cash flow, not to exceed 20% of operating profit, as defined ("Incentive Management Fee"). In addition, the Manager is reimbursed for each hotel's pro rata share of the actual costs and expenses incurred in providing certain services on a central or regional basis to all Courtyard by Marriott hotels operated by the Manager. Base Rent is to be paid prior to payment of Base Management Fees and Incentive Management Fees. To the extent Base Management Fees are deferred, they must be paid in future periods. If available cash flow is insufficient to pay Incentive Management Fees, no Incentive Management Fees are earned by the Manager. Beginning in 1999, all fees payable under the agreement are the obligation of CCMH Courtyard. Our obligations under the leases are guaranteed to a limited extent by CCMH Courtyard. We remain obligated to the Manager if CCMH Courtyard fails to pay these fees (but would be entitled to reimbursement from CCMH Courtyard under the terms of the subleases). Pursuant to the terms of the management agreement, the Manager is required to furnish the hotels with certain services ("Chain Services") which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. In addition, the hotels participate in Marriott Rewards and Marriott's Courtyard Club programs. The costs of these programs are charged to all hotels in the system. CCMH Courtyard, as our sublessee, is obligated to provide the Manager with sufficient funds to cover the cost of certain non-routine repairs and maintenance to the hotels which are normally capitalized; and replacements and renewals to the hotel and improvements. Under certain circumstances, we will be required to establish escrow accounts for such purposes under terms outlined in the agreement. Pursuant to the terms of the management agreement, we are required to provide the Manager with funding for working capital to meet the operating needs of the hotels. The Manager converts cash advanced by us into other forms of working capital consisting primarily of operating cash, inventories and trade receivables. Under the terms of the management agreement, the Manager maintains possession of and sole control over the components of working capital. Upon termination of the agreement, the working capital will be returned to us. We sold the existing working capital to CCMH Courtyard in return for a note receivable that bears interest at a rate of 5.12%. Interest accrued on the note is due simultaneously with each periodic rent payment. The principal amount of the note is payable upon termination of the subleases. CCMH Courtyard can return the working capital in satisfaction of the note. As of December 31, 2002 and 2001, the note receivable from CCMH Courtyard for working capital was $5.1 million. F-27 INTRODUCTION TO SUPPLEMENTARY FINANCIAL STATEMENTS OF CCMH COURTYARD I LLC CCMH Courtyard I LLC is the sublessee of the 20% of Hospitality Properties Trust's investments, at cost, which are leased to HMH HPT Courtyard LLC. The financial statements of HMH HPT Courtyard LLC are presented on the pages F-29 to F-39. CCMH Courtyard I LLC is a subsidiary of Crestline Capital Corporation and is not owned by Hospitality Properties Trust. The following financial statements of CCMH Courtyard I LLC are presented to comply with applicable accounting regulations of the Securities and Exchange Commission and were prepared by CCMH Courtyard I LLC's management. F-28 REPORT OF INDEPENDENT AUDITORS' To CCMH Courtyard I LLC: We have audited the accompanying balance sheet of CCMH Courtyard I LLC (a Delaware limited liability company) as of January 3, 2003 and the related statements of operations, member's equity and cash flows for the fiscal year ended January 3, 2003. These financial statements are the responsibility of CCMH Courtyard I LLC's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of CCMH Courtyard I LLC as of December 28, 2001 and for each of the years in the two-year period then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, before the restatements described in Note 6 to the financial statements, in their reports dated February 25, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of CCMH Courtyard I LLC as of January 3, 2003 and the results of its operations and its cash flows for the fiscal year ended January 3, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed above, the financial statements of CCMH Courtyard I LLC as of December 28, 2001 and for each of the years in the two-year period then ended were audited by other auditors who have ceased operations. As described in Note 6, those financial statements have been restated. We audited the adjustments described in Note 6 that were applied to restate the 2001 and 2000 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the CCMH Courtyard I LLC other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole. /s/ KPMG LLP McLean, Virginia February 24, 2003 (except with respect to note 6, which is as of March 26, 2003) F-29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CCMH Courtyard I LLC: We have audited the accompanying balance sheets of CCMH Courtyard I LLC (a Delaware limited liability company) as of December 28, 2001 and December 29, 2000, and the related statements of operations, member's equity and cash flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999. These financial statements are the responsibility of CCMH Courtyard I LLC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CCMH Courtyard I LLC as of December 28, 2001 and December 29, 2000 and the results of its operations and its cash flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Vienna, Virginia March 26, 2002 NOTE: This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Hospitality Properties Trust and subsidiaries filing on Form 10-K for the year ended December 31, 2001. The audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K. As described in Note 6 to the CCHM Courtyard I LLC financial statements, these financial statements have been restated. F-30 CCMH COURTYARD I LLC BALANCE SHEETS JANUARY 3, 2003 AND DECEMBER 28, 2001 (IN THOUSANDS)
2002 2001 ------------ ------------ (RESTATED) ASSETS Current assets Cash and cash equivalents .............................. $ 1,277 $ 3,824 Due from Marriott International ........................ 3,685 3,793 Other current assets ................................... - 5 ------------ ------------ Total current assets ................................... 4,962 7,622 Hotel working capital ...................................... 5,100 5,100 Sublease deposit ........................................... 1,948 1,948 ------------ ------------ Total assets ........................................... $ 12,010 $ 14,670 ============ ============ LIABILITIES AND MEMBER'S EQUITY Current liabilities Lease payable to Host Marriott ......................... $ 3,689 $ 3,463 Hotel working capital notes payable to Host Marriott ....... 5,100 5,100 ------------ ------------ Total liabilities ...................................... 8,789 8,563 ------------ ------------ Member's equity Member's accounts ...................................... 23,221 26,107 Note receivable from Barcelo Crestline Corporation ..... (20,000) (20,000) ------------ ------------ Total member's equity .................................. 3,221 6,107 ------------ ------------ Total liabilities and member's equity .................. $ 12,010 $ 14,670 ============ ============
See Accompanying Notes to Financial Statements. F-31 CCMH COURTYARD I LLC STATEMENTS OF OPERATIONS FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000 (IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ REVENUES Rooms ................................................... $ 189,979 $ 207,037 $ 221,571 Food and beverage ....................................... 12,579 13,799 15,198 Other ................................................... 4,403 6,313 7,955 ------------ ------------ ------------ Total revenues ...................................... 206,961 227,149 244,724 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Property-level operating costs and expenses Rooms ................................................... 41,884 44,834 48,603 Food and beverage ....................................... 10,345 11,990 13,652 Other ................................................... 74,011 81,575 85,200 Other operating costs and expenses Lease expense paid to Host Marriott ..................... 54,199 58,603 62,332 Management fees paid to Marriott International .......... 19,833 22,152 26,827 ------------ ------------ ------------ Total operating costs and expenses .................. 200,272 219,154 236,614 ------------ ------------ ------------ OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST ............................................ 6,689 7,995 8,110 Corporate expenses allocated ............................... (338) (282) (311) Interest expense on hotel working capital loan ............. (261) (261) (261) Interest income ............................................ 62 235 142 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ................................. 6,152 7,687 7,680 Provision for income taxes ................................. (2,461) (3,075) (3,160) ------------ ------------ ------------ NET INCOME ................................................. $ 3,691 $ 4,612 $ 4,520 ============ ============ ============
See Accompanying Notes to Financial Statements. F-32 CCMH COURTYARD I LLC STATEMENTS OF MEMBER'S EQUITY FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000 (IN THOUSANDS) Balance, December 31, 1999, as restated ......................... $ 1,396 Dividend to Barcelo Crestline Corporation ..................... (3,728) Net income .................................................... 4,520 ------------ Balance, December 29, 2000, as restated ......................... 2,188 Dividend to Barcelo Crestline Corporation ..................... (693) Net income .................................................... 4,612 ------------ Balance, December 28, 2001, as restated ......................... 6,107 Dividend to Barcelo Crestline Corporation ..................... (7,537) Interest income related to note receivable from Barcelo Crestline Corporation, net .................................. 960 Net income .................................................... 3,691 ------------ Balance, January 3, 2003 ........................................ $ 3,221 ============
See Accompanying Notes to Financial Statements. F-33 CCMH COURTYARD I LLC STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000 (IN THOUSANDS)
2002 2001 2000 ------------ ------------ ------------ OPERATING ACTIVITIES Net income ................................................. $ 3,691 $ 4,612 $ 4,520 Change in amounts due from Marriott International .......... 108 (185) (599) Change in lease payable to Host Marriott ................... 226 (406) 211 Change in other current assets and liabilities ............. 5 (139) 131 ------------ ------------ ------------ Cash provided by operating activities ................. 4,030 3,882 4,263 ------------ ------------ ------------ FINANCING ACTIVITIES Dividend to Barcelo Crestline Corporation .................. (7,537) (693) (3,728) Interest income related to note receivable from Barcelo Crestline Corporation, net ............................... 960 - - ------------ ------------ ------------ Cash used in financing activities ..................... (6,577) (693) (3,728) ------------ ------------ ------------ Increase in cash and cash equivalents ...................... (2,547) 3,189 535 Cash and cash equivalents, beginning of year ............... 3,824 635 100 ------------ ------------ ------------ Cash and cash equivalents, end of year ..................... $ 1,277 $ 3,824 $ 635 ============ ============ ============
See Accompanying Notes to Financial Statements. F-34 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION CCMH Courtyard I LLC (the "Company") was organized in the state of Delaware on December 28, 1998 as a wholly owned subsidiary of Crestline Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a publicly traded company when Host Marriott Corporation ("Host Marriott") completed its plan of reorganizing its business operations by spinning-off Crestline to the shareholders of Host Marriott as part of a series of transactions pursuant to which Host Marriott converted into a real estate investment trust (the "Distribution"). On June 7, 2002 Barcelo Corporacion Empresarial, S.A. acquired all of the outstanding shares of Crestline and Crestline was renamed Barcelo Crestline Corporation ("Barcelo Crestline"). On December 31, 1998, the Company entered into sublease agreements with HMH HPT Courtyard LLC ("HMH"), a wholly owned subsidiary of Host Marriott, to sublease 53 of HMH's limited-service hotels with the existing management agreements of the subleased hotels assigned to the Company. As of January 3, 2003, the Company subleased 53 limited-service Courtyard hotels from HMH. The Company operates as a unit of Barcelo Crestline, utilizing Barcelo Crestline's employees, insurance and administrative services since the Company does not have any employees. Certain direct expenses are paid by Barcelo Crestline and charged directly or allocated to the Company. Certain general and administrative costs of Barcelo Crestline are allocated to the Company, using a variety of methods, principally Barcelo Crestline's specific identification of individual costs and otherwise through allocations based upon estimated levels of effort devoted by general and administrative departments to the Company or relative measures of the size of the Company based on revenues. In the opinion of management, the methods for allocating general and administrative expenses and other direct costs are reasonable. FISCAL YEAR The Company's fiscal year ends on the Friday nearest December 31. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less at date of purchase as cash equivalents. REVENUES The Company records the gross property-level revenues generated by the hotels as revenues. The Company recognizes revenue when it is earned. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-35 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS NOTE 2. SUBLEASES HMH leases 53 limited-service hotels under the Courtyard by Marriott brand (the "HPT Leases") from Hospitality Properties Trust, Inc. ("HPT"). The HPT Leases have initial terms expiring through 2012 and are renewable at the option of HMH. In connection with the Distribution, the Company entered into sublease agreements with HMH for these limited-service hotels (the "Subleases"). The terms of the Subleases will expire simultaneously with the expiration of the initial term of the HPT Leases. If HMH elects to renew the HPT Leases, the Company can elect to also renew the Subleases for the corresponding renewal term. F-36 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS Each Sublease provides that generally all of the terms in the HPT Leases will apply to the Subleases. The HPT Leases require the lessee to pay rent equal to (i) a fixed minimum rent of $51,480,000 plus (ii) an additional rent equal to 5% of the excess of hotel revenues over a base year total of hotel revenues. The minimum rent is increased by 10% of payments by the owner for certain capital expenditures. In addition, the HPT Leases require the lessee to pay all repair and maintenance costs, impositions, utility charges, insurance premiums and all fees payable under the hotel management agreements. Pursuant to the Subleases, the Company is required to pay rent to HMH equal to the minimum rent due under the HPT Leases and an additional rent based on a percentage of revenues. Pursuant to the Subleases, the Company is required to maintain a minimum net worth of $20 million (see Note 6). The Company is also not permitted under its Subleases to pay dividends or advance funds to Barcelo Crestline or its affiliates in excess of its cumulative net income. The Subleases also required the Company to provide a security deposit to HMH for $1,948,000, which shall be returned to the Company upon the termination of the Subleases. On December 17, 1999, the Work Incentives Improvement Act was passed which contained certain tax provisions related to REITs, commonly known as the REIT Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs could lease hotels to a "taxable subsidiary" if the hotel is operated and managed on behalf of such subsidiary by an independent third party. This law enabled Host Marriott, beginning in 2001, to lease its hotels to a taxable REIT subsidiary. Host Marriott may, at its discretion, elect to terminate all of Barcelo Crestline's subleases beginning in 2001, upon payment of a termination fee equal to the fair market value of the Company's leasehold interests in the remaining term of the Subleases using a discount rate of five percent. If Host Marriott elects to terminate the Subleases, it would have to terminate all of Barcelo Crestline's subleases. Future minimum annual rental commitments for all non-cancelable leases as of January 3, 2003 are as follows (in thousands): 2003.................................................... $ 51,480 2004.................................................... 51,480 2005.................................................... 51,480 2006.................................................... 51,480 2007.................................................... 51,480 Thereafter.............................................. 257,403 ------------ Total minimum lease payments............................ $ 514,803 ============
Rent expense for the fiscal years 2002, 2001 and 2000 consisted of the following (in thousands):
2002 2001 2000 ------------ ------------ ------------ Sublease base rent ......................................... $ 51,379 $ 51,260 $ 50,957 Sublease percentage rent ................................... 2,820 7,343 11,375 ------------ ------------ ------------ Total rent to Host Marriott Corporation .................... 54,199 58,603 62,332 Other base rent ............................................ 2,630 2,821 2,944 ------------ ------------ ------------ Total rent ............................................ $ 56,829 $ 61,424 $ 65,276 ============ ============ ============
NOTE 3. WORKING CAPITAL NOTES Upon the commencement of the Subleases, the Company purchased the working capital of the subleased hotels from HMH for $5,100,000 with the purchase price evidenced by notes that bear interest at 5.12%. Interest on each note is due simultaneously with the rent payment of each Sublease. The principal amount of each note is due upon the termination of each Sublease. Upon termination of the Subleases, the Company will sell HMH the existing working capital at its current value. To the extent the working capital delivered to HMH is less than the value of the note, the Company will pay HMH the difference in cash. However, to the extent the working capital delivered to HMH exceeds the value of the note, HMH will pay the Company the difference in cash. As of January 3, 2003, the outstanding F-37 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS balance of the working capital notes was $5,100,000, which mature in 2010. Interest expense in 2002, 2001 and 2000 totaled $261,000, $261,000 and $261,000, respectively. NOTE 4. MANAGEMENT AGREEMENTS The hotels are managed by Marriott International, Inc. ("Marriott International") under long-term management agreements between HPT and Marriott International (the "Agreements"). HPT's rights and obligations under the Agreements were transferred to HMH through the HPT Leases. HMH's rights and obligations under the Agreements with Marriott International were assigned to the Company for the term of the Subleases. The Agreements have an initial term expiring in 2012 with an option to extend the Agreements on all of the hotels for up to 36 years. The Agreements provide that Marriott International be paid a system fee equal to 3% of hotel revenues, a base management fee of 2% of hotel revenues ("Base Management Fee") and an incentive management fee equal to 50% of available cash flow, not to exceed 20% of operating profit, as defined ("Incentive Management Fee"). In addition, Marriott International is reimbursed for each hotel's pro rata share of the actual costs and expenses incurred in providing certain services on a central or regional basis to all Courtyard by Marriott hotels operated by Marriott International. Base rent on the Subleases are paid prior to payment of Base Management Fees and Incentive Management Fees. To the extent Base Management Fees are so deferred, they must be paid in future periods. If available cash flow is insufficient to pay Incentive Management Fees, no Incentive Management Fees are earned by Marriott International. Pursuant to the terms of the Agreements, Marriott International is required to furnish the hotels with certain services ("Chain Services"), which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. In addition, the hotels participate in Marriott Rewards and Marriott's Courtyard Club programs. The cost of these programs are charged to all hotels in the system. The Company is obligated to provide Marriott International with sufficient funds to cover the cost of repairs and maintenance to the hotels and certain minor replacements and renewals to the hotels' property and improvements. To the extent the reserves for FF&E replacements are insufficient to meet the hotel's capital expenditure requirements, HPT, as owner, is required to fund the shortfall. NOTE 5. INCOME TAXES The Company is included in the consolidated Federal income tax return of Barcelo Crestline and its affiliates (the "Group"). Tax expense is allocated to the Company as a member of the Group based upon the relative contribution to the Group's pre-tax income. This allocation method results in Federal and state tax expense allocated for the period presented that is substantially equal to the expense that would have been recognized if the Company had filed separate tax returns. As of January 3, 2003 and December 28, 2001, the Company had no deferred tax assets or liabilities. NOTE 6. NOTE RECEIVABLE FROM BARCELO CRESTLINE The Company was capitalized with a $20 million note receivable from Barcelo Crestline. The note is payable upon demand. Effective December 28, 2001, the note was amended to bear interest at 8.0%. Prior to that date, the note was non-interest bearing. Fair value approximates book value at January 3, 2003. The note receivable serves as collateral security for the sublease. As this note relates to the initial capitalization of the Company, the note is treated as a reduction to member's equity. Consistent with this presentation, the interest income, net of taxes, related to this note receivable is treated as a capital infusion. The balance sheet as of December 28, 2001 and the statement of member's equity have been restated to conform to this presentation. As a result, the member's equity presented in the accompanying financial statements as of December 28, 2001 and December 29, 2000, and December 31, 1999 is $6.1 million, $2.2 million, and $1.4 million, respectively, as compared to $26.1 million, $22.2 million, and $21.4 million, respectively, as previously reported. F-38 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS As indicated in Note 2, the Company is required to maintain minimum net worth of $20 million. As a result of the treatment of the note receivable as a reduction of member's equity, the Company is not in compliance with the sublease. HPT has waived this non-compliance through June 30, 2003. Barcelo Crestline will pay the note by June 30, 2003 or make other arrangements to assure compliance with the sublease. F-39 SIGNATURES Pursuant to the requirements 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. HOSPITALITY PROPERTIES TRUST By: /s/ John G. Murray ------------------------------------- John G. Murray President and Chief Operating Officer Dated: March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ John G. Murray President and March 28, 2003 - ------------------------------ Chief Operating Officer John G. Murray /s/ Mark L. Kleifges Treasurer and Chief March 28, 2003 - ------------------------------ Financial Officer Mark L. Kleifges /s/ John L. Harrington Trustee March 28, 2003 - ------------------------------ John L. Harrington /s/ Arthur G. Koumantzelis Trustee March 28, 2003 - ------------------------------ Arthur G. Koumantzelis /s/ William J. Sheehan Trustee March 28, 2003 - ------------------------------ William J. Sheehan /s/ Gerard M. Martin Trustee March 28, 2003 - ------------------------------ Gerard M. Martin /s/ Barry M. Portnoy Trustee March 28, 2003 - ------------------------------ Barry M. Portnoy
F-40 CERTIFICATIONS I, Barry M. Portnoy, certify that: 1. I have reviewed this annual report on Form 10-K of Hospitality Properties Trust; 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 registrant's board of directors (or persons performing the equivalent function): 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 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 28,2003 /s/ Barry M. Portnoy ------------------------------------- Barry M. Portnoy Managing Trustee I, Gerard M. Martin, certify that: 1. I have reviewed this annual report on Form 10-K of Hospitality Properties Trust; 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 registrant's board of directors (or persons performing the equivalent function): 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 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 28,2003 /s/ Gerard M. Martin ------------------------------------- Gerard M. Martin Managing Trustee I, John G. Murray, certify that: 1. I have reviewed this annual report on Form 10-K of Hospitality Properties Trust; 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 registrant's board of directors (or persons performing the equivalent function): 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 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 28,2003 /s/ John G. Murray ------------------------------------- John G. Murray President and Chief Operating Officer I, Mark L. Kleifges, certify that: 1. I have reviewed this annual report on Form 10-K of Hospitality Properties Trust; 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 registrant's board of directors (or persons performing the equivalent function): 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 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 28 ,2003 /s/ Mark L. Kleifges ------------------------------------- Mark L. Kleifges Treasurer and Chief Financial Officer EX-3.5 3 a2106714zex-3_5.txt EXHIBIT 3.5 EXHIBIT 3.5 HOSPITALITY PROPERTIES TRUST ARTICLES SUPPLEMENTARY 8.875% SERIES B CUMULATIVE REDEEMABLE PREFERRED SHARES without par value HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust (the "Trust"), having its principal office in Newton, Massachusetts, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to authority expressly vested in the Trustees by Section 5.1 of the Amended and Restated Declaration of Trust of the Trust, dated August 21, 1995, as amended and supplemented (the "Declaration"), the Trustees have duly classified and designated 3,450,000 Preferred Shares of the Trust as 8.875% Series B Cumulative Redeemable Preferred Shares, without par value, of the Trust ("Series B Preferred Shares"). SECOND: The preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms or conditions of redemption of the Series B Preferred Shares are as follows, which upon any restatement of the Declaration shall be made part of Article V of the Declaration, with any necessary or appropriate changes to the enumeration or lettering of sections or subsections hereof. Capitalized terms used in this ARTICLE SECOND which are defined in the Declaration and not otherwise defined herein are used herein as so defined in the Declaration. 8.875% Series B Cumulative Redeemable Preferred Shares, without par value 1. Designation and Number. A series of Preferred Shares, designated the 8.875% Series B Cumulative Redeemable Preferred Shares, without par value (the "Series B Preferred Shares"), is hereby established. The number of authorized Series B Preferred Shares is 3,450,000. 2. Relative Seniority. In respect of rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, the Series B Preferred Shares shall rank (i) senior to the Common Shares, the Junior Participating Preferred Shares and any other class or series of Shares of the Trust, the terms of which specifically provide that such class or series ranks, as to rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, junior to the Series B Preferred Shares (the Shares described in this clause (i) being, collectively, "Junior Shares"), (ii) on a parity with the 9 1/2% Series A Cumulative Redeemable Preferred Shares, without par value (the "Series A Preferred Shares"), and any other class or series of Shares of the Trust, the terms of which specifically provide that such class or series ranks, as to rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, on a parity with the Series B Preferred Shares, and (iii) junior to any class or series of Shares of the Trust, the terms of which specifically provide that such class or series ranks, as to rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, senior to the Series B Preferred Shares. For the avoidance of doubt, debt securities of the Trust which are convertible into or exchangeable for Shares of the Trust or any other debt securities of the Trust do not constitute a class or series of Shares for purposes of this Section 2. 3. Dividends and Distributions. (a) Subject to the preferential rights of the holders of any class or series of Shares of the Trust ranking senior to the Series B Preferred Shares as to dividends, the holders of the then outstanding Series B Preferred Shares shall be entitled to receive, when and as authorized by the Trustees and declared by the Trust, out of any funds legally available therefor, cumulative dividends at a rate of eight and seven-eighths percent 8.875% per annum of the Twenty-five Dollars ($25.00) per share liquidation preference of the Series B Preferred Shares (equivalent to the annual rate of $2.21875 per share). Such dividends shall accrue and be cumulative from (but excluding) December 10, 2002 (the "Original Issue Date") in the case of Series B Preferred Shares issued on or prior to January 9, 2003, and otherwise from (but excluding) the date of the original issuance thereof, and will be payable quarterly in arrears in cash on the fifteenth day of each January, April, July and October beginning on April 15, 2003 (each such day being hereinafter called a "Quarterly Dividend Date"); provided that if any Quarterly Dividend Date is not a Business Day (as hereinafter defined), then the dividend which would otherwise have been payable on such Quarterly Dividend Date may be paid on the next succeeding Business Day with the same force and effect as if paid on such Quarterly Dividend Date, and no interest or additional dividends or other sums shall accrue on the amount so payable from such Quarterly Dividend Date to such next succeeding Business Day. As used herein the term "Dividend Period" for Series B Preferred Shares means the period from but excluding the Original Issue Date or other date of the original issuance thereof, as applicable, and ending on and including the next following Quarterly Dividend Date, and each subsequent period from but excluding a Quarterly Dividend Date and ending on and including the next following Quarterly Dividend Date. The amount of any dividend payable for any full Dividend Period or portion thereof shall be computed on the basis of a 360-day year consisting of twelve 30-day months (it being understood that the first Dividend Period is shorter than a full Dividend Period). Dividends shall be payable to holders of record as they appear in the share records of the Trust at the close of business on the applicable record date (the "Record Date"), which shall be a date designated by the Trustees for the payment of dividends that is not more than 60 nor less than 10 days prior to the applicable Quarterly Dividend Date. (b) Dividends on the Series B Preferred Shares shall accrue and be cumulative, whether or not (i) the Trust has earnings, (ii) there are funds legally available for the payment of such dividends or (iii) such dividends have been declared. (c) If Series B Preferred Shares are outstanding, no full dividends shall be declared or paid or set apart for payment on any other class or series of Shares of the Trust ranking, as to dividends, on a parity with the Series B Preferred Shares for any period, unless the full cumulative dividends on the Series B Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods. When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series B Preferred Shares and the Shares of any other class or series ranking on a parity as to dividends with the Series B Preferred Shares, all -2- dividends declared upon Series B Preferred Shares and any such other class or series of Shares shall in all cases bear to each other the same ratio that accrued dividends per share on the Series B Preferred Shares and such other class or series of Shares (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such other class or series does not have a cumulative dividend) bear to each other. (d) Except as provided in Section 3(c) above, unless full cumulative dividends on the Series B Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the repayment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, no dividends (other than in Common Shares or other Junior Shares or options, warrants or rights to subscribe for or purchase Common Shares or other Junior Shares) shall be declared or paid or set apart for payment and no other distribution shall be declared or made upon the Common Shares or any other Shares ranking junior to the Series B Preferred Shares as to rights to receive dividends or to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, nor shall any Common Shares or any other such Shares be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such Shares) by the Trust except (i) by conversion into or exchange for Common Shares or other Junior Shares, (ii) pursuant to pro rata offers to purchase or a concurrent redemption of all, or a pro rata portion of, the outstanding Series B Preferred Shares and any other class or series of Shares ranking on a parity with Series B Preferred Shares as to rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, (iii) by redemption, purchase or other acquisition of Common Shares made for purposes of an incentive, benefit or share purchase plan of the Trust or any of its subsidiaries for officers, Trustees or employees or others performing or providing similar services, (iv) by redemption, purchase or other acquisition of rights to purchase Junior Participating Preferred Shares pursuant to the Rights Agreement, dated as of May 30, 1997, between the Trust and State Street Bank and Trust Company, as rights agent, or pursuant to any replacement agreement therefor relating to such rights, each as in effect from time to time, or of any similar rights from time to time issued by the Trust in connection with a successor or supplemental shareholder rights protection plan adopted by the Trustees, and (v) for redemptions, purchases or other acquisitions by the Trust, whether pursuant to any provision of the Declaration or otherwise, for the purpose of preserving the Trust's status as a real estate investment trust (a "REIT") for federal income tax purposes. (e) No interest, or sum of money in lieu thereof, shall be payable in respect of any dividend payment or payments on Series B Preferred Shares which may be in arrears, and the holders of Series B Preferred Shares are not entitled to any dividends, whether payable in cash, securities or other property, in excess of the full cumulative dividends described in this Section 3. Except as otherwise expressly provided herein, the Series B Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust. (f) Any dividend payment made on the Series B Preferred Shares shall be first credited against the earliest accrued but unpaid dividend due with respect to such Shares which remains payable. Any cash dividends paid in respect of Series B Preferred Shares, including any portion thereof which the Trust elects to designate as "capital gain dividends" (as defined in -3- Section 857 (or any successor provision) of the Internal Revenue Code) or as a return of capital, shall be credited to the cumulative dividends on the Series B Preferred Shares. (g) No dividends on the Series B Preferred Shares shall be authorized by the Trustees or be paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, directly or indirectly prohibit authorization, payment or setting apart for payment or provide that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration, payment or setting apart for payment shall be restricted or prohibited by law. (h) The Trust shall remain entitled to receive and retain any interest or other earnings on any money set aside for the payment of dividends on Series B Preferred Shares and holders thereof shall have no claim to such interest or other earnings. Any funds for the payment of dividends on Series B Preferred Shares which have been set apart by the Trust and which remain unclaimed by the holders of the Series B Preferred Shares entitled thereto on the first anniversary of the applicable Quarterly Dividend Date, or other dividend payment date, shall revert and be repaid to the general funds of the Trust, and thereafter the holders of the Series B Preferred Shares entitled to the funds which have reverted or been repaid to the Trust shall look only to the general funds of the Trust for payment, without interest or other earnings thereon. (i) "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York, New York or Boston, Massachusetts are authorized or required by law, regulation or executive order to close. 4. Liquidation Rights. (a) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Trust, before any distribution or payment shall be made to the holders of any Common Shares or any other Shares ranking junior to the Series B Preferred Shares as to rights to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, but subject to the preferential rights of holders of any class or series of Shares ranking senior to the Series B Preferred Shares as to rights to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, the holders of Series B Preferred Shares shall be entitled to receive, out of assets of the Trust legally available for distribution to shareholders, liquidating distributions in cash or property at its fair market value as determined by the Trustees in the amount of Twenty-five Dollars ($25.00) per Series B Preferred Share, plus an amount equal to all dividends accrued and unpaid thereon. (b) After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series B Preferred Shares will have no right or claim to any of the remaining assets of the Trust. (c) In the event that upon any voluntary or involuntary liquidation, dissolution or winding up of the Trust, the available assets of the Trust are insufficient to pay the full amount of the liquidating distributions on all outstanding Series B Preferred Shares and the full amounts payable as liquidating distributions on all Shares of other classes or series of Shares of the Trust -4- ranking on a parity with the Series B Preferred Shares as to rights to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Trust, then the holders of the Series B Preferred Shares and all other such classes or series of Shares shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. (d) For purposes of this Section 4, neither the sale, lease, transfer or conveyance of all or substantially all of the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other entity or the merger or consolidation of any other entity into or with the Trust or a statutory share exchange by the Trust, shall be deemed to be a dissolution, liquidation or winding up of the Trust. (e) In determining whether a distribution (other than upon voluntary or involuntary liquidation), by dividend, redemption or other acquisition of Shares or otherwise, is permitted under Maryland law, amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of the holders of Series B Preferred Shares will not be added to the Trust's total liabilities. 5. Redemption by the Trust. (a) Optional Redemption. The Series B Preferred Shares are not redeemable prior to December 10, 2007 except as otherwise provided in Section 5(b) below. On and after December 10, 2007, the Trust may, at its option, redeem Series B Preferred Shares in whole or from time to time in part, for cash at a redemption price per share of Twenty-five Dollars ($25.00), together with all accrued and unpaid dividends to the date fixed for redemption, except as otherwise provided in Section 5(c)(vi) below, and without interest (the "Series B Redemption Price"). Each date fixed for redemption of Series B Preferred Shares pursuant to this Section 5(a) or to Section 5(b) below is referred to in these provisions of the Series B Preferred Shares as a "Series B Redemption Date." The Series B Preferred Shares have no stated maturity and are not subject to any sinking fund or mandatory redemption. Any redemption of Series B Preferred Shares pursuant to this Section 5(a) shall be made in accordance with the applicable provisions of Section 5(c) below. (b) Special Optional Redemption. The Trust may, at its option, redeem at any time all or from time to time any Series B Preferred Shares which constitute Excess Series B Preferred Shares (as defined in Section 9 below) for cash at a redemption price per share equal to the Series B Redemption Price, subject, with respect to the portion of the Series B Redemption Price constituting accrued and unpaid dividends to the date fixed for redemption, to the provisions of the second paragraph of subsection (c) of Section 5.14 of the Declaration and to Section 5(c)(vi) below, and without interest. The Trust's right to redeem Excess Series B Preferred Shares shall be in addition to, and shall not limit, its rights with respect to such Series B Preferred Shares set forth in Section 9 below or in Section 5.14 of the Declaration. Any redemption of Series B Preferred Shares pursuant to this Section 5(b) shall be made in accordance with the applicable provisions of Section 5(c) below. (c) Procedures and Terms for Redemption. -5- (i) Notice of redemption will be mailed at least 30 days but not more than 60 days before the Series B Redemption Date to each holder of record of Series B Preferred Shares to be redeemed at the address shown on the share transfer books of the Trust; provided that if the Trust shall have reasonably concluded, based on advice of independent tax counsel experienced in such matters, that a redemption pursuant to Section 5(b) must be made on a date (the "Special Redemption Date") which is earlier than 30 days after the date of such mailing in order to preserve the status of the Trust as a REIT for federal income tax purposes or to comply with federal tax laws relating to the Trust's qualification as a REIT, then the Trust may give such shorter notice as is necessary to effect such redemption on the Special Redemption Date. Each notice of redemption shall state: (A) the applicable Series B Redemption Date; (B) the number of Series B Preferred Shares to be redeemed; (C) the applicable Series B Redemption Price; (D) the place or places where certificates for such Series B Preferred Shares are to be surrendered for payment of the Series B Redemption Price; and (E) that dividends on the Series B Preferred Shares to be redeemed will cease to accrue on such Series B Redemption Date. If fewer than all the Series B Preferred Shares are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of Series B Preferred Shares to be redeemed from each such holder or the method for calculating that number. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series B Preferred Shares except as to the holder to whom the Trust has failed to give notice or to whom notice was defective. (ii) If notice of redemption of Series B Preferred Shares has been mailed in accordance with Section 5(c)(i) above and if the funds necessary for such redemption have been set aside by the Trust in trust for the benefit of the holders of the Series B Preferred Shares so called for redemption, subject to the provisions of Section 5(c)(v) below, then from and after the Series B Redemption Date specified in the notice, dividends will cease to accumulate, and such Shares shall no longer be deemed to be outstanding and shall not have the status of Series B Preferred Shares and all rights of the holders thereof as shareholders of the Trust (except the right to receive the Series B Redemption Price) shall terminate. (iii) Upon surrender, in accordance with the Trust's notice of redemption, of the certificates for any Series B Preferred Shares redeemed (properly endorsed or assigned for transfer and with applicable signature guarantees, if the Trust shall so require and the notice shall so state), the Series B Preferred Shares shall be redeemed by the Trust at the Series B Redemption Price. In case fewer than all the Series B Preferred Shares evidenced by any such certificate are redeemed, a new certificate or certificates shall be issued evidencing the unredeemed Series B Preferred Shares without cost to the holder thereof. (iv) If fewer than all of the outstanding Series B Preferred Shares are to be redeemed, the number of Series B Preferred Shares to be redeemed will be determined by the Trust and such Shares may be redeemed pro rata from the holders of record of such Shares in proportion to the number of such Shares held by such holders (with -6- adjustments to avoid redemption of fractional Shares), by lot or by any other equitable method determined by the Trust. (v) Any funds for the redemption of Series B Preferred Shares which have been set aside by the Trust pursuant to Section 5(c)(ii) above, shall be irrevocably set aside separate and apart from the Trust's other funds in trust for the pro rata benefit of the holders of the Series B Preferred Shares called for redemption, except that: (A) the Trust shall be entitled to receive any interest or other earnings, if any, earned on any money so set aside in trust, and the holders of any Shares redeemed shall have no claim to such interest or other earnings; and (B) any balance of monies deposited by the Trust and unclaimed by the holders of the Series B Preferred Shares entitled thereto at the expiration of one year from the applicable Series B Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the general funds of the Trust, and after any such repayment, the holders of the Shares entitled to the funds which have been repaid to the Trust shall look only to the general funds of the Trust for payment without interest or other earnings thereon. (vi) Anything in these provisions of the Series B Preferred Shares to the contrary notwithstanding, the holders of record of Series B Preferred Shares at the close of business on a Record Date will be entitled to receive the dividend payable with respect to such Shares on the corresponding Quarterly Dividend Date notwithstanding the redemption of such Shares after such Record Date and on or prior to such Quarterly Dividend Date or the Trust's default in the payment of the dividend due on such Quarterly Dividend Date, in which case the amount payable upon redemption of such Series B Preferred Shares will not include such dividend (and the full amount of the dividend payable for the applicable Dividend Period shall instead be paid on such Quarterly Dividend Date to the holders of record on such Record Date as aforesaid). Except as provided in this clause (vi) and except to the extent that accrued and unpaid dividends are payable as a part of the Series B Redemption Price pursuant to Section 5(a) or 5(b), the Trust will make no payment or allowance for unpaid dividends, regardless of whether or not in arrears, on Series B Preferred Shares called for redemption. (vii) Notwithstanding the foregoing, unless the full cumulative dividends on all Series B Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, no Series B Preferred Shares shall be redeemed unless all outstanding Series B Preferred Shares are simultaneously redeemed; provided, however, that (i) the foregoing shall not prevent the redemption of Series B Preferred Shares pursuant to Section 5(b) above or the purchase or acquisition of Series B Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series B Preferred Shares, and (ii) the foregoing shall not in any respect limit the terms and provisions of Section 5.14 of the Declaration or Section 9 hereof. In addition, unless the full cumulative dividends on all -7- outstanding Series B Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, the Trust shall not purchase or otherwise acquire directly or indirectly any Series B Preferred Shares (except by conversion into or exchange for Common Shares or other Junior Shares); provided, however, that (i) the foregoing shall not prevent the redemption of Series B Preferred Shares pursuant to Section 5(b) above or the purchase or acquisition of Series B Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series B Preferred Shares, and (ii) the foregoing shall not in any respect limit the terms and provisions of Section 5.14 of the Declaration or Section 9 hereof. (viii) For the avoidance of doubt, the provisions of this Section 5 shall not limit any direct or indirect purchase or acquisition by the Trust of all or any Series B Preferred Shares on the open market (including in privately negotiated transactions), except as otherwise expressly provided in Section 5(c)(vii) above. 6. Voting Rights. Notwithstanding anything to the contrary contained in the Declaration, except as set forth below in this Section 6, the holders of the Series B Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of Trustees or for any other purpose or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders (except for such notices as may be expressly required by law). (a) At any time dividends on the Series B Preferred Shares shall be in arrears for six or more quarterly periods, whether or not the quarterly periods are consecutive, the holders of Series B Preferred Shares (voting separately as a class with all other series of Preferred Shares of the Trust upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional Trustees of the Trust at the next annual meeting of shareholders and for those or other replacement Trustees at each subsequent meeting (and the number of Trustees then constituting the Board of Trustees will automatically increase by two, if not already increased by two by reason of the election of Trustees by the holders of such Preferred Shares), until all dividends accumulated on Series B Preferred Shares for the past Dividend Periods and the then current Dividend Period shall have been fully paid or declared and a sum sufficient for the payment thereof set apart for payment. For the avoidance of doubt, and by means of example, in the event dividends on the Series B Preferred Shares and the Series A Preferred Shares shall both be in arrears for six or more quarterly periods, the holders of Series B Preferred Shares and Series A Preferred Shares (and the holders of all other series of Preferred Shares of the Trust upon which like voting rights have been conferred and are exercisable) shall be entitled to vote for the election of two additional Trustees in the aggregate, not four or more additional Trustees. (i) Upon the full payment of all such dividends accumulated on Series B Preferred Shares for the past Dividend Periods and the then current Dividend Period or the declaration in full thereof and the Trust's setting aside a sum sufficient for the payment thereof, the right of the holders of Series B Preferred Shares to elect such two Trustees shall cease, and (unless there are one or more other series of Preferred Shares of the Trust upon which like voting rights have been conferred and are exercisable) the term -8- of office of such Trustees previously so elected shall automatically terminate and the authorized number of Trustees of the Trust will thereupon automatically return to the number of authorized Trustees otherwise in effect, but subject always to the same provisions for the reinstatement and divestment of the right to elect two additional Trustees in the case of any such future dividend arrearage. (ii) If at any time when the voting rights conferred upon the Series B Preferred Shares pursuant to this Section 6(a) are exercisable any vacancy in the office of a Trustee elected pursuant to this Section 6(a) shall occur, then such vacancy may be filled only by the written consent of the remaining such Trustee or by vote of the holders of record of the outstanding Series B Preferred Shares and any other series of Preferred Shares of the Trust upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Series B Preferred Shares in the election of Trustees pursuant to this Section 6(a). (iii) Any Trustee elected or appointed pursuant to this Section 6(a) may be removed only by the holders of the outstanding Series B Preferred Shares and any other series of Preferred Shares of the Trust upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Series B Preferred Shares in the election of Trustees pursuant to this Section 6(a), and may not be removed by the holders of the Common Shares. (iv) The term of any Trustees elected or appointed pursuant to this Section 6(a) shall be from the date of such election or appointment and their qualification until the next annual meeting of the shareholders and until their successors are duly elected and qualify, except as otherwise provided above in this Section 6(a). (b) So long as any Series B Preferred Shares remain outstanding, the Trust shall not, without the affirmative vote or consent of the holders of at least two-thirds of the Series B Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (the holders of Series B Preferred Shares voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of Shares ranking senior to the Series B Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Trust, or reclassify any authorized Shares of the Trust into any such Shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such Shares; or (ii) amend, alter or repeal the provisions of the Declaration or the terms of the Series B Preferred Shares, whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of the Series B Preferred Shares; provided, however, that any increase in the amount of authorized Preferred Shares, any issuance of or increase in the amount of Series B Preferred Shares or any creation or issuance of or increase in the amount of authorized shares of any class or series of Preferred Shares which rank on a parity with the Series B Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up of the Trust or which are Junior Shares shall not be deemed to materially and adversely affect the rights, preferences, privileges or voting powers of the Series B Preferred Shares. -9- (c) The voting provisions set forth in clauses (a) and (b) above will not apply if, at or prior to the time when the act with respect to which a vote would otherwise be required shall be effected, all outstanding Series B Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust pursuant to the provisions of Sections 5(c)(ii) and 5(c)(v) hereof to effect the redemption. (d) On each matter submitted to a vote of the holders of Series B Preferred Shares or on which the holders of Series B Preferred Shares are otherwise entitled to vote as provided herein, each Series B Preferred Share shall be entitled to one vote, except that when Shares of any other class or series of Preferred Shares of the Trust have the right to vote with the Series B Preferred Shares as a single class on any matter, the Series B Preferred Shares and the Shares of each such other class or series will have one vote for each Twenty-five Dollars ($25.00) of liquidation preference. 7. Conversion. The Series B Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust. This provision will not prevent the Trust from offering to convert or exchange the Series B Preferred Shares. 8. Status of Redeemed and Reacquired Series B Preferred Shares. In the event any Series B Preferred Shares shall be redeemed pursuant to Section 5 hereof or otherwise reacquired by the Trust, the Shares so redeemed or reacquired shall become authorized but unissued Series B Preferred Shares, available for future issuance and reclassification by the Trust or, if so determined by the Trustees, may be retired and canceled by the Trust. 9. Restrictions on Transfer. (a) As a condition to the transfer (including, without limitation, any sale, transfer, gift, assignment, devise or other disposition of Series B Preferred Shares, whether voluntary or involuntary, whether beneficially or of record, and whether effected constructively, by operation of law or otherwise) and/or registration of transfer of any Series B Preferred Shares ("Excess Series B Preferred Shares") which could in the opinion of the Trustees result in (i) direct or indirect ownership (as defined in Section 5.14 of the Declaration) of Series B Preferred Shares representing more than 9.8% in number, value or voting power of the total Series B Preferred Shares outstanding becoming concentrated in the hands of one owner other than an Excepted Person (as such term is defined in the Declaration), (ii) the outstanding Series B Preferred Shares of the Trust being owned by fewer than one hundred twenty (120) persons, or (iii) the Trust being "closely held" within the meaning of Section 856(h) of the Internal Revenue Code, such potential owner (a "Proposed Transferee") shall file with the Trust the statement or affidavit described in Section 5.14(b) of the Declaration no later than the fifteenth (15th) day prior to any proposed transfer, registration of transfer or transaction which, if consummated, would have any of the results set forth above; provided, however, that the Trustees may waive such requirement -10- of prior notice upon determination that such waiver is in the best interests of the Trust. Subject to Section 5.14(i) of the Declaration, the Trustees shall have the power and right (i) to refuse to transfer or issue Excess Series B Preferred Shares or share certificates to any Proposed Transferee whose acquisition of such Excess Series B Preferred Shares would, in the opinion of the Trustees, result in the direct or indirect beneficial ownership of any Excess Series B Preferred Shares by a Person other than an Excepted Person and (ii) to treat such Excess Series B Preferred Shares as having been transferred not to the Proposed Transferee but rather to a trustee for the benefit of one or more Charitable Beneficiaries (as defined in the Declaration) selected and otherwise as described in Section 5.14(c) of the Declaration. Any such trust shall be deemed to have been established by the holder of such Excess Series B Preferred Shares for the benefit of the applicable Charitable Beneficiary or Charitable Beneficiaries on the day prior to the date of the purported transfer to the Proposed Transferee, which purported transfer shall be void ab initio and the Proposed Transferee shall be deemed never to have acquired any interest in or with respect to the Excess Series B Preferred Shares purportedly transferred. (b) Any Excess Series B Preferred Shares shall automatically be deemed to constitute Excess Shares (within the meaning of the Declaration) and shall be treated in the manner prescribed for Excess Shares, including, without limitation, the provisions set forth in Section 5.14(c) thereof. (c) Notwithstanding any other provision of the Declaration or hereof to the contrary, but subject to Section 5.14(i) of the Declaration, any purported acquisition of Series B Preferred Shares (whether such purported acquisition results from the direct or indirect acquisition or ownership (as defined for purposes of the Declaration) of Series B Preferred Shares) which would result in the disqualification of the Trust as a REIT for federal income tax purposes shall be null and void. Any such Series B Preferred Shares may be treated by the Trustees in the manner prescribed for Excess Series B Preferred Shares in these provisions of the Series B Preferred Shares and for Excess Shares in Section 5.14(c) of the Declaration. (d) The provisions of this Section 9 shall not limit the applicability of Section 5.14 of the Declaration to Series B Preferred Shares in accordance with the terms thereof, and the provisions of this Section 9 and of Section 5.14 of the Declaration shall not limit the right of the Trust to elect to redeem Excess Series B Preferred Shares pursuant to Section 5(b) hereof. Subject only to Section 5.14(i) of the Declaration, nothing contained in this Section 9 or in any other provision of the Series B Preferred Shares shall limit the authority of the Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interests of the shareholders by preservation of the Trust's status as a REIT for federal income tax purposes. The provisions of subsections (f) through (i) of Section 5.14 of the Declaration shall be applicable to this Section 9 as though (i) the references therein to Section 5.14 of the Declaration referred instead to this Section 9 and (ii) the references therein to subsections of Section 5.14 of the Declaration referred to the comparable provisions of this Section 9. 10. Severability. If any preference, right, voting power, restriction, limitation as to dividends or other distributions, qualification, term or condition of redemption or other term of the Series B Preferred Shares is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, then, to the extent permitted by law, all other preferences, rights, -11- voting powers, restrictions, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms of the Series B Preferred Shares which can be given effect without the invalid, unlawful or unenforceable preference, right, voting power, restriction, limitation as to dividends or other distributions, qualification, term or condition of redemption or other term of the Series B Preferred Shares shall remain in full force and effect and shall not be deemed dependent upon any invalid, unlawful or unenforceable preference, right, voting power, restriction, limitation as to dividends or other distributions, qualification, term or condition of redemption or other term of the Series B Preferred Shares. THIRD: The Series B Preferred Shares have been classified and designated by the Board of Trustees under the authority contained in the Declaration. FOURTH: These Articles Supplementary have been approved by the Board of Trustees in the manner and by the vote required by law. FIFTH: The undersigned Executive Vice President of the Trust acknowledges these Articles Supplementary to be the trust act of the Trust and, as to all matters or facts required to be verified under oath, the undersigned Executive Vice President acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and this statement is made under the penalties for perjury. (Remainder of Page Intentionally Left Blank) -12- IN WITNESS WHEREOF, HOSPITALITY PROPERTIES TRUST has caused these Articles Supplementary to be signed in its name and on its behalf by its Executive Vice President and witnessed by its Secretary on December 9, 2002. WITNESS: HOSPITALITY PROPERTIES TRUST /s/ John G. Murray By: /s/ Thomas M. O'Brien John G. Murray Thomas M. O'Brien Secretary Executive Vice President EX-3.6 4 a2106714zex-3_6.txt EXHIBIT 3.6 EXHIBIT 3.6 ---------------------------------------- HOSPITALITY PROPERTIES TRUST ---------- AMENDED AND RESTATED BYLAWS ---------- As Amended and Restated March 18, 2003 ---------------------------------------- TABLE OF CONTENTS
PAGE ---- ARTICLE I OFFICES...................................................................................1 Section 1.1. Principal Office..........................................................1 Section 1.2. Additional Offices........................................................1 ARTICLE II MEETINGS OF SHAREHOLDERS..................................................................1 Section 2.1. Place.....................................................................1 Section 2.2. Annual Meeting............................................................1 Section 2.3. Special Meetings..........................................................1 Section 2.4. Notice of Regular or Special Meetings.....................................1 Section 2.5. Notice of Adjourned Meetings..............................................2 Section 2.6. Scope of Notice...........................................................2 Section 2.7. Organization of Shareholder Meetings......................................2 Section 2.8. Quorum....................................................................3 Section 2.9. Voting....................................................................3 Section 2.10. Proxies...................................................................3 Section 2.11. Voting Rights.............................................................3 Section 2.12. Voting of Shares by Certain Holders.......................................3 Section 2.13. Inspectors................................................................4 Section 2.14. Reports to Shareholders...................................................4 Section 2.15. Nominations and Proposals to be Considered at Meeting of Shareholders.............................................4 Section 2.15.1 Annual Meetings of Shareholders...........................................5 Section 2.15.2 Shareholder Nominations or Proposals Causing Covenant Breaches.......................................................7 Section 2.15.3 Shareholder Nominations or Proposals Requiring Regulatory Notice, Consent or Approval...............................................................7 Section 2.15.4 Special Meetings of Shareholders..........................................7 Section 2.15.5 General...................................................................8 Section 2.16. No Shareholder Actions by Written Consent.................................8 Section 2.17. Voting by Ballot..........................................................9 ARTICLE III TRUSTEES..................................................................................9 Section 3.1. General Powers; Qualifications; Trustees Holding Over.....................9 Section 3.2. Independent Trustees......................................................9 Section 3.3. Managing Trustees.........................................................9 Section 3.4. Number and Tenure.........................................................9 Section 3.5. Annual and Regular Meetings...............................................9 Section 3.6. Special Meetings..........................................................9 Section 3.7. Notice....................................................................9 Section 3.8. Quorum...................................................................10 Section 3.9. Voting...................................................................10 Section 3.10. Telephone Meetings.......................................................10
i TABLE OF CONTENTS (continued)
PAGE ---- Section 3.11. Informal Action by Trustees..............................................10 Section 3.12. Waiver of Notice.........................................................10 Section 3.13. Vacancies................................................................11 Section 3.14. Compensation; Financial Assistance.......................................11 Section 3.14.1 Compensation.............................................................11 Section 3.14.2 Financial Assistance to Trustees.........................................11 Section 3.15. Removal of Trustees......................................................11 Section 3.16. Loss of Deposits.........................................................11 Section 3.17. Surety Bonds.............................................................11 Section 3.18. Reliance.................................................................11 Section 3.19. Interested Trustee Transactions..........................................12 Section 3.20. Qualifying Shares Not Required...........................................12 Section 3.21. Certain Rights of Trustees, Officers, Employees and Agents...............12 Section 3.22. Certain Transactions.....................................................12 ARTICLE IV COMMITTEES...............................................................................12 Section 4.1. Number; Tenure and Qualifications........................................12 Section 4.2. Powers...................................................................12 Section 4.3. Meetings.................................................................12 Section 4.4. Telephone Meetings.......................................................13 Section 4.5. Informal Action by Committees............................................13 Section 4.6. Vacancies................................................................13 ARTICLE V OFFICERS.................................................................................13 Section 5.1. General Provisions.......................................................13 Section 5.2. Removal and Resignation..................................................13 Section 5.3. Vacancies................................................................14 Section 5.4. Chief Executive Officer..................................................14 Section 5.5. Chief Operating Officer..................................................14 Section 5.6. Chief Financial Officer..................................................14 Section 5.7. Chairman and Vice Chairman of the Board..................................14 Section 5.8. President................................................................14 Section 5.9. Vice Presidents..........................................................14 Section 5.10. Secretary................................................................15 Section 5.11. Treasurer................................................................15 Section 5.12. Assistant Secretaries and Assistant Treasurers...........................15 ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS....................................................15 Section 6.1. Contracts................................................................15 Section 6.2. Checks and Drafts........................................................15 Section 6.3. Deposits.................................................................16 ARTICLE VII SHARES...................................................................................16 Section 7.1. Certificates.............................................................16
ii TABLE OF CONTENTS (continued)
PAGE ---- Section 7.2. Transfers................................................................16 Section 7.3. Replacement Certificate..................................................16 Section 7.4. Closing of Transfer Books or Fixing of Record Date.......................16 Section 7.5. Share Ledger.............................................................17 Section 7.6. Fractional Shares; Issuance of Units.....................................17 ARTICLE VIII FISCAL YEAR..............................................................................17 ARTICLE IX DISTRIBUTIONS............................................................................17 Section 9.1. Authorization............................................................17 Section 9.2. Contingencies............................................................18 ARTICLE X SEAL.....................................................................................18 Section 10.1. Seal.....................................................................18 Section 10.2. Affixing Seal............................................................18 ARTICLE XI WAIVER OF NOTICE.........................................................................18 ARTICLE XII THE ADVISOR..............................................................................18 Section 12.1. Employment of Advisor....................................................18 Section 12.2. Other Activities of Advisor..............................................19 ARTICLE XIII AMENDMENT OF BYLAWS......................................................................19 ARTICLE XIV MISCELLANEOUS............................................................................20 Section 14.1. References to Declaration of Trust.......................................20 Section 14.2. Inspection of Bylaws.....................................................20 Section 14.3. Election to be Subject to Part of Title 3, Subtitle 8....................20
iii HOSPITALITY PROPERTIES TRUST AMENDED AND RESTATED BYLAWS ARTICLE I OFFICES Section 1.1. PRINCIPAL OFFICE. The principal office of the Trust shall be located at such place or places as the Board of Trustees may designate. Section 1.2. ADDITIONAL OFFICES. The Trust may have additional offices at such places as the Board of Trustees may from time to time determine or the business of the Trust may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1. PLACE. All meetings of shareholders shall be held at the principal office of the Trust or at such other place within the United States as is designated by the Trustees or the chairman of the board or president, given either before or after the meeting and filed with the secretary of the Trust. Section 2.2. ANNUAL MEETING. An annual meeting of the shareholders for the election of Trustees and the transaction of any business within the powers of the Trust shall be held within six months after the end of each fiscal year. Failure to hold an annual meeting does not invalidate the Trust's existence or affect any otherwise valid acts of the Trust. Section 2.3. SPECIAL MEETINGS. Special meetings of shareholders may be called only by a majority of the Trustees. If there shall be no Trustees, the officers of the Trust shall promptly call a special meeting of the shareholders entitled to vote for the election of successor Trustees. No business shall be transacted by the shareholders at a special meeting other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Trustees (or any duly authorized committee thereof) or (b) otherwise properly brought before the shareholders by or at the direction of the Trustees. Section 2.4. NOTICE OF REGULAR OR SPECIAL MEETINGS. Written notice specifying the place, day and hour of any regular or special meeting, the purposes of the meeting, and all other matters required by law shall be given to each shareholder of record entitled to vote, either personally or by sending a copy thereof by mail, telegraph or telecopier, charges prepaid, to his address appearing on the books of the Trust or theretofore given by him to the Trust for the purpose of notice or, if no address appears or has been given, addressed to the place where the principal office of the Trust is situated. If mailed, such notice shall be deemed to be given once deposited in the U.S. mail addressed to the shareholder at his post office address as it appears on the records of the Trust, with postage thereon prepaid. It shall be the duty of the secretary to give notice of each Annual Meeting of the Shareholders at least fifteen (15) days and not more than sixty (60) days before the date on which it is to be held. Whenever an officer has been duly requested by the Trustees to call a special meeting of shareholders, it shall be his duty to fix the date and hour thereof, which date shall be not less than twenty (20) days and not more than sixty (60) days after the receipt of such request, and to give notice of such special meeting within ten (10) days after receipt of such request. Section 2.5. NOTICE OF ADJOURNED MEETINGS. It shall not be necessary to give notice of the time and place of any adjourned meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken, except that when a meeting is adjourned for more than 120 days after the original record date, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 2.6. SCOPE OF NOTICE. No business shall be transacted at an annual or special meeting of shareholders except as specifically designated in the notice or otherwise properly brought before the shareholders by or at the direction of the Trustees. Section 2.7. ORGANIZATION OF SHAREHOLDER MEETINGS. Every meeting of shareholders shall be conducted by an individual appointed by the Trustees to be chairperson of the meeting or, in the absence of such appointment or the absence of the appointed individual, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the following officers present at the meeting: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority or, in the absence of such officers, a chairperson chosen by the shareholders by the vote of holders of shares of beneficial interest representing a majority of the votes cast by shareholders present in person or represented by proxy. The secretary or, in the secretary's absence, an assistant secretary or, in the absence of both the secretary and any and all assistant secretaries, a person appointed by the Trustees or, in the absence of such appointment, a person appointed by the chairperson of the meeting shall act as secretary of the meeting and record the minutes of the meeting. If the secretary presides as chairperson at a meeting of the shareholders, then the secretary shall not also act as secretary of the meeting and record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of shareholders shall be determined by the chairperson of the meeting. The chairperson of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of such chairperson, are appropriate for the proper conduct of the meeting, including, without limitation: (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to shareholders of record of the Trust, their duly authorized proxies or other such persons as the chairperson of the meeting may determine; (c) limiting participation at the meeting on any matter to shareholders of record of the Trust entitled to vote on such matter, their duly authorized proxies or other such persons as the chairperson of the meeting may determine; (d) limiting the time allotted to questions or comments by participants; (e) maintaining order and security at the meeting; (f) removing any shareholder or other person who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairperson of the meeting; and (g) recessing or adjourning the meeting to a later date and time and place announced at the meeting. Unless otherwise determined by the chairperson of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure or any established rules of order. -2- Section 2.8. QUORUM. At any meeting of shareholders, the presence in person or by proxy of shareholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the Declaration of Trust for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the shareholders, the shareholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.9. VOTING. At all elections of Trustees, voting by shareholders shall be conducted under the non-cumulative method and the election of Trustees shall be by the affirmative vote of the holders of shares representing a majority of the total number of votes authorized to be cast by shares then outstanding and entitled to vote thereon. A majority of the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required herein or by statute or by the Declaration of Trust. Section 2.10. PROXIES. A shareholder may cast the votes entitled to be cast by him either in person or by proxy executed by the shareholder or by his duly authorized agent in any manner permitted by law. Such proxy shall be filed with such officer of the Trust as the Trustees shall have designated for such purpose for verification prior to such meeting. Any proxy relating to the Trust's shares of beneficial interest shall be valid until the expiration date therein or, if no expiration is so indicated, for such period as is permitted pursuant to Maryland law. At a meeting of shareholders, all questions concerning the qualification of voters, the validity of proxies, and the acceptance or rejection of votes, shall be decided by the secretary of the meeting, unless inspectors of election are appointed pursuant to Section 2.13, in which event such inspectors shall pass upon all questions and shall have all other duties specified in said section. Section 2.11. VOTING RIGHTS. The Board of Trustees shall fix the date for determination of shareholders entitled to vote at a meeting of shareholders. If no date is fixed for the determination of the shareholders entitled to vote at any meeting of shareholders, only persons in whose names shares entitled to vote stand on the share records of the Trust at the opening of business on the day of any meeting of shareholders shall be entitled to vote at such meeting. Section 2.12. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the Trust registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the governing board of such corporation or other entity or pursuant to an agreement of the partners of the partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such shares. Any trustee or other fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. -3- Shares of the Trust directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Trustees may adopt by resolution a procedure by which a shareholder may certify in writing to the Trust that any shares registered in the name of the shareholder are held for the account of a specified person other than the shareholder. The resolution shall set forth the class of shareholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Trust; and any other provisions with respect to the procedure which the Trustees consider necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the shareholder of record of the specified shares in place of the shareholder who makes the certification. Section 2.13. INSPECTORS. At any meeting of shareholders, the chairperson of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting at the meeting. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be PRIMA FACIE evidence thereof. Section 2.14. REPORTS TO SHAREHOLDERS. The Trustees shall submit to the shareholders at or before the annual meeting of shareholders a report of the business and operations of the Trust during such fiscal year containing financial statements of the Trust, accompanied by the report of an independent certified public accountant, and such further information as the Trustees may determine is required pursuant to any law or regulation to which the Trust is subject. Within the earlier of twenty (20) days after the annual meeting of shareholders or 120 days after the end of the fiscal year of the Trust, the Trustees shall place the annual report on file at the principal office of the Trust and with any governmental agencies as may be required by law and as the Trustees may deem appropriate. Section 2.15. NOMINATIONS AND PROPOSALS TO BE CONSIDERED AT MEETING OF SHAREHOLDERS. Nominations of persons for election to the Board of Trustees and the proposal of other business to be considered by the shareholders at an annual or special meeting of shareholders may be properly brought before the meeting only as set forth in this Section 2.15. All judgments and determinations made by the Board of Trustees or the chairperson of the meeting, as applicable, under this Section 2.15 (including without limitation judgments as to whether any matter or thing -4- is satisfactory to the Board of Trustees and determinations as to the propriety of a proposed nomination or a proposal of other business) shall be made in good faith. Section 2.15.1. ANNUAL MEETINGS OF SHAREHOLDERS. (a) Nominations of persons for election to the Board of Trustees and the proposal of other business to be considered by the shareholders at an annual meeting of shareholders may be properly brought before the meeting (i) pursuant to the Trust's notice of meeting by or at the direction of the Trustees or (ii) by any shareholder of the Trust who is a shareholder of record both at the time of giving of notice provided for in this Section 2.15.1 and at the time of the annual meeting, who is entitled to vote at the meeting and who complies with the terms and provisions set forth in this Section 2.15. (b) For nominations for election to the Board of Trustees or other business to be properly brought before an annual meeting by a shareholder pursuant to Section 2.15.1(a)(ii), the shareholder must have given timely notice thereof in writing to the secretary of the Trust and such other business must otherwise be a proper matter for action by shareholders. To be timely, a shareholder's notice shall set forth all information required under this Section 2.15 and shall be delivered to the secretary at the principal executive offices of the Trust not later than the close of business on the 90th day nor earlier than the 120th day prior to the first anniversary of the date of mailing of the notice for the preceding year's annual meeting; provided, however, that in the event that the date of mailing of the notice for the annual meeting is advanced or delayed by more than 30 days from the anniversary date of the date of mailing of the notice for the preceding year's annual meeting, notice by the shareholder to be timely must be so delivered not earlier than the 120th day prior to the date of mailing of the notice for such annual meeting and not later than the close of business on the later of: (i) the 90th day prior to the date of mailing of the notice for such annual meeting or (ii) the 10th day following the day on which public announcement of the date of mailing of the notice for such meeting is first made by the Trust. In no event shall the public announcement of a postponement of the mailing of the notice for such annual meeting or of an adjournment or postponement of an annual meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. A shareholder's notice shall set forth: (A) as to each person whom the shareholder proposes to nominate for election or reelection as a Trustee, (1) such person's name, age, business address and residence address, (2) the class, series and number of shares of beneficial interest of the Trust that are beneficially owned or owned of record by such person, (3) the date such shares were acquired and the investment intent of such acquisition, (4) the record of all purchases and sales of securities of the Trust by such person during the previous 12 month period including the date of the transactions, the class, series and number of securities involved in the transactions and the consideration involved and (5) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of Trustees in an election contest (even if an election contest is not involved), or is -5- otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serve as a Trustee if elected; (B) as to any other business that the shareholder proposes to bring before the meeting, a description of such business, the reasons for proposing such business at the meeting and any material interest in such business of such shareholder and any Shareholder Associated Person (as defined below), including any anticipated benefit therefrom; (C) as to the shareholder giving the notice and any Shareholder Associated Person, the class, series and number of shares of the Trust which are owned of record by such shareholder and by such Shareholder Associated Person, if any, and the class, series and number of, and the nominee holder for, shares owned beneficially but not of record by such shareholder and by any such Shareholder Associated Person; (D) as to the shareholder giving the notice and any Shareholder Associated Person, the name and address of such shareholder, as they appear on the Trust's share ledger and current name and address, if different, of such Shareholder Associated Person; (E) as to the shareholder giving the notice and any Shareholder Associated Person, the record of all purchases and sales of securities of the Trust by such shareholder or Shareholder Associated Person during the previous 12 month period including the date of the transactions, the class, series and number of securities involved in the transactions and the consideration involved; and (F) to the extent known by the shareholder giving the notice, the name and address of any other shareholder supporting the nominee for election or reelection as a Trustee or the proposal of other business on the date of such shareholder's notice. (c) Notwithstanding anything in the second sentence of Section 2.15.1(b) to the contrary, in the event that the number of Trustees to be elected to the Board of Trustees is increased and there is no public announcement of such action at least 130 days prior to the first anniversary of the date of mailing of notice for the preceding year's annual meeting, a shareholder's notice required by this Section 2.15.1 also shall be considered timely, but only with respect to nominees for any new positions created by such increase, if the notice is delivered to the secretary at the principal executive offices of the Trust not later than the close of business on the 10th day immediately following the day on which such public announcement is first made by the Trust. -6- (d) For purposes of this Section 2.15, "Shareholder Associated Person" of any shareholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such shareholder, (ii) any beneficial owner of shares of beneficial interest of the Trust owned of record or beneficially by such shareholder and (iii) any person controlling, controlled by or under common control with such shareholder or Shareholder Associated Person. Section 2.15.2. SHAREHOLDER NOMINATIONS OR PROPOSALS CAUSING COVENANT BREACHES. At the same time as or prior to the submission of any shareholder nomination or proposal of business to be considered at an annual or special meeting that, if approved and implemented by the Trust, would cause the Trust to be in breach of any covenant of the Trust in any existing or proposed debt instrument or agreement of the Trust, the proponent shareholder or shareholders must submit to the secretary of the Trust at the principal executive offices of the Trust (a) evidence satisfactory to the Board of Trustees of the lender's or contracting party's willingness to waive the breach of covenant or (b) a plan for repayment of the indebtedness to the lender or correcting the contractual default, specifically identifying the actions to be taken or the source of funds to be used in the repayment, which plan must be satisfactory to the Board of Trustees in its discretion. Section 2.15.3. SHAREHOLDER NOMINATIONS OR PROPOSALS REQUIRING REGULATORY NOTICE, CONSENT OR APPROVAL. At the same time or prior to the submission of any shareholder nominations or proposal of business to be considered at an annual or special meeting that, if approved, could not be implemented by the Trust without notifying or obtaining the consent or approval of any federal, state, municipal or other regulatory body, the proponent shareholder or shareholders must submit to the secretary of the Trust at the principal executive offices of the Trust (a) evidence satisfactory to the Board of Trustees that any and all required notices, consents or approvals have been given or obtained or (b) a plan, for making the requisite notices or obtaining the requisite consents or approvals, as applicable, prior to the implementation of the proposal or election, which plan must be satisfactory to the Board of Trustees in it discretion. Section 2.15.4. SPECIAL MEETINGS OF SHAREHOLDERS. As set forth in Section 2.6, only business brought before the meeting pursuant to a proper notice of meeting shall be conducted at a special meeting of shareholders. Nominations of persons for election to the Board of Trustees only may be made at a special meeting of shareholders at which Trustees are to be elected: (a) pursuant to the Trust's notice of meeting by or at the direction of the Board of Trustees; or (b) provided that the Board of Trustees has determined that Trustees shall be elected at such special meeting, by any shareholder of the Trust who is a shareholder of record both at the time of giving of notice provided for in this Section 2.15.4 and at the time of the special meeting, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.15.4. In the event the Trust calls a special meeting of shareholders for the purpose of electing one or more Trustees to the Board of Trustees, any such shareholder may nominate a person or persons (as the case may be) for election to such position as specified in the Trust's notice of meeting, if the shareholder's notice contains the information required by Section 2.15.1(b) and the shareholder has given timely notice thereof in writing to the secretary of the Trust at the principal executive offices of the Trust. To be timely, a shareholder's notice shall be delivered to the secretary of the Trust at the principal executive offices of the Trust not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of (i) the 90th day prior to such special meeting or (ii) the 10th day following the day on -7- which public announcement is first made of the date of the special meeting and of the nominees proposed by the Trustees to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. Section 2.15.5. GENERAL. (a) Upon written request by the secretary or the Board of Trustees or any committee thereof, any shareholder proposing a nominee for election as a Trustee or any proposal for other business at a meeting of shareholders shall provide, within three business days of delivery of such request (or such other period as may be specified in such request), written verification, satisfactory to the secretary or the Board or any committee thereof, in his, her or its sole discretion, of the accuracy of any information submitted by the shareholder pursuant to this Section 2.15. If a shareholder fails to provide such written verification within such period, the secretary or the Board of Trustees or any committee thereof may treat the information as to which written verification was requested as not having been provided in accordance with the procedures set forth in this Section 2.15. (b) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.15 shall be eligible to serve as Trustees and only such business as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.15 shall be transacted at a meeting of shareholders. The chairperson of the meeting shall have the power and duty to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 2.15 and, if any proposed nomination or other business is not in compliance with this Section 2.15, to declare that such defective nomination or proposal be disregarded. (c) For purposes of this Section 2.15, (i) the "date of mailing of the notice" shall mean the date of the proxy statement for the solicitation of proxies for the election of Trustees and (ii) "public announcement" shall mean disclosure in (A) a press release reported by the Dow Jones News Service, Associated Press or comparable news service or (B) a document publicly filed by the Trust with the United States Securities and Exchange Commission pursuant to the Exchange Act. (d) Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in Sections 2.15 through 2.15.5. Nothing in this Section 2.15 shall be deemed to require that a shareholder nomination of a person for election to the Board of Trustees or a shareholder proposal relating to other business be included in the Trust's proxy statement except as may be required by law. Section 2.16. NO SHAREHOLDER ACTIONS BY WRITTEN CONSENT. Shareholders shall not be authorized or permitted to take any action required or permitted to be taken at a meeting of shareholders by written consent, and may take such action only at an annual or special meeting as provided by Maryland law, the Declaration of Trust and hereby. -8- Section 2.17. VOTING BY BALLOT. Voting on any question or in any election may be VIVA VOCE unless the presiding officer of the meeting or any shareholder shall demand that voting be by ballot. ARTICLE III TRUSTEES Section 3.1. GENERAL POWERS; QUALIFICATIONS; TRUSTEES HOLDING OVER. The business and affairs of the Trust shall be managed under the direction of its Board of Trustees. A Trustee shall be an individual at least twenty-one (21) years of age who is not under legal disability. In case of failure to elect Trustees at an annual meeting of the shareholders, the Trustees holding over shall continue to direct the management of the business and affairs of the Trust until their successors are elected and qualify. Section 3.2. INDEPENDENT TRUSTEES. A majority of the Trustees holding office shall at all times be Independent Trustees (as defined below); PROVIDED, HOWEVER, that upon a failure to comply with this requirement as a result of the creation of a temporary vacancy which must be filled by an Independent Trustee, whether as a result of enlargement of the Board of Trustees or the resignation, removal or death of a Trustee who is an Independent Trustee, such requirement shall not be applicable. An Independent Trustee is one who is not an employee of the Advisor (as defined in Article XII), and who is not involved in the Trust's day-to-day activities. Section 3.3. MANAGING TRUSTEES. Any Trustee who is not an Independent Trustee may be designated a Managing Trustee by the Board of Trustees. Section 3.4. NUMBER AND TENURE. Pursuant to the Articles Supplementary accepted for record by the State Department of Assessments and Taxation (the "SDAT") as of May 16, 2000, the number of Trustees constituting the entire Board of Trustees may be increased or decreased from time to time only by a vote of the Trustees, provided however that the tenure of office of a Trustee shall not be affected by any decrease in the number of Trustees. Section 3.5. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Trustees shall be held immediately after and at the same place as the annual meeting of shareholders, no notice other than this Bylaw being necessary. The time and place of the annual meeting of the Trustees may be changed by the Board of Trustees. The Trustees may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Trustees without other notice than such resolution. Section 3.6. SPECIAL MEETINGS. Special meetings of the Trustees may be called at any time by the chairman of the board, any Managing Trustee or the president and shall be called by request of any two (2) Trustees then in office. The person or persons authorized to call special meetings of the Trustees may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Trustees called by them. Section 3.7. NOTICE. Notice of any special meeting shall be given by written notice delivered personally, telegraphed, delivered by electronic mail, telephoned, facsimile-transmitted -9- or mailed to each Trustee at his business or residence address. Personally delivered, telegraphed, telephoned, facsimile-transmitted or electronically mailed notices shall be given at least twenty-four (24) hours prior to the meeting. Notice by mail shall be deposited in the U.S. mail at least seventy-two (72) hours prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the U.S. mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Trust by the Trustee. Telephone notice shall be deemed given when the Trustee is personally given such notice in a telephone call to which he is a party. Facsimile-transmission notice shall be deemed given upon completion of the transmission of the message to the number given to the Trust by the Trustee and receipt of a completed answer-back indicating receipt. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Trustees need be stated in the notice, unless specifically required by statute or these Bylaws. Section 3.8. QUORUM. A majority of the Trustees shall constitute a quorum for transaction of business at any meeting of the Trustees, provided that, if less than a majority of such Trustees are present at a meeting, a majority of the Trustees present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the Declaration of Trust or these Bylaws, the vote of a majority of a particular group of Trustees is required for action, a quorum for that action must also include a majority of such group. The Trustees present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Trustees to leave less than a quorum. Section 3.9. VOTING. The action of the majority of the Trustees present at a meeting at which a quorum is present shall be the action of the Trustees, unless the concurrence of a greater proportion is required for such action by specific provision of an applicable statute, the Declaration of Trust or these Bylaws. Section 3.10. TELEPHONE MEETINGS. Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Such meeting shall be deemed to have been held at a place designated by the Trustees at the meeting. Section 3.11. INFORMAL ACTION BY TRUSTEES. Unless specifically otherwise provided in the Declaration of Trust, any action required or permitted to be taken at any meeting of the Trustees may be taken without a meeting, if a majority of the Trustees shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the records of the Trust and shall have the same force and effect as the affirmative vote of such Trustees at a duly held meeting of the Trustees at which a quorum was present. Section 3.12. WAIVER OF NOTICE. The actions taken at any meeting of the Trustees, however called and noticed or wherever held, shall be as valid as though taken at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, -10- each of the Trustees not present signs a written waiver of notice, a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be lodged with the Trust records or made a part of the minutes of the meeting. Section 3.13. VACANCIES. Pursuant to the Articles Supplementary accepted for record by the SDAT as of May 16, 2000, if for any reason any or all the Trustees cease to be Trustees, such event shall not terminate the Trust or affect these Bylaws or the powers of the remaining Trustees hereunder (even if fewer than three (3) Trustees remain). Any vacancy on the Board of Trustees may be filled only by a majority of the remaining Trustees, even if the remaining Trustees do not constitute a quorum. Any Trustee elected to fill a vacancy shall hold office for the remainder of the full term of the class of Trustees in which the vacancy occurred and until a successor is elected and qualifies. Section 3.14. COMPENSATION; FINANCIAL ASSISTANCE. Section 3.14.1. COMPENSATION. The Trustees shall be entitled to receive such reasonable compensation for their services as Trustees as the Trustees may determine from time to time. Trustees may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Trustees or of any committee thereof; and for their expenses, if any, in connection with each property visit and any other service or activity performed or engaged in as Trustee. The Trustees shall be entitled to receive remuneration for services rendered to the Trust in any other capacity, and such services may include, without limitation, services as an officer of the Trust, services as an employee of the Advisor, legal, accounting or other professional services, or services as a broker, transfer agent or underwriter, whether performed by a Trustee or any person affiliated with a Trustee. Section 3.14.2. FINANCIAL ASSISTANCE TO TRUSTEES. The Trust may lend money to, guarantee an obligation of or otherwise assist a Trustee or a trustee of its direct or indirect subsidiary. The loan, guarantee or other assistance may be with or without interest, unsecured or secured in any manner that the Board of Trustees approves, including by a pledge of shares. Section 3.15. REMOVAL OF TRUSTEES. The shareholders may, at any time, remove any Trustee in the manner provided in the Declaration of Trust. Section 3.16. LOSS OF DEPOSITS. No Trustee shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association or other institution with whom moneys or shares have been deposited. Section 3.17. SURETY BONDS. Unless specifically required by law, no Trustee shall be obligated to give any bond or surety or other security for the performance of any of his duties. Section 3.18. RELIANCE. Each Trustee, officer, employee and agent of the Trust shall, in the performance of his duties with respect to the Trust, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel or upon reports made to the Trust by any of its officers or employees or by the Advisor, accountants, appraisers or other experts or consultants -11- selected by the Trustees or officers of the Trust, regardless of whether such counsel or expert may also be a Trustee. Section 3.19. INTERESTED TRUSTEE TRANSACTIONS. Section 2-419 of the Maryland General Corporation Law shall be available for and apply to any contract or other transaction between the Trust and any of its Trustees or between the Trust and any other trust, corporation, firm or other entity in which any of its Trustees is a trustee or director or has a material financial interest. Section 3.20. QUALIFYING SHARES NOT REQUIRED. Trustees need not be shareholders of the Trust. Section 3.21. CERTAIN RIGHTS OF TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS. The Trustees shall have no responsibility to devote their full time to the affairs of the Trust. Any Trustee or officer, employee or agent of the Trust, in his personal capacity or in a capacity as an affiliate, employee or agent of any other person, or otherwise, may have business interests and engage in business activities similar or in addition to those of or relating to the Trust. Section 3.22. CERTAIN TRANSACTIONS. Notwithstanding any other provision in the Bylaws, no determination shall be made by the Trustees nor shall any transaction be entered into by the Trust that would cause any shares or other beneficial interest in the Trust not to constitute "transferable shares" or "transferable certificates of beneficial interest" under Section 856(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code. ARTICLE IV COMMITTEES Section 4.1. NUMBER; TENURE AND QUALIFICATIONS. The Board of Trustees may appoint an audit committee and other committees, composed of one (1) or more members, at least one (1) of which shall be a Trustee, to serve at the pleasure of the Board of Trustees. Section 4.2. POWERS. The Trustees may delegate any of the powers of the Trustees to committees appointed under Section 4.1 and composed solely of Trustees, except as prohibited by law. Section 4.3. MEETINGS. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another Trustee to act in the place of such absent member. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Trustees. One-third, but not less than one, of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee. The Board of Trustees may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two members of any committee (if there are at least two members of the committee) may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or -12- disqualification of any member of any such committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Trustee to act at the meeting in the place of such absent or disqualified members. Each committee shall keep minutes of its proceedings and shall report the same to the Board of Trustees at the next succeeding meeting, and any action by the committee shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration. Section 4.4. TELEPHONE MEETINGS. Members of a committee of the Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 4.5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Trustees may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. Section 4.6. VACANCIES. Subject to the provisions hereof, the Board of Trustees shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. ARTICLE V OFFICERS Section 5.1. GENERAL PROVISIONS. The officers of the Trust shall include a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, a chief operating officer, a chief financial officer, one or more vice presidents, one or more assistant secretaries and one or more assistant treasurers. In addition, the Trustees may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Trust shall be elected annually by the Trustees at the first meeting of the Trustees held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. In their discretion, the Trustees may leave unfilled any office except that of president and secretary. Election of an officer or agent shall not of itself create contract rights between the Trust and such officer or agent. Section 5.2. REMOVAL AND RESIGNATION. Any officer or agent of the Trust may be removed by the Trustees if in their judgment the best interests of the Trust would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person -13- so removed. Any officer of the Trust may resign at any time by giving written notice of his resignation to the Trustees, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Trust. Section 5.3. VACANCIES. A vacancy in any office may be filled by the Trustees for the balance of the term. Section 5.4. CHIEF EXECUTIVE OFFICER. The Trustees may designate a chief executive officer from among the elected officers. The chief executive officer shall have responsibility for implementation of the policies of the Trust, as determined by the Trustees, and for the administration of the business affairs of the Trust. In the absence of both the chairman and vice chairman of the board, the chief executive officer shall preside over the meetings of the Trustees at which he shall be present. The Managing Trustees, or any of them, may be designated to function as the chief executive officer of the Trust. Section 5.5. CHIEF OPERATING OFFICER. The Trustees may designate a chief operating officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 5.6. CHIEF FINANCIAL OFFICER. The Trustees may designate a chief financial officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 5.7. CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The chairman of the board, if any, shall in general oversee all of the business and affairs of the Trust. In the absence of the chairman of the board, the vice chairman of the board, if any, shall preside at such meetings at which he shall be present. The chairman and the vice chairman of the board, if any, may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed. The chairman of the board and the vice chairman of the board, if any, shall perform such other duties as may be assigned to him or them by the Trustees. In the absence of a chairman and vice chairman of the board or if none are appointed, the Managing Trustees, or either of them, shall perform all duties and have all power and authority assigned to the chairman under these Bylaws. Section 5.8. PRESIDENT. The president may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Trustees from time to time. Section 5.9. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, -14- the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Trustees. The Trustees may designate one or more vice presidents as executive vice president, senior vice president or as vice president for particular areas of responsibility. Section 5.10. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the shareholders, the Trustees and committees of the Trustees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the Trust records and of the seal of the Trust; (d) keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder; (e) maintain at the principal office of the Trust a share register, showing the ownership and transfers of ownership of all shares of the Trust, unless a transfer agent is employed to maintain and does maintain such a share register; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or the Trustees. Section 5.11. TREASURER. The treasurer shall have the custody of the funds and securities of the Trust and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Trust and shall deposit all moneys and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Trustees. He shall disburse the funds of the Trust as may be ordered by the Trustees, taking proper vouchers for such disbursements, and shall render to the president and Trustees, at the regular meetings of the Trustees or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the Trust. Section 5.12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Trustees. The assistant treasurers shall, if required by the Trustees, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Trustees. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 6.1. CONTRACTS. The Trustees may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Trust and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Trustees or by an authorized person shall be valid and binding upon the Trustees and upon the Trust when authorized or ratified by action of the Trustees. Section 6.2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Trust shall be signed -15- by such officer or agent of the Trust in such manner as shall from time to time be determined by the treasurer or by the Trustees. Section 6.3. DEPOSITS. All funds of the Trust not otherwise employed shall be deposited from time to time to the credit of the Trust in such banks, trust companies or other depositories as the treasurer or the Trustees may designate. ARTICLE VII SHARES Section 7.1. CERTIFICATES. Ownership of shares shall be evidenced by certificates, as described in Section 5.2 of the Declaration of Trust. Such certificates shall be signed by the chief executive officer, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Trust. Certificates shall be consecutively numbered; and if the Trust shall from time to time issue several classes of shares, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Section 7.2. TRANSFERS. (a) Certificates shall be treated as negotiable and title thereto and to the shares they represent shall be transferred, as described in Sections 5.2 and 5.6 of the Declaration of Trust. (b) The Trust shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided in these Bylaws or by the laws of the State of Maryland. (c) Notwithstanding the foregoing, transfers of shares of beneficial interest of the Trust will be subject in all respects to the Declaration of Trust and all of the terms and conditions contained therein. Section 7.3. REPLACEMENT CERTIFICATE. Any officer designated by the Trustees may direct a new certificate to be issued in place of any certificate previously issued by the Trust alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Trustees may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Trust to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 7.4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. -16- (a) The Trustees may set, in advance, a record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or determining shareholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of shareholders for any other proper purpose. (b) In lieu of fixing a record date, the Trustees may provide that the share transfer books shall be closed for a stated period but not longer than twenty (20) days. If the share transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days before the date of such meeting. (c) If no record date is fixed and the share transfer books are not closed for the determination of shareholders, (i) the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (ii) the record date for the determination of shareholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Trustees, declaring the dividend or allotment of rights, is adopted. (d) When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. Section 7.5. SHARE LEDGER. The Trust shall maintain at its principal office or at the office of its counsel, accountants or transfer agent a share ledger containing the name and address of each shareholder and the number of shares of each class held by such shareholder. Section 7.6. FRACTIONAL SHARES; ISSUANCE OF UNITS. The Trustees may issue fractional shares or provide for the issuance of scrip, as described in Section 5.3 of the Declaration of Trust. ARTICLE VIII FISCAL YEAR The fiscal year of the Trust shall be the calendar year. ARTICLE IX DISTRIBUTIONS Section 9.1. AUTHORIZATION. Dividends and other distributions upon the shares of beneficial interest of the Trust may be authorized and declared by the Trustees, subject to the provisions of law and the Declaration of Trust. Dividends and other distributions may be paid in cash, property or shares of the Trust, subject to the provisions of law and the Declaration of Trust. -17- Section 9.2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any funds of the Trust available for dividends or other distributions such sum or sums as the Trustees may from time to time, in their absolute discretion, think proper as a reserve fund for contingencies or for any other purpose as the Trustees shall determine to be in the best interest of the Trust, and the Trustees may modify or abolish any such reserve in the manner in which it was created. ARTICLE X SEAL Section 10.1. SEAL. The Trustees may authorize the adoption of a seal by the Trust. The seal shall have inscribed thereon the name of the Trust and the year of its formation. The Trustees may authorize one or more duplicate seals and provide for the custody thereof. Section 10.2. AFFIXING SEAL. Whenever the Trust is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Trust. ARTICLE XI WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the Declaration of Trust, these Bylaws or applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XII THE ADVISOR Section 12.1. EMPLOYMENT OF ADVISOR. The Trustees are not and shall not be required personally to conduct the business of the Trust, and the Trustees shall have the power to appoint, employ or contract with any person (including one or more of themselves or any corporation, partnership, or trust in which one or more of them may be Trustees, officers, shareholders, partners or trustees) as the Trustees may deem necessary or proper for the transaction of the business of the Trust. The Trustees may therefore employ or contract with such person (herein referred to as the "Advisor") and may grant or delegate such authority to the Advisor as the Trustees may in their sole discretion deem necessary or desirable without regard to whether such authority is normally granted or delegated by boards of trustees or boards of directors of business corporations. The Advisor shall be required to use its best efforts to supervise the operation of -18- the Trust in a manner consistent with the investment policies and objectives of the Trust as established from time to time by the Trustees. The Trustees shall have the power to determine the terms and compensation of the Advisor or any other person whom it may cause the Trust to employ or with whom it may cause the Trust to contract for advisory services. The Trustees may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Trust, to act as agent for the Trust, to execute documents on behalf of the Trustees and to make executive decisions which conform to general policies and general principles previously established by the Trustees. Section 12.2. OTHER ACTIVITIES OF ADVISOR. The Advisor shall not be required to administer the Trust as its sole and exclusive function and may have other business interests and may engage in other activities similar or in addition to those relating to the Trust, including the rendering of advice or services of any kind to other investors or any other persons (including other real estate investment trusts) and the management of other investments. The Trustees may request the Advisor to engage in certain other activities which complement the Trust's investments, and the Advisor may receive compensation or commissions therefor from the Trust or other persons. Neither the Advisor nor any affiliate of the Advisor shall be obligated to present any particular investment opportunities to the Trust, even if such opportunities are of a character such that, if presented to the Trust, they could be taken by the Trust, and, subject to the foregoing, each of them shall be protected in taking for its own account or recommending to others any such particular investment opportunity. Notwithstanding the foregoing, the Advisor shall be required to use its best efforts to present the Trust with a continuing and suitable program consistent with the investment policies and objectives of the Trust and with investments which are representative of, comparable with and on similar terms as investments being made by Affiliates of the Advisor, or by the Advisor for its own account or for the account of any person for whom the Advisor is providing advisory services. In addition, the Advisor shall be required to, upon the request of any Trustee, promptly furnish the Trustees with such information on a confidential basis as to any investments within the investment policies of the Trust made by Affiliates of the Advisor or by the Advisor for its own account or for the account of any person for whom the Advisor is providing advisory services. ARTICLE XIII AMENDMENT OF BYLAWS Except for any change for which the Declaration or these Bylaws requires approval by more than a majority vote of the Trustees, these Bylaws may be amended or repealed or new or additional Bylaws may be adopted only by the vote or written consent of a majority of the Trustees. -19- ARTICLE XIV MISCELLANEOUS Section 14.1. REFERENCES TO DECLARATION OF TRUST. All references to the Declaration of Trust shall include any amendments thereto. Section 14.2. INSPECTION OF BYLAWS. The Trustees shall keep at the principal office for the transaction of business of the Trust the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the secretary, which shall be open to inspection by the shareholders at all reasonable times during office hours. Section 14.3. ELECTION TO BE SUBJECT TO PART OF TITLE 3, SUBTITLE 8. Notwithstanding any other provision contained in the Declaration of Trust or these Bylaws, the Trust hereby elects to be subject to Section 3-804(b) and (c) of Title 3, Subtitle 8 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute). This Section 14.3 only may be repealed, in whole or in part, by a subsequent amendment to these Bylaws. -20- EX-4.10 5 a2106714zex-4_10.txt EXHIBIT 4.10 EXHIBIT 4.10 SUPPLEMENTAL INDENTURE NO. 7 by and between HOSPITALITY PROPERTIES TRUST and U.S. BANK NATIONAL ASSOCIATION as Trustee as of January 24, 2003 SUPPLEMENTAL TO THE INDENTURE DATED AS OF FEBRUARY 25, 1998 ------------------------------------ HOSPITALITY PROPERTIES TRUST 6 3/4% Senior Notes due February 15, 2013 This SUPPLEMENTAL INDENTURE NO. 7 (this "Supplemental Indenture") made and entered into as of January 24, 2003 between HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust (the "Company"), and U.S. BANK NATIONAL ASSOCIATION, a national banking association (and successor to State Street Bank and Trust Company ("State Street") in its capacity as Trustee), as Trustee (the "Trustee"). WITNESSETH THAT: WHEREAS, the Company and State Street have executed and delivered an Indenture, dated as of February 25, 1998 (the "Indenture"), relating to the Company's issuance, from time to time, of various series of debt securities; and WHEREAS, U.S. Bank National Association has acquired and succeeded to substantially all of the corporate trust business of State Street, and, being eligible to serve as trustee under the Indenture, has succeeded to State Street as Trustee under the Indenture; and WHEREAS, the Company has determined to issue debt securities known as its 6 3/4% Senior Notes due February 15, 2013; and WHEREAS, the Indenture provides that certain terms and conditions for each series of debt securities issued by the Company thereunder may be set forth in an indenture supplemental to the Indenture; NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: ARTICLE 1 DEFINED TERMS Section 1.1 The following definitions supplement, and, to the extent inconsistent with, replace the definitions in Section 101 of the Indenture: "Acquired Debt" means Debt of a Person (i) existing at the time such Person becomes a Subsidiary or (ii) assumed in connection with the acquisition of assets from such Person, in each case, other than Debt incurred in connection with, or in contemplation of, such Person becoming a Subsidiary or such acquisition. Acquired Debt shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Subsidiary. "Annual Debt Service" as of any date means the maximum amount which is expensed in any 12-month period for interest on Debt of the Company and its Subsidiaries. "Business Day" means any day other than a Saturday or Sunday or a day on which banking institutions in the City of New York or in the city in which the Corporate Trust Office of the Trustee is located, are required or authorized to close. "Capital Stock" means, with respect to any Person, any capital stock (including preferred stock), shares, interests, participation or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into or exchangeable for capital stock), warrants or options to purchase any thereof. "Consolidated Income Available for Debt Service" for any period means Earnings from Operations of the Company and its Subsidiaries plus amounts which have been deducted, and minus amounts which have been added, for the following (without duplication): (i) interest on Debt of the Company and its Subsidiaries, (ii) cash reserves made by lessees as required by the Company's leases for periodic replacement and refurbishment of the Company's assets, (iii) provision for taxes of the Company and its Subsidiaries based on income, (iv) amortization of debt discount and deferred financing costs, (v) provisions for gains and losses on properties and property depreciation and amortization, (vi) the effect of any noncash charge resulting from a change in accounting principles in determining Earnings from Operations for such period and (vii) amortization of deferred charges. "Debt" of the Company or any Subsidiary means, without duplication, any indebtedness of the Company or any Subsidiary, whether or not contingent, in respect of (i) borrowed money or evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness for borrowed money secured by any Encumbrance existing on property owned by the Company or any Subsidiary, to the extent of the lesser of (x) the amount of indebtedness so secured and (y) the fair market value of the property subject to such Encumbrance, (iii) the reimbursement obligations, contingent or otherwise, in connection with any letters of credit actually issued (other than letters of credit issued to provide credit enhancement or support with respect to other indebtedness of the Company or any Subsidiary otherwise reflected as Debt hereunder) or amounts representing the balance deferred and unpaid of the purchase price of any property or services, except any such balance that constitutes an accrued expense or trade payable, or all conditional sale obligations or obligations under any title retention agreement, (iv) the principal amount of all obligations of the Company or any Subsidiary with respect to redemption, repayment or other repurchase of any Disqualified Stock, or (v) any lease of property by the Company or any Subsidiary as lessee which is reflected on the Company's consolidated balance sheet as a capitalized lease in accordance with GAAP, to the extent, in the case of items of indebtedness under (i) through (iii) above, that any such items (other than letters of credit) would appear as a liability on the Company's consolidated balance sheet in accordance with GAAP, and also includes, to the extent not otherwise included, any obligation by the Company or any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), Debt of another Person (other than the Company or any Subsidiary) (it being understood that Debt shall be deemed to be incurred by the Company or any Subsidiary whenever the Company or such Subsidiary shall create, assume, guarantee or otherwise become liable in respect thereof). "Disqualified Stock" means, with respect to any Person, any Capital Stock of such Person which by the terms of such Capital Stock (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable), upon the happening of any event or otherwise (i) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or 2 otherwise (other than Capital Stock which is redeemable solely in exchange for common stock or shares), (ii) is convertible into or exchangeable or exercisable for Debt or Disqualified Stock, or (iii) is redeemable at the option of the holder thereof, in whole or in part (other than Capital Stock which is redeemable solely in exchange for common stock or shares), in each case on or prior to the stated maturity of the Notes. "Earnings from Operations" for any period means net earnings excluding gains and losses on sales of investments, extraordinary items, gains and losses from early extinguishment of debt and property valuation losses, as reflected in the financial statements of the Company and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP. "Encumbrance" means any mortgage, lien, charge, pledge or security interest of any kind. "Make-Whole Amount" means, in connection with any optional redemption or accelerated payment of any Notes prior to August 15, 2012, the excess, if any, of (i) the aggregate present value as of the date of such redemption or accelerated payment of each dollar of principal being redeemed or paid and the amount of interest (exclusive of interest accrued to the date of redemption or accelerated payment) that would have been payable in respect of such dollar if such redemption or accelerated payment had been made on August 15, 2012, determined by discounting, on a semiannual basis, such principal and interest at the Reinvestment Rate (determined on the third Business Day preceding the date such notice of redemption is given or declaration of acceleration is made) from the respective dates on which such principal and interest would have been payable if such redemption or accelerated payment had been made on August 15, 2012, over (ii) the aggregate principal amount of the Notes being redeemed or paid. In the case of any redemption or accelerated payment of notes on or after August 15, 2012, the Make-Whole Amount means zero. For purposes of this Supplemental Indenture and the Notes, references in the Indenture to the payment of the principal (and premium, if any) and interest on the Notes shall be deemed to include the payment of the Make-Whole Amount, if any, due upon redemption with respect to the Notes. The Make-Whole Amount shall be calculated by the Company and set forth in an Officer's Certificate delivered to the Trustee, and the Trustee shall be entitled to rely on said Officer's Certificate. "Notes" means the Company's 6 3/4% Senior Notes due February 15, 2013, issued under this Supplemental Indenture and the Indenture, as amended or supplemented from time to time. "Reinvestment Rate" means a rate per annum equal to the sum of 0.50% (fifty one hundredths of one percent) plus the yield on treasury securities at constant maturity under the heading "Week Ending" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity (which, the case of maturities corresponding to the principal and interest due on the notes at their maturity, shall be deemed to be August 15, 2012), as of the payment date of the principal being redeemed or paid. If no maturity exactly corresponds to such maturity, yields for the two published maturities most closely corresponding to such maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, 3 rounding in each of such relevant periods to the nearest month. For purposes of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Make-Whole Amount shall be used. "Secured Debt" means Debt secured by any mortgage, lien, charge, pledge or security interest of any kind. "Statistical Release" means the statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded United States government securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination under this Supplemental Indenture, then any publicly available source of similar market data which shall be designated by the Company. "Subsidiary" means any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests of which are owned, directly or indirectly, by the Company or one or more other Subsidiaries of the Company. For the purposes of this definition, "voting equity securities" means equity securities having voting power for the election of directors, whether at all times or only so long as no senior class of security has such voting power by reason of any contingency. "Total Assets" as of any date means the sum of (i) the Undepreciated Real Estate Assets and (ii) all other assets of the Company and its Subsidiaries determined in accordance with GAAP (but excluding accounts receivable and intangibles). "Total Unencumbered Assets" means the sum of (i) those Undepreciated Real Estate Assets not subject to an Encumbrance for borrowed money and (ii) all other assets of the Company and its Subsidiaries not subject to an Encumbrance for borrowed money determined in accordance with GAAP (but excluding accounts receivable and intangibles). "Undepreciated Real Estate Assets" as of any date means the cost (original cost plus capital improvements) of real estate assets of the Company and its Subsidiaries on such date, before depreciation and amortization determined on a consolidated basis in accordance with GAAP. "Unsecured Debt" means Debt which is not secured by any of the properties of the Company or any Subsidiary. ARTICLE 2 TERMS OF THE NOTES Section 2.1 Pursuant to Section 301 of the Indenture, the Notes shall have the following terms and conditions: 4 (a) Title; Limitation on Aggregate Principal Amount; Form of Notes. The Notes shall be Registered Securities under the Indenture and shall be known as the Company's "6 3/4% Senior Notes due February 15, 2013." The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture Supplement shall not, except as permitted by the provisions of the Indenture, exceed $175,000,000 provided that the Company may, without the consent of the holders of the Notes, reopen this series and issue additional Notes under the Indenture and this Indenture Supplement in addition to the $175,000,000 of Notes authorized as of the date hereof. The Notes (together with the Trustee's certificate of authentication) shall be substantially in the form of Exhibit A hereto, which is hereby incorporated in and made a part of this Supplemental Indenture. The Notes will be issued in the form of one or more registered global securities without coupons ("Global Notes") which will be deposited with, or on behalf of, The Depository Trust Company ("DTC"), and registered in the name of DTC's nominee, Cede & Co. Except under the circumstance described below, the Notes will not be issuable in definitive form. Unless and until it is exchanged in whole or in part for the individual notes represented thereby, a Global Note may not be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee of DTC to a successor depositary or any nominee of such successor. So long as DTC or its nominee is the registered owner of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Note for all purposes under this Supplemental Indenture. Except as described below, owners of beneficial interest in Notes evidenced by a Global Note will not be entitled to have any of the individual Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of any such Notes in definitive form and will not be considered the owners or holders thereof under the Indenture or this Supplemental Indenture. If DTC is at any time unwilling, unable or ineligible to continue as depositary and a successor depositary is not appointed by the Company within 90 days, the Company will issue individual Notes in exchange for the Global Note or Global Notes representing such Notes. In addition, the Company may at any time and in its sole discretion, subject to certain limitations set forth in the Indenture, determine not to have any of such Notes represented by one or more Global Notes and, in such event, will issue individual Notes in exchange for the Global Note or Global Notes representing the Notes. Individual Notes so issued will be issued in denominations of $1,000 and integral multiples thereof. (b) Interest and Interest Rate. The Notes will bear interest at a rate of 6 3/4% per annum, from January 24, 2003 (or, in the case of Notes issued upon the reopening of this series of Notes, from the date designated by the Company in connection with such reopening) or from the immediately preceding Interest Payment Date to which interest has been paid or duly provided for, payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 2003 or if such day is not a Business Day (as defined in the Indenture), on the next succeeding Business Day (each of which shall be an "Interest Payment Date"), to the Persons in 5 whose names the Notes are registered in the Security Register at the close of business on the day falling 14 calendar days immediately preceding the applicable interest payment date (whether or not a Business Day), as the case may be (each, a "Regular Record Date"). (c) Principal Repayment; Currency. The stated maturity of the Notes is February 15, 2013, provided, however, the Notes may be earlier redeemed at the option of the Company as provided in paragraph (d) below. The principal of each Note payable on its maturity date shall be paid against presentation and surrender thereof at the Corporate Trust Office of the Trustee, located initially at Two Avenue de Lafayette, Boston, Massachusetts 02111, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public or private debts. The Company will not pay Additional Amounts (as defined in the Indenture) on the Notes. (d) Redemption at the Option of the Company. The Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice to each Holder of Notes to be redeemed at its address appearing in the Security Register, at a price equal to the sum of (i) the principal amount of the Notes being redeemed, plus accrued and unpaid interest to but excluding the applicable Redemption Date, plus (ii) the Make-Whole Amount, if any. If the notes are redeemed on or after August 15, 2012, the redemption price will not include the Make-Whole Amount. (e) Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Company shall be directed to it at 400 Centre Street, Newton, Massachusetts 02458, Attention: President; notices to the Trustee shall be directed to it at Two Avenue de Lafayette, Boston, Massachusetts 02111, Attention: Corporate Trust Department, Re: Hospitality Properties Trust 6 3/4% Senior Notes due February 15, 2013, or as to either party, at such other address as shall be designated by such party in a written notice to the other party. (f) Global Note Legend. Each Global Note shall bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. 6 (g) Applicability of Discharge, Defeasance and Covenant Defeasance Provisions. The Discharge, Defeasance and Covenant Defeasance provisions in Article Fourteen of the Indenture will apply to the Notes. ARTICLE 3 ADDITIONAL COVENANTS Section 3.1 In addition to the covenants of the Company set forth in Article Ten of the Indenture, for the benefit of the holders of the Notes: (a) Limitations on Incurrence of Debt. (i) The Company will not, and will not permit any Subsidiary to, incur any Debt if, immediately after giving effect to the incurrence of such additional Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Debt of the Company and its Subsidiaries on a consolidated basis determined in accordance with GAAP is greater than 60% of the sum ("Adjusted Total Assets") of (without duplication) (i) the Total Assets of the Company and its Subsidiaries as of the end of the calendar quarter covered in the Company's Annual Report on Form 10-K, or the Quarterly Report on Form 10-Q, as the case may be, most recently filed with the Securities and Exchange Commission (or, if such filing is not permitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the Trustee) prior to the incurrence of such additional Debt and (ii) the purchase price of any real estate assets or mortgages receivable acquired, and the amount of any securities offering proceeds received (to the extent that such proceeds were not used to acquire real estate assets or mortgages receivable or used to reduce Debt), by the Company or any Subsidiary since the end of such calendar quarter, including those proceeds obtained in connection with the incurrence of such additional Debt. (ii) In addition to the foregoing limitations on the incurrence of Debt, the Company will not, and will not permit any Subsidiary to, incur any Secured Debt if, immediately after giving effect to the incurrence of such additional Secured Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Secured Debt of the Company and its Subsidiaries on a consolidated basis is greater than 40% of Adjusted Total Assets. (iii) In addition to the foregoing limitations on the incurrence of Debt, the Company will not, and will not permit any Subsidiary to, incur any Debt if the ratio of Consolidated Income Available for Debt Service to the Annual Debt Service for the four consecutive fiscal quarters most recently ended prior to the date on which such additional Debt is to be incurred shall have been less than 1.5x, on a pro forma basis after giving effect thereto and to the application of the proceeds therefrom, and calculated on the assumption that (i) such Debt and any other Debt incurred by the Company and its Subsidiaries since the first day of such four-quarter period and the application of the proceeds therefrom, including to refinance other Debt, had occurred at the beginning of such period; (ii) the repayment or retirement of any other Debt by the Company and its Subsidiaries since the first date of such four-quarter period had been repaid or retired at the 7 beginning of such period (except that, in making such computation, the amount of Debt under any revolving credit facility shall be computed based upon the average daily balance of such Debt during such period); (iii) in the case of Acquired Debt or Debt incurred in connection with any acquisition since the first day of such four-quarter period, the related acquisition had occurred as of the first day of such period with appropriate adjustments with respect to such acquisition being included in such pro forma calculation; and (iv) in the case of any acquisition or disposition by the Company or its Subsidiaries of any asset or group of assets since the first day of such four-quarter period, whether by merger, stock purchase or sale, or asset purchase or sale, such acquisition or disposition or any related repayment of Debt had occurred as of the first day of such period with the appropriate adjustments with respect to such acquisition or disposition being included in such pro forma calculation. If the Debt giving rise to the need to make the foregoing calculation or any other Debt incurred after the first day of the relevant four-quarter period bears interest at a floating rate then, for purposes of calculating the Annual Debt Service, the interest rate on such Debt shall be computed on a pro forma basis as if the average interest rate which would have been in effect during the entire such four-quarter period had been the applicable rate for the entire such period. (b) Maintenance of Total Unencumbered Assets. The Company and its Subsidiaries will maintain at all times Total Unencumbered Assets of not less than 200% of the aggregate outstanding principal amount of the Unsecured Debt of the Company and its Subsidiaries on a consolidated basis. ARTICLE 4 ADDITIONAL EVENTS OF DEFAULT Section 4.1 For purposes of this Supplemental Indenture and the Notes, in addition to the Events of Default set forth in Section 501 of the Indenture, it shall also constitute an "Event of Default" if a default under any bond, debenture, note or other evidence of indebtedness of the Company (including a default with respect to any other series of securities), or under any mortgage, indenture or other instrument of the Company under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company (or by any Subsidiary, the repayment of which the Company has guaranteed or for which the Company is directly responsible or liable as obligor or guarantor) having an aggregate principal amount outstanding of at least $20,000,000, whether such indebtedness now exists or shall hereafter be incurred or created, which default shall have resulted in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged or such acceleration having been rescinded or annulled within a period of ten days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the outstanding Notes, a written notice specifying such default and requiring the Company to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder. 8 Section 4.2 Notwithstanding any provisions to the contrary in the Indenture, upon any acceleration of the Notes under Section 502 of the Indenture, the amount immediately due and payable in respect of the Notes shall equal the Outstanding principal amount thereof, plus accrued interest, plus, if such acceleration occurs prior to August 15, 2012, the Make-Whole Amount. ARTICLE 5 EFFECTIVENESS This Supplemental Indenture shall be effective for all purposes as of the date and time this Supplemental Indenture has been executed and delivered by the Company and the Trustee in accordance with Article Nine of the Indenture. As supplemented hereby, the Indenture is hereby confirmed as being in full force and effect. ARTICLE 6 MISCELLANEOUS Section 6.1 In the event any provision of this Supplemental Indenture shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof or any provision of the Indenture. Section 6.2 To the extent that any terms of this Supplemental Indenture or the Notes are inconsistent with the terms of the Indenture, the terms of this Supplemental Indenture or the Notes shall govern and supersede such inconsistent terms. Section 6.3 This Supplemental Indenture shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. Section 6.4 This Supplemental Indenture may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 9 IN WITNESS WHEREOF, the Company and the Trustee have caused this Supplemental Indenture to be executed as an instrument under seal in their respective corporate names as of the date first above written. HOSPITALITY PROPERTIES TRUST By: /s/ John G. Murray Name: John G. Murray Title: President U.S. BANK NATIONAL ASSOCIATION, as Trustee By: /s/ Paul D. Allen Name: Paul D. Allen Title: Vice President 10 EXHIBIT A (Face of Note) 6 3/4% Senior Note due February 15, 2013 No. $__________ HOSPITALITY PROPERTIES TRUST promises to pay to _______________________________________ or registered assigns, the principal sum of __________ ($_______) on February 15, 2013, subject to the terms set forth on the reverse of this Note and the terms of the Indenture referred to therein. Interest Payment Dates: February 15 and August 15, commencing August 15, 2003. Record Dates: the day falling 14 calendar days prior to any Interest Payment Date. CUSIP No: _____________ HOSPITALITY PROPERTIES TRUST By: ------------------------------ Name: Title: Dated: This is one of the Notes referred to in the within-mentioned Indenture: U.S. BANK NATIONAL ASSOCIATION, as Trustee By: ------------------------------ Authorized Officer A-1 [THE FOLLOWING CONSTITUTES THE REVERSE OF THE SECURITY] HOSPITALITY PROPERTIES TRUST 6 3/4% Senior Note due February 15, 2013 Capitalized terms used herein have the meanings assigned to them in the Indenture (as defined below) unless otherwise indicated. 1. Interest. Hospitality Properties Trust, a Maryland real estate investment trust (the "Company"), promises to pay interest on the principal amount of this Note at the rate and in the manner specified below. The Company shall pay in cash interest on the principal amount of this Note at the rate per annum of 6 3/4%. The Company will pay interest semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2003 or if any such day is not a Business Day (as defined in the Indenture), on the next succeeding Business Day (each an "Interest Payment Date"), to Holders of record on the day falling 14 calendar days immediately preceding such Interest Payment Date (whether or not a Business Day). Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of the Notes. 2. Method of Payment. The Company will pay interest on the Notes (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the record date next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal, premium, if any, and interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Indenture. The Company issued the Notes under an Indenture dated as of February 25, 1998 and Supplemental Indenture No. 7 dated as of January 24, 2003 (collectively, the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code secs. 77aaa-77bbbb) as in effect on the date of the Indenture. The Notes are subject to all such terms, and Holders of the Notes are referred to the Indenture and such Act for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Notes. The Notes are unsecured general obligations of the Company initially issued in an aggregate principal amount of $175,000,000. 4. Optional Redemption. The Notes will be subject to redemption at any time at the option of the Company, in whole or in part, upon not less than 30 nor more than 60 days' notice, at a redemption price equal to the sum of (i) the principal amount of the Notes being redeemed, A-2 plus accrued and unpaid interest to but excluding the applicable Redemption Date and (ii) the Make-Whole Amount. As used herein the term "Make-Whole Amount" means, in connection with any optional redemption or accelerated payment of any notes prior to August 15, 2012, the excess, if any, of (i) the aggregate present value as of the date of such redemption or accelerated payment of each dollar of principal being redeemed or paid and the amount of interest (exclusive of interest accrued to the date of redemption or accelerated payment) that would have been payable in respect of such dollar if such redemption or accelerated payment had been made on August 15, 2012, determined by discounting, on a semiannual basis, such principal and interest at the Reinvestment Rate (determined on the third Business Day preceding the date such notice of redemption is given or declaration of acceleration is made) from the respective dates on which such principal and interest would have been payable if such redemption or accelerated payment had been made on August 15, 2012, over (ii) the aggregate principal amount of the Notes being redeemed or paid. In the case of any redemption or accelerated payment of notes on or after August 15, 2012, the Make-Whole Amount means zero. For purposes of the Indenture and the Notes, references in the Indenture to the payment of the principal (and premium, if any) and interest on the Notes shall be deemed to include the payment of the Make-Whole Amount, if any, due upon redemption with respect to the Notes. The Make-Whole Amount shall be calculated by the Company and set forth in an Officer's Certificate delivered to the Trustee, and the Trustee shall be entitled to rely on said Officer's Certificate. As used herein the term "Reinvestment Rate" means a rate per annum equal to the sum of 0.50% (fifty one hundredths of one percent) plus the yield on treasury securities at constant maturity under the heading "Week Ending" published in the Statistical Release (as defined herein) under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the remaining life to maturity (which, in the case of maturities corresponding to the principal and interest due on the notes at their maturity, shall be deemed to be August 15, 2012), as of the payment date of the principal being redeemed or paid. If no maturity exactly corresponds to such maturity, yields for the two published maturities most closely corresponding to such maturity shall be calculated pursuant to the immediately preceding sentence and the Reinvestment Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month. For purposes of calculating the Reinvestment Rate, the most recent Statistical Release published prior to the date of determination of the Make-Whole Amount shall be used. As used herein the term "Statistical Release" means the statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded United States government securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination under the Supplemental Indenture, then any publicly available source of similar market data which shall be designated by the Company. 5. Mandatory Redemption. The Company shall not be required to make sinking fund or redemption payments with respect to the Notes. A-3 6. Notice of Redemption. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at its registered address. Notes may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date, interest ceases to accrue on Notes or portions of them called for redemption. 7. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000 in excess thereof. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Security Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Security Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption. Also, it need not exchange or register the transfer of any Notes for a period of 15 days before the mailing of a notice of redemption of Notes, or during the period between a record date and the corresponding Interest Payment Date. 8. Defaults and Remedies. In case an Event of Default (as defined in the Indenture) with respect to the Notes shall have occurred and be continuing, the principal hereof may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the provisions provided in the Indenture. 9. Actions of Holders. The Indenture contains provisions permitting the holders of not less than a majority of the aggregate principal amount of the outstanding Notes, subject to certain exceptions as provided in the Indenture, on behalf of the holders of all such Notes at a meeting duly called and held as provided in the Indenture, to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided in the Indenture to be made, given or taken by the holders of the Notes, including without limitation, waiving (a) compliance by the Company with certain provisions of the Indenture, and (b) certain past defaults under the Indenture and their consequences. Any resolution passed or decision taken at any meeting of the holders of the Notes in accordance with the provisions of the Indenture shall be conclusive and binding upon such holders and upon all future holders of this Note and other Notes issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof. 10. Persons Deemed Owners. The Company, the Trustee, and any agent of the Company or the Trustee may deem and treat the Person in whose name this Note is registered on the Security Register as its absolute owner for all purposes. 11. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 12. Governing Law. THE INTERNAL LAW OF THE COMMONWEALTH OF MASSACHUSETTS SHALL GOVERN AND BE USED TO CONSTRUE THE INDENTURE AND THE NOTES. A-4 13. No Personal Liability. THE DECLARATION OF TRUST OF THE COMPANY, AMENDED AND RESTATED ON AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Request may be made to: Hospitality Properties Trust 400 Centre Street Newton, MA 02458 Telecopier No.: (617) 964-8389 Attention: President A-5 ASSIGNMENT FORM To assign this Note, fill in the form below: [I] [We] assign and transfer this Note to ____________________________________ __________________________________ [Print or type assignee's name, address and zip code] _________________________ [Insert assignee's soc. sec. or tax I.D. no.] and irrevocably appoint_____________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: -------------- Your Signature: ---------------------------------- [Sign exactly as your name appears on the face of this Note] Signature Guarantee: - ----------------------------- [The signature must be guaranteed by an officer of a participant in a recognized signature guarantee program. Notarized or witnessed signatures are not acceptable.] EX-8.1 6 a2106714zex-8_1.txt EXHIBIT 8.1 Exhibit 8.1 March 28, 2003 Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02458 Ladies and Gentlemen: In connection with the filing by Hospitality Properties Trust, a Maryland real estate investment trust (the "Company"), of its Annual Report on Form 10-K for the year ended December 31, 2002 (the "Form 10-K"), under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the following opinion is furnished to you to be filed with the Securities and Exchange Commission (the "SEC") as Exhibit 8.1 to the Form 10-K. We have acted as counsel for the Company in connection with the preparation of the Form 10-K, and we have reviewed originals or copies, certified or otherwise identified to our satisfaction, of corporate records, certificates and statements of officers and accountants of the Company and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinion hereinafter set forth. In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such documents. Specifically, and without limiting the generality of the foregoing, we have reviewed: (i) the declaration of trust and the by-laws of the Company, each as amended and restated; and (ii) the sections in the Form 10-K captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts." With respect to all questions of fact on which the opinion set forth below is based, we have assumed the accuracy and completeness of and have relied on the information set forth in the Form 10-K and in the documents incorporated therein by reference, and on representations made to us by officers of the Company. We have not independently verified such information. The opinion set forth below is based upon the Internal Revenue Code of 1986, as amended, the Treasury Regulations issued thereunder, published administrative interpretations Hospitality Properties Trust March 28, 2003 Page 2 thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the "Tax Laws"), and upon the Employee Retirement Income Security Act of 1974, as amended, the Department of Labor regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the "ERISA Laws"). No assurance can be given that the Tax Laws or the ERISA Laws will not change. In preparing the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Form 10-K captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. With respect to all questions of fact on which our opinion is based, we have assumed the initial and continuing truth, accuracy and completeness of: (i) the information set forth in the Form 10-K and in the documents incorporated therein by reference; and (ii) representations made to us by officers of the Company or contained in the Form 10-K in each such instance without regard to qualifications such as "to the best knowledge of" or "in the belief of". We have relied upon, but not independently verified, the foregoing assumptions. If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Form 10-K (or the documents incorporated therein by reference) have been consummated in a manner that is inconsistent with the manner contemplated therein, our opinion as expressed below may be adversely affected and may not be relied upon. Based upon and subject to the foregoing, we are of the opinion that the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Form 10-K captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," in all material respects are accurate and fairly summarize the Tax Laws issues and the ERISA Laws issues addressed therein, and hereby confirm that the opinions of counsel referred to in said sections represent our opinions on the subject matter thereof. Our opinion above is limited to the matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other matters or any other transactions. Further, we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented or assumed herein or any subsequent changes in the Tax Laws or the ERISA Laws. Hospitality Properties Trust March 28, 2003 Page 3 This opinion is intended solely for the benefit and use of the Company, and is not to be used, released, quoted, or relied upon by anyone else for any purpose (other than as required by law) without our prior written consent. We hereby consent to filing of a copy of this opinion as an exhibit to the Form 10-K, which is incorporated by reference in the Company's Registration Statements on Form S-3 (File Nos. 333-43573, 333-89307, 333-84064) under the Securities Act of 1933, as amended (the "Act"), and to the references to our firm in the Form 10-K and such Registration Statements. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or under the rules and regulations of the SEC promulgated thereunder. Very truly yours, /s/ SULLIVAN & WORCESTER LLP SULLIVAN & WORCESTER LLP EX-12.1 7 a2106714zex-12_1.txt EXHIBIT 12.1 EXHIBIT 12.1 HOSPITALITY PROPERTIES TRUST COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS, EXCEPT RATIO AMOUNTS)
Year Ended December 31, ------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Net income Before Extraordinary Item $ 143,802 $ 131,956 $ 126,271 $ 111,929 $ 87,982 Fixed Charges 42,424 41,312 37,682 37,352 21,751 ------------ ------------ ------------ ------------ ------------ Adjusted Earnings $ 186,226 $ 173,268 $ 163,953 $ 149,281 $ 109,733 Fixed Charges: Interest on indebtedness and amortization of deferred finance costs $ 42,424 $ 41,312 $ 37,682 $ 37,352 $ 21,751 Ratio of Earnings to Fixed Charges 4.39x 4.19x 4.35x 4.00x 5.04x
EX-12.2 8 a2106714zex-12_2.txt EXHIBIT 12.2 EXHIBIT 12.2 HOSPITALITY PROPERTIES TRUST COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS (IN THOUSANDS, EXCEPT RATIO AMOUNTS)
Year Ended December 31, ------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Income Before Extraordinary Item $ 143,802 $ 131,956 $ 126,271 $ 111,929 $ 87,982 Fixed Charges 42,424 41,312 37,682 37,352 21,751 ------------ ------------ ------------ ------------ ------------ Adjusted Earnings $ 186,226 $ 173,268 $ 163,953 $ 149,281 $ 109,733 Fixed Charges and Preferred Distributions: Interest on indebtedness and amortization of deferred finance costs $ 42,424 $ 41,312 $ 37,682 $ 37,352 $ 21,751 Preferred distributions 7,572 7,125 7,125 5,106 ------------ ------------ ------------ ------------ ------------ Total Combined Fixed Charges And Preferred Distributions $ 49,996 $ 48,437 $ 44,807 $ 42,458 $ 21,751 Ratio of Earnings to Combined Fixed Charges and Preferred Distributions 3.72x 3.58x 3.66x 3.52x 5.04x
EX-21.1 9 a2106714zex-21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 HOSPITALITY PROPERTIES TRUST SUBSIDIARIES OF THE REGISTRANT HH HPTCW II Properties LLC (Delaware) HH HPTCY Properties LLC (Delaware) HH HPTMI III Properties LLC (Delaware) HH HPTRI Properties LLC (Delaware) HH HPT Suite Properties LLC (Delaware) HH HPTWN Properties LLC (Delaware) HPT CW Properties Trust (Maryland) HPTCY Properties Trust (Maryland) HPT HSD Properties Trust (Maryland) HPTMI Hawaii, Inc. (Delaware) HPTMI Properties Trust (Maryland) HPTMI II Properties Trust (Maryland) HPTRI Properties Trust (Maryland) HPTSHC Properties Trust (Maryland) HPT Smokey Mountain LLC (Delaware) HPT Suite Properties Trust (Maryland) HPTSY Properties Trust (Maryland) HPT TRS, INC. (Delaware) HPT TRS MI-135, INC. (Delaware) HPTWN Properties Trust (Maryland) HPTLA Properties Trust (Maryland) EX-23.1 10 a2106714zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S - 3 Nos. 333-84064, 333-43573 and 333-89307) of Hospitality Properties Trust and subsidiaries of our report dated February 18, 2003, with respect to the consolidated financial statements and schedule of Hospitality Properties Trust and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP Boston, Massachusetts March 28, 2003 EX-23.2 11 a2106714zex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 Independent Auditors' Consent The Members of HMH HPT CBM LLC: We consent to the incorporation on Form 10-K of Hospitality Properties Trust of our report dated March 17, 2003, with respect to the balance sheet of HMH HPT CBM LLC as of December 31, 2002 and the related statements of operations, changes in member's equity, and cash flows for the year then ended, which report appears in the December 31, 2002, annual report on Form 10-K of Hospitality Properties Trust. /s/ KPMG LLP McLean, Virginia March 28, 2003 EX-23.2A 12 a2106714zex-23_2a.txt EXHIBIT 23.2A EXHIBIT 23.2.A Independent Auditors' Consent The Members of CCMH Courtyard I LLC: We consent to the incorporation on Form 10-K of Hospitality Properties Trust of our report dated February 24, 2003, except for Note 6 to the financial statements which is dated March 26, 2003, with respect to the balance sheet of CCMH Courtyard I LLC as of January 3, 2002 and the related statements of operations, changes in member's equity, and cash flows for the year then ended, which report appears in the December 31, 2002, annual report on Form 10-K of Hospitality Properties Trust. /s/ KPMG LLP McLean, Virginia March 28, 2003 EX-23.3 13 a2106714zex-23_3.txt EXHIBIT 23.3 EXHIBIT 23.3 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP The Company has not been able to obtain the consent of Arthur Andersen LLP ("Arthur Andersen") to the incorporation by reference into the Company's previously filed registration statements on Forms S-3 (File Nos. 333-84064, 333-43573 and 333-89307) (collectively, the "Registration Statements") of the audit reports of Arthur Andersen included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "2002 Form 10-K") with respect to the financial statements of the Company, HMH HPT CBM LLC (formerly HMH HPT Courtyard LLC) and CCMH Courtyard I LLC for the years ended December 31, 2001 and 2000. Rule 437a under the Securities Act of 1933, as amended (the "Securities Act"), permits the Company to file the 2002 Form 10-K without a written consent from Arthur Andersen. Because Arthur Andersen has not consented to the incorporation by reference of their audit reports in the 2002 Form 10-K into the Registration Statements, purchasers of securities offered pursuant to the Registration Statements on or after the filing of the 2002 Form 10-K will not be able to recover against Arthur Andersen under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the consolidated financial statements audited by Arthur Andersen and incorporated by reference in the Registration Statements, or, any omissions to state a material fact required to be stated in those consolidated financial statements. EX-99.1 14 a2106714zex-99_1.txt EXHIBIT 99.1 Exhibit 99.1 Certification Required by 18 U.S.C. Sec. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) --------------------------------------------------- In connection with the filing by Hospitality Properties Trust (the "Company") of the Annual Report on Form 10-K for the year ending December 31, 2002 (the "Report"), each of the undersigned hereby certifies, to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Barry M. Portnoy /s/ John G. Murray - -------------------------------------- ------------------------------ Barry M. Portnoy John G. Murray Managing Trustee President and Chief Operating Officer /s/ Gerard M. Martin /s/ Mark L. Kleifges - -------------------------------------- ------------------------------ Gerard M. Martin Mark L. Kleifges Managing Trustee Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----