Hotel Management Agreements and Leases

9 Months Ended

Sep. 30, 2011

Hotel Management Agreements and Leases

Hotel Management Agreements and Leases

Note 12.  Hotel Management Agreements and Leases

Marriott agreement.  On June 14, 2011, we entered an agreement to re-align three of our contracts with Marriott International Inc., or Marriott.  The three affected contracts (which we have historically referred to as our Marriott Contracts Nos. 2, 3 and 4) concern 71 hotels and provide for payments of minimum returns and rents to us totaling $98,404 per year.  Among other terms the new agreement provides as follows:

· All 71 hotels have been combined for purposes of determining the distribution of hotel cash flows so that any excess cash flows from any of the hotels are available to pay our minimum returns for all 71 hotels.

· The combined annual minimum returns due to us are $98,404 per year, which is equal to the previous annual amounts of minimum returns and rents due to us under the historical contracts.  In addition, we will participate in the net cash flows from hotel operations after payment of management fees to Marriott, which fees continue to be subordinated to our minimum returns.

· The historical contracts were scheduled to expire in 2015 through 2020.  The new agreement extends through 2025. In addition, Marriott has the option to renew for two consecutive ten year terms for all, but not less than all, the properties.

· The cash security deposits which secured the minimum returns and rents to us under two of the three historical contracts have been combined and continue to secure the minimum return payments under the new agreement for all 71 hotels. These security deposits originally totaled $64,700.  As of September 30, 2011, the amounts of these deposits totaled $247, as the deposits have been reduced to fund shortfalls in the operating results of the hotels from 2009 through September 30, 2011.  The new agreement provides that the combined security deposit is to be replenished up to the original amount of $64,700 from 70% of the cash flows realized from operations of the 71 hotels, after payment of our minimum returns and working capital advances, if any, by us or Marriott, while 30% of the cash flows is paid to Marriott toward agreed amounts for management fees. The security deposit is non-interest bearing and is not held in escrow.

· In addition to this security deposit, Marriott has provided a limited guaranty for 90% of the minimum returns due to us. The Marriott guaranty is limited to total payments by Marriott to us of $40,000 and it expires on December 31, 2017.

· The new agreement continues to require that 5% to 6% of gross revenues from hotel operations be escrowed as FF&E reserves.

· In addition to amounts available in the FF&E reserve, we agreed to fund approximately $102,000 for renovation of the hotels during the next two years. As we fund these renovations, the amount of the minimum returns due to us under the new agreement will increase by 9% per annum of the amounts we fund.

· We and Marriott have identified 21 hotels of the 71 hotels in the new agreement which have been offered for sale.  We currently expect these sales to be completed by June 30, 2012, however, we can provide no assurance that we will sell any of the hotels.  If and as these hotels are sold, we will retain the sales proceeds and the minimum returns due to us under the new agreement will decrease by an amount equal to 9% per annum of the sales proceeds.  We currently expect that the proceeds we may receive from the sale of these hotels may be at least equal to the capital investment we will make during the next two years as described above; however, the timing of hotel sales and capital investments will likely differ.  See Note 13 for further information relating to these hotels.

· One of the contracts which was re-aligned by the new agreement (our historical Marriott Contract No. 4) concerns our hotels which were leased to Barceló Crestline Corporation, or Barceló Crestline, and are managed by Marriott.  Simultaneously with the re-alignment of the agreement between us and Marriott, Marriott arranged with Barceló Crestline to terminate that lease. Accordingly, all 71 affected hotels are owned by us, leased to one of our TRSs, and managed by Marriott.

· The new agreement was effective retroactively to January 1, 2011.

After giving effect to the January 1, 2011 effective date of the new agreement with Marriott, the net cash flows of the 71 hotels were $2,784 and $18,145 less than the minimum return payments due to us during the three and nine months ended September 30, 2011, respectively. We applied the available security deposit to cover these shortfalls.  The retroactive effective date of the new agreement had the net effect of increasing the amount of payment shortfalls that were covered by the security deposit by $4,081 through June 14, 2011, the execution date of the agreement.

Also, during the period from September 30, 2011 to November 7, 2011, the minimum return payments we received for these hotels were $2,556 less than the contractual minimum returns due to us.  We applied the remaining security deposit available of $247 to the shortfalls and have requested Marriott to fund $1,554 under the terms of the guaranty.  The balance of the guaranty was $40,000 as of November 7, 2011.

InterContinental agreement.  On July 25, 2011, we entered an agreement to re-align all four of our hotel contracts with InterContinental Hotels Group plc, or InterContinental.  The four affected contracts (which we have historically referred to as our InterContinental Contracts Nos. 1, 2, 3 and 4) for 130 hotels provide for payments of minimum returns and rents to us totaling $153,129 per year.  Among other terms the new agreement provides as follows:

· All 130 hotels have been combined for purposes of determining the distribution of hotel cash flows under the agreement so that cash flows from all of the hotels are available to pay our minimum returns and rents for all 130 hotels.

· The combined annual minimum returns and rents due to us from the 130 hotels are $153,129 per year, which is the same amount that was due to us under the historical contracts.

· The historical contracts were scheduled to expire beginning in 2028 through 2031.  The new agreement extends to 2036.  In addition, InterContinental has options to renew for two consecutive 15 year terms for all, but not less than all, the properties.

· The security deposit we hold for the historical InterContinental contracts ($27,557 as of June 30, 2011) continues to secure payment of our minimum returns and rents under the new agreement.  In addition, pursuant to the new agreement, InterContinental has delivered to us an additional $37,000 to supplement this security deposit.  As of September 30, 2011, the amount of this combined deposit totaled $64,203, as the deposit has been reduced to fund shortfalls of approximately $9,669 in the operating results of the hotels from January 2011 through September 30, 2011.

· The security deposit may be further increased up to $100,000 from 50% of the cash flows realized from operations of the 130 hotels after payment of our minimum returns and rents.  The security deposit is non-interest bearing and is not required to be held in escrow.

· The cash flows in excess of amounts used to pay our minimum returns and rents and to fund the security deposit up to $100,000 are available to pay InterContinental’s management fees up to agreed amounts, which continue to be subordinated to our minimum returns and rents.

· Available cash flows after our minimum returns and rents, funding for the security deposit and the agreed management fees are available to pay us additional returns and to pay incentive fees to InterContinental, as provided under the agreement.

· We and InterContinental have identified 42 hotels of the 130 hotels which we may remove from the contract and rebrand or offer for sale.  If the hotels are removed from the agreement and rebranded, our minimum returns and rents will be reduced by amounts which we have agreed with InterContinental pursuant to the new agreement.  If these hotels are sold, our minimum returns and rents will be reduced by 8% per annum of the net sales proceeds we receive.  In addition to these 42 hotels, we sold one hotel previously managed by InterContinental on July 19, 2011. We received net sales proceeds of approximately $6,905 from this sale and our minimum returns and rents were reduced by 8% per annum of the sales proceeds to the current amount of $153,129 per year.

· We and InterContinental have committed to a renovation program for all of the hotels included in the agreement pursuant to which we expect to invest approximately $300,000.  The final amounts invested will be adjusted to reflect the number of hotels which we determine to rebrand or sell and remove from the agreement.  As we fund these renovations, the amounts of our minimum returns and rents will increase by 8% per annum of the amount we fund.  Some of the capital required for these renovations may be provided by hotel sales, but the timing of our renovation funding and receipts of sales proceeds will likely differ.

· The new agreement requires that a portion of gross revenues from all the hotels be escrowed for FF&E reserves after the planned renovations are completed.  These escrows will be funded beginning in 2014 and will increase to 5% of gross revenues in 2016. These escrowed funds will be available to fund renovations for any of the hotels in the agreement.

· The new agreement was effective as of July 1, 2011.

During the three and nine months ended September 30, 2011, the payments we received under our agreements with InterContinental were $355 and $9,669, respectively, less than the minimum amounts contractually required.  We applied the available security deposit to cover these shortfalls.  Also, during the period from September 30, 2011 to November 7, 2011, the minimum return payments we received under our InterContinental agreement were $1,863 less than the minimum amounts due to us.  We applied the available security deposit to cover these amounts.  The remaining balance of the security deposit was $62,339 as of November 7, 2011.

When we reduce the amounts of the security deposits we hold for these agreements or any other operating agreements for payment deficiencies, we record income equal to the amounts by which these deposits are reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flow to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective lessees or managers who have provided us with these deposits.  The security deposit is non-interest bearing and is not held in escrow.  Under all of our hotel contracts that include a security deposit, any amount of the security deposits which are applied to payment deficits may be replenished from future cash flows under the respective contracts.

Other hotel management agreement and lease matters. As of November 7, 2011, all other payments due to us from our hotel managers and hotel tenants under our operating agreements were current.

Minimum return and minimum rent payments due to us under some of our other hotel management agreements and leases are supported by guarantees. The guaranty provided by Hyatt Hotels Corporation, or Hyatt, with respect to the 22 hotels managed by Hyatt is limited to $50,000 ($23,155 remaining at September 30, 2011). The guaranty provided by Carlson Hotels Worldwide, or Carlson, with respect to the 11 hotels managed by Carlson is limited to $40,000 ($27,873 remaining at September 30, 2011).  The guaranty provided by Marriott with respect to the one hotel leased by Marriott (our Marriott Contract No. 5) is unlimited and does not expire.

Our managed hotel portfolios had net operating results that were, in the aggregate, $6,653 and $37,875 less than the minimum returns due to us in the three and nine months ended September 30, 2011, respectively, and $18,573 and $59,322 less than the minimum returns due to us in the three and nine months ended September 30, 2010, respectively. We reflect these amounts in our condensed consolidated statements of income as a reduction to hotel operating expense when the minimum returns were funded by the manager of these hotels under the terms of our operating agreements or from the security deposits we hold.

In November 2010, Host Hotels & Resorts, Inc., or Host, notified us that it will not exercise its renewal option at the end of the current lease term for 53 hotels which we have historically referred to as our Marriott Contract No. 1.  In the absence of any default by Host, upon expiration of the agreement on December 31, 2012, we expect to return the $50,540 security deposit to Host, to lease these hotels to one of our TRSs and to continue the existing hotel brand and management agreements with Marriott with respect to these hotels, which expire on December 31, 2012.  In June 2011, Marriott provided notice to us that it intends to exercise its option to renew these management agreements for an additional 12 years to 2024.