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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:
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<Caption>
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
</Table>
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
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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
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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.
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HOSPITALITY PROPERTIES TRUST
2002 FORM 10-K ANNUAL REPORT
Table of Contents
<Table>
<Caption>
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
</Table>
* 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.
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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
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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
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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.
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- 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.
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- 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:
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- 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.
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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;
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(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
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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
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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.
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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.
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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
<Page>
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
<Page>
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.
<Table>
<Caption>
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
========== ============ ============
</Table>
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
<Page>
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
<Page>
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:
<Table>
<Caption>
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
<Caption>
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
</Table>
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.
<Table>
<Caption>
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
</Table>
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
<Page>
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.
<Table>
<Caption>
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
</Table>
25
<Page>
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
<Page>
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
<Page>
<Table>
<Caption>
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
========== ==========
</Table>
(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
<Page>
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:
<Table>
<Caption>
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
========== ==========
</Table>
(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
<Page>
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
<Page>
- -- 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
<Page>
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
<Page>
<Table>
<Caption>
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.
<Caption>
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.
</Table>
(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
<Page>
<Table>
<Caption>
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.
</Table>
(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
<Page>
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:
<Table>
<Caption>
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%
</Table>
(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
<Page>
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:
<Table>
<Caption>
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
</Table>
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
<Page>
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
<Page>
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.
<Table>
<Caption>
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
</Table>
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
<Page>
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:
<Table>
<Caption>
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
</Table>
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:
<Table>
<Caption>
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
</Table>
39
<Page>
<Table>
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
</Table>
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.
<Table>
<Caption>
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
</Table>
(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
<Page>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except share data)
<Table>
<Caption>
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
=========== ===========
</Table>
The accompanying notes are an integral part of these financial statements.
F-3
<Page>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
<Table>
<Caption>
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
========== ========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
F-4
<Page>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<Table>
<Caption>
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)
=========== =========== =========== =========== =============
<Caption>
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
=========== =========== ============= =========== =========== ===========
</Table>
The accompanying notes are an integral part of these financial statements.
F-5
<Page>
HOSPITALITY PROPERTIES TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<Table>
<Caption>
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 -- --
</Table>
The accompanying notes are an integral part of these financial statements.
F-6
<Page>
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
<Page>
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
<Page>
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:
<Table>
<Caption>
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
=========== ========= ===========
</Table>
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
<Page>
HOSPITALITY PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share data)
6. INDEBTEDNESS
<Table>
<Caption>
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
============ ============
</Table>
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:
<Table>
<Caption>
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
============ ============
</Table>
F-10
<Page>
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.
<Table>
<Caption>
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%
=== =========== ===
</Table>
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
<Page>
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)
<Table>
<Caption>
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
</Table>
<Table>
<Caption>
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
</Table>
(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
<Page>
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
<Page>
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
<Page>
HOSPITALITY PROPERTIES TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(dollars in millions)
<Table>
<Caption>
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
==== ===== ======= ==== ===== ======= =======
</Table>
<Table>
<Caption>
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)
======
</Table>
F-15
<Page>
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:
<Table>
<Caption>
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
============ ============ ============
</Table>
(B) The change in total cost of properties for the period from January 1, 2000,
to December 31, 2002, is as follows:
<Table>
<Caption>
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
============ ============ ============
</Table>
(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
<Page>
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
<Page>
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
<Page>
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
<Page>
HMH HPT CBM LLC
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS)
<Table>
<Caption>
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
============ ============
</Table>
See Notes to Financial Statements.
F-20
<Page>
HMH HPT CBM LLC
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
<Table>
<Caption>
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
============ ============ ============
</Table>
See Notes to Financial Statements.
F-21
<Page>
HMH HPT CBM LLC
STATEMENTS OF CHANGES IN MEMBER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
<Table>
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
============
</Table>
See Notes to Financial Statements.
F-22
<Page>
HMH HPT CBM LLC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
<Table>
<Caption>
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 ..................... $ -- $ -- $ --
============ ============ ============
</Table>
See Notes to Financial Statements.
F-23
<Page>
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
<Page>
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
<Page>
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):
<Table>
<Caption>
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
==========
</Table>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
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
<Page>
CCMH COURTYARD I LLC
BALANCE SHEETS
JANUARY 3, 2003 AND DECEMBER 28, 2001
(IN THOUSANDS)
<Table>
<Caption>
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
============ ============
</Table>
See Accompanying Notes to Financial Statements.
F-31
<Page>
CCMH COURTYARD I LLC
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(IN THOUSANDS)
<Table>
<Caption>
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
============ ============ ============
</Table>
See Accompanying Notes to Financial Statements.
F-32
<Page>
CCMH COURTYARD I LLC
STATEMENTS OF MEMBER'S EQUITY
FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(IN THOUSANDS)
<Table>
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
============
</Table>
See Accompanying Notes to Financial Statements.
F-33
<Page>
CCMH COURTYARD I LLC
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 2003, DECEMBER 28, 2001 AND DECEMBER 29, 2000
(IN THOUSANDS)
<Table>
<Caption>
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
============ ============ ============
</Table>
See Accompanying Notes to Financial Statements.
F-34
<Page>
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
<Page>
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
<Page>
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):
<Table>
2003.................................................... $ 51,480
2004.................................................... 51,480
2005.................................................... 51,480
2006.................................................... 51,480
2007.................................................... 51,480
Thereafter.............................................. 257,403
------------
Total minimum lease payments............................ $ 514,803
============
</Table>
Rent expense for the fiscal years 2002, 2001 and 2000 consisted of the
following (in thousands):
<Table>
<Caption>
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
============ ============ ============
</Table>
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
<Page>
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
<Page>
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
<Page>
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.
<Table>
<Caption>
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
</Table>
F-40
<Page>
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
<Page>
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
<Page>
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
<Page>
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