HOST MARRIOTT L P, 8-K/A, 1999-03-15

HOST MARRIOTT L P
8-K/A, 1999-03-15
HOTELS & MOTELS

Previous: SEACOAST FINANCIAL SERVICES CORP, 10-Q, 1999-03-15

Next: FLASHNET COMMUNICATIONS INC, S-1/A, 1999-03-15

<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of Earliest Event Reported) December 30, 1998

----------------

HOST MARRIOTT, L.P.
(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of Incorporation)

333-55807 52-2095412
(Commission File Number) (I.R.S. Employer Identification
Number)

10400 Fernwood Road, Bethesda, Maryland 20817
(Address of Principal Executive Offices) (Zip Code)

----------------

Registrant's Telephone Number, Including Area Code (301) 380-9000
(Former Name or Former Address, if changed since last report.)

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

Item 2. Acquisition Or Disposition Of Assets

On December 30, 1998, Host Marriott Corporation ("Host Marriott" or "Host
REIT"), through its subsidiary Host Marriott, L.P. (the "Operating
Partnership"), acquired ownership of, or controlling interests in, twelve
upscale and luxury full-service hotels and certain other assets (collectively,
the "Blackstone Portfolio") from the Blackstone Group, a Delaware limited
partnership, and a series of funds controlled by affiliates Blackstone Real
Estate Partners (together, the "Blackstone Entities"). Host Marriott
Corporation is the sole general partner and majority limited partner of Host
Marriott, L.P. In exchange for these assets, (1) Host Marriott, L.P. issued
approximately 43.9 million of its limited partnership units ("OP Units"), which
OP Units are redeemable for cash (or at Host Marriott's option, shares of
common stock of Host Marriott), assumed debt and made cash payments totaling
approximately $920 million and (2) Host Marriott distributed 1.4 million shares
of Crestline Capital Corporation ("Crestline", NYSE:CLJ). The actual number of
OP Units to be issued to the Blackstone Entities will fluctuate based upon
certain adjustments to be determined on March 31, 1999. Based on current stock
prices, the Operating Partnership will be required to issue to the Blackstone
Entities approximately 3.7 million additional OP Units in April 1999. The
Blackstone portfolio includes The Ritz-Carlton, Amelia Island, The Ritz-
Carlton, Boston, the Hyatt Regency Burlingame at San Francisco Airport, the
Hyatt Regency Cambridge, the Hyatt Regency Reston, Virginia, the Grand Hyatt
Atlanta, the Four Seasons Philadelphia, the Four Seasons Atlanta, the Drake
(Swissotel), New York, the Swissotel Chicago, the Swissotel Boston and the
Swissotel Atlanta.

A director of Host Marriott Corporation, John G. Schreiber, is a limited
partner of Blackstone Real Estate Associates, LP and Blackstone Real Estate
Associates II, LP and as such is deemed to indirectly beneficially own
approximately 34.8 million partnership units of Host Marriott, L.P.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Form 8-K/A contains "forward-
looking statements" within the meaning of the federal securities law. Forward-
looking statements include information relating to our intent, belief or
current expectations, primarily with respect to, but not limited to: economic
outlook; capital expenditures; cost reduction; cash flow; operating
performance; tax status of the Operating Partnership and Host REIT; or related
industry developments (including trends affecting our business, financial
condition and results of operations).

We intend to identify forward-looking statements by using words or phrases
such as "anticipate", "believe", "estimate", "expect", "intend", "may be",
"objective", "plan", "predict", "project" and "will be" and similar words or
phrases (or the negatives thereof).

The forward-looking information involves important risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from our anticipated results, performance or achievements expressed
or implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to: national and local economic and business
conditions that will, among other things, affect demand for hotels and other
properties, the level of rates and occupancy that can be achieved by such
properties and the availability and terms of financing; the ability to maintain
the properties in a first-class manner (including meeting capital expenditure
requirements); our ability to compete effectively in areas such as access,
location, quality or accommodations and room rate structures; our ability to
acquire or develop additional properties and the risk that potential
acquisitions or developments may not perform in accordance with expectations;
changes in travel patterns, taxes and government regulations which influence or
determine wages, prices, construction procedures and costs; governmental
approvals, actions and initiatives including the need for compliance with
environmental and safety requirements, and changes in laws and regulations or
the interpretation thereof; the effects of tax legislative action; and the
effect on us and our operations of the year 2000 issue.

2
<PAGE>

Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, we can give no assurance that
such expectations will be attained or that any deviations will not be material.
We disclaim any obligation or undertaking to disseminate to you any updates or
revisions to any forward-looking statement contained in this offering
memorandum to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.

Item 7. Financial Statements And Exhibits

(a) Financial statements:

The following financial information is included on the pages indicated:

<TABLE>
<CAPTION>
Page
----
<S> <C>
The Blackstone Hotel Portfolio
Report of Independent Public Accountants................................. 5
Combined Balance Sheet as of December 29, 1998........................... 6
Combined Statement of Operations for the period from January 1, 1998 to
December 29, 1998....................................................... 7
Combined Statement of Changes in Capital for the period from January 1,
1998 to December 29, 1998............................................... 8
Combined Statement of Cash Flows for the period from January 1, 1998 to
December 29, 1998....................................................... 9
Notes to Combined Financial Statements................................... 10
Host Marriott, L.P.
Report of Independent Public Accountants................................. 19
Consolidated Balance Sheets as of December 31, 1998 and January 2, 1998.. 20
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 1998, January 2, 1998 and January 3, 1997........................... 21
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Fiscal Years Ended December 31, 1998, January 2, 1998 and
January 3, 1997......................................................... 22
Consolidated Statement of Partner's Capital for the period ended December
31, 1998 ............................................................... 23
Consolidated Statement of Cash Flows for the Fiscal Years Ended December
31, 1998, January 2, 1998 and January 3, 1997........................... 24
Notes to Consolidated Financial Statements............................... 25
</TABLE>
(b) Pro forma financial information:

The following information is included on the pages indicated:
<TABLE>
<S> <C>
Pro Forma Financial Information of Host Marriott, L.P. ................... 55
Unaudited Pro Forma Balance Sheet as of December 31, 1998................. 57
Unaudited Pro Forma Statement of Operations for the fiscal year ended
December 31, 1998........................................................ 58
Notes to the Unaudited Pro Forma Financial Statements..................... 59
</TABLE>

<TABLE>
<C> <S>
27 Financial Data Schedule for Host Marriott, L.P.
</TABLE>

3
<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 hereunto duly authorized.

HOST MARRIOTT, L.P.

By: HOST MARRIOTT CORPORATION, its
General Partner

/s/ Donald D. Olinger
By___________________________________
Donald D. Olinger
Senior Vice President and
Corporate Controller

Date: March 15, 1999

4
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Host Marriott, L.P.

We have audited the accompanying combined balance sheet of the Blackstone
Hotel Portfolio (as defined in Note 1) as of December 29, 1998, and the related
combined statements of operations, changes in capital and cash flows for the
period from January 1, 1998 to December 29, 1998. These financial statements
are the responsibility of the Blackstone Hotel Portfolio's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Blackstone
Hotel Portfolio as of December 29, 1998, and the results of its operations and
cash flows for the period from January 1, 1998 to December 29, 1998, in
conformity with generally accepted accounting principles.

Arthur Andersen LLP

Washington, D.C.
February 19, 1999

5
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

COMBINED BALANCE SHEET

December 29, 1998
(in thousands)

<TABLE>
<S> <C>
ASSETS
Property and Equipment, net......................................... $1,008,125
Accounts Receivable, net............................................ 29,629
Prepaid Expenses.................................................... 1,148
Organization and Deferred Financing Costs, net...................... 6,292
Property Improvement Fund........................................... 11,693
Other Assets........................................................ 7,902
Cash and Cash Equivalents........................................... 35,052
----------
Total Assets..................................................... $1,099,841
==========
LIABILITIES AND CAPITAL
Debt
Mortgage Debt...................................................... $ 676,896
Note Payable....................................................... 100,000
Other.............................................................. 15,422
----------
Total Debt....................................................... 792,318
----------
Accounts Payable and Accrued Expenses............................... 57,076
Other Liabilities................................................... 2,047
----------
Total Liabilities............................................... 851,441
----------
Members' Capital.................................................... 186,275
Limited Partners.................................................... 15,371
General Partners.................................................... 46,754
----------
Total Liabilities and Capital.................................... $1,099,841
==========
</TABLE>

See Notes to Combined Financial Statements.

6
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

COMBINED STATEMENT OF OPERATIONS

For the period from January 1, 1998 to December 29, 1998
(in thousands)

<TABLE>
<S> <C>
REVENUES
Rooms................................................................ $277,368
Food and beverage.................................................... 143,314
Other................................................................ 37,787
--------
Total revenues..................................................... 458,469
--------
OPERATING EXPENSES
Hotel property-level costs and expenses
Rooms............................................................... 71,122
Food and beverage................................................... 100,398
Other department costs and expenses................................. 102,703
--------
Total hotel property-level costs and expenses...................... 274,223
--------
Depreciation and amortization....................................... 47,830
Property taxes...................................................... 16,585
Base management fee................................................. 12,702
Incentive management fee............................................ 5,526
Equipment rent and other............................................ 17,810
--------
Total operating expenses........................................... 100,453
--------
OPERATING PROFIT...................................................... 83,793
INTEREST EXPENSE...................................................... (58,603)
INTEREST INCOME....................................................... 1,129
--------
NET INCOME............................................................ $ 26,319
========
</TABLE>

See Notes to Combined Financial Statements.

7
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

COMBINED STATEMENT OF CHANGES IN CAPITAL

For the period from January 1, 1998 to December 29, 1998
(in thousands)

<TABLE>
<CAPTION>
Blackstone Hotel
Members' Limited General Portfolio
Capital Partners Partners Combined Capital
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Balance, at December 31, 1997... $156,144 $16,781 $(50,554) $122,371
Capital Contributions........... 34,826 -- 98,486 133,312
Distributions................... (25,325) (4,133) (4,144) (33,602)
Net Income...................... 20,630 2,723 2,966 26,319
-------- ------- -------- --------
Balance, at December 29, 1998... $186,275 $15,371 $ 46,754 $248,400
======== ======= ======== ========
</TABLE>

See Notes to Combined Financial Statements.

8
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

COMBINED STATEMENT OF CASH FLOWS

For the period from January 1, 1998 to December 29, 1998
(in thousands)

<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 26,319
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization....................................... 47,830
Other............................................................... 7
Working capital changes:
Accounts receivable................................................ (5,951)
Other assets....................................................... (3,590)
Accounts payable and accrued expenses.............................. 1,160
Other liabilities.................................................. 5,190
--------
Cash provided by operations......................................... 70,965
--------
INVESTING ACTIVITIES
Additions to property and equipment.................................. (21,341)
Acquisitions of hotel property....................................... (141,048)
Investment in mortgage debt.......................................... (86,927)
Change in property improvement fund.................................. 4,373
--------
Cash used in investing activities.................................. (244,943)
--------
FINANCING ACTIVITIES
Scheduled principal repayments....................................... (14,189)
Capital contributions................................................ 133,312
Payment of financing costs........................................... (1,520)
Issuance of mortgage debt............................................ 95,871
Distributions........................................................ (33,602)
--------
Cash provided by financing activities.............................. 179,872
--------
INCREASE IN CASH AND CASH EQUIVALENTS................................ 5,894
CASH AND CASH EQUIVALENTS, beginning of period....................... 29,158
--------
CASH AND CASH EQUIVALENTS, end of period............................. $ 35,052
========
</TABLE>

See Notes to Combined Financial Statements.

9
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS

1. Description of Acquisition of Blackstone Hotel Portfolio

On December 30, 1998 (the "Acquisition Date"), Host Marriott, L.P. (the
"Operating Partnership") a Delaware limited partnership and subsidiary of Host
Marriott Corporation ("Host REIT"), acquired controlling interest in the land,
building, improvements and furniture, fixtures and equipment related to the
twelve hotels listed below that were acquired from Affiliates of Blackstone(R)
Real Estate Partners I and Blackstone(R) Real Estate Partners II Funds
(collectively, "Blackstone"). These hotels are collectively referred to herein
as the "Blackstone Hotel Portfolio".

. the Grand Hyatt Atlanta (Atlanta, Georgia)

. the Swissotel Atlanta (Atlanta, Georgia)

. the Four Seasons Atlanta (Atlanta, Georgia)

. The Ritz-Carlton--Boston (Boston, Massachusetts)

. the Swissotel Boston (Boston, Massachusetts)

. the Hyatt Regency Cambridge (Cambridge, Massachusetts)

. the Hyatt Regency Reston (Reston, Virginia)

. the Hyatt Regency Burlingame (San Francisco, California)

. the Four Seasons Philadelphia (Philadelphia, Pennsylvania)

. The Ritz-Carlton--Amelia Island (Amelia Island, Florida)

. the Swissotel Chicago (Chicago, Illinois)

. the Swissotel New York (New York, New York)

In exchange for these assets, (1) Host Marriott, L.P., issued to Blackstone
approximately 43.9 million of its limited partnership units (OP Units) (which
are convertible into cash or at Host REIT's option, common stock of Host REIT),
assumed debt of $792 million, made cash payments totaling approximately $117
million and (2) Host REIT distributed 1.4 million shares of Crestline Capital
Corporation ( a subsidiary of Host Marriott spun-off to its shareholders on
December 29, 1998, herein referred to as Crestline) common stock and other
consideration to Blackstone. The total number of OP Units to be issued to
Blackstone will fluctuate based upon certain adjustments to be determined on
March 31, 1999. Based on the relative stock prices of Host Marriott and
Crestline, the Operating Partnership will be required to issue to Blackstone
approximately 3.7 million additional OP Units pursuant to such adjustments in
April 1999. The Blackstone Hotel Portfolio consists of four properties managed
by Swissotel Management (USA) L.L.C., four hotels managed by Hyatt Corporation,
two hotels managed by The Ritz-Carlton Hotel Company and two hotels managed by
Four Seasons Hotel Limited. The accompanying combined financial statements of
the Blackstone Hotel Portfolio present the financial position and results of
operations and cash flows of the Blackstone Hotel Portfolio prior to
acquisition by the Operating Partnership. The Blackstone Hotel Portfolio
consists of twelve hotels, which were owned by six separate limited liability
corporations and three limited partnerships. The assets and liabilities of the
Blackstone Hotel Portfolio are presented at Blackstone's historical basis and
do not reflect the basis that will be recorded by the Operating Partnership. No
adjustments related to the acquisition are reflected in the accompanying
combined financial statements.

The balance sheet and operating accounts of the Blackstone Hotel Portfolio
have been combined in these financial statements because the hotels were
acquired simultaneously by the Operating Partnership as a portfolio from
affiliated entities and are intended to meet the requirements of Rule 3-05 of
Regulation S-X of the Securities Exchange Act of 1934, as amended.

10
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

2. Description of Host Marriott Corporation REIT Conversion

During 1998, Host REIT, Host REIT's predecessor Host Marriott Corporation, a
Delaware corporation ("Host" or "Host Marriott"), and their subsidiaries
(including the Operating Partnership) and affiliates consummated a series of
transactions intended to enable Host Marriott to qualify as a REIT for federal
income tax purposes. As a result of these transactions (which are referred to
collectively herein as the "REIT Conversion"), the hotel ownership business
formerly conducted by Host Marriott and its subsidiaries and other affiliates
is now conducted as an Umbrella Partnership REIT through the Operating
Partnership and its subsidiaries. Host REIT is the sole general partner of the
Operating Partnership and intends to elect, effective January 1, 1999, to be
treated as a REIT for federal income tax purposes.

Effective December 29, 1998, Host Marriott merged with and into Host REIT,
then named HMC Merger Corporation. In the merger, Host Marriott shareholders
received one share of common stock of Host REIT for each share of Host Marriott
common stock. In addition, Host REIT made certain distributions to its
shareholders in which they received one-tenth of one share of common stock of
Crestline and $1 or 0.087 share of Host REIT, at the election of the
shareholder, for each share of Host Marriott common stock. Host REIT was the
surviving entity in the merger and subsequently renamed itself Host Marriott
Corporation.

Subsequent to their acquisition by the Operating Partnership, the hotels
were leased to subsidiaries of Crestline.

3. Summary of Significant Accounting Policies

Principles of Combination

The combined financial statements include the accounts of the Blackstone
Hotel Portfolio. The Blackstone Hotel Portfolio's records are maintained on the
accrual basis of accounting. As part of the acquisition, the Operating
Partnership acquired mortgage notes relating to The Ritz Carlton-Boston and the
Hyatt Regency Burlingame totalling $86.9 million which were held by Blackstone
and therefore eliminated in combination. Acquisition of these mortgage notes by
the Blackstone Hotel Portfolio have been treated as capital contributions by
Blackstone.

Property and Equipment

Property and equipment is recorded at the historical purchase price of the
seller, adjusted for replacements and improvements which are capitalized, and
accumulated depreciation.

Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.

Blackstone assesses impairment of its real estate properties based on
whether it is probable that undiscounted future cash flows from each individual
property will be less than its net book value. If a property is impaired, its
basis is adjusted to its fair market value.

Deferred Financing Costs

Deferred financing costs related to long-term debt are deferred and
amortized using the straight-line method over the remaining life of the debt
which approximates the effective interest method.

Cash and Cash Equivalents

Blackstone considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents.

11
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Revenues

Revenues primarily represent the gross sales generated by the Blackstone
Hotel Portfolio's hotels.

Income Taxes
The accompanying combined statement of operations includes no provision for
income taxes because the hotels within the Blackstone Hotel Portfolio were
owned by limited partnerships and limited liability companies which do not pay
income taxes, but, rather allocate their profits and losses to the partners and
members. The acquisition by the Operating Partnership creates a new income tax
structure for most of these assets.

Interest Rate Swap Agreements

Blackstone had eight interest rate swap agreements which effectively
converted certain of its debt from variable rate to fixed rate debt. The
interest rate differential paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense.

Concentrations of Credit Risk

Financial instruments that potentially subject the Blackstone Hotel
Portfolio to significant concentrations of credit risk consist principally of
cash and cash equivalents. Blackstone maintains cash and cash equivalents with
various high credit-quality financial institutions. Blackstone performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any institution.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles 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.

4. Property and Equipment

Property and equipment as of December 29, 1998 consists of the following (in
thousands):

<TABLE>
<S> <C>
Land and land improvements.................................... $ 113,457
Buildings and leasehold improvements.......................... 852,757
Furniture and equipment....................................... 184,147
----------
1,150,361
Less accumulated depreciation................................. (142,236)
----------
$1,008,125
==========
</TABLE>

12
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

5. Debt

Debt consisted of the following as of December 29, 1998 (in thousands):

<TABLE>
<CAPTION>
Description of Debt
-------------------
<S> <C>
Four Seasons Atlanta Mortgage Note, bearing interest at 8.41% due
April 2002.......................................................... $ 39,159
Four Seasons Atlanta Second Mortgage, due April 2032................. 7,500
Four Seasons Atlanta Line of Credit, bearing interest at LIBOR plus
75 basis points
(6.03% at December 29, 1998)........................................ 7,922
Four Seasons Philadelphia Mortgage Note, bearing interest at 8.499%
due March 2002...................................................... 46,158
Grand Hyatt Atlanta Mortgage Note, bearing interest at LIBOR plus 260
basis points
(7.88% at December 29, 1998) due February 2002...................... 58,107
Hyatt Regency Cambridge Mortgage Note, bearing interest at LIBOR plus
150 basis points
(6.78% at December 29, 1998) due August 2000........................ 44,821
Hyatt Regency Reston Mortgage Note, bearing interest at LIBOR plus
150 basis points
(6.78% at December 29, 1998) due November 2001...................... 48,500
Hyatt Regency Burlingame Mortgage Note, bearing interest at LIBOR
plus 150 basis points
(6.78% at December 29, 1998) due November 2000...................... 54,275
Swissotel Mortgage Note, bearing interest at LIBOR plus 140 basis
points
(6.68% at December 29, 1998) due August 2002........................ 243,775
Swissotel Second Mortgage Note, bearing interest at 9% due August
2003................................................................ 100,000
The Ritz Carlton--Amelia Island Mortgage Note, bearing interest at
LIBOR plus 200 basis points (7.28% at December 29, 1998) due January
2002................................................................ 90,000
The Ritz Carlton--Boston Mortgage Note, bearing interest at LIBOR
plus 75 basis points due 2000....................................... 52,101
--------
Total.............................................................. $792,318
========
</TABLE>

Description of Blackstone Hotel Portfolio Debt

Four Seasons Atlanta Mortgage Note

On March 27, 1997 Blackstone entered into a $40,000,000 non-recourse
mortgage note secured by a first priority lien on the hotel property maturing
on April 1, 2002. The debt is payable in equal monthly payments of principal
and interest of 8.41%.

Four Seasons Atlanta Second Mortgage

On March 27, 1997 Blackstone entered into a $7,500,000 non-recourse mortgage
note secured by the hotel property and is subordinated to the Four Seasons
Atlanta Mortgage Debt. The debt is composed of two notes: a $2,500,000 Capital
Loan Promissory Note bearing interest at LIBOR plus 200 basis points due on
January 1, 2002 and a $5,000,000 Investment Loan bearing interest at LIBOR plus
100 basis points due April 1, 2032. The Capital Loan Promissory Note is payable
out of cash flow in excess of a certain priority. The weighted average interest
rate on the mortgage note was 6.56% for the period from January 1, 1998 to
December 29, 1998.

13
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

Four Seasons Philadelphia Mortgage Note

On February 28, 1997 Blackstone entered into a $46,850,000 non-recourse
mortgage note secured by a first priority lien on the hotel property maturing
on February 28, 2002. The debt is payable in equal monthly payments of
principal and interest of 8.499%.

Grand Hyatt Atlanta Mortgage Note

On February 28, 1997 Blackstone entered into a $61,500,000 non-recourse
mortgage note secured by a first priority lien on the hotel property maturing
on February 28, 2002. The debt is payable in equal monthly payments of
principal and interest accruing at LIBOR plus 260 basis points. The weighted
average interest rate on the mortgage note was 8.16% for the period from
January 1, 1998 to December 29, 1998.

Hyatt Regency Cambridge Mortgage Note

On August 1, 1996 Blackstone entered into a $45,000,000 non-recourse
mortgage note secured by a first priority lien on the hotel property maturing
on August 1, 2000. The debt is payable in payments of principal and interest
accruing at LIBOR plus 150 basis points. The weighted average interest rate on
the mortgage note was 7.06% for the period from January 1, 1998 to December 29,
1998.

Hyatt Regency Reston Mortgage Note

On November 25, 1996 Blackstone entered into a $48,750,000 non-recourse
mortgage note secured by a first priority lien on the hotel property maturing
on November 26, 2001. The debt is payable in payments of principal and interest
accruing at LIBOR plus 150 basis points. The weighted average interest rate on
the mortgage note was 7.06% for the period from January 1, 1998 to December 29,
1998.

Hyatt Regency Burlingame Mortgage Note

On November 30, 1995 Blackstone entered into a $45,000,000 non-recourse
mortgage note secured by a first priority lien on the hotel property maturing
on November 2000. An additional $12,000,000 was drawn on the mortgage on
October 25, 1996. The debt is payable in payments of principal and interest
accruing at LIBOR plus 150 basis points. The weighted average interest rate on
the mortgage note was 7.06% for the period from January 1, 1998 to December 29,
1998.

Swissotel Mortgage Note

On August 1, 1997 Blackstone entered into a $245,000,000 non-recourse
mortgage note secured by a first priority lien on the four Swissotels' hotel
properties maturing on July 31, 2002. The debt is payable in monthly payments
of interest accruing at LIBOR plus 140 basis points and quarterly principal
payments. Subsequent to December 30, 1998, the interest rate on this debt
increased to LIBOR plus 260 basis points. The weighted average interest rate on
the mortgage note was 7.06% for the period from January 1, 1998 to December 29,
1998. Host repaid $43,775,000 of the Swissotel Mortgage Note in early 1999.

Swissotel Second Mortgage Note

On August 1, 1997 Blackstone entered into a $100,000,000 non-recourse
mortgage note secured by a first priority lien on the four Swissotels' hotel
property and is subordinated to the Swissotel First Mortgage Debt. The second
mortgage debt matures on August 1, 2003. The debt is payable in quarterly

14
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

]payments of interest accruing at 9% with no required principal repayment until
maturity. Host repaid the Swissotel Second Mortgage Note in early 1999.

The Ritz Carlton--Amelia Island Mortgage Note

On January 20, 1998 Blackstone entered into a $90,000,000 recourse mortgage
note secured by a first priority lien on the hotel property maturing on January
1, 2003. The debt is payable in monthly payments of principal and interest
accruing at LIBOR plus 200 basis points. The weighted average interest rate on
the mortgage note was 7.56% for the period from January 21, 1998 to December
29, 1998.

The Ritz Carlton--Boston Mortgage Note

On March 6, 1998 Blackstone entered into a $50,000,000 recourse mortgage
note secured by a first priority lien on the hotel property maturing on January
1, 2000. The debt accrued interest at LIBOR plus 75 basis points for the period
from March 7, 1998 to December 29, 1998. The Operating Partnership repaid The
Ritz- Carlton, Boston Mortgage Note in early 1999.

Aggregate scheduled debt maturities at December 29, 1998, excluding capital
lease obligations and unscheduled Operating Partnership repayments subsequent
to December 30, 1998, are (in thousands):

<TABLE>
<S> <C>
1999............................................................. $ 1,558
2000............................................................. 100,746
2001............................................................. 50,344
2002............................................................. 397,614
2003............................................................. 90,789
Thereafter....................................................... 51,267
--------
$792,318
========
</TABLE>

Cash paid for interest was $48 million for the period from January 1, 1998
to December 29, 1998. Deferred financing costs amounted to $9,392,000 as of
December 29, 1998. Accumulated amortization of deferred financing costs totaled
$3,100,000 on December 29, 1998.

Interest Rate Swap Agreements

At December 29, 1998, Blackstone was subject to eight interest rate swap
agreements with an aggregate notional amount of $365 million. In all cases, the
notional amount of the swaps is equal to the amount of the related debt
balance. Under these agreements, the Blackstone Hotel Portfolio collects
interest based on specified floating interest rates of one month LIBOR (rate of
5.06% at December 29, 1998) and pays interest of fixed rates (rates ranging
from 5.72% to 6.6% at December 29, 1998). These agreements expire at dates
ranging from August 1, 2000 to February 28, 2002 in conjunction with the
maturity of the mortgages which related to the interest rate swap agreements.
The Blackstone Hotel Portfolio monitors the creditworthiness of its contracting
parties by evaluating credit exposure and referring to ratings of widely
accepted credit rating services. The Standard and Poor's long-term debt rating
for the contracting parties ranges from AA- to BBB+.

15
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

6. Leases

Blackstone is the lessee of certain property and equipment under non-
cancelable operating leases. Future minimum annual rental commitments for all
non-cancellable leases are as follows (in thousands):

<TABLE>
<S> <C>
1999.............................................................. $1,607
2000.............................................................. 964
2001.............................................................. 493
2002.............................................................. 206
2003.............................................................. 111
Thereafter........................................................ 43
------
Total minimum lease payments...................................... $3,424
======
</TABLE>

Rent expense for the Blackstone Hotel Portfolio for the period from January
1, 1998 to December 29, 1998 was $486,700.

7. Acquisitions and Dispositions

In 1998, Blackstone acquired, or purchased controlling interests in, two
full-service hotels totaling 724 rooms for an aggregate purchase price of
approximately $216 million. Blackstone acquired The Ritz-Carlton, Amelia Island
in January 1998 for $136 million, including a $90 million mortgage note.
Blackstone acquired a controlling interest in the partnership that owns The
Ritz-Carlton--Boston in March 1998 and the mortgage note secured by The Ritz-
Carlton, Boston for $80 million.

8. Fair Value of Financial Instruments

The fair values of certain financial assets and liabilities and other
financial instruments are shown below (in thousands):

<TABLE>
<CAPTION>
1998
----------------
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Financial assets
Accounts receivable......................................... $29,629 $29,629
Financial liabilities
Accounts payable and accrued expenses....................... 59,123 59,123
Mortgage debt............................................... 676,896 676,561
Note payable................................................ 100,000 100,000
Other debt.................................................. 15,422 15,422
Interest rate swap agreements............................... -- (13,612)
</TABLE>

Accounts receivables and other financial assets and liabilities are valued
based on the expected future cash flows discounted at risk-adjusted rates.

The fair value of interest rate swap agreements is based on the estimated
amount the Blackstone Hotel Portfolio would pay or receive to terminate the
swap agreements. The aggregate notional amount of the swap

16
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

agreements was $365 million at December 29, 1998. In all cases, the notional
amount of the swaps is equal to the amount of the related debt balance.

9. Hotel Management Agreements

Swissotel Hotel Management Agreements

Four of the Blackstone Hotel Portfolio's hotels are subject to management
agreements with Swissotel Management (USA) L.L.C. ("Swissotel"), under which
Swissotel will manage the four hotels for initial terms of 15 years with two 5
year extensions at the option of Swissotel. The agreements provide for payment
of basic management fees equal to 1.5% of sales, trademark fees of 1% of sales
and incentive management fees equal to 12% of net operating income (as defined
in the agreements) over a priority return (as defined). Blackstone has the
option to terminate the agreements if certain performance thresholds defined in
the agreements are not met. No agreement with respect to a single hotel is
cross-defaulted to any other agreement and a single agreement may be cancelled
under certain conditions, although such cancellation will not trigger the
cancellation of any other agreement.

Blackstone is obligated to provide Swissotel with sufficient funds to cover
the costs of (a) certain non-routine repairs and maintenance to the hotels that
are normally capitalized; and b) replacements and renewals to the hotels'
property and improvements. Blackstone is required to establish an escrow
account for such purposes and is required to contribute 4% of hotel sales into
such escrow account. Contributions were $5.8 million for the four hotels
managed by Swissotel during the year ended December 29, 1998. The balance of
the escrow account for certain furniture, fixtures, furnishings and equipment
("FF&E") for the above-mentioned hotels was approximately $3 million as of
December 29, 1998.

Hyatt Corporation Management Agreements

Four of the Blackstone Hotel Portfolio's hotels are subject to management
agreements with Hyatt Corporation ("Hyatt"), under which Hyatt will manage the
four hotels for initial terms of 10 to 30 years with renewal extensions at the
option of either party. The agreements provide for payment of basic management
fees ranging from 2.5% to 4% of sales and incentive management fees ranging
from 10% to 25% of operating profit (as defined in the agreements) over a
priority return (as defined). Blackstone has the option to terminate the
agreements if certain performance thresholds are not met, as defined in the
agreements. No agreement with respect to a single hotel is cross-defaulted to
any other agreement and a single agreement may be cancelled under certain
conditions, although such cancellation will not trigger the cancellation of any
other agreement.

Blackstone is obligated to provide Hyatt with sufficient funds to cover the
costs of (a) certain non-routine repairs and maintenance to the hotels that are
normally capitalized; and b) replacements and renewals to the hotels' property
and improvements. Blackstone is required to establish an escrow account for
such purposes and is required to contribute 4% of hotel sales into such escrow
account. Contributions were $6.3 million for the four hotels managed by Hyatt
during the year ended December 29, 1998. The balance of the FF&E escrow account
for the above-mentioned hotels was approximately $4.2 million as of December
29, 1998.

17
<PAGE>

THE BLACKSTONE HOTEL PORTFOLIO
(Acquired by Host Marriott, L.P. on December 30, 1998)

NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)

The Ritz Carlton Hotel Company Management Agreements

Two of the Blackstone Hotel Portfolio's hotels are subject to management
agreements with The Ritz Carlton Hotel Company ("Ritz"), under which Ritz will
manage the two hotels for initial terms of 25 years with four 10 year renewal
extensions at the option of Ritz. The agreements provide for payment of
operator fees ranging from 3% to 5% of sales and incentive management fees
ranging from 0% to 10% of operating profit (as defined in the agreements) over
a priority return (as defined). The total management fees earned by Ritz can
not exceed 5% of gross revenues, as defined in the agreements. Blackstone has
the option to terminate the agreements if certain performance thresholds
defined in the agreements are not met. No agreement with respect to a single
hotel is cross-defaulted to any other agreement and a single agreement may be
cancelled under certain conditions, although such cancellation will not trigger
the cancellation of any other agreement.

Blackstone is obligated to provide Ritz with sufficient funds to cover the
costs of (a) certain non-routine repairs and maintenance to the hotels that are
normally capitalized; and b) replacements and renewals to the hotels' property
and improvements. Blackstone is required to establish an escrow account for
such purposes and is required to contribute 4% of hotel sales into such escrow
account. Contributions were $3.7 million for the two hotels managed by Ritz
during the year ended December 29, 1998. The balance of the FF&E escrow account
for the above-mentioned hotels was approximately $4 million as of December 29,
1998.

Four Seasons Hotels Limited Management Agreements

Two of the Blackstone Hotel Portfolio's hotels are subject to management
agreements with Four Seasons Hotels Limited ("Four Seasons"), under which Four
Seasons will manage the two hotels for initial terms of 20 years with renewal
extensions at the option of Four Seasons. The agreements provide for payment of
operator fees ranging from 1.5% to 2% of sales and incentive management fees
ranging from 10% to 20% of operating profit (as defined in the agreements) over
a priority return (as defined). Blackstone has the option to terminate the
agreements if certain performance thresholds defined in the agreements are not
met. No agreement with respect to a single hotel is cross-defaulted to any
other agreement and a single agreement may be cancelled under certain
conditions, although such cancellation will not trigger the cancellation of any
other agreement.

Blackstone is obligated to provide Four Seasons with sufficient funds to
cover the costs of (a) certain non-routine repairs and maintenance to the
hotels that are normally capitalized; and b) replacements and renewals to the
hotels' property and improvements. Blackstone is required to establish an
escrow account for such purposes and is required to contribute 2% to 3% of
hotel sales into such escrow account. Contributions were $1.5 million for the
two hotels managed by Four Seasons during the year ended December 29, 1998. The
balance of the FF&E escrow account for the above-mentioned hotels was
approximately $446,000 as of December 29, 1998.

10. Litigation

Blackstone is from time-to-time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Blackstone Hotel Portfolio.

18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Host Marriott Corporation as general partner of Host Marriott, L.P.:

We have audited the accompanying consolidated balance sheets of Host
Marriott, L.P. and subsidiaries as of December 31, 1998 and Host Marriott
Corporation as of January 2, 1998, and the related consolidated statements of
operations, shareholders' equity and comprehensive income and cash flows of
Host Marriott Corporation for each of the three fiscal years in the period
ended December 31, 1998 and the statement of partner's capital of Host
Marriott, L.P. for the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 Host
Marriott, L.P. and subsidiaries as of December 31, 1998 and Host Marriott
Corporation as of January 2, 1998, and the results of their operations and
their cash flows for each of the three fiscal years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company
has given retroactive effect to the change to include property-level sales and
operating expenses of its hotels in the consolidated statements of operations.

Arthur Andersen LLP

Washington, D.C.
March 5, 1999

19
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 1998 and January 2, 1998

<TABLE>
<CAPTION>
Host Host
Marriott, Marriott
L.P. Corporation
1998 1997
--------- -----------
(in millions)
<S> <C> <C>
ASSETS
Property and equipment, net............................. $7,201 $4,634
Notes and other receivables, net (including amounts due
from affiliates of $130 million and $23 million,
respectively).......................................... 203 52
Due from managers....................................... 19 87
Investments in affiliates............................... 33 13
Other assets............................................ 370 272
Short-term marketable securities........................ -- 354
Cash and cash equivalents............................... 436 493
Net investment in discontinued operations............... -- 236
------ ------
$8,262 $6,141
====== ======
LIABILITIES AND EQUITY
Debt
Senior notes issued by the Company or its
subsidiaries......................................... $2,246 $1,585
Mortgage debt......................................... 2,438 1,784
Convertible debt obligation to Host Marriott.......... 567 --
Other................................................. 447 97
------ ------
5,698 3,466
Accounts payable and accrued expenses................... 204 84
Deferred income taxes................................... 97 487
Other liabilities....................................... 460 296
------ ------
Total liabilities................................... 6,459 4,333
------ ------
Minority interests...................................... 147 58
Limited partner interests of third parties at redemption
value (representing 64.6 million units at December 31,
1998).................................................. 892 --
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust holding
company substantially all of whose assets are the
convertible subordinated debentures due 2026
("Convertible Preferred Securities")................... -- 550
------ ------
Shareholders' equity
Common Stock, 750 million shares authorized; 203.8
million shares in 1997 issued and outstanding........ -- 204
Additional paid-in capital............................ -- 935
Accumulated other comprehensive income................ -- 12
Retained (deficit) earnings........................... -- 49
Partners' Capital
General partner....................................... 1 --
Limited partner....................................... 767 --
Accumulated other comprehensive income................ (4) --
------ ------
Total partner's capital............................. 764 --
Total equity........................................ -- 1,200
------ ------
$8,262 $6,141
====== ======
</TABLE>

See Notes to Consolidated Financial Statements.

20
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997
(in millions, except per common share amounts)

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
REVENUES
Rooms................................................. $2,220 $1,850 $1,302
Food and beverage..................................... 984 776 515
Other................................................. 238 180 125
------ ------ ------
Total hotel revenues.................................. 3,442 2,806 1,942
Net gains (losses) on property transactions........... 57 (11) 1
Other................................................. 14 28 14
------ ------ ------
Total revenues........................................ 3,513 2,823 1,957
------ ------ ------
OPERATING COSTS AND EXPENSES
Hotel property-level costs and expenses
Rooms................................................. 524 428 313
Food and beverage..................................... 731 592 406
Other department costs and deductions................. 843 693 506
Management fees and other (including Marriott
International management fees of $196 million,
$162 million and $101 million, respectively)......... 726 649 461
Other................................................. 28 29 38
------ ------ ------
Total operating costs and expenses.................... 2,852 2,391 1,724
------ ------ ------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
EXPENSES AND INTEREST................................. 661 432 233
Minority interest...................................... (52) (31) (6)
Corporate expenses..................................... (50) (45) (43)
REIT conversion expenses............................... (64) -- --
Interest expense....................................... (335) (288) (237)
Dividends on Convertible Preferred Securities of
subsidiary trust...................................... (37) (37) (3)
Interest income........................................ 51 52 48
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES................................................. 174 83 (8)
Provision for income taxes............................. (86) (36) (5)
Benefit from change in tax status...................... 106 -- --
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS............... 194 47 (13)
DISCONTINUED OPERATIONS
Income from discontinued operations (net of income tax
expense of $4 million in 1998)........................ 6 -- --
Provision for loss on disposal (net of income tax
benefit of $3 million in 1998)........................ (5) -- --
------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............... 195 47 (13)
Extraordinary items--gain (loss) on early
extinguishment of debt (net of income tax (benefit)
expense of
($80 million) and $1 million in 1998 and 1997,
respectively)......................................... (148) 3 --
------ ------ ------
NET INCOME (LOSS)...................................... $ 47 $ 50 $ (13)
====== ====== ======
BASIC EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS.................................. $ .90 $ .22 $ (.06)
Discontinued operations (net of income taxes).......... .01 -- --
Extraordinary items--gain (loss) on early
extinguishment of debt (net of income taxes).......... (.69) .01 --
------ ------ ------
BASIC EARNINGS (LOSS) PER COMMON SHARE................. $ .22 $ .23 $ (.06)
====== ====== ======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS.................................. $ .84 $ .22 $ (.06)
Discontinued operations (net of income taxes).......... .01 -- --
Extraordinary items--gain (loss) on early
extinguishment of debt (net of income taxes).......... (.58) .01 --
------ ------ ------
DILUTED EARNINGS (LOSS) PER COMMON SHARE............... $ .27 $ .23 $ (.06)
====== ====== ======
</TABLE>

See Notes to Consolidated Financial Statements.

21
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME OF
HOST MARRIOTT CORPORATION (Predecessor to Host Marriott, L.P.)

Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997

<TABLE>
<CAPTION>
Accumulated
Common Additional Other
Shares Common Paid-in Retained Comprehensive Comprehensive
Outstanding Stock Capital Earnings Income (Loss) Income (Loss)
----------- ------ ---------- -------- ------------- -------------
(in millions) (in millions)
<C> <S> <C> <C> <C> <C> <C>
Balance, December 29,
159.7 1995.................... $ 160 $ 499 $ 16 $ -- $ --
-- Net loss................ -- -- (13) -- (13)
Other comprehensive
-- income:
Unrealized gain on HM
Services common stock... -- -- -- 5 5
----
-- Comprehensive loss...... $ (8)
====
Adjustment to Host
Marriott
-- Services dividend....... -- -- (4) --
3.9 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... 3 12 -- --
6.8 Common stock issued for
warrants exercised...... 7 42 -- --
Common stock issued in
31.6 stock offering.......... 32 368 -- --
- -------------------------------------------------------------------------------------------------
Balance, January 3,
202.0 1997.................... 202 921 (1) 5 --
-- Net income.............. -- -- 50 -- 50
Other comprehensive
-- income:
Unrealized gain on HM
Services common stock... -- -- -- 7 7
----
-- Comprehensive income.... $ 57
====
1.8 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... 2 14 -- --
- -------------------------------------------------------------------------------------------------
Balance, January 2,
203.8 1998.................... 204 935 49 12 --
-- Net income.............. -- -- 47 -- 47
Other comprehensive
-- income (loss):
Unrealized loss on HM
Services common stock... -- -- -- (5) (5)
Foreign currency
translation adjustment.. -- -- -- (9) (9)
Reclassification of gain
realized on HM Services
common stock--net
income.................. -- -- -- (2) (2)
----
-- Comprehensive income.... $ 31
====
1.4 Common stock issued for
the comprehensive stock
and employee stock
purchase plans.......... -- 8 -- --
-- Adjustment of stock par
value from $1 to $.01
per share............... (202) 202 -- --
11.9 Common stock issued for
Special Dividend........ -- 143 (143) --
-- Distribution of stock of
Crestline Capital
Corporation............. -- -- (438) --
-- Cash portion of Special
Dividend................ -- -- (69) --
- -------------------------------------------------------------------------------------------------
217.1 Balance, Before
Contribution to Host
Marriott, L.P. ......... $ 2 $1,288 $(554) $ (4)
Net assets retained by
Host Marriott .......... (23)
------
Balance contributed to
Host Marriott, L.P. .... $ 709
======
</TABLE>

See Notes to Consolidated Financial Statements.

22
<PAGE>

HOST MARRIOTT, L.P.

CONSOLIDATED STATEMENT OF PARTNER'S CAPITAL

For the period ended December 31, 1998

<TABLE>
<CAPTION>
Accumulated
Other
OP Units General Limited Comprehensive
Outstanding Partner Partner Income (Loss) Total
----------- ------- ------- ------------- -----
<S> <C> <C> <C> <C> <C>
Contribution by Host Marriott.. 217.1 $ 1 $712 $ (4) $709
Issuance of OP Units to Host
Marriott in connection with
the Partnership Mergers....... 8.5 -- 113 -- 113
Adjustments to limited partner
interests in the Operating
Partnership................... -- -- (58) -- (58)
----- ---- ---- ---- ----
Balance, December 31, 1998..... 225.6 $ 1 $767 $ (4) $764
===== ==== ==== ==== ====
</TABLE>

23
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997

<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ----
(in millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations................ $ 194 $ 47 $(13)
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 243 231 168
Income taxes........................................... (103) (20) (35)
Amortization of deferred income........................ (4) (4) (6)
Net (gains) losses on property transactions............ (50) 19 4
Equity in earnings of affiliates....................... (1) (4) (3)
Other.................................................. 39 62 49
Changes in operating accounts:
Other assets........................................... (56) 57 9
Other liabilities...................................... 50 44 32
------- ------ ----
Cash from continuing operations........................ 312 432 205
Cash from (used in) discontinued operations............ 29 32 (4)
------- ------ ----
Cash from operations................................... 341 464 201
------- ------ ----
INVESTING ACTIVITIES
Proceeds from sales of assets........................... 227 51 373
Less non-cash proceeds................................. -- -- (35)
------- ------ ----
Cash received from sales of assets...................... 227 51 338
Acquisitions............................................ (988) (359) (702)
Capital expenditures:
Capital expenditures for renewals and replacements..... (165) (129) (87)
New investment capital expenditures.................... (87) (29) (72)
Purchases of short-term marketable securities........... (134) (354) --
Sales of short-term marketable securities............... 488 -- --
Notes receivable collections............................ 4 6 13
Affiliate notes receivable issuances and collections,
net.................................................... (13) (6) 21
Other................................................... 13 13 (15)
------- ------ ----
Cash used in investing activities from continuing
operations............................................ (655) (807) (504)
Cash used in investing activities from discontinued
operations............................................ (50) (239) --
------- ------ ----
Cash used in investing activities...................... (705) (1,046) (504)
------- ------ ----
FINANCING ACTIVITIES
Issuances of debt....................................... 2,496 857 46
Debt prepayments........................................ (1,898) (403) (173)
Cash contributed to Crestline at inception.............. (52) -- --
Cash contributed to Non-Controlled Subsidiary........... (30) -- --
Cost of extinguishment of debt.......................... (175) -- --
Scheduled principal repayments.......................... (51) (90) (82)
Issuances of common stock............................... 1 6 454
Issuances of Convertible Preferred Securities, net...... -- -- 533
Other................................................... (26) 22 28
------- ------ ----
Cash from financing activities from continuing
operations............................................ 265 392 806
Cash from (used in) financing activities from
discontinued operations............................... 24 (3) --
------- ------ ----
Cash from financing activities......................... 289 389 806
------- ------ ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (75) (193) 503
CASH AND CASH EQUIVALENTS, beginning of year............ 511 704 201
------- ------ ----
CASH AND CASH EQUIVALENTS, end of year.................. $ 436 $ 511 $704
======= ====== ====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or
purchase of controlling interests in, certain hotel
properties and discontinued senior living communities.. $ 1,215 $ 733 $696
======= ====== ====
Distribution of net assets in connection with the
discontinued operations................................ .24$438
=======
Contribution of net assets to Non-Controlled
Subsidiaries........................................... $ 12
=======
</TABLE>

See Notes to Consolidated Financial Statements.

24
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Host Marriott Corporation ("Host Marriott"), operating through an umbrella
partnership REIT structure, is the owner of full-service hotel properties. Host
Marriott operates as a self-managed and self-administered real estate
investment trust ("REIT") and its operations are conducted solely through an
operating partnership and its subsidiaries. As REITs are not permitted to
derive revenues directly from the operations of hotels, Host Marriott leases
substantially all of the hotels to subsidiaries of Crestline Capital
Corporation ("Crestline" or the "Lessee") and certain other lessees as further
discussed at Note 9.

As of December 31, 1998, Host Marriott owned, or had controlling interests
in, 126 upscale and luxury, full-service hotel lodging properties generally
located throughout the United States and operated primarily under the Marriott,
Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names. Most of these
properties are managed by Marriott International, Inc. ("Marriott
International"). Host Marriott also has certain economic, non-voting interests
in certain Non-Controlled Subsidiaries, whose hotels are also managed by
Marriott International (see Note 4).

Basis of Presentation

In these consolidated financial statements, the "Company" or "Host Marriott"
refers to Host Marriott Corporation before, and Host Marriott, L.P. (the
"Operating Partnership"), after Host Marriott Corporation's conversion to a
REIT (the "REIT Conversion"). Host Marriott Corporation is presented as the
predecessor to the Operating Partnership since the Operating Partnership and
its subsidiaries received substantially all of the continuing operations,
assets and liabilities of Host Marriott Corporation and its subsidiaries.

On April 16, 1998, the Board of Directors of Host Marriott approved a plan
to reorganize Host Marriott's business operations through the spin-off of Host
Marriott's senior living business as part of Crestline and the contribution of
Host Marriott's hotels and certain other assets and liabilities to a newly
formed Delaware limited partnership, Host Marriott, L.P. Host Marriott merged
into HMC Merger Corporation (the "Merger"), a newly formed Maryland corporation
(renamed Host Marriott Corporation) which intends to qualify, effective January
1, 1999 as a real estate investment trust ("REIT") and is the sole general
partner of the Operating Partnership. On December 29, 1998, Host Marriott
completed the previously announced spin-off of Crestline (See Note 2) through a
taxable stock dividend to its shareholders. Each Host Marriott shareholder of
record on December 28, 1998 received one share of Crestline for every ten
shares of Host Marriott Corporation owned. In connection with the REIT
Conversion Host Marriott contributed its hotels and substantially all of its
other assets and liabilities to the Operating Partnership (the "Contribution")
in exchange for units of partnership interest in the Operating Partnership. The
Contribution was accounted for at Host Marriott's historical basis. As of
December 31, 1998, Host Marriott owned approximately 78% of the Operating
Partnership.

Immediately after the Contribution, the Company completed the acquisition of
a portfolio of hotels from the Blackstone Entities (defined herein) which
included twelve hotels and other assets for approximately 47.6 million limited
partnership units ("OP Units") and a combination of assumed debt and cash
payments totaling approximately $920 million and distributed 1.4 million of the
shares of Crestline common stock to the Blackstone Entities (the "Blackstone
Acquisition"). The Operating Partnership also completed the roll-up of eight
public partnerships and four private partnerships (collectively, the
"Partnership Mergers") in exchange for the issuance of approximately 25 million
OP Units. See Note 12 for a further discussion of these and other acquisitions.

As a result of the Distribution (see Note 2), the financial statements have
been restated to present the senior living communities' business results of
operations and cash flows as discontinued operations. All

25
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

historical financial statements presented have been restated to conform to this
presentation, with the historical assets and liabilities of that segment
presented on the balance sheet as Net Investment in Discontinued Operations.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates over
which the Company has the ability to exercise significant influence, but does
not control, are accounted for using the equity method. All material
intercompany transactions and balances have been eliminated.

Fiscal Year End Change

The U.S. Internal Revenue Code of 1986, as amended requires REITs to file
their U.S. income tax return on a calendar year basis. Accordingly in 1998, the
Company changed its fiscal year-end to December 31 for both financial and tax
reporting requirements. Previously, the Company's fiscal year ended on the
Friday nearest to December 31. Fiscal year 1998 and 1997 included 52 weeks
compared to 53 weeks for fiscal year 1996.

Revenues and Expenses

Revenues primarily represent the gross sales generated by the Company's
hotel properties and net gains (losses) on property transactions. As discussed
below, the Company previously recorded only the house profit generated by the
Company's hotels as revenue. House profit is total hotel sales less certain
hotel property-level costs and expenses, which reflects the net revenues
flowing to the Company as the property owner.

On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.

The Company considered the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Company to include property-level
sales and operating expenses of its hotels in its statements of operations. The
Company has given retroactive effect to the adoption of EITF 97-2 in the
accompanying consolidated statements of operations. Application of EITF 97-2 to
the consolidated financial statements for the fiscal years ended December 31,
1998, January 2, 1998 and January 3, 1997 increased both revenues and operating
expenses by approximately $2.1 billion, $1.7 billion and $1.2 billion,
respectively, and had no impact on operating profit, net income (loss) or
earnings per share.

In prior years, operations for certain of the Company's hotels were recorded
from the beginning of December of the prior year to November of the current
year due to a one-month delay in receiving results from those hotel properties.
Upon conversion to a REIT, all operations are required to be reported on a
calendar year basis in accordance with Federal income tax regulations. As a
result, the Company has recorded one additional period of operations in fiscal
year 1998 for these properties. The effect on revenues and net income was to
increase revenue by $44 million, net income by $6 million and diluted earnings
per share by $.02.

26
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Earnings (Loss) Per Common Share

Earnings (loss) per common share represent the earnings per share of Host
Marriott for all years presented because the Operating Partnerships results
were insignificant for the period after the contribution. Therefore, earnings
per unit of the Operating Partnership have not been presented. Basic earnings
per common share are computed by dividing net income by the weighted average
number of shares of common stock outstanding. Diluted earnings per common share
are computed by dividing net income by the weighted average number of shares of
common stock outstanding plus other dilutive securities. Diluted earnings per
common share has not been adjusted for the impact of the Convertible Preferred
Securities for 1997 and 1996 and for the comprehensive stock plan and warrants
for 1996 as they were anti-dilutive. In December 1998, the Company declared the
Special Dividend (Note 2) and, in February 1999, the Company distributed 11.9
million shares to existing shareholders in conjunction with the Special
Dividend. The weighted average number of common shares outstanding and the
basic and diluted earnings per share computations have been restated to reflect
these shares as outstanding for all periods presented issued to certain limited
partners. In February 1999, Host Marriott issued 8.5 million shares in exchange
for 8.5 million OP Units issued to certain limited partners in connection with
the Partnership Mergers which are deemed outstanding at December 31, 1998.

A reconciliation of the number of shares utilized for the calculation of
dilutive earnings per common share follows:

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted average number of common shares outstanding...... 216.3 215.0 200.6
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at average market price.................................. 4.0 4.8 --
Assuming conversion of Convertible Preferred Securities... 35.8 -- --
Other..................................................... 0.3 0.3 --
----- ----- -----
Shares utilized for the calculation of diluted earnings
per share................................................ 256.4 220.1 200.6
===== ===== =====
</TABLE>

A reconciliation of net income (loss) to earnings (loss) used for the
calculation of dilutive earnings per common share follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss).......................................... $47 $ 50 $(13)
Dividends, net of tax benefit, assuming conversion of
Convertible Preferred Securities.......................... 22 -- --
--- ---- ----
Earnings used for the calculation of diluted earnings per
share..................................................... $69 $ 50 $(13)
=== ==== ====
</TABLE>

International Operations

The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: revenues of $121 million, $105
million and $49 million and income (loss) before income taxes of $7 million,
($9 million) and ($2 million) in 1998, 1997 and 1996, respectively.

27
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Property and Equipment

Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, ground rent and real estate taxes incurred during
development and construction. Replacements and improvements are capitalized.

Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.

In cases where management is holding for sale particular hotel properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than the
net book value. A property is considered to be held for sale when the Company
has made the decision to dispose of the property. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.

Deferred Charges

Financing costs related to long-term debt are deferred and amortized over
the remaining life of the debt.

Cash, Cash Equivalents and Short-term Marketable Securities

The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $22 million and $115 million at December
31, 1998 and January 2, 1998, respectively, of cash related to certain
consolidated partnerships, the use of which is restricted generally for
partnership purposes to the extent it is not distributed to the partners.
Short-term marketable securities include investments with a maturity of 91
days to one year at the date of purchase. The Company's short-term marketable
securities represent investments in U.S. government agency notes and high
quality commercial paper. The short-term marketable securities are categorized
as available for sale and, as a result, are stated at fair market value.
Unrealized holding gains and losses are included as a separate component of
shareholders' equity until realized.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.

The Company is also subject to credit risk as a party to interest rate swap
agreements. The Company monitors the creditworthiness of its contracting
parties by evaluating credit exposure and referring to the ratings of widely
accepted credit rating services. The Standard and Poors' long-term debt
ratings for the contracting parties are AA-, AA- and BBB+. The Company is
exposed to credit loss in the event of non-performance by the contracting
party to the interest rate swap agreements; however, the Company does not
anticipate non-performance by any of the contracting parties.

28
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In addition, on January 1, 1999, subsidiaries of Crestline became the
lessees of virtually all the hotels and, as such, its rent payments are the
primary source of the Company's future revenues. Rent payments are provided
from pools of hotels which are guaranteed by Crestline. For discussion of the
guarantee, see Note 9. However, management believes that due to Crestline's
substantial assets, net worth and ability to operate as a separate publicly
traded company, Crestline will have the financial stability and access to
capital necessary to meet the substantial obligations as lessee under the
leases.

Use of Estimates in the Preparation of Financial Statements

REIT Conversion Expenses

The Company incurred certain costs related to the REIT Conversion. These
costs consist of professional fees, printing and filing costs, consent fees and
certain other related fees and are classified as REIT Conversion expenses on
the consolidated statement of operations. As of December 31, 1998, $48 million
of REIT Conversion expenses were accrued and included in accounts payable and
accrued expenses.

Interest Rate Swap Agreements

The Company has entered into a limited number of interest rate swap
agreements for non-trading purposes. The Company uses such agreements to fix
certain of its variable rate debt to a fixed rate basis. The interest rate
differential to be paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense.

Limited Partner Interests of Third Parties at Redemption Value

As of December 31, 1998, 64.5 million OP Units are held by outside third
parties. Each OP Unit is convertible into a share of common stock of Host
Marriott or cash, at the election of Host Marriott. Those OP Units are recorded
by the Operating Partnership as "Limited Partner Interests of Third Parties at
Redemption Value" at fair value in the accompanying balance sheet because
control over how the OP Units are redeemed is outside the control of the
Operating Partnership.

Other Comprehensive Income.

As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130) which establishes new rules for the reporting
and display of comprehensive income and its components. SFAS 130 requires
unrealized gains or losses on the Company's right to receive HM Services stock
(see note 10) and foreign currency translation adjustments, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.

The components of total accumulated other comprehensive income in the
balance sheet are as follows (in millions):

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net unrealized gains.............................................. 5 12
Foreign currency translation adjustment........................... (9) --
--- ---
Total accumulated other comprehensive income (loss)............... $(4) $12
=== ===
</TABLE>

29
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Application of New Accounting Standards

During 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation." In 1997, the
Company adopted SFAS No. 128, "Earnings Per Share;" SFAS No. 129, "Disclosure
of Information About Capital Structure" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The adoption of these
statements did not have a material effect on the Company's consolidated
financial statements and comprehensive income.

As discussed above, the Company has retroactively adopted EITF 97-2.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company has not determined the impact of SFAS No. 133, but
management does not believe it will be material.

The EITF reached a consensus in May 1998 on Issue 98-9, "Accounting for
Contingent Rents in Interim Financial Periods," which required a lessor to
defer recognition of contingent rental income in interim periods until the
specified target that triggers the contingent rental income is achieved. In
November 1998, EITF 98-9 was rescinded; however, the impact of the accounting
principles outlined in EITF 98-9 must continue to be disclosed in quarterly
financial statements. The Company's accounting policy is to recognize rental
income based on an estimate of full-year rental income and disclose in the
footnotes to the financial statements the portion of rental income that is
contingent.

2. Distribution and Special Dividend

In December 1998, the Company distributed to its shareholders through a
taxable distribution, the outstanding shares of common stock of Crestline, (the
"Distribution") formerly a wholly owned subsidiary of the Company, which, as of
the date of the Distribution, owned and operated the Company's senior living
communities, owned certain other assets and held leasehold interests in
substantially all of the Company's hotels. The Distribution provided Company
shareholders with one share of Crestline common stock for every ten shares of
Company common stock held by such shareholders on the record date of December
28, 1998. As a result of the Distribution, the Company's financial statements
have been restated to present the senior living communities' business results
of operations and cash flows as discontinued operations. Revenues for the
Company's discontinued operations totaled $241 million and $111 million in 1998
and 1997, respectively. The provision for loss on disposal includes
organizational and formation costs related to Crestline.

30
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For purposes of governing certain of the ongoing relationships between the
Company and Crestline after the Distribution and to provide for an orderly
transition, the Company and Crestline entered into various agreements,
including a Distribution Agreement, an Employee Benefits Allocation Agreement
and a Tax Sharing Agreement. Effective as of December 29, 1998, these
agreements provide, among other things, for the division between the Company
and Crestline of certain assets and liabilities.

On December 18, 1998, the Board of Directors declared a special dividend
which entitled shareholders of record on December 28, 1998 to elect to receive
either $1.00 in cash or .087 of a share of common stock of the Company for each
outstanding share of the Company's common stock owned by such shareholder on
the record date (the "Special Dividend"). Cash totaling $69 million and 11.9
million shares of common stock that were elected in the Special Dividend were
paid and/or issued on February 10, 1999.

3. Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
Land and land improvements................................ $ 740 $ 418
Buildings and leasehold improvements...................... 6,613 4,329
Furniture and equipment................................... 740 686
Construction in progress.................................. 78 36
------ ------
8,171 5,469
Less accumulated depreciation and amortization............ (970) (835)
------ ------
$7,201 $4,634
====== ======
</TABLE>

The detail of property and equipment above excludes net book value of the
discontinued senior living business of $583 million at January 2, 1998.

Interest cost capitalized in connection with the Company's development and
construction activities totaled $4 million in 1998, $1 million in 1997 and $3
million in 1996.

In 1997, the Company, through an agreement with the ground lessor of one of
its properties terminated its ground lease and recorded a $15 million loss on
the write-off of its investment, including certain transaction costs, which has
been included in net gains (losses) on property transactions in the
accompanying consolidated financial statements.

In 1996, the Company recorded a $4 million charge to write down an
undeveloped land parcel to its net realizable value based on its expected sales
value.

31
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Investments in and Receivables from Affiliates

Investments in and receivables from affiliates consist of the following:

<TABLE>
<CAPTION>
Ownership
Interests 1998 1997
--------- ------ ------
(in millions)
<S> <C> <C> <C>
Equity investments
Rockledge Hotel Properties, Inc................... 95% $ 31 $ --
Fernwood Hotel Assets, Inc........................ 95% 2 --
Hotel partnerships(1)............................. 1%-50% -- 13
Notes and other receivables from affiliates, net.... -- 134 23
------ ------
$ 167 $ 36
====== ======
</TABLE>
- --------
(1) During 1998, all or substantially all of the interests in the previously
unconsolidated hotel partnerships were consolidated or contributed to the
Non-Controlled Subsidiaries (defined herein) as a result of the REIT
Conversion and the Partnership Mergers.

In connection with the REIT Conversion, Rockledge Hotel Properties, Inc. and
Fernwood Hotel Assets, Inc. (together, the "Non-Controlled Subsidiaries") were
formed to own various assets of approximately $264 million contributed by the
Company to the Operating Partnership, the direct ownership of which by the
Company or the Operating Partnership could jeopardize the Company's status as a
REIT. These assets primarily consist of partnership or other interests in
hotels which are not leased and certain furniture, fixtures and equipment
("FF&E") used in the hotels. In exchange for the contribution of these assets
to the Non-Controlled Subsidiaries, the Operating Partnership received only
non-voting common stock of the Non-Controlled Subsidiaries, representing 95% of
the total economic interests therein. The Host Marriott Statutory
Employee/Charitable Trust, the beneficiaries of which are certain employees of
the Company and the J.W. Marriott Foundation concurrently acquired all of the
voting common stock representing the remaining 5% of the total economic
interest. As a result, as of December 31, 1998, the Company did not control the
Non-Controlled Subsidiaries. The Non-Controlled Subsidiaries own three full-
service hotels and interests in partnerships that own an additional two full-
service hotels and 220 limited-service hotels.

In connection with the REIT Conversion, the Company completed the
Partnership Mergers and, as a result, investments in affiliates in prior years
include earnings and assets, which are now consolidated. (See Note 12 for
discussion.)

In 1997, the Company acquired all of the outstanding interests in Chesapeake
Hotel Limited Partnership ("CHLP") that owns six hotels and acquired
controlling interests in four affiliated partnerships for approximately $550
million, including the assumption of approximately $410 million of debt. In
early 1998, the Company obtained a controlling interest in the partnership that
owns the 1,671-room Atlanta Marriott Marquis for approximately $239 million,
including the assumption of $164 million of mortgage debt.

Receivables from affiliates are reported net of reserves of $7 million at
December 31, 1998 and $144 million at January 2, 1998. Net amounts funded by
the Company totaled $10 million in 1997, and repayments were $14 million in
1998 and $2 million in 1997. There were no fundings in 1998 and 1996.

The Company's pre-tax income from affiliates includes the following:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Interest income............................................... $ 1 $11 $17
Equity in net income.......................................... 1 5 3
--- --- ---
$ 2 $16 $20
=== === ===
</TABLE>

32
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Combined summarized balance sheet information for the Company's affiliates
follows:

<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
Property and equipment, net.................................. $1,656 $1,979
Other assets................................................. 258 283
------ ------
Total assets............................................... $1,914 $2,262
====== ======
Debt, principally mortgages.................................. $1,622 $2,179
Other liabilities............................................ 300 412
Partners' deficit............................................ (8) (329)
------ ------
Total liabilities and partners' deficit.................... $1,914 $2,262
====== ======
</TABLE>

Combined summarized operating results for the Company's affiliates follow:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(in millions)
<S> <C> <C> <C>
Revenues............................................. $1,123 $1,393 $1,740
Operating expenses:
Cash charges (including interest).................. (930) (1,166) (1,469)
Depreciation and other non-cash charges............ (151) (190) (229)
------ ------ ------
Income before extraordinary items.................... 42 37 42
Extraordinary items--forgiveness of debt............. 4 40 12
------ ------ ------
Net income......................................... $ 46 $ 77 $ 54
====== ====== ======
</TABLE>

5. Debt
Debt consists of the following:

<TABLE>
<CAPTION>
1998 1997
------ ------
(in millions)
<S> <C> <C>
Series A senior notes, with a rate of 7 7/8% due August
2005........................................................ $ 500 $ --
Series B senior notes, with a rate of 7 7/8% due August
2008........................................................ 1,192 --
Series C senior notes, with a rate of 8.45% due December
2008........................................................ 498 --
Senior secured notes, with a rate of 9 1/2% due May 2005..... 21 600
Senior secured notes, with a rate of 8 7/8% due July 2007.... -- 600
Senior secured notes, with a rate of 9% due December 2007.... -- 350
Senior notes, with an average rate of 9 3/4% at December 31,
1998, maturing through 2012................................. 35 35
------ ------
Total senior notes......................................... 2,246 1,585
------ ------
Mortgage debt (non-recourse) secured by $3.3 billion of real
estate assets, with an average rate of 7.77% at
December 31, 1998, maturing through February 2023........... 2,438 1,762
Line of credit, terminated in August 1998.................... -- 22
------ ------
Total mortgage debt........................................ 2,438 1,784
------ ------
Convertible debt obligation to Host Marriott, with a rate of
6.75% due 2026 (see Note 6)................................. 567 --
Line of credit, with a variable rate of Eurodollar plus 1.75%
(7.5% at December 31, 1998)................................. 350 --
Other notes, with an average rate of 7.39% at December 31,
1998, maturing through December 2017........................ 90 89
Capital lease obligations.................................... 7 8
------ ------
Total other................................................ 1,014 97
------ ------
$5,698 $3,466
====== ======
</TABLE>

33
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The detail above excludes $317 million of debt relating to the discontinued
senior living business in 1997.

On July 10, 1997, HMH Properties, Inc. ("Properties," an indirect wholly
owned subsidiary of Host Marriott) and HMC Acquisitions Properties, Inc.
("Acquisitions", an indirect, wholly owned subsidiary of Host Marriott)
completed consent solicitations (the "1997 Consent Solicitations") with holders
of their senior notes ($600 million of 9 1/2% senior notes due 2005 and $350
million of 9% senior notes due 2007) to amend certain provisions of their
senior indentures. The 1997 Consent Solicitations facilitated the merger of
Acquisitions with and into Properties. The amendments to the indentures also
increased the ability of Properties to acquire, through certain subsidiaries,
additional properties subject to non-recourse indebtedness and controlling
interests in corporations, partnerships and other entities holding attractive
properties and increased the threshold required to permit Properties to make
distributions to affiliates.

Concurrent with the 1997 Consent Solicitations and the Properties and
Acquisitions merger, Properties issued an aggregate of $600 million of 8 7/8%
senior notes at par with a maturity of July 2007. Properties received net
proceeds of approximately $570 million, net of the costs of the 1997 Consent
Solicitations and the offering.

In conjunction with the REIT Conversion, Properties was merged with the
Operating Partnership and all of the debt of Host Marriott and Properties was
assumed by the Operating Partnership.

During 1997, the Company, through its wholly owned subsidiary, HMC Capital
Resources Corporation ("Resources"), entered into a credit facility (the "Old
Credit Facility") with a group of commercial banks under which it could borrow
up to $500 million for the acquisition of lodging real estate and for the
Company's working capital purposes. During August 1998, the Old Credit Facility
was terminated.

The Company also purchased 100% of the outstanding bonds secured by a first
mortgage on the San Francisco Marriott in 1997. The Company purchased the bonds
for $219 million, an $11 million discount to the face value of $230 million. In
connection with the redemption and defeasance of the bonds, the Company
recognized an extraordinary gain of $5 million, which represents the $11
million discount less the write-off of unamortized deferred financing fees, net
of taxes. In 1997, the Company also incurred approximately $418 million of
mortgage debt in conjunction with the acquisition of 11 hotels.

In connection with the acquisition of the outstanding common stock of Forum
Group, Inc. (the "Forum Group") in June 1997, the Company assumed debt of
approximately $270 million. In 1997, an additional $33 million of debt
financing was provided by Marriott International. The Company also assumed
approximately $15 million of debt in conjunction with the acquisition of the
Leisure Park retirement community in 1997. As a result of the Distribution, the
debt related to the Forum Group and Leisure Park retirement community is
included in net investments of discontinued operations for 1997 (Note 2). The
Company continues to provide a guarantee on the Leisure Park debt.

In the fourth quarter of 1996, the Company repaid the $109 million mortgage
on the Philadelphia Marriott. In the first quarter of 1997, the Company
obtained $90 million in first mortgage financing from two insurance companies
secured by the Philadelphia Marriott. The mortgage bears interest at a fixed
rate of 8.49% and matures in April 2009.

In December 1997, the Company successfully completed the refinancing of the
MHP (defined herein) mortgage debt for approximately $152 million. The new
mortgage bears interest at 7.48% and matures in January 2008. In

34
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

connection with the refinancing, the Company recognized an extraordinary loss
of $2 million which represents payment of a prepayment penalty and the write-
off of unamortized deferred financing fees, net of taxes.

On April 20, 1998, the Company and certain of its subsidiaries filed a shelf
registration on Form S-3 (the "Shelf Registration") with the Securities and
Exchange Commission for the issuance of up to $2.5 billion in securities.

On August 5, 1998, the Company (through Properties) utilized the Shelf
Registration to issue an aggregate of $1.7 billion in new senior notes (the
"New Senior Notes"). The New Senior Notes were issued in two series, $500
million of 7 7/8% Series A notes due in 2005 and $1.2 billion of 7 7/8% Series
B notes due in 2008. The Company utilized the proceeds from the New Senior
Notes to purchase substantially all of its (i) $600 million in 9 1/2% senior
notes due 2005; (ii) $350 million in 9% senior notes due 2007 and (iii) $600
million in 8 7/8% senior notes due 2007 (collectively, the "Old Senior Notes").
Approximately $21 million of the Old Senior Notes remain outstanding. In
connection with the purchase of substantially all of the Old Senior Notes, the
Company recorded a charge of approximately $148 million (net of income tax
benefit of $80 million) as an extraordinary item representing the amount paid
for bond premiums and consent fees, as well as the write-off of deferred
financing fees on the Old Senior Notes.

Concurrently with each offer to purchase, Properties successfully solicited
consents (the "1998 Consent Solicitations") from registered holders of the Old
Senior Notes to certain amendments to eliminate or modify substantially all of
the restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Old Senior Notes were issued.

In conjunction with the issuance of the New Senior Notes, Properties entered
into a $1.25 billion credit facility (the "New Credit Facility") with a group
of commercial banks. The New Credit Facility has an initial three-year term
with two one-year extension options. Borrowings under the New Credit Facility
bear interest currently at the Eurodollar rate plus 1.75% (7.5% at December 31,
1998). The interest rate and commitment fee on the unused portion of the New
Credit Facility fluctuate based on certain financial ratios. The New Senior
Notes and the New Credit Facility were assumed by the Operating Partnership in
connection with the REIT Conversion. As of December 31, 1998, $350 million was
outstanding under the New Credit Facility.

The New Credit Facility and the indenture under which the New Senior Notes
were issued contain covenants restricting the ability of Properties and certain
of its subsidiaries to incur indebtedness, grant liens on their assets, acquire
or sell assets or make investments in other entities, and make certain
distributions to equityholders of Properties, the Company, and the Operating
Partnership. The New Credit Facility also contains certain financial covenants
relating to, among other things, maintaining certain levels of tangible net
worth and certain ratios of EBITDA to interest and fixed charges, total debt to
EBITDA, unencumbered assets to unsecured debt, and secured debt to total debt.
In connection with the REIT Conversion, Properties was merged with, and into,
the Operating Partnership in December 1998.

In December 1998, the Operating Partnership issued $500 million of 8.45%
Series C notes due in 2008 under the same indenture and with the same covenants
as the New Senior Notes. In February 1999, the Company issued $300 million of 8
3/8% Series D notes due in 2006. The debt was used to refinance, or purchase,
approximately $299 million of debt acquired in the Partnership Mergers, and
approximately $40 million of other mortgage debt.

In December 1998, the Company became party to eight interest rate swap
agreements in connection with the Blackstone Acquisition discussed in Note 12.
The notional amount of the agreements is approximately $365 million, with
expiration dates between August 2000 and August 2002. The Company receives
interest based on one month LIBOR (5.06% at December 31, 1998) and pays
interest at fixed rates ranging from 5.72% to 6.60%. The interest rate swap
agreements allow the Company to effectively eliminate the variability of the

35
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

interest rates on certain secured debt. The Company was party to an interest
rate swap agreement with a financial institution with an aggregate notional
amount of $100 million which expired in December 1998. In 1997, the Company was
party to two additional interest rate swap agreements with an aggregate
notional amount of $400 million which expired in May 1997. The Company realized
a net reduction of interest expense of $1 million in 1997 and $6 million in
1996 related to interest rate swap agreements. The reduction in interest
expense in 1998 was not material as the Company did not assume the agreements
until December 30.

The Company's debt balance at December 31, 1998, includes $87 million of
debt that is recourse to the parent company. Aggregate debt maturities at
December 31, 1998 are (in millions):

<TABLE>
<S> <C>
1999.............................................................. $ 405
2000.............................................................. 206
2001.............................................................. 435
2002.............................................................. 430
2003.............................................................. 121
Thereafter........................................................ 4,090
------
5,687
Discount on senior notes.......................................... (10)
Interest rate swap agreements..................................... 14
Capital lease obligation.......................................... 7
------
$5,698
======
</TABLE>

Cash paid for interest for continuing operations, net of amounts
capitalized, was $325 million in 1998, $278 million in 1997 and $220 million in
1996. Deferred financing costs, which are included in other assets, amounted to
$98 million and $96 million, net of accumulated amortization, as of December
31, 1998 and January 2, 1998, respectively. Amortization of deferred financing
costs totaled $10 million, $7 million and $5 million in 1998, 1997 and 1996,
respectively.

6. Convertible Debt Obligation to Host Marriott Corporation

The obligation for the $567 million of 6 3/4% Convertible Subordinated
Debentures (the "Debentures") has been included in these financial statements
as debt of the Company because upon the REIT Conversion the Operating
Partnership assumed primary liability for repayment of the Debentures of Host
Marriott underlying the Convertible Preferred Securities (defined below) of the
Host Marriott Financial Trust (the "Issuer"), a wholly-owned subsidiary trust
of Host Marriott. The common securities of Host Marriott Financial Trust were
not contributed to the Operating Partnership and therefore Host Marriott
Financial Trust is not consolidated by the Operating Partnership. Upon
conversion by a Convertible Preferred Securities holder, the Host Marriott will
issue shares of its common stock which will be delivered to such holder. Upon
the issuance of such shares by the Host Marriott, the Operating Partnership
will issue to the Host Marriott the number of OP Units equal to the number of
shares of the Host Marriott common stock issued in exchange for the Debentures.

In December 1996, Host Marriott Financial Trust issued 11 million shares of
6 3/4% convertible quarterly income preferred securities (the "Convertible
Preferred Securities"), with a liquidation preference of $50 per share (for a
total liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures (defined
below)

36
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

were issued, the Debentures, the Company's obligations under the Trust
Agreement and its obligations under the indenture to pay costs, expenses, debts
and liabilities of the Issuer (other than with respect to the Convertible
Preferred Securities) provides a full and unconditional guarantee of amounts
due on the Convertible Preferred Securities. Proceeds from the issuance of the
Convertible Preferred Securities were invested in 6 3/4% Convertible
Subordinated Debentures (the "Debentures") due December 2, 2026 issued by the
Company. The Issuer exists solely to issue the Convertible Preferred Securities
and its own common securities (the "Common Securities") and invest the proceeds
therefrom in the Debentures. The note receivable from the Operating Partnership
is the Issuer's sole asset.

Each of the Convertible Preferred Securities is convertible at the option of
the holder into shares of Company common stock at the rate of 3.2537 shares per
Convertible Preferred Security (equivalent to a conversion price of $15.367 per
share of Company common stock). The Debentures are convertible at the option of
the holders into shares of Host Marriott common stock at a conversion rate of
3.2537 shares for each $50 in principal amount of Debentures. The Issuer will
only convert Debentures pursuant to a notice of conversion by a holder of
Convertible Preferred Securities. During 1998, 1997 and 1996, no shares were
converted into common stock. The conversion ratio and price were adjusted to
reflect the impact of the Distribution and the Special Dividend.

Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4% accruing
from the original issue date, commencing March 1, 1997, and payable quarterly
in arrears thereafter. The distribution rate and the distribution and other
payment dates for the Convertible Preferred Securities will correspond to the
interest rate and interest and other payment dates on the Debentures. The
Company may defer interest payments on the Debentures for a period not to
exceed 20 consecutive quarters. If interest payments on the Debentures are
deferred, so too are payments on the Convertible Preferred Securities. Under
this circumstance, the Company will not be permitted to declare or pay any cash
distributions with respect to its capital stock or debt securities that rank
pari passu with or junior to the Debentures.

Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result of
the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.

7. Equity and Partner's Capital

The Contribution and related transactions resulted in the exchange of 217.1
million OP Units for substantially all of the assets and liabilities of Host
Marriott Corporation.

In conjunction with the Merger, the Blackstone Acquisition and the
Partnership Mergers (Note 12), the Operating Partnership issued approximately
64.5 million OP Units which are convertible into cash (or at Host Marriott's
option shares of Host Marriott common stock.) These OP Units are restricted
from converting until July 1999, October 1999 and January 2000 when 23.9
million, 11.9 million and 28.8 million units, respectively, are eligible for
conversion.

Host Marriott issued 11.9 million shares of common stock as part of the
Special Dividend (Note 2) and 8.5 million shares of common stock in exchange
for 8.5 million OP Units issued to certain other limited partners in connection
with the Partnership Mergers (Note 12). Also, as part of the REIT Conversion,
Host Marriott changed its par value from $1 to $0.01 per share. The change in
par value did not affect the number of shares outstanding.

37
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Income Taxes

The Operating Partnership is not a tax paying entity. However, the Operating
Partnership under the Operating Partnership Agreement is required to reimburse
Host Marriott for any tax payments Host Marriott is required to make.
Accordingly, the tax information included herein represents disclosures
regarding Host Marriott. As a result of the requirement of the Operating
Partnership to reimburse Host Marriott for these liabilities, such liabilities
and related disclosures are included in the Operating Partnership's financial
statements.

In December 1998, Host Marriott restructured itself to enable Host Marriott
to qualify for treatment as a REIT, pursuant to the Internal Revenue Code of
1986, as amended, effective January 1, 1999. In general, a corporation that
elects REIT status and distributes at least 95% of its taxable income to
shareholders and complies with certain other requirements (relating primarily
to the nature of its assets and the sources of its revenues) is not subject to
Federal income taxation to the extent it distributes its taxable income.
Management believes that Host Marriott was organized and will operate so as to
qualify as a REIT as of January 1, 1999 (including distribution of at least 95%
of its REIT taxable income to shareholders in 1999 and subsequent years).
Management expects that Host Marriott will pay taxes on "built-in gains" on
only certain of its assets. Based on these considerations, management does not
believe that Host Marriott will be liable for income taxes at the federal level
or in most of the states in which it operates in future years, and Host
Marriott eliminated $106 million of its net existing deferred tax liabilities
as of December 31, 1998. Host Marriott does not expect to provide for any
material deferred income taxes in future periods except in certain states and
foreign countries. Additionally, in connection with the Distribution and the
formation of the Non-Controlled Subsidiaries, Host Marriott reduced deferred
income tax liabilities by $102 million.

In order to qualify as a REIT for federal income tax purposes, among other
things, Host Marriott must have distributed all of the accumulated earnings and
profits ("E&P") of Host Marriott Corporation to its stockholders in one or more
taxable dividends prior to the end of the first full taxable year for which the
REIT election of Host Marriott is effective, which currently is expected to be
the taxable year commencing January 1, 1999.

In an effort to help accomplish the requisite distributions of the
accumulated E&P, Host Marriott made an initial E&P distribution consisting of
approximately 20.4 million shares of Crestline valued at $297 million, $69
million in cash, and approximately 11.9 million shares of Host Marriott stock
valued at $143 million.

The actual amount of the initial E&P distribution was based, in part, upon
the estimated amount of accumulated E&P of Host Marriott as of the last day of
its taxable year. To the extent that the initial E&P distribution was not
sufficient to eliminate Host Marriott's accumulated E&P, Host Marriott will
make one or more additional taxable distributions to its stockholders (in the
form of cash or securities) prior to the last day of Host Marriott's first full
taxable year as a REIT.

38
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Where required, deferred income taxes are accounted for using the asset and
liability method. Under this method, deferred income taxes are recognized for
temporary differences between the financial reporting bases of assets and
liabilities and their respective tax bases and for operating loss and tax
credit carryforwards based on enacted tax rates expected to be in effect when
such amounts are realized or settled. However, deferred tax assets are
recognized only to the extent that it is more likely than not that they will be
realized based on consideration of available evidence, including tax planning
strategies and other factors.

Total deferred tax assets and liabilities at December 31, 1998 and January
2, 1998 were as follows:

<TABLE>
<CAPTION>
1998 1997
------ -------
(in millions)
<S> <C> <C>
Deferred tax assets..................................... $ 32 $ 159
Deferred tax liabilities................................ (129) (646)
------ -------
Net deferred income tax liability..................... $ (97) $ (487)
====== =======

The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of December 31, 1998 and January 2, 1998 follows:

<CAPTION>
1998 1997
------ -------
(in millions)
<S> <C> <C>
Investments in affiliates............................... $ -- $ (310)
Property and equipment.................................. -- (179)
Safe harbor lease investments........................... (24) (65)
Deferred tax gain....................................... (105) (92)
Reserves................................................ -- 103
Alternative minimum tax credit carryforwards............ 32 41
Other, net.............................................. -- 15
------ -------
Net deferred income tax liability..................... $ (97) $ (487)
====== =======
</TABLE>

The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Current--Federal............................................ $116 $19 $(2)
--State................................................. 27 4 3
--Foreign............................................... 4 3 3
---- --- ---
147 26 4
---- --- ---
Deferred--Federal........................................... (49) 8 2
--State................................................. (12) 2 (1)
---- --- ---
(61) 10 1
---- --- ---
$ 86 $36 $ 5
==== === ===
</TABLE>

At December 31, 1998, Host Marriott had approximately $32 million of
alternative minimum tax credit carryforwards available which do not expire.

Through 1997, Host Marriott settled with the Internal Revenue Service
("IRS") substantially all issues for tax years through 1993. Host Marriott
expects to resolve any remaining issues with no material impact on the

39
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

consolidated financial statements. Host Marriott made net payments to the IRS
of approximately $10 million and $45 million in 1997 and 1996, respectively,
related to these settlements. Certain adjustments totaling approximately $2
million in 1996 were made to the tax provision related to those settlements.

A reconciliation of the statutory Federal tax rate to Host Marriott's
effective income tax rate follows (excluding the impact of the change in tax
status):

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Statutory Federal tax
rate..................... 35.0 % 35.0 % (35.0)%
State income taxes, net of
Federal tax benefit...... 5.8 4.9 21.7
Tax credits............... (1.7) (2.7) --
Additional tax on foreign
source income............ 4.2 6.0 40.8
Tax contingencies......... -- -- 25.0
Permanent non-deductible
REIT Conversion
expenses................. 4.6 -- --
Other permanent items..... 1.2 .1 9.0
Other, net................ 0.3 .1 1.0
---- ---- -----
Effective income tax
rate................... 49.4 % 43.4 % 62.5 %
==== ==== =====
</TABLE>

Crestline and Host Marriott entered into a tax sharing agreement (the "Tax
Sharing Agreement") which defines each party's rights and obligations with
respect to deficiencies and refunds of federal, state and other income or
franchise taxes relating to Crestline's business for taxable years prior to the
Distribution and with respect to certain tax attributes of Crestline after the
Distribution. Host Marriott is responsible for filing consolidated returns and
paying taxes for periods through the date of the Distribution, and Crestline is
responsible for filing its returns and paying taxes for subsequent periods.

Cash paid for income taxes, including IRS settlements, net of refunds
received, was $83 million in 1998, $56 million in 1997 and $40 million in 1996.

9. Leases

As of January 1, 1999, the Company leases substantially all of its hotels to
subsidiaries of Crestline. Additionally, the Company also leases certain
property and equipment under non-cancellable operating and capital leases.

Hotel Leases. Due to current federal income tax law restrictions on a REIT's
ability to derive revenues directly from the operation of a hotel, the Company
leases its hotels (the "Leases") to one or more lessees (the "Lessees").

There generally is a separate Lessee for each hotel or group of hotels that
is owned by a separate subsidiary of the Company. The operating agreements for
such Lessees provide that the Crestline member of the Lessee has full control
over the management of the business of the Lessee, subject to blocking rights
by Marriott International, where it is the manager, over certain decisions by
virtue of its non-economic, limited voting interest in the lessee subsidiaries.
Each full-service hotel Lease has a fixed term generally ranging from seven to
ten years, subject to earlier termination upon the occurrence of certain
contingencies as defined in the Leases. Each Lease requires the Lessee to pay
1) minimum rent in a fixed dollar amount per annum plus 2) to the extent it
exceeds minimum rent, percentage rent based upon specified percentages of
aggregate sales from the applicable hotel, including room sales, food and
beverage sales, and other income in excess of specified thresholds. The amount
of minimum rent and the percentage rent thresholds will be adjusted each year
based upon any increases in the Consumer Price Index and the Employment Cost
Index during the previous ten months, as well as for certain capital
expenditures and casualty occurrences.

40
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

If the Company anticipates that the average tax basis of the Company's FF&E
and other personal property that are leased by any individual lessor entity
will exceed 15% of the aggregate average tax basis of the fixed assets in that
entity, then the Lessee would be obligated either to acquire such excess FF&E
from the Company or to cause a third party to purchase such FF&E. The Lessee
has agreed to give a right of first opportunity to a Non-Controlled Subsidiary
to acquire the excess FF&E and to lease the excess FF&E to the Lessee.

Each Lessee is responsible for paying all of the expenses of operating the
applicable hotel(s), including all personnel costs, utility costs and general
repair and maintenance of the hotel(s). The Lessee also is responsible for all
fees payable to the applicable 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 Lease. Host Marriott also remains liable
under each management agreement.

The Company is responsible for paying real estate taxes, personal property
taxes (to the extent the Company owns the personal property), casualty
insurance on the structures, ground lease rent payments, required expenditures
for FF&E (including maintaining the FF&E reserve, to the extent such is
required by the applicable management agreement) and other capital
expenditures.

Crestline Guarantees

Crestline and certain of its subsidiaries entered into limited guarantees of
the Lease obligations of each Lessee. For each of four identified "pools" of
hotels (determined on the basis of the term of the particular Lease with all
leases having generally the same lease term placed in the same "pool"), the
cumulative limit of Crestline's guaranty obligation is the greater of 10% of
the aggregate rent payable for the immediately preceding fiscal year under all
Leases in the pool or 10% of the aggregate rent payable under all Leases in the
pool. For each pool, the subsidiary of Crestline that is the parent of the
Lessees in the pool (a "Pool Parent") also is a party to the guaranty of the
Lease obligations for that pool.

The obligations of the Pool Parent under each guaranty is secured by all
funds received by the applicable Pool Parent from the hotels in the pool, and
the hotels in the pool are required to distribute their excess cash flow to the
Pool Parent for each accounting period, under certain conditions as described
by the guaranty.

In the event that Crestline's obligation under a guaranty is reduced to
zero, the applicable Pool Parent can elect to terminate its guaranty and the
pooling agreement for that pool by giving notice to the Operating Partnership.
In that event, subject to certain conditions, the Pool Parent's guaranty will
terminate six months after the effective date of such notice, subject to
reinstatement in certain limited circumstances.

The Operating Partnership sold the existing working capital to the
applicable Lessee upon the commencement of the Lease at a price equal to the
fair market value of such assets. The purchase price is represented by a note
evidencing a loan that bears interest at a rate of 5.12%. Interest accrued on
the working capital loan is due simultaneously with each periodic rent payment,
and the amount of each payment of interest is credited against such rent
payment. The principal amount of the working capital loan is payable upon
termination of the Lease. The Lessee can return the working capital in
satisfaction of the note. As of December 31, 1998, the note receivable from
Crestline for working capital was $95 million.

In the event the Company enters into an agreement to sell or otherwise
transfer any full-service hotel free and clear of the applicable Lease, the
Lessor must pay the Lessee a termination fee equal to the fair market value of
the Lessee's leasehold interest in the remaining term of the Lease using a
discount rate of 12%. Alternatively, the Lessor will be entitled to (i)
substitute a comparable hotel or hotels for any hotel that is sold or (ii) sell
the hotel subject to the Lease and certain conditions without being required to
pay a termination fee.

41
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In the event that changes in the Federal income tax laws allow the Company,
or subsidiaries or affiliates of the Company, to directly operate the hotels
without jeopardizing Host Marriott's status as a REIT, the Company will have
the right to terminate all, but not less than all, of the full-service and HPT
hotel Leases in return for paying the Lessees the fair market value of the
remaining terms of the full-service hotel Leases, valued in the same manner as
discussed above. The payment is payable in cash or, subject to certain
conditions, shares of the Host Marriott's common stock, at the election of Host
Marriott. The rights of each Lessee will be expressly subordinated to
qualifying mortgage debt and any refinancing thereof.

The Company sold and leased back 37 of its Courtyard properties in 1995 and
an additional 16 Courtyard properties in 1996 to Hospitality Properties Trust
("HPT"). Additionally, in 1996, the Company sold and leased back 18 of its
Residence Inns to HPT. These leases, which are accounted for as operating
leases and are included in the table below, have initial terms expiring through
2012 for the Courtyard properties and 2010 for the Residence Inn properties,
and are renewable at the option of the Company. Minimum rent payments are $51
million annually for the Courtyard properties and $17 million annually for the
Residence Inn properties, and additional rent based upon sales levels are
payable to the owner under the terms of the leases.

In connection with the REIT Conversion, the Operating Partnership sublet the
HPT hotels (the "Subleases") to separate indirect sublessee subsidiaries of
Crestline ("Sublessee"), subject to the terms of the applicable HPT Lease.

The term of each Sublease expires simultaneously with the expiration of the
initial term of the HPT lease to which it relates and automatically renews for
the corresponding renewal term under the HPT lease, unless either the HPT
lessee (the "Sublessor") elects not to renew the HPT lease, or the Sublessee
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 in a particular pool of HPT hotels (one for Courtyard by Marriott
hotels and one for Residence Inn hotels). Rent under the Sublease consists of
the Minimum Rent payable under the HPT lease and an additional percentage rent
payable to the Sublessor. The percentage rent is sufficient to cover the
additional rent due under the HPT lease, with any excess being retained by the
Sublessor. The rent payable under the Subleases is guaranteed by Crestline, up
to a maximum amount of $30 million which amount is allocated between the two
pools of HPT hotels.

A number of the Company's leased hotel properties also include long-term
ground leases for certain hotels, generally with multiple renewal options.
Certain leases contain provision for the payment of contingent rentals based on
a percentage of sales in excess of stipulated amounts. Future minimum annual
rental commitments for all non-cancelable leases for which the Company is the
lessee are as follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(in millions)
<S> <C> <C>
1999....................................................... $ 2 $ 119
2000....................................................... 1 116
2001....................................................... 1 111
2002....................................................... 1 106
2003....................................................... 1 102
Thereafter................................................. 4 1,292
--- ------
Total minimum lease payments............................... 10 $1,846
======
Less amount representing interest.......................... (3)
---
Present value of minimum lease payments.................. $ 7
===
</TABLE>

42
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals from restaurants and HPT subleases of $103 million and $915 million,
respectively, payable to the Company under non-cancellable subleases.

The aggregate minimum rental payments to be received by the Operating
Partnership under the hotel leases are $774 million in 1999 and will be
adjusted in future periods based on changes in the Consumer Price Index and
Employment Cost Index.

In conjunction with the refinancing of the mortgage of the New York Marriott
Marquis, the Company also renegotiated the terms of the ground lease. The
renegotiated ground lease provides for the payment of a percentage of the hotel
sales (3% in 1998, 4% in 1999 and 5% thereafter) through 2017, which is to be
used to amortize the existing deferred ground rent obligation of $116 million.
The Company has the right to purchase the land under certain circumstances.

The Company remains contingently liable at December 31, 1998 on certain
leases relating to divested non-lodging properties. Such contingent liabilities
aggregated $93 million at December 31, 1998. However, management considers the
likelihood of any substantial funding related to these leases to be remote.

Rent expense consists of:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Minimum rentals on operating leases........................... $104 $ 98 $83
Additional rentals based on sales............................. 26 20 16
---- ---- ---
$130 $118 $99
==== ==== ===
</TABLE>

10. Employee Stock Plans

In connection with the REIT Conversion, the Operating Partnership assumed
the employee obligations of Host Marriott. Upon the exercise of stock options
in Host Marriott common stock, Host Marriott will issue shares of its common
stock in return for the issuance of an equal number of OP Units of the
Operating Partnership. Accordingly, those liabilities and related disclosures
are included in the Operating Partnership financial statements.

At December 31, 1998, the Company maintained two stock-based compensation
plans, including the comprehensive stock plan (the "Comprehensive Plan"),
whereby the Company may award to participating employees (i) options to
purchase Host Marriott's common stock, (ii) deferred shares of Host Marriott's
common stock and (iii) restricted shares of Host Marriott's common stock and
the employee stock purchase plan (the "Employee Stock Purchase Plan").

Total shares of common stock reserved and available for issuance under the
Comprehensive Plan at December 31, 1998 was 26.6 million.

Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Non-qualified options generally expire up to 15 years after the
date of grant. Most options vest ratably over each of the first four years
following the date of the grant. In connection with the Marriott International
Distribution in 1993, the Company issued an equivalent number of Marriott
International options and adjusted the exercise prices of its options then
outstanding based on the relative trading prices of shares of the common stock
of the two companies.

43
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the Host Marriott Services Corporation ("HM Services")
spin-off in 1995, outstanding options held by current and former employees of
the Company were redenominated in both Company and HM Services stock and the
exercise prices of the options were adjusted based on the relative trading
prices of shares of the common stock of the two companies. Pursuant to the
distribution agreement between the Company and HM Services, the Company has the
right to receive up to 1.4 million shares of HM Services' common stock or an
equivalent cash value subsequent to exercise of the options held by certain
former and current employees of Marriott International. As of December 31,
1998, the Company valued this right at approximately $9 million, which is
included in other assets.

Effective December 29, 1998, the Company adjusted the number of outstanding
stock options and the related exercise prices to maintain the intrinsic value
of the options to account for the Special Dividend and the Distribution. The
vesting provisions and option period of the original grant was retained. No
compensation expense was recorded by the Company as a result of these
adjustments. Employee optionholders that remained with the Company received
options only in the Company's stock and those employee optionholders that
became Crestline employees received Crestline options in exchange for the
Company's options.

The Company continues to account for expense under its plans according to
the provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Consequently, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.

For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 1997 and 1996, respectively: risk-free interest rate of 6.2% and
6.6%, respectively, volatility of 35% and 36%, respectively, expected lives of
12 years and no dividend yield. The weighted average fair value per option
granted during the year was $13.13 in 1997 and $8.68 in 1996. No options were
granted in 1998. Pro forma compensation cost for 1998, 1997 and 1996 would have
reduced (increased) net income (loss) by approximately $524,000, $330,000 and
($150,000), respectively. Basic and diluted earnings per share on a pro forma
basis were not impacted by the pro forma compensation cost in 1998, 1997 and
1996.

The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1996 and 1997 have been considered.

A summary of the status of Host Marriott's stock option plan for 1998, 1997
and 1996 follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in millions) Exercise Price (in millions) Exercise Price (in millions) Exercise Price
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, at beginning of
year................... 6.8 $ 4 8.3 $ 4 10.0 $ 4
Granted................. -- -- .1 20 .2 13
Exercised............... (1.3) 5 (1.6) 4 (1.9) 4
Forfeited/Expired....... (0.6) 4 -- -- -- --
Adjustment for
Distribution and
Special Dividend....... 0.7 3 -- -- -- --
---- ---- ----
Balance, at end of
year................... 5.6 3 6.8 4 8.3 4
==== ==== ====
Options exercisable at
year-end............... 5.5 6.4 7.6
==== ==== ====
</TABLE>

44
<PAGE>

HOST MARIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Range of Exercise Prices 1998 Life Price 1998 Price
------------------------ -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 1 - 3 4.1 8 $ 2 4.1 $ 2
4 - 6 0.8 6 5 0.8 5
7 - 9 0.4 11 8 0.4 8
10 - 12 0.1 12 10 0.1 10
13 - 15 0.1 13 13 0.1 13
19 - 22 0.1 14 18 -- --
--- ---
5.6 5.5
=== ===
</TABLE>

Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. The Company accrues compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures. In 1998, 1997 and 1996, 12,000, 14,000 and 13,000 shares were
granted, respectively, under this plan. The compensation cost that has been
charged against income for deferred stock was not material in 1998, 1997 and
1996. The weighted average fair value per share granted during each year was
$19.21 in 1998, $15.81 in 1997 and $11.81 in 1996.

The Company from time to time awards restricted stock plan shares under the
Comprehensive Plan to officers and key executives to be distributed over the
next three to 10 years in annual installments based on continued employment and
the attainment of certain performance criteria. The Company recognizes
compensation expense over the restriction period equal to the fair market value
of the shares on the date of issuance adjusted for forfeitures, and where
appropriate, the level of attainment of performance criteria and fluctuations
in the fair market value of the Company's common stock. In 1998, 1997 and 1996,
2,900, 198,000 and 2,511,000 shares of additional restricted stock plan shares
were granted to certain key employees under these terms and conditions similar
to the 1993 grants. Approximately 16,842 and 161,000 shares were forfeited in
1998 and 1996, respectively. There were no shares forfeited in 1997. The
Company recorded compensation expense of $11 million, $13 million and $11
million in 1998, 1997 and 1996, respectively, related to these awards. The
weighted average fair value per share granted during each year was $18.13 in
1998, $16.88 in 1997 and $14.01 in 1996. Under these awards 925,000 shares were
outstanding at December 31, 1998. The Board has voted to approve 3,199,000
shares for award in 1999 under similar terms.

In 1998, 568,408 stock appreciation rights ("SARs") were issued under the
Comprehensive Plan to certain directors of the Company as a replacement for
previously issued options that were cancelled during the year. The conversion
to SARs was completed in order to comply with ownership limits applicable to
the Company upon conversion to a REIT. The SARs are fully vested and the grant
prices range from $1.20 to $5.13. In 1998, the Company recognized compensation
expense of $4.8 million related to this grant. Additionally, in future periods,
the Company will recognize compensation expense for outstanding SARs as a
result of fluctuations in the market price of the Company's common stock.

Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at 90% of the lower of market
value at the beginning or market value at the end of the plan year.

45
<PAGE>

HOST MARIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. Profit Sharing and Postemployment Benefit Plans

The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements and
electing participation in the plans. The amount to be matched by the Company is
determined annually by the Board of Directors. The Company provides medical
benefits to a limited number of retired employees meeting restrictive
eligibility requirements. Amounts for these items were not material in 1996
through 1998.

12. Acquisitions and Dispositions

The Company acquired or gained controlling interest in 36 hotels with 15,166
rooms in 1998, 18 hotels with 9,128 rooms in 1997 and 24 hotels with 11,385
rooms in 1996. The Company has also disposed of a number of hotels, including
two hotels since 1997 and one subsequent to year-end 1998. Twenty-five of the
1998 acquisitions, consisting of the Blackstone Acquisition and the Partnership
Mergers, were completed on December 30, 1998, in conjunction with the REIT
Conversion. Additionally, three full-service properties were contributed to one
of the Non-Controlled Subsidiaries (Note 4). Each of these transactions is
discussed separately below.

1998 Acquisitions. In January 1998, the Company acquired an additional
interest in Atlanta Marriott Marquis II Limited Partnership, which owns an
interest in the 1,671-room Atlanta Marriott Marquis Hotel, for $239 million,
including the assumption of $164 million of mortgage debt. The Company
previously owned a 1.3% general and limited partnership interest. In March
1998, the Company acquired a controlling interest in a partnership that owns
three hotels: the 359-room Albany Marriott, the 350-room San Diego Marriott
Mission Valley and the 320-room Minneapolis Marriott Southwest for
approximately $50 million. In the second quarter of 1998, the Company acquired
the partnership that owns the 289-room Park Ridge Marriott in Park Ridge, New
Jersey for $24 million. The Company previously owned a 1% managing general
partner interest and a note receivable interest in such partnership. In
addition, the Company acquired the 281-room Ritz-Carlton, Phoenix for $75
million, the 397-room Ritz-Carlton in Tysons Corner, Virginia for $96 million
and the 487-room Torrance Marriott near Los Angeles, California for $52
million. In the third quarter of 1998, the Company acquired the 308-room Ritz-
Carlton, Dearborn for $65 million, the 336-room Ritz-Carlton, San Francisco for
$161 million and the 404-room Memphis Crowne Plaza (which was converted to the
Marriott brand upon acquisition) for $16 million.

Blackstone Acquisition. In December 1998, the Company completed the
acquisition of, or controlling interests in, twelve hotels and one mortgage
loan secured by an additional hotel from the Blackstone Group, a Delaware
limited partnership, and a series of funds controlled by affiliates of
Blackstone Real Estate Partners (together, the "Blackstone Entities"). In
addition, the Company acquired a 25% interest in Swissotel Management (USA)
L.L.C., which operates five Swissotel hotels in the United States, from the
Blackstone Entities, which the Company transferred to Crestline in connection
with the Distribution. The Operating Partnership issued approximately 43.9
million OP Units, which OP Units are redeemable for cash (or at Host Marriott's
option, shares of common stock of Host Marriott), assumed debt and made cash
payments totaling approximately $920 million and distributed 1.4 million of the
shares of Crestline common stock to the Blackstone Entities. The actual number
of OP Units to be issued to the Blackstone Entities will fluctuate based upon
certain adjustments to be determined on March 31, 1999. Based on current stock
prices the Operating Partnership will be required to issue to the Blackstone
Entities approximately 3.7 million additional units in April 1999. The
consideration received by the Blackstone Entities was determined through
negotiations between the Company and Blackstone and was not based upon
appraisals of the assets. After all adjustments, the Blackstone Entities will
own approximately 16.4% of the outstanding OP Units.

At the closing of the Blackstone Acquisition, the hotels were leased to
subsidiaries of Crestline but will continue to be managed on behalf of the
Lessees under their existing management agreements.

46
<PAGE>

HOST MARIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Partnership Mergers. In December 1998, the Company completed the Partnership
Mergers which was the roll-up of eight public partnerships and four private
partnerships which own or control 28 properties, 13 of which were already
consolidated. The Operating Partnership issued approximately 25 million OP
Units to partners for their interests valued at approximately $333 million. The
eight public partnerships that merged are: the Atlanta Marriott Marquis II,
Limited Partnership ("Atlanta Marquis"); Desert Springs Marriott Limited
Partnership ("Desert Springs"); Hanover Marriott Limited Partnership
("Hanover"); Marriott Diversified American Hotels, Limited Partnership
("MDAH"); Marriott Hotel Properties, Limited Partnership ("MHP"); Marriott
Hotel Properties II, Limited Partnership ("MHP2"); Mutual Benefit Chicago
Marriott Suite Hotel Partners, Limited Partnership ("Chicago Suites") and
Potomac Hotel Limited Partnership ("PHLP") (collectively, the "Public
Partnerships"). The four private partnerships in which all or controlling
interests also were acquired include privately-held ownership interests in the
Atlanta Marriott Marquis; The Ritz-Carlton, Naples; The Ritz-Carlton, Buckhead;
the New York Marriott Marquis and the Hartford Marriott (collectively, the
"Private Partnerships"). The Company had previously not consolidated three of
the 12 partnerships. Those three partnerships are: 1) MDAH, the owner of six
full-service Marriott hotels; 2) PHLP, the owner of eight Marriott hotels (two
of which were previously consolidated) and 3) Chicago Suites, the owner of the
256-room Marriott O'Hare Suites. As a result of these transactions, the Company
has increased its ownership of most of the 28 properties to 100% while
consolidating 13 additional hotels (4,445 rooms).

1998 Dispositions. In 1998, the Company sold the 662-room New York Marriott
East Side for approximately $191 million and recorded a pre-tax gain of
approximately $40 million. The Company also sold the 191-room Napa Valley
Marriott for approximately $21 million and recorded a pre-tax gain of
approximately $10 million.

1999 Dispositions. In February 1999, the Company sold the 479-room
Minneapolis/Bloomington Marriott for approximately $35 million and recorded a
pre-tax gain of approximately $13 million.

1997 Acquisitions. In 1997, the Company acquired eight full-service hotels
totaling 3,600 rooms for approximately $145 million. In addition, the Company
acquired controlling interests in nine full-service hotels totaling 5,024 rooms
for approximately $621 million, including the assumption of approximately $418
million of debt. The Company also completed the acquisition of the 504-room New
York Marriott Financial Center, after acquiring the mortgage on the hotel for
$101 million in late 1996.

Also in 1997, the Company acquired the outstanding common stock of the Forum
Group from Marriott Senior Living Services. The Company purchased the Forum
Group portfolio of 29 senior living communities for approximately $460 million,
including approximately $270 million in debt. The Company also acquired 49% of
the remaining 50% interest in the partnership which owned the 418-unit Leisure
Park retirement community for approximately $23 million, including the
assumption of approximately $15 million of debt. The Company contributed these
assets in conjunction with the Distribution of Crestline.

1996 Acquisitions. In 1996, the Company acquired six full-service hotels
totaling 1,964 rooms for an aggregate purchase price of approximately $189
million. In addition, the Company acquired controlling interests in 17 full-
service hotels totaling 8,917 rooms for an aggregate purchase price of
approximately $1.1 billion, including the assumption of approximately $696
million of debt. The Company also purchased the first mortgage of the 504-room
New York Marriott Financial Center for approximately $101 million.

In the first and second quarters of 1996, the Company completed the sale and
leaseback of 16 of its Courtyard properties and 18 of its Residence Inn
properties for $349 million. The Company received net proceeds of approximately
$314 million and will receive approximately $35 million upon expiration of the
leases. A deferred gain of $45 million on the sale/leaseback transactions is
being amortized over the initial term of the leases.

47
<PAGE>

HOST MARIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's summarized, unaudited consolidated pro forma results of
operations, assuming the above transactions occurred on January 3, 1997, are as
follows (in millions, except per share amounts):

<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Revenues................................................... $4,220 $3,919
Income before extraordinary items.......................... 189 71
Net income (loss).......................................... 41 74
Basic earnings (loss) per common share:
Income before extraordinary items........................ .88 .33
Basic earnings (loss) per common share................... .19 .34
Diluted earnings (loss) per common share:
Income before extraordinary items........................ .83 .32
Diluted earnings (loss) per common share................. .25 .33
</TABLE>

13. Fair Value of Financial Instruments

The fair values of certain financial assets and liabilities and other
financial instruments are shown below:

<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(in millions)
<S> <C> <C> <C> <C>
Financial assets
Short-term marketable securities......... $ -- $ -- $ 354 $ 354
Receivables from affiliates.............. 134 141 23 26
Notes receivable......................... 69 69 29 46
Other.................................... 9 9 20 20
Financial liabilities
Debt, net of capital leases.............. 5,124 5,139 3,458 3,493
Other financial instruments
Convertible Preferred Securities......... -- -- 550 638
Convertible debt obligation to Host
Marriott................................ 567 466 -- --
</TABLE>

Short-term marketable securities and Convertible Preferred Securities and
convertible debt obligations to Host Marriott are valued based on quoted market
prices. Receivables from affiliates, notes and other financial assets are
valued based on the expected future cash flows discounted at risk-adjusted
rates. Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of the New Credit
Facility and other notes are estimated to be equal to their carrying value.
Senior notes are valued based on quoted market prices.

The fair value of the liability related to the interest rate swap agreements
assumed in the Blackstone Acquisition was $14 million. The fair value is based
on the estimated amount the Company would pay or receive to terminate the swap
agreements. The aggregate notional amount of the agreements was $365 million at
December 31, 1998 and $100 million at January 2, 1998.

14. Marriott International Distribution and Relationship with Marriott
International

The Company and Marriott International (formerly a wholly owned subsidiary,
the common stock of which was distributed to the Company's shareholders on
October 8, 1993) have entered into various agreements in connection with the
Marriott International Distribution and thereafter which provide, among other
things, that (i) the majority of the Company's hotel lodging properties are
managed by Marriott International under agreements with initial terms of 15 to
20 years and which are subject to renewal at the

48
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

option of Marriott International for up to an additional 16 to 30 years (see
Note 15); (ii) 13 of the Company's full-service properties are operated under
franchise agreements with Marriott International with terms of 15 to 30 years;
(iii) Marriott International provided the Company with $92 million of financing
at an average rate of 9% in 1997 related to the Company's discontinued senior
living operations; (iv) the Company acquired 49% of Marriott International's
50% interest in the Leisure Park retirement community in 1997 for $23 million,
including approximately $15 million of assumed debt; (v) Marriott International
guarantees the Company's performance in connection with certain loans and other
obligations ($70 million at December 31, 1998); (vi) the Company borrowed and
repaid $109 million of first mortgage financing for construction of the
Philadelphia Marriott (see Note 5); (vii) Marriott International and the
Company formed a joint venture and Marriott International provided the Company
with $29 million in debt financing at an average interest rate of 12.7% and $28
million in preferred equity in 1996 for the acquisition of two full-service
properties in Mexico City, Mexico; and (viii) Marriott International provides
certain limited administrative services.

In 1998, 1997 and 1996, the Company paid to Marriott International $196
million, $162 million and $101 million, respectively, in hotel management fees;
$4 million, $13 million and $18 million, respectively, in interest and
commitment fees under the debt financing and line of credit provided by
Marriott International, and $3 million, $3 million and $4 million,
respectively, for limited administrative services. The Company also paid
Marriott International $9 million, $4 million and $2 million, respectively, of
franchise fees in 1998, 1997 and 1996. In connection with the discontinued
senior living communities' business, the Company paid Marriott International
$13 million and $6 million in management fees during 1998 and 1997,
respectively.

Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in control
of the Company occur.

15. Hotel Management Agreements

Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages the Company's hotels,
generally for an initial term of 15 to 20 years with renewal terms at the
option of Marriott International of up to an additional 16 to 30 years. The
Agreements generally provide for payment of base management fees equal to one
to four percent of sales and incentive management fees generally equal to 20%
to 50% of Operating Profit (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not to
exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit. In the event of early termination of the Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Company has the option
to terminate certain management agreements if specified performance thresholds
are not satisfied. No agreement with respect to a single lodging facility is
cross-collateralized or cross-defaulted to any other agreement and a single
agreement may be canceled under certain conditions, although such cancellation
will not trigger the cancellation of any other agreement.

As a result of the REIT Conversion, all fees payable under the Agreements
for subsequent periods are the primary obligations of the Lessees. The
obligations of the Lessees are guaranteed to a limited extent by Crestline. The
Company remains obligated to the managers in case the Lessee fails to pay these
fees (but it would be entitled to reimbursement from the Lessee under the terms
of the Leases).

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

49
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

providing such services are allocated among all domestic hotels managed, owned
or leased by Marriott International or its subsidiaries. In addition, the
Company's hotels also participate in the Marriott Rewards program. The cost of
this program is charged to all hotels in the Marriott hotel system.

Crestline, as the Company's Lessee, is obligated to provide the manager with
sufficient funds to cover the cost of (a) certain non-routine repairs and
maintenance to the hotels which are normally capitalized; and (b) replacements
and renewals to the hotels' property and improvements. Under certain
circumstances, Crestline will be required to establish escrow accounts for such
purposes under terms outlined in the Agreements.

Crestline assumed franchise agreements with Marriott International for 10
hotels. Pursuant to these franchise agreements, Crestline generally pays a
franchise fee based on a percentage of room sales and food and beverage sales
as well as certain other fees for advertising and reservations. Franchise fees
for room sales vary from four to six percent of sales, while fees for food and
beverage sales vary from two to three percent of sales. The terms of the
franchise agreements are from 15 to 30 years.

Crestline assumed management agreements with The Ritz-Carlton Hotel Company,
LLC ("Ritz-Carlton"), an affiliate of Marriott International, to manage ten of
the Company's hotels. These agreements have an initial term of 15 to 25 years
with renewal terms at the option of Ritz-Carlton of up to an additional 10 to
40 years. Base management fees vary from two to five percent of sales and
incentive management fees are generally equal to 20% of available cash flow or
operating profit, as defined in the agreements.

Crestline also assumed management agreements with hotel management companies
other than Marriott International and Ritz-Carlton for 23 of the Company's
hotels (10 of which are franchised under the Marriott brand). These agreements
generally provide for an initial term of 10 to 20 years with renewal terms at
the option of either party or, in some cases, the hotel management company of
up to an additional one to 15 years. The agreements generally provide for
payment of base management fees equal to one to four percent of sales.
Seventeen of the 23 agreements also provide for incentive management fees
generally equal to 10 to 25 percent of available cash flow, operating profit,
or net operating income, as defined in the agreements.

16. Relationship with Crestline Capital Corporation

The Company and Crestline have entered into various agreements in connection
with the Distribution as discussed in Note 2 and further outlined below.

Distribution Agreement

Crestline and the Company entered into a distribution agreement (the
"Distribution Agreement"), which provided for, among other things, (i) the
distribution of shares of Crestline in connection with the Distribution; (ii)
the division between Crestline and the Company of certain assets and
liabilities; (iii) the transfer to Crestline of the 25% interest in the
Swissotel management company acquired in the Blackstone Acquisition and (iv)
certain other agreements governing the relationship between Crestline and the
Company following the Distribution. Crestline also granted the Company a
contingent right to purchase Crestline's interest in Swissotel Management (USA)
L.L.C. at fair market value in the event the tax laws are changed so that the
Company could own such interest without jeopardizing its status as a REIT.

Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate to Crestline, effective as of the date of the Distribution,
financial responsibilities for liabilities arising out of, or in connection
with, the business of the senior living communities.

50
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Asset Management Agreement

The Company and the Non-Controlled Subsidiaries entered into asset
management agreements (the "Asset Management Agreements") with Crestline
whereby Crestline agrees to provide advice on the operation of the hotels and
review financial results, projections, loan documents and hotel management
agreements. Crestline also agrees to consult on market conditions and
competition, as well as monitor and negotiate with governmental agencies,
insurance companies and contractors. Crestline will be paid a fee not to exceed
$4.5 million for each calendar year for its consulting services under the Asset
Management Agreements, which includes $0.25 million related to the Non-
Controlled Subsidiaries. The Asset Management Agreements each have terms of two
years with an automatic one year renewal, unless earlier terminated by either
party in accordance with the terms thereof.

Non-Competition Agreement

Crestline and the Company entered into a non-competition agreement that
limits the respective parties' future business opportunities. Pursuant to this
non-competition agreement, Crestline agrees, among other things, that until the
earlier of December 31, 2008, or the date on which it is no longer a Lessee of
more than 25% of the number of hotels owned by the Company at the time of the
Distribution, it will not own any full service hotel, manage any limited
service or full service hotel owned by the Company, or own or operate a full
service hotel franchise system operating under a common name brand, subject to
certain exceptions. In addition, the Company agrees not to participate in the
business of leasing, operating or franchising limited service or full service
properties, subject to certain exceptions.

1998 Employee Benefits and Other Employment Matters Allocation Agreement

As part of the REIT Conversion, the Company, the Operating Partnership and
Crestline entered into the 1998 Employee Benefits Allocation Agreement relating
to various compensation, benefits and labor matters. Under the agreement, the
Operating Partnership and Crestline each assumed certain liabilities related to
covered benefits and labor matters arising prior to the effective date of the
Distribution and relating to employees of each organization, respectively,
after the Distribution. The agreements also govern the treatment of awards
under the Comprehensive Plan and requires the adoption of such a plan by
Crestline and the Operating Partnership.

17. Litigation

The Company is and from time-to-time will be the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss resulting
from such matters will not have a material adverse effect on the financial
position or results of operations of the Company.

In the fourth quarter of 1997, the Company reached a settlement in a lawsuit
against Trinity Industries and others for claims related to construction of the
New York Marriott Marquis. In settlement of the lawsuit, the Company and its
affiliate received a cash settlement of approximately $70 million, the majority
of which was considered a recovery of construction costs and $10 million of
which has been recorded as other revenues in the accompanying consolidated
financial statements.

18. Geographic and Business Segment Information

The Company operates one business segment, hotel ownership. The Company's
hotels are primarily operated under the Marriott or Ritz-Carlton brands,
contain an average of nearly 465 rooms, as well as supply

51
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

other amenities such as meeting space and banquet facilities; a variety of
restaurants and lounges; gift shops and swimming pools. They are typically
located in downtown, airport, suburban and resort areas throughout the United
States.

The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest expense.
The Company's income taxes are included in the consolidated Federal income tax
return of the Company and its affiliates and is allocated based upon the
relative contribution to the Company's consolidated taxable income/loss and
changes in temporary differences. The allocation of taxes is not evaluated at
the segment level and, therefore, the Company does not believe the information
is material to the consolidated financial statements.

The following table presents revenues and other financial information,
excluding amounts related to the Company's discontinued senior living business
(in millions):

<TABLE>
<CAPTION>
1998
-----------------------------
Corporate
Hotels & Other Consolidated
------ --------- ------------
<S> <C> <C> <C>
Revenues.......................................... $3,492 $ 21 $3,513
Operating profit ................................. 618 43 661
Interest expense.................................. 328 7 335
Interest income................................... 37 14 51
Depreciation and amortization..................... 238 5 243
Capital expenditures.............................. 247 5 252
Total assets...................................... 7,902 360 8,262

<CAPTION>
1997
-----------------------------
Corporate
Hotels & Other Consolidated
------ --------- ------------
<S> <C> <C> <C>
Revenues.......................................... $2,806 $ 17 $2,823
Operating profit (loss)........................... 444 (12) 432
Interest expense.................................. 281 7 288
Interest income................................... 40 12 52
Depreciation and amortization..................... 226 5 231
Capital expenditures.............................. 154 4 158
Total assets...................................... 5,789 116 5,905

<CAPTION>
1996
-----------------------------
Corporate
Hotels & Other Consolidated
------ --------- ------------
<S> <C> <C> <C>
Revenues.......................................... $1,942 $ 15 $1,957
Operating profit (loss)........................... 256 (23) 233
Interest expense.................................. 228 9 237
Interest income................................... 31 17 48
Depreciation and amortization..................... 165 3 168
Capital expenditures.............................. 156 3 159
Total assets...................................... 4,770 382 5,152
</TABLE>

During most of 1998, the Company's foreign operations consisted of six full-
service hotel properties located in Mexico and Canada. As of December 31, 1998,
the Company's foreign operations had decreased to four Canadian hotel
properties, as the hotels in Mexico were contributed to Rockledge Hotel
Properties, Inc.

52
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

There were no intercompany sales between the properties and the Company. The
following table presents revenues and long-lived assets for each of the
geographical areas in which the Company operates (in millions):

<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Long-lived Long-lived Long-lived
Revenues Assets Revenues Assets Revenues Assets
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States...... $3,392 $7,112 $2,718 $4,412 $1,908 $3,587
International...... 121 89 105 222 49 218
------ ------ ------ ------ ------ ------
Total............. $3,513 $7,201 $2,823 $4,634 $1,957 $3,805
====== ====== ====== ====== ====== ======
</TABLE>

The long-lived assets for 1997 exclude $583 million of assets related to the
discontinued senior living business.

19. Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
1998
--------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
--------- --------- --------- ---------- ----------
(in millions, except per common share amounts)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 791 $ 839 $ 745 $ 1,138 $ 3,513
Operating profit before
minority interest,
corporate expenses and
interest................. 147 208 111 195 661
Income from continuing
operations............... 28 62 2 102 194
Income before
extraordinary items...... 30 66 4 95 195
Net income (loss)......... 30 66 (144) 95 47
Basic earnings (loss) per
common share:
Income from continuing
operations............. .13 .29 .01 .47 .90
Income before
extraordinary items.... .14 .31 .02 .44 .91
Net income (loss)....... .14 .31 (.67) .44 .22
Diluted earnings (loss)
per common share:
Income from continuing
operations............. .13 .26 .01 .43 .84
Income before
extraordinary items.... .14 .28 .02 .40 .85
Net income (loss)....... .14 .28 (.65) .40 .27

<CAPTION>
1997
--------------------------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
--------- --------- --------- ---------- ----------
(in millions, except per common share amounts)
<S> <C> <C> <C> <C> <C>
Revenues.................. $ 624 $ 643 $ 615 $ 941 $ 2,823
Operating profit before
minority interest,
corporate expenses and
interest................. 91 124 82 135 432
Income from continuing
operations............... 6 26 6 9 47
Income before
extraordinary items...... 6 26 6 9 47
Net income................ 11 26 6 7 50
Basic earnings per common
share:
Income from continuing
operations............. .03 .12 .03 .04 .22
Income before
extraordinary items.... .03 .12 .03 .04 .22
Net income.............. .05 .12 .03 .03 .23
Diluted earnings per
common share:
Income from continuing
operations............. .03 .12 .03 .04 .22
Income before
extraordinary items.... .03 .12 .03 .04 .22
Net income.............. .05 .12 .03 .03 .23
</TABLE>

53
<PAGE>

HOST MARRIOTT, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The quarterly data in the table above has been restated to reflect the
Company's senior living business as a discontinued operation and the impact of
the 1998 stock portion of the Special Dividend on earnings per share.

The first three quarters consist of 12 weeks each in both 1998 and 1997, and
the fourth quarter includes 16 weeks. The sum of the basic and diluted earnings
(loss) per common share for the four quarters in 1998 and 1997 differs from the
annual earnings per common share due to the required method of computing the
weighted average number of shares in the respective periods.

54
<PAGE>

PRO FORMA FINANCIAL INFORMATION OF HOST MARRIOTT, L.P.

The Operating Partnership was formed to facilitate the restructuring of
Host Marriott and to enable Host Marriott to qualify for treatment as a REIT
under the applicable Federal income tax regulations. In connection with the
REIT Conversion, substantially all of Host Marriott's and its subsidiaries
assets and liabilities were contributed to the Operating Partnership and its
subsidiaries. Host Marriott is the predecessor of the Operating Partnership
for purposes of financial presentation. Accordingly, the pro forma financial
information of the Operating Partnership set forth below is based on Host
Marriott's audited consolidated financial statements for the fiscal year ended
December 31, 1998. The consolidated financial statements for all periods have
been restated to present the operations of Host Marriott's senior living
business distributed to Crestline as a discontinued operation.

The pro forma financial information for the Operating Partnership reflects
various transactions effected as part of or contemporaneously with the REIT
Conversion, including (i) the distribution of Crestline common stock to the
shareholders of Host Marriott, (ii) certain acquisitions and dispositions
consummated by Host Marriott, its subsidiaries or the Operating Partnership
and certain financing transactions and (iii) certain other transactions
relating to the REIT Conversion.

The unaudited pro forma financial statements of the Operating Partnership
reflect the transactions described below for the fiscal year ended December
31, 1998 as if such transactions had been completed at the beginning of the
fiscal year presented.

Pro forma adjustments under the caption "Distribution Adjustments" include
an adjustment to record the obligation to Host REIT for the Subordinated
Debentures and the related elimination of the Convertible Preferred
Securities. The unaudited pro forma statements of operations presented below
include only income from continuing operations and therefore exclude the
operations of the discontinued senior living business.

Pro forma adjustments under the caption "Acquisitions, dispositions and
other activities" represent the transactions shown below:

. February 1999 Series D Senior Notes and the application of proceeds
therefrom

. Blackstone Acquisition

. August 1998 issuance of New Senior Notes and retirement of Old Senior
Notes

. December 1998 issuance of Series C Senior Notes and the application of
proceeds therefrom refinancing certain debt

. 1999 Disposition of one full service hotel

. 1998 acquisition of, or purchase of controlling interests in, eleven
full service hotels

. 1998 purchase of minority interests in two full service hotels

. 1998 disposition of two full service hotels

All of the above transactions except for the issuance of the Series D
Senior Notes and the 1999 disposition of one full service hotel are already
reflected in the Operating Partnership's consolidated balance sheet as of
December 31, 1998 and, therefore, no pro forma adjustments for these
transactions were necessary on the unaudited pro forma balance sheet.

Pro forma adjustments under the caption "REIT Conversion Activities"
include the following transactions comprising a portion of the REIT Conversion
(all of which are reflected in the historical balance sheet as of December 31,
1998):

. 1998 contribution of assets and liabilities to the Non-Controlled
Subsidiaries, including the sale of certain FF&E to the Non-Controlled
Subsidiaries

55
<PAGE>

. 1998 Public Partnership mergers

. 1998 acquisition of minority interests in four private partnerships in
exchange for OP Units

. 1998 lease of certain hotel properties to Crestline and conversion of
revenues and certain operating expenses to rental income

. 1998 adjustment to remove deferred taxes and the impact on the tax
provision resulting from the change in tax status related to the REIT
Conversion

. 1998 special dividend to Host Marriott shareholders of either .087
shares of Host REIT stock or $1.00 in cash per share of common stock, at
the election of each shareholder ("Special Dividend")

. 1998 sale of an investment in a subsidiary to Crestline

The unaudited pro forma financial statements do not purport to represent
what the results of operations of Host Marriott or the Operating Partnership
would actually have been if these transactions had in fact occurred on such
date or at the beginning of such period, or to project the results of
operations for any future period.

The unaudited pro forma financial statements are based upon available
information and upon certain assumptions, as set forth in the notes to the
unaudited pro forma financial statements, that the Operating Partnership
believes are reasonable under the circumstances. The unaudited pro forma
financial statements and accompanying notes should be read in conjunction with
Host Marriott, L.P.'s consolidated financial statements included in this Form
8-K.

56
<PAGE>

UNAUDITED PRO FORMA BALANCE SHEET
December 31, 1998
(in millions, except OP Unit amounts)

<TABLE>
<CAPTION>
A B
Debt
Host Issuance,
Marriott, L.P. 1999 Repayment Pro
Historical Disposition & Refinancing Forma
-------------- ----------- ------------- ------
<S> <C> <C> <C> <C>
Assets
Property and equipment, net... $ 7,201 $(21) $ -- $7,180
Notes and other receivables,
net.......................... 203 -- -- 203
Due from managers............. 19 -- -- 19
Investments in affiliates..... 33 -- -- 33
Other assets.................. 370 -- 7 377
Cash, cash equivalents and
short-term marketable
securities................... 436 34 293 464
(299)
------- ---- ----- ------
$ 8,262 $ 13 $ 1 $8,276
======= ==== ===== ======
Liabilities and Equity
Debt.......................... $ 5,698 $-- $ 300 $5,699
(299)
Accounts payable and accrued
expenses..................... 204 -- -- 204
Deferred income taxes......... 97 -- -- 97
Other liabilities............. 460 -- -- 460
------- ---- ----- ------
Total liabilities............. 6,459 -- 1 6,460
Minority interests............ 147 -- -- 147
Limited Partner interests of
third parties at redemption
value (on a historical pro
forma basis 64.5 million OP
Units outstanding or
currently issuable)(C)....... 892 -- -- 892
Equity
General Partner (on a
historical and pro forma
basis
.2 million OP Units
outstanding)(C) 1 -- -- 1
Limited Partner interests of
Host REIT (on a historical
and pro forma basis 225.4
million OP Units
outstanding)(C)............. 767 13 -- 780
Accumulated other
comprehensive income........ (4) -- -- (4)
------- ---- ----- ------
$ 8,262 $ 13 $ 1 $8,276
======= ==== ===== ======
</TABLE>

See Notes to the Unaudited Pro Forma Financial Statements.

57
<PAGE>

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
Fiscal Year 1998
(in millions, except per OP Unit amounts and ratios)

<TABLE>
<CAPTION>
Acquisitions, Dispositions and Other Activities
------------------------------------------------------------
D E F G H
Host
Marriott, Debt
L.P. 1998 Issuance,
Corporation Distribution Blackstone Acquisi- Repayment &
Historical Adjustment Acquisition tions Dispositions Refinancing
----------- ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $-- $ -- $ -- $ -- $ --
Hotel revenues.. 3,442 -- 459 116 (36) --
Net gains
(losses) on
property
transactions... 57 -- -- -- (53) --
Other revenues.. 14 -- -- -- -- --
----- ---- ----------- ----------- ----------- -----------
Total revenues.. 3,513 -- 459 116 (89) --
----- ---- ----------- ----------- ----------- -----------
OPERATING COSTS
AND EXPENSES
Hotels.......... 2,824 -- 382 98 (30) --
Other........... 28 -- -- -- -- --
----- ---- ----------- ----------- ----------- -----------
Total operating
costs and
expenses....... 2,852 -- 382 98 (30) --
----- ---- ----------- ----------- ----------- -----------
OPERATING
PROFIT......... 661 -- 77 18 (59) --
Minority
interest....... (52) -- -- (1) 1 --
Corporate
expenses....... (50) -- -- -- (1) --
REIT Conversion
expenses....... (64) -- -- -- -- --
Interest
expense........ (335) (38) (39) (1) 1 (54)
Dividends on
Convertible
Preferred
Securities..... (37) 37 -- -- -- --
Interest
income......... 51 -- (13) (16) (2) --
----- ---- ----------- ----------- ----------- -----------
Income (loss)
before income
taxes.......... 174 (1) 25 -- (60) (54)
Benefit
(provision) for
income taxes... 20 -- (10) -- 24 22
----- ---- ----------- ----------- ----------- -----------
Income (loss)
from continuing
operations..... $ 194 $ (1) $ 15 $ -- $ (36) $ (32)
===== ==== =========== =========== =========== ===========
Basic earnings
per OP Unit.... $0.90
=====
<CAPTION>
REIT Conversion Activities
---------------------------------------------------------------------------
I K L M O/Q J/N P
Non- Public Private Earnings Other Lease Income
Controlled Partnership Partner- & Profits REIT Conver- Tax Pro
Subsidiary Mergers ships Distribution Activities sion Adjustment Forma
---------- ----------- -------- ------------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rental
revenues....... $ -- $ -- $ -- $ -- $ -- $ 1,264 $ -- $1,264
Hotel revenues.. (73) 223 -- -- -- (4,131) -- --
Net gains
(losses) on
property
transactions... -- -- -- -- -- -- -- 4
Other revenues.. (3) -- -- -- -- -- -- 11
---------- ----------- -------- ------------ ---------- -------- ---------- -------
Total revenues.. (76) 223 -- -- -- (2,867) -- 1,279
---------- ----------- -------- ------------ ---------- -------- ---------- -------
OPERATING COSTS
AND EXPENSES
Hotels.......... (55) 194 2 -- -- (2,816) -- 599
Other........... (2) -- -- -- -- -- -- 26
---------- ----------- -------- ------------ ---------- -------- ---------- -------
Total operating
costs and
expenses....... (57) 194 2 -- -- (2,816) -- 625
---------- ----------- -------- ------------ ---------- -------- ---------- -------
OPERATING
PROFIT......... (19) 29 (2) -- -- (51) -- 654
Minority
interest....... 4 26 1 -- (2) -- -- (23)
Corporate
expenses....... 1 -- -- -- -- -- -- (50)
REIT Conversion
expenses....... -- -- -- -- 64 -- -- --
Interest
expense........ 7 (29) -- -- -- -- -- (488)
Dividends on
Convertible
Preferred
Securities..... -- -- -- -- -- -- -- --
Interest
income......... 4 1 -- (4) -- 6 -- 27
---------- ----------- -------- ------------ ---------- -------- ---------- -------
Income (loss)
before income
taxes.......... (3) 27 (1) (4) 62 (45) -- 120
Benefit
(provision) for
income taxes... 3 (11) -- 1 (25) 18 (48) (6)
---------- ----------- -------- ------------ ---------- -------- ---------- -------
Income (loss)
from continuing
operations..... $ -- $ 16 $ (1) $ (3) $ 37 $ (27) $ (48) $ 114
========== =========== ======== ============ ========== ======== ========== =======
Basic earnings
per OP Unit.... $ 0.39
=======
</TABLE>

See Notes to the Unaudited Pro Forma Financial Statements.

58
<PAGE>

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

A. Represents the adjustment to record the sale of the
Bloomington/Minneapolis Marriott:

. Record decrease in property and equipment of $21 million
. Record increase in cash of $34 million
. Record increase in equity of $13 million

B. Represents the adjustment to record the offering of Series D senior
notes:

. Record the issuance of $300 million of notes and the repayment or
acquisition of $299 million of debt.
. Record the deferred financing fees of $7 million

C. The number of OP Units includes the following (in millions):

<TABLE>
<S> <C>
Limited Partner interests of Host Marriott........................... 225.4
General Partner interests of Host Marriott........................... 0.2
Limited Partner interests of former partners of the Public
Partnerships........................................................ 13.8
Limited Partner interests of former partners of Private
Partnerships........................................................ 3.1
Limited Partner interests of Blackstone Entities..................... 47.6
-----
Total OP Units..................................................... 290.1
=====
</TABLE>

D. Represents the adjustment to eliminate the dividends on the Convertible
Preferred Securities of Host Marriott and record interest expense on the
Subordinated Debentures.

E. Represents the adjustment to record the historical revenues, operating
expenses, interest expense, income taxes and to reduce interest income
associated with the Blackstone Acquisition.

F. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, income taxes and to reduce
interest income associated with the 1998 acquisition of, or purchase of
controlling interests in 11 full-service hotels.

G. Represents the adjustment to historical revenues, operating expenses,
minority interest, interest expense, income taxes and to reduce interest income
for the 1998 sale of the New York Marriott East Side and the Napa Valley
Marriott, and the 1999 sale of the Minneapolis/Bloomington Marriott, including
the elimination of the non-recurring gains on the sales totalling $50 million
and related taxes of $20 million in 1998.

H. Represents the adjustment to record interest expense and related
amortization of deferred financing fees, reduce interest income, and to record
income taxes as a result of the New Senior Notes, the Series C Senior Notes,
the Series D Senior Notes and the repayment or refinancing of the various
mortgages, the Old Credit Facility and the Old Senior Notes. The adjustment
excludes the extraordinary loss of $148 million, net of taxes, related to the
Old Senior Notes resulting from the write-off of deferred financing fees and
the payment of bond tender and consent fees.

The following table represents the interest expense, including amortization
of deferred financing fees for the period:

<TABLE>
<CAPTION>
Fiscal Year
1998
-----------
<S> <C>
New Senior Notes.................................................. $(75)
Credit Facility................................................... (17)
Series C Senior Notes............................................. (34)
Series D Senior Notes............................................. (26)
Old Senior Notes.................................................. 72
Old Credit Facility............................................... 2
Debt repaid, refinanced or acquired with proceeds of Series C
Senior Notes..................................................... 17
Debt repaid, refinanced, or acquired with proceeds of Series D
Senior Notes..................................................... 24
----
$(37)
====
</TABLE>

59
<PAGE>

I. Represents the adjustment for revenues, operating expenses, minority
interest, interest expense, corporate expenses, income taxes and interest
income contributed to the Non-Controlled Subsidiaries and to reflect the
Operating Partnership's share of income as equity in earnings of affiliates.

J. Represents the adjustment to reduce depreciation expense of $8 million
for fiscal year 1998 related to certain furniture and equipment sold to the
Non-Controlled Subsidiaries, record interest income of approximately $1 million
for fiscal year 1998 earned on the 8.75%, $15 million in notes from the Non-
Controlled Subsidiaries and reduce the lease payment to the operating
partnership from the lessee.

K. Represents the adjustment to record the historical revenues, operating
expenses, minority interest, interest expense, interest income and income taxes
associated with the Public Partnership mergers, including three partnerships
not previously consolidated.

L. Represents the adjustment to record additional depreciation expense and
the decrease in minority interest expense related to the purchase of the
remaining minority interests in the Private Partnerships.

M. Represents the adjustment to reduce interest income and income taxes for
the $69 million cash payment of the Special Dividend to shareholders of Host
Marriott.

N. Represents the adjustment to remove hotel revenues of $4,131 million and
management fees and other expenses of $2,816 million for fiscal year 1998, and
to record rental revenues associated with the leasing of certain hotel
properties to Crestline and other lessees and interest income of $5 million for
fiscal year 1998 earned on the 5.12%, $95 million in notes from Crestline.
Rental revenues under the leases are based on the greater of percentage rent or
minimum rent. Total rent in the pro forma statements of operations is
calculated based on the historical gross sales of the property and the
negotiated rental rates and thresholds by property as if the leases were
entered into on the first day of fiscal year 1998. There are generally three
sales categories utilized in the rent calculation: rooms, food and beverage and
other. For rooms and food and beverage, there are three tiers of rent with two
thresholds, while the other category generally has two tiers of rent and one
threshold. The percentage rent thresholds are increased annually on the first
day of each year after the initial lease year based on a blended increase of
the consumer price index ("CPI") and a wage and benefit index.

O. Represents the adjustment to record minority interest expense related to
amendments to partnership agreements adjusted in connection with the REIT
Conversion.

P. Represents the adjustment to the income tax provision to reflect the REIT
Conversion including the elimination of the $106 million tax benefit recorded
in connection with the REIT Conversion.

Q. Represents the adjustment to eliminate non-recurring expenses incurred in
connection with the REIT Conversion.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOST
MARRIOTT, L.P. CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001061937
<NAME> HOST MARRIOTT, L.P.
<MULTIPLIER> 1,000,000
<CURRENCY> US

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-03-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 436
<SECURITIES> 0
<RECEIVABLES> 19
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,171
<DEPRECIATION> 970
<TOTAL-ASSETS> 8,262
<CURRENT-LIABILITIES> 0
<BONDS> 2,246
0
0
<COMMON> 0
<OTHER-SE> 764
<TOTAL-LIABILITY-AND-EQUITY> 8,262
<SALES> 0
<TOTAL-REVENUES> 3,513
<CGS> 0
<TOTAL-COSTS> 2,824
<OTHER-EXPENSES> 28
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 335
<INCOME-PRETAX> 174
<INCOME-TAX> 20
<INCOME-CONTINUING> 194
<DISCONTINUED> 1
<EXTRAORDINARY> (148)
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> .22
<EPS-DILUTED> .27

</TABLE>