<PAGE>
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 10, 1999 Commission File No. 0-25087
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-2095412
- ------------------------ -------------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No___
---
<TABLE>
<CAPTION>
Units outstanding
Class at October 19, 1999
- ------------- -------------------
<S> <C>
Units of limited partnership interest 293,335,128
Units of Class TS Cumulative Redeemable Preferred limited partnership interest 585,777
Units of Class A Cumulative Redeemable Preferred limited partnership interest 4,160,000
</TABLE>
<PAGE>
INDEX
-----
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
-------
Condensed Consolidated Balance Sheets - 3
September 10, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Thirty-six Weeks Ended
September 10, 1999 and September 11, 1998
Condensed Consolidated Statements of Cash Flows - 8
Thirty-six Weeks Ended September 10, 1999 and
September 11, 1998
Notes to Condensed Consolidated Financial Statements 10
Management's Discussion and Analysis of Results of 27
Operations and Financial Condition
Quantitative and Qualitative Disclosures about Market Risk 35
Part II. OTHER INFORMATION AND SIGNATURE 36
-2-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 10, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Property and equipment, net............................................................. $ 7,221 $ 7,201
Notes and other receivables (including amounts due from
affiliates of $131 million and $134 million, respectively).......................... 244 203
Rent receivable......................................................................... 63 --
Due from managers....................................................................... -- 19
Investments in affiliates............................................................... 48 33
Other assets............................................................................ 458 370
Cash and cash equivalents............................................................... 290 436
--------- ---------
$ 8,324 $ 8,262
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes........................................................................ $ 2,539 $ 2,246
Mortgage debt....................................................................... 2,255 2,438
Convertible debt obligation to Host Marriott........................................ 567 567
Other............................................................................... 356 447
--------- ---------
5,717 5,698
Accounts payable and accrued expenses................................................... 142 204
Deferred income taxes................................................................... 96 97
Other liabilities....................................................................... 383 460
--------- ---------
Total liabilities.................................................................. 6,338 6,459
--------- ---------
Minority interest....................................................................... 141 147
Class TS cumulative redeemable preferred limited partnership interests of third parties
at redemption value ("Class TS Preferred Units") (representing 0.6 million units and
0 units at September 10, 1999 and December 31, 1998, respectively).................. 6 --
Limited partnership interests of third parties at redemption value (representing
64.3 million units and 64.6 million units at September 10, 1999
and December 31, 1998, respectively)................................................ 611 892
Partners' Capital
General partner..................................................................... 1 1
Class A cumulative redeemable preferred limited partner units ("Class A Preferred
Units")........................................................................... 100 --
Limited partner..................................................................... 1,124 767
Accumulated other comprehensive income (loss)....................................... 3 (4)
--------- ---------
Total shareholders' equity........................................................ 1,228 764
--------- ---------
$ 8,324 $ 8,262
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-3-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
REVENUES
Rental income (Note 3).............................................................. $ 274 $ --
Hotel sales
Rooms............................................................................. -- 494
Food and beverage................................................................. -- 198
Other............................................................................. -- 49
Interest income..................................................................... 10 11
Net gains on property transactions.................................................. -- 1
Equity in earnings of affiliates.................................................... 3 2
Other............................................................................... 2 1
------- -------
Total revenues.................................................................... 289 756
------- -------
EXPENSES
Depreciation and amortization....................................................... 68 53
Property-level expenses............................................................. 62 67
Hotel operating expenses
Rooms............................................................................. -- 121
Food and beverage................................................................. -- 156
Other department costs and deductions............................................. -- 194
Management fees (including Marriott International
management fees of $36 million in 1998)........................................ -- 39
Minority interest................................................................... 3 6
Interest expense.................................................................... 108 79
Dividends on Host Marriott-obligated mandatorily
redeemable convertible preferred securities of a subsidiary
trust whose sole assets are the convertible subordinated
debentures due 2026 ("Convertible Preferred Securities").......................... -- 9
Corporate expenses.................................................................. 6 12
REIT Conversion expenses............................................................ -- 8
Other expenses.......................................................................... 1 4
------- -------
248 748
------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES........................................................................ 41 8
Provision for income taxes.............................................................. -- (6)
------- -------
INCOME FROM CONTINUING OPERATIONS....................................................... 41 2
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAXES....................................... -- 2
------- -------
INCOME BEFORE EXTRAORDINARY ITEM........................................................ 41 4
Extraordinary gain (loss)............................................................... 4 (148)
------- -------
NET INCOME (LOSS)....................................................................... $ 45 $ (144)
======= =======
Less: Distributions on Class A Preferred Units......................................... (1) --
------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON UNITHOLDERS....................................... $ 44 $ (144)
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twelve weeks ended September 10, 1999 and September 11, 1998
(unaudited)
<TABLE>
<S> <C> <C>
BASIC EARNINGS PER UNIT:
CONTINUING OPERATIONS................................................................... $ 0.13 $ 0.01
Discontinued operations (net of income taxes)........................................... -- 0.01
Extraordinary gain (loss)............................................................... 0.02 (0.69)
-------- --------
BASIC EARNINGS (LOSS) PER UNIT:......................................................... $ 0.15 $ (0.67)
======== ========
DILUTED EARNINGS PER UNIT:
CONTINUING OPERATIONS................................................................... $ 0.13 $ 0.01
Discontinued operations (net of income taxes)........................................... -- 0.01
Extraordinary gain (loss)............................................................... 0.02 (0.67)
-------- --------
DILUTED EARNINGS (LOSS) PER UNIT........................................................ $ 0.15 $ (0.65)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six weeks ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
REVENUES
Rental income (Note 3)........................................................................ $ 885 $ --
Hotel sales...................................................................................
Rooms...................................................................................... -- 1,514
Food and beverage.......................................................................... -- 642
Other...................................................................................... -- 159
Interest income............................................................................... 26 35
Net gains on property transactions............................................................ 16 53
Equity in earnings of affiliates.............................................................. 5 1
Other ........................................................................................ 5 6
-------- --------
Total revenues............................................................................ 937 2,410
-------- --------
EXPENSES
Depreciation and amortization............................................................. 201 166
Property-level expenses................................................................... 182 189
Hotel operating expenses
Rooms................................................................................... -- 348
Food and beverage....................................................................... -- 477
Other department costs and deductions................................................... -- 568
Management fees (including Marriott International management fees of $138
million in 1998)..................................................................... -- 147
Minority interest......................................................................... 16 36
Interest expense.......................................................................... 325 231
Dividends on Host Marriott-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust whose sole assets are the convertible subordinated
debentures due 2026 ("Convertible Preferred Securities")................................ -- 26
Corporate expenses........................................................................ 22 33
REIT conversion expenses.................................................................. -- 14
Other expenses............................................................................ 10 14
-------- --------
756 2,249
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......................................... 181 161
Provision for income taxes.................................................................... -- (69)
-------- --------
INCOME FROM CONTINUING OPERATIONS............................................................. 181 92
INCOME FROM DISCONTINUED OPERATIONS, net of taxes............................................. -- 8
-------- --------
INCOME BEFORE EXTRAORDINARY ITEM.............................................................. 181 100
Extraordinary gain (loss)..................................................................... 17 (148)
-------- --------
NET INCOME (LOSS)............................................................................. $ 198 $ (48)
======== ========
Less: Distributions on Class A Preferred Units................................................ (1) --
-------- --------
NET INCOME (LOSS) AVAILABLE TO COMMON UNITHOLDERS....................................... $ 197 $ (48)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-6-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Thirty-six weeks ended September 10, 1999 and September 11, 1998
(unaudited)
<TABLE>
<S> <C> <C>
BASIC EARNINGS PER UNIT:
CONTINUING OPERATIONS................................................................... $ 0.62 $ 0.42
Discontinued operations (net of income taxes)........................................... -- 0.04
Extraordinary gain (loss)............................................................... 0.06 (0.69)
-------- --------
BASIC EARNINGS (LOSS) PER UNIT:......................................................... $ 0.68 $ (0.23)
======== ========
DILUTED EARNINGS PER UNIT:
CONTINUING OPERATIONS................................................................... $ 0.60 $ 0.42
Discontinued operations (net of income taxes)........................................... -- 0.03
Extraordinary gain (loss)............................................................... 0.06 (0.67)
-------- --------
DILUTED EARNINGS (LOSS) PER UNIT........................................................ $ 0.66 $ (0.22)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-7-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
Thirty-six weeks ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations....................................................... $ 181 $ 92
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization....................................................... 203 168
Income taxes........................................................................ -- 50
Gain on sale of hotel properties.................................................... (16) (50)
Equity in earnings of affiliates.................................................... (5) (1)
Changes in operating accounts....................................................... (127) (35)
Other............................................................................... 20 30
-------- --------
Cash from continuing operations..................................................... 256 254
Cash from discontinued operations................................................... -- 24
-------- --------
Cash from operations................................................................ 256 278
-------- --------
INVESTING ACTIVITIES
Proceeds from sales of assets........................................................... 49 211
Acquisitions............................................................................ (17) (607)
Capital expenditures:
Renewals and replacements........................................................... (143) (108)
Development projects................................................................ (102) (32)
Other investments................................................................... (16) (19)
Purchases of short-term marketable securities........................................... -- (134)
Sales of short-term marketable securities............................................... -- 451
Note receivable advances, net of collections............................................ (47) 4
Affiliate collections, net.............................................................. -- 13
Other................................................................................... -- (12)
-------- --------
Cash used in investing activities from continuing operations........................ (276) (233)
Cash used in investing activities from discontinued operations...................... -- (10)
-------- --------
Cash used in investing activities................................................... (276) (243)
-------- --------
FINANCING ACTIVITIES
Issuances of debt, net.................................................................. 1,282 2,004
Issuances of Class A Preferred Units.................................................... 100 --
Issuances of common units............................................................... 2 --
Distributions........................................................................... (195) --
Scheduled principal repayments.......................................................... (26) (39)
Debt prepayments........................................................................ (1,275) (1,631)
Costs of extinguishment of debt......................................................... (2) (175)
Other................................................................................... (12) (14)
-------- --------
Cash (used in) from financing activities from continuing operations................. (126) 145
Cash used in financing activities from discontinued operations...................... -- (152)
-------- ---------
Cash used in financing activities................................................... (126) (7)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ $ (146) $ 28
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-8-
<PAGE>
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
Thirty-six weeks ended September 10, 1999 and September 11, 1998
(unaudited, in millions)
Supplemental schedule of noncash investing and financing activities:
Approximately 586,000 Class TS Preferred Units valued at $7.4 million were
issued in connection with the acquisition by merger of two partnerships that own
limited partnership interests in the partnership that owns the New York Marriott
Marquis.
In the first quarter of 1998, the Company assumed $164 million of mortgage debt
for the acquisition of, or purchase of controlling interests in, certain hotel
properties.
See Notes to Condensed Consolidated Financial Statements
-9-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
Host Marriott Corporation ("Host Marriott"), operating through an umbrella
partnership REIT structure, is the owner of hotel properties. Host Marriott
operates as a self-managed and self-administered real estate investment
trust ("REIT") and its operations are conducted through an operating
partnership and its subsidiaries. As REITs are not currently permitted to
derive revenues directly from the operation of hotels, Host Marriott leases
substantially all of its hotels to subsidiaries of Crestline Capital
Corporation ("Crestline" or the "Lessee") and certain other lessees.
In these condensed consolidated financial statements, the "Company" or
"Host Marriott" refers to Host Marriott Corporation and its consolidated
subsidiaries before, and Host Marriott, L.P. and its consolidated
subsidiaries (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 December 15, 1998, shareholders 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 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 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 (the "Distribution"). In
connection with the REIT Conversion, Host Marriott contributed its hotels
and substantially all of its other assets and liabilities to the Operating
Partnership and subsidiaries (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 September 10,
1999, Host Marriott owned approximately 78% of the Operating Partnership.
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. All historical
financial statements presented have been restated to conform to this
presentation.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of
the Company and its subsidiaries have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. However, the unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of September 10,
1999 and December 31, 1998, and the results of operations for the twelve
and thirty-six weeks ended September 10, 1999 and September 11, 1998 and
cash flows for the thirty-six weeks
-10-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ended September 10, 1999 and September 11, 1998. The statements of
operations for the twelve and thirty-six weeks ended September 11, 1998 and
the cash flows for the thirty-six weeks ended September 11, 1998 reflect
the historical results of Host Marriott Corporation as discussed in Note 1.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
The Company's leases have remaining terms ranging from 2 to 10 years,
subject to earlier termination upon the occurrence of certain
contingencies, as defined. The rent due under each lease is the greater of
base rent or percentage rent, as defined. Percentage rent applicable to
room, food and beverage and other types of hotel revenue varies by lease
and is calculated by multiplying fixed percentages by the total amounts of
such revenues over specified threshold amounts. Both the minimum rent and
the revenue thresholds used in computing percentage rents are subject to
annual adjustments based on increases in the United States Consumer Price
Index and the Labor Index, as defined. Certain amounts of the percentage
rent recognized are considered contingent until such time as the revenue
recognized exceeds annual thresholds, which are determined individually by
property. For the twelve and thirty-six weeks ended September 10, 1999, $86
million and $339 million of contingent rent is included in the statement of
operations, respectively.
3. Rental Revenue
The Company's 1999 revenue primarily represents the rental income from its
leased hotels and is not comparable to 1998 hotel revenues which reflect
gross sales generated by the properties. Also, in December 1998 the Company
retroactively adopted Emerging Issues Task Force Issue No. 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Management Entities and Certain Other Entities with Contractual Management
Arrangements." The impact of the adoption of Issue 97-2 on the condensed
consolidated financial statements for the twelve and thirty-six weeks ended
September 11, 1998 was to increase both revenues and operating expenses by
approximately $471 million and $1,393 million, respectively, with no impact
on net income or earnings per share.
The comparison of the 1999 results with 1998 is also affected by a change
in the reporting period for the Company's hotels not managed by Marriott
International. The 1998 year to date historical results would have to be
adjusted to exclude the results of these hotels for December 1997 and
include August 1998 for the thirty-six weeks ended September 11, 1998 in
order to be comparable to the 1999 period results as reported. Also, for
the third quarter the 1998 historical results would have to be adjusted to
exclude the results of these hotels for May 1998 and include August 1998
for the twelve weeks ended September 11, 1998 in order to be comparable to
the 1999 period results as reported.
The table below represents hotel sales for which rental income is computed
for 1999.
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------- -----------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Hotel Sales
Rooms............................. $ 609 $ 494 $ 1,881 $ 1,514
Food and beverage................. 250 198 828 642
Other............................. 66 49 201 159
------------- ------------- ------------- -------------
Total hotel sales............... $ 925 $ 741 $ 2,910 $ 2,315
============= ============= ============= =============
</TABLE>
-11-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Earnings Per Unit
Basic earnings per common unit is computed by dividing net income less
dividends on preferred limited partner interests by the weighted average
number of common units outstanding. Diluted earnings per unit is computed
by dividing net income less dividends on preferred limited partner units as
adjusted for potentially dilutive securities, by the weighted average
number of common units outstanding plus other potentially dilutive
securities. Dilutive securities may include units distributed to Host
Marriott Corporation for Host Marriott Corporation common shares granted
under comprehensive stock plans, warrants and the Convertible Preferred
Securities. Dilutive securities also include those common and preferred
Operating Partnership Units ("OP Units") issuable or outstanding that are
held by minority partners which are assumed to be converted. Diluted
earnings per unit was not adjusted for the impact of the Convertible
Preferred Securities as they were anti-dilutive for all periods presented.
<TABLE>
<CAPTION>
Twelve weeks ended
-------------------------------------------------------------------------
September 10, 1999 September 11, 1998
---------------------------------- ------------------------------------
Income Units Per Unit Income Units Per Unit
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income................................... $ 45 292.9 $ .15 $ (144) 216.2 $ (.67)
Distributions on Class A Preferred Units.... (1) -- -- -- -- --
-------- --------- -------- --------- --------- --------
Basic earnings available to common
unitholders per unit........................ 44 292.9 .15 (144) 216.2 (.67)
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
Corporation common shares granted under
the Host Marriott comprehensive stock
plan, less shares assumed purchased at
average market price....................... -- 5.3 -- -- 4.0 .02
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
common shares issuable for warrants, less
shares assumed purchased at average
market price............................... -- -- -- -- 0.1 --
Assuming conversion of Class TS Preferred
Units...................................... -- 0.6 -- -- -- --
Assuming issuance of OP Units issuable
under certain purchase agreements.......... 2 9.1 -- -- -- --
Assuming conversion of Convertible
Preferred Securities....................... -- -- -- -- -- --
-------- --------- -------- --------- --------- --------
Diluted Earnings per Unit.................... $ 46 307.9 $ .15 $ (144) 220.3 $ (.65)
======== ========= ======== ========= ========= ========
</TABLE>
-12-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Thirty-six Weeks Ended
------------------------------------------------------------------------
September 10, 1999 September 11, 1998
------------------------------------------------------------------------
Income Units Per Unit Income Units Per Unit
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income.................................... $ 198 292.4 $ .68 $ (48) 216.0 $ (.23)
Distributions on Class A preferred units..... (1) -- -- -- -- --
-------- --------- -------- ---------- ---------- --------
Basic earnings available to common
unitholders per unit......................... 197 292.4 .68 (48) 216.0 (.23)
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
Corporation common shares granted under
the Host Marriott comprehensive stock
plan, less shares assumed purchased at
average market price........................ -- 5.6 (.02) -- 4.2 .01
Assuming distribution of units to Host
Marriott Corporation for Host Marriott
common shares issuable for warrants, less
shares assumed purchased at average
market price................................ -- -- -- -- 0.1 --
Assuming conversion of Class TS Preferred
Units....................................... -- 0.6 -- -- -- --
Assuming issuance of OP Units issuable
under certain purchase agreements........... 6 9.1 -- -- -- --
Assuming conversion of Convertible
Preferred Securities........................ -- -- -- -- -- --
-------- --------- -------- ---------- ---------- --------
Diluted Earnings per Unit..................... $ 203 307.7 $ .66 $ (48) 220.3 $ (.22)
======== ========= ======== ========== ========== ========
</TABLE>
In September 1999, the Board of Directors of Host Marriott Corporation
approved the repurchase, from time to time on the open market and/or in
privately negotiated transactions, of up to 22 million of the outstanding
shares of Host Marriott common stock or a corresponding amount (based on
the appropriate conversion ratio) of Host Marriott Convertible Preferred
Securities. Such repurchases will be made at management's discretion,
subject to market conditions, and may be suspended at any time at Host
Marriott Corporation's discretion. Additionally, under the terms of the
partnership agreement, an equivalent number of OP units will also be
repurchased on a one-for-one basis from Host Marriott Corporation.
Subsequent to quarter end, Host Marriott has spent approximately $7.7
million to repurchase 797,000 shares.
5. Class A Cumulative Redeemable Preferred Limited Partner Interest
In August 1999, Host Marriott sold 4.16 million shares of 10% Class A
cumulative redeemable preferred stock ("Class A Preferred Shares") with a
$0.01 par value and we issued an equivalent security, the Class A Preferred
Units to Host Marriott Corporation. Holders of the shares are entitled to
receive cumulative cash dividends at a rate of 10% per annum of the $25.00
per share liquidation preference. Dividends are payable quarterly in
arrears commencing October 15, 1999. A corresponding distribution on the
Class A Preferred Units is also payable quarterly in arrears commencing
October 15, 1999. After August 3, 2004 Host Marriott Corporation has the
option to redeem the Class A Preferred Shares for $25.00 per share, plus
accrued and unpaid dividends to the date of redemption. The Class A
Preferred Units rank senior to the common units and the Class TS Preferred
Units. The Class A Preferred shareholders generally have no voting rights.
Cumulative cash distributions on the Class A Preferred Units have been
accrued from the date of issuance, August 3, 1999, through the balance
sheet date. The Company declared a pro rata distribution of $0.50 per unit
on September 23, 1999, which was paid on October 15, 1999.
-13-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Dividends and Distributions Payable
On September 23, 1999, the Board of Directors of Host Marriott declared a
cash dividend of $0.21 per share of Host Marriott Corporation common stock
and a corresponding distribution of $0.21 per OP Unit, which was paid on
October 15, 1999 to shareholders and unitholders of record on September 30,
1999. Total dividends and corresponding distributions year to date are
$0.63 per share and per unit, respectively.
The 1998 earnings per share has been restated to reflect the impact of the
stock portion of a special dividend totaling 11.9 million shares of common
stock issued in February, 1999 as a result of the REIT Conversion.
7. Acquisitions and Property Expansions
On December 30, 1998, the Company acquired a portfolio of twelve luxury
hotels and other assets (the "Blackstone Acquisition") from the Blackstone
Group, a Delaware limited partnership, and a series of funds controlled by
affiliates of Blackstone Real Estate Partners. Approximately 467,000 OP
Units issued in connection with the Blackstone Acquisition were redeemed
for common stock of Host Marriott Corporation during the third quarter of
1999.
The Company completed a 210-room expansion of the Philadelphia Marriott in
April 1999 at a cost of approximately $37 million.
In June 1999, the Company acquired by merger Timewell Group, L.P. and
Timeport, L.P. which each own limited partnership interests in the
partnership that owns the New York Marriott Marquis. As part of the merger,
the general partners of Timewell Group, L.P. and Timeport, L.P. received
345,559 and 240,218 Class TS Preferred Units, respectively. The Class TS
Preferred Units are convertible into OP Units on a one-for-one basis,
subject to certain adjustments, at any time beginning one year after the
merger at the option of the holders. At any time beginning two years after
the merger, the Company can redeem the Class TS Preferred Units for OP
Units or cash. Also as part of the merger, the Company repaid in cash
outstanding Partner loans totaling $5.9 million on behalf of each of the
partnerships.
8. Dispositions
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a gain of $10 million. In May 1999,
the Company sold the 221-room Saddle Brook Marriott for $15 million and
recorded a gain of $4 million.
In the fourth quarter, the Company sold the 306-room Grand Hotel Resort and
Golf Club for $28 million, recognizing a loss of $1 million. The Company
also announced it has reached an agreement to sell the Ritz-Carlton Boston
for total proceeds of approximately $122 million in 1999, subject to normal
closing requirements.
9. Debt Issuances and Refinancing
In February 1999, the Company issued $300 million of 83/8% Series D senior
notes due in 2006. The senior notes were used to refinance, or purchase,
debt which had been acquired through the merger of certain partnerships or
the purchase of hotel properties in connection with the REIT Conversion in
-14-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 1998. The notes were exchanged during the third quarter for Series
E senior notes on a one-for-one basis, which are freely transferable by the
holders.
In April 1999, a subsidiary of the Company completed the refinancing of the
$245 million mortgage on the New York Marriott Marquis, maturing June 2000.
The Company was required to make a principal payment of $1.25 million on
June 30, 1999. In connection with the refinancing, the Company renegotiated
the management agreement and recognized an extraordinary gain of $13
million on the forgiveness of accrued incentive management fees by the
manager. This mortgage was subsequently refinanced as part of the $665
million financing agreement discussed below.
In June 1999, the Company refinanced the debt on the San Diego Marriott
Hotel and Marina. The mortgage is for $195 million for a term of 10 years
at a rate of 8.45%. In addition, the Company issued $23 million of mortgage
debt on the Philadelphia Marriott expansion in July 1999 at an interest
rate of approximately 8.6%, maturing 2009.
In July 1999, the Company entered into a financing agreement pursuant to
which it borrowed $665 million due 2009 at a fixed interest rate of 7.47%.
The New York Marriott Marquis as well as seven other hotels serve as
collateral. The proceeds from this financing were used to refinance
existing mortgage indebtedness maturing at various times through 2000.
In August 1999, the Company repaid $100 million of the outstanding balance
on a $350 million term loan entered into in August 1998 as part of its
$1.25 billion line of credit. During the fourth quarter an additional $50
million repayment was made, reducing the outstanding balance of the term
loan to $200 million. Subsequent to these repayments, the available
capacity under the line of credit balance remains $900 million while the
total line has been permanently reduced to $1.1 billion as a result of the
term loan payments.
In August 1999, the Company made a prepayment of $19 million to pay down in
full the mezzanine mortgage on the Marriott Desert Springs Resort and Spa.
In September 1999, the Company made a prepayment of $45 million to pay down
in full the mortgage note on the Philadelphia Four Seasons Hotel.
10. Geographic and Business Segment Information
The Company operates in one business segment, hotel ownership. The
Company's hotels are primarily operated under the Marriott or Ritz-Carlton
brands. Substantially all of the Company's revenues are earned through
leases with Crestline. With respect to 1998, the allocation of taxes is not
evaluated at the segment level or reflected in the following information
because the Company does not believe the information is material to the
readers of the financial statements.
The Company's segmented revenues and income (loss) from continuing
operations before income taxes are as follows (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
----------------------------------------------------
Hotels Corporate & Other Consolidated
--------- ------------------- --------------
<S> <C> <C> <C>
Revenues..................................... $ 287 $ 2 $ 289
Income (loss) from continuing operations
before income taxes........................ 56 (15) 41
</TABLE>
-15-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 11, 1998
-------------------------------------------------
Hotels Corporate & Other Consolidated
-------- ------------------- ---------------
<S> <C> <C> <C>
Revenues....................................... $ 752 $ 4 $ 756
Income (loss) from continuing operations
before income taxes........................ 38 (30) 8
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
-------------------------------------------------
Hotels Corporate & Other Consolidated
-------- ------------------- ---------------
<S> <C> <C> <C>
Revenues....................................... $ 926 $ 11 $ 937
Income (loss) from continuing operations
before income taxes........................ 228 (47) 181
<CAPTION>
Thirty-six Weeks Ended September 11, 1998
-------------------------------------------------
Hotels Corporate & Other Consolidated
-------- ------------------- ---------------
<S> <C> <C> <C>
Revenues....................................... $ 2,350 $ 60 $ 2,410
Income (loss) from continuing operations
before income taxes........................ 191 (30) 161
</TABLE>
As of September 10, 1999, the Company's foreign operations consisted of
four hotel properties located in Canada. There were no intercompany sales
between the properties and the Company. The following table presents rental
revenues in 1999 and hotel revenues in 1998 for each of the geographical
areas in which the Company owns hotels (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------------------------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
United States.................................. $ 268 $ 713 $ 869 $ 2,237
International.................................. 6 28 16 78
------ ------ ------ -------
Total...................................... $ 274 $ 741 $ 885 $ 2,315
====== ====== ====== =======
</TABLE>
11. Comprehensive Income
The Company's other comprehensive income consists of foreign currency
translation adjustments and the right to receive up to 1.4 million shares
of Host Marriott Services Corporation's common stock or an equivalent cash
value, at Host Marriott Services Corporation's option, subsequent to the
exercise of the options held by certain former and current employees of
Marriott International. For the twelve and thirty-six weeks ended September
10, 1999, comprehensive income totaled $51 million and $205 million,
respectively. The comprehensive loss was $148 million and $51 million for
the twelve and thirty-six weeks ended September 11, 1998. As of September
10, 1999 the Company's accumulated other comprehensive income was
approximately $3 million. As of December 31, 1998, the Company's
accumulated other comprehensive loss was approximately $4 million
On August 27, 1999, Autogrill Acquisition Co., a wholly-owned subsidiary of
Autogrill SpA of Italy, completed its cash tender offer for all the
outstanding shares of common stock of Host Marriott Services Corporation.
Since Host Marriott Services Corporation is no longer publicly traded, the
Company has adjusted the unrealized gain on the receivable to reflect the
tender price of $15.75. Further, all future payments to the Company will be
made in cash as Host Marriott Services Corporation has indicated that the
receivable will not be settled in Autogrill stock.
-16-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
12. Subsequent Events
In September 1999, the mortgage note receivable on a hotel property matured
and the Company collected the outstanding balance of approximately $65
million. The note was originally acquired as part of the Blackstone
Acquisition.
In October 1999, the Company initiated a tender offer to acquire the
remaining partnership interests in the Hopewell Group, Ltd., a minority
owner in the Atlanta Marriott Marquis, for preferred OP Units and cash.
13. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of September 10, 1999, almost all the properties
of the Company and its subsidiaries were leased to Crestline Capital
Corporation and managed by Marriott International, Inc. In conjunction with
these leases, Crestline and certain of its subsidiaries entered into
limited guarantees of the lease obligations of each lessee. The full-
service hotel leases are grouped into four lease pools, with Crestline's
guarantee limited to the greater of 10% of the aggregate rent payable for
the preceding year or 10% of the aggregate rent payable under all leases in
the respective pool. Additionally, the lessee's obligation under each lease
agreement is guaranteed by all other lessees in the respective lease pool.
As a result, the Company believes that the operating results of each full-
service lease pool may be material to the Company's financial statements.
Financial information of certain pools related to the sublease agreements
for limited service properties are not presented, as the Company believes
they are not material to the Company's financial statements. Financial
information of Crestline may be found in its quarterly and annual filings
with the Securities and Exchange Commission. Further information regarding
these leases and Crestline's limited guarantees may be found in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1998. The results of operations for the twelve and thirty-six weeks ended
September 10, 1999 and summarized balance sheet data as of September 10,
1999 of the lease pools in which the Company's hotels are organized are as
follows (in millions):
-17-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
-------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms..................................... $ 135 $ 142 $ 126 $ 128 $ 531
Food and beverage......................... 57 59 55 67 238
Other..................................... 16 15 16 17 64
----- ----- ----- ----- -----
Total hotel sales.................... 208 216 197 212 833
Operating Costs and Expenses
Rooms..................................... 34 40 32 30 136
Food and beverage......................... 46 48 44 50 188
Other..................................... 58 50 54 55 217
Management fees........................... 9 13 9 13 44
Lease expense............................. 57 59 56 61 233
----- ----- ----- ----- -----
Total operating expenses............. 204 210 195 209 818
----- ----- ----- ----- -----
Operating Profit............................... 4 6 2 3 15
Corporate and Interest Expenses................ (1) (1) -- (1) (3)
----- ----- ----- ----- -----
Income before taxes...................... 3 5 2 2 12
Income taxes............................. (1) (3) (1) (1) (6)
----- ----- ----- ----- -----
Net Income........................... $ 2 $ 2 $ 1 $ 1 $ 6
===== ===== ===== ===== =====
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
-----------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms..................................... $ 408 $ 436 $ 394 $ 401 $ 1,639
Food and beverage......................... 184 196 183 220 783
Other..................................... 46 44 54 51 195
----- ----- ----- ----- -------
Total hotel sales.................... 638 676 631 672 2,617
Operating Costs and Expenses
Rooms..................................... 98 108 95 88 389
Food and beverage......................... 143 150 135 154 582
Other..................................... 168 157 161 158 644
Management fees........................... 29 43 30 46 148
Lease expense............................. 190 206 202 218 816
----- ----- ----- ----- -------
Total operating expenses............. 628 664 623 664 2,579
----- ----- ----- ----- -------
Operating Profit............................... 10 12 8 8 38
Corporate and Interest Expenses................ (2) (2) (1) (2) (7)
----- ----- ----- ----- -------
Income before taxes...................... 8 10 7 6 31
Income taxes............................. (3) (5) (3) (2) (13)
----- ----- ----- ----- -------
Net Income........................... $ 5 $ 5 $ 4 $ 4 $ 18
===== ===== ===== ===== =======
<CAPTION>
As of September 10, 1999
------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Assets......................................... $ 43 $ 32 $ 35 $ 34 $ 144
Liabilities.................................... 38 27 31 30 126
Equity......................................... 5 5 4 4 18
</TABLE>
-18-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
14. Supplemental Guarantor and Non-Guarantor Subsidiary Information
All subsidiaries of the operating partnership guarantee the Company's
senior notes except those among the twenty full service hotels listed below
and HMH HPT Residence Inn, LLC and HMH HPT Courtyard, LLC, the lessees of
the Residence Inn and Courtyard properties, respectively. The separate
financial statements of each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented because management has concluded that such
financial statements are not material to investors. The guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several and
each Guarantor Subsidiary is a wholly owned subsidiary of the Company. The
non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") own the
following full-service hotels: the Albany Marriott; Atlanta Marriott
Marquis; Grand Hyatt, Atlanta; Harbor Beach Resort; Hartford Marriott;
Hyatt Regency, Cambridge; Hyatt Regency, Reston; Manhattan Beach Marriott;
Minneapolis Southwest Marriott; New York Marriott Marquis; Ontario Airport
Marriott; Pittsburgh City Center Marriott; The Ritz-Carlton, Amelia Island;
San Diego Marriott Hotel and Marina; San Diego Mission Valley; Swissotel,
Atlanta; Swissotel, Boston; Swissotel, Chicago; The Drake (Swissotel) New
York; and the Oklahoma City Waterford Marriott.
The following condensed combined consolidating information sets forth the
financial position as of September 10, 1999 and December 31, 1998 and
results of operations for the twelve and thirty-six weeks ended September
10, 1999 and September 11, 1998, and cash flows for the thirty-six weeks
ended September 10, 1999 and September 11, 1998 of the parent, Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries.
-19-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Consolidating Balance Sheets
(in millions)
September 10, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Property and equipment, net.................. $ 1,224 $ 3,787 $ 2,210 $ -- $ 7,221
Investments in affiliate..................... 1,685 -- -- (1,637) 48
Notes and other receivables.................. 840 53 19 (668) 244
Other assets................................. 165 178 215 (37) 521
Cash and cash equivalents.................... 119 148 23 -- 290
------- ------- ------- -------- -------
Total assets.............................. $ 4,033 $ 4,166 $ 2,467 $ (2,342) $ 8,324
======= ======= ======= ======== =======
Debt......................................... $ 1,317 $ 3,014 $ 1,173 $ (354) $ 5,150
Convertible debt obligations to Host Marriott 567 -- -- -- 567
Deferred income taxes........................ 57 32 7 -- 96
Other liabilities............................ 234 446 196 (351) 525
------- ------- ------- -------- -------
Total liabilities......................... 2,175 3,492 1,376 (705) 6,338
Minority interests........................... 13 54 74 -- 141
Limited partner interest of third parties
at redemption value.......................... 617 -- -- -- 617
Owner's capital.............................. 1,228 620 1,017 (1,637) 1,228
------- ------- ------- --------- -------
Total liabilities and owner's capital..... $ 4,033 $ 4,166 $ 2,467 $ (2,342) $ 8,324
======= ======= ======= ======== =======
<CAPTION>
December 31, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Property and equipment, net.................. $ 1,172 $ 3,796 $ 2,233 $ -- $ 7,201
Investments in affiliate..................... 1,475 -- -- (1,442) 33
Notes and other receivables.................. 782 52 19 (650) 203
Other assets................................. 259 145 141 (156) 389
Cash and cash equivalents.................... 330 91 15 -- 436
------- ------- ------- ------- ------
Total assets.............................. $ 4,018 $ 4,084 $ 2,408 $(2,248) $ 8,262
======= ======= ======= ======= =======
Debt......................................... $ 1,438 $ 2,837 $ 1,183 $ (327) $ 5,131
Convertible debt obligation to Host Marriott. 567 -- -- -- 567
Deferred income taxes........................ 51 39 7 -- 97
Other liabilities............................ 291 600 252 (479) 664
------- ------- ------- ------- -------
Total liabilities.......................... 2,347 3,476 1,442 (806) 6,459
Minority interests........................... 15 56 76 -- 147
Limited partner interest of third parties
at redemption value.......................... 892 -- -- -- 892
Owner's capital.............................. 764 552 890 (1,442) 764
------- ------- ------- ------- -------
Total liabilities and owner's capital...... $ 4,018 $ 4,084 $ 2,408 $(2,248) $ 8,262
======= ======= ======= ======= =======
</TABLE>
-20-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 10, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES........................................ $ 96 $ 137 $ 93 $ (37) $ 289
Depreciation.................................... (13) (35) (20) -- (68)
Property-level expenses......................... (10) (24) (28) -- (62)
Hotel operating expenses........................ -- -- -- -- --
Minority interest............................... (1) -- (2) -- (3)
Interest expense................................ (17) (64) (22) (5) (108)
Dividends on convertible preferred securities... -- -- -- -- --
Corporate expenses.............................. (1) (3) (2) -- (6)
Other expenses.................................. -- (1) -- -- (1)
------ ------- ------- ------- -------
Income before extraordinary gain................ 54 10 19 (42) 41
Extraordinary item-gain on forgiveness of debt.. -- 1 3 -- 4
------ ------- ------- ------- -------
NET INCOME...................................... $ 54 $ 11 $ 22 $ (42) $ 45
====== ======= ======= ======= =======
<CAPTION>
Twelve Weeks Ended September 11, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES........................................ $ 22 $ 309 $ 428 $ (3) $ 756
Depreciation.................................... (11) (26) (16) -- (53)
Property-level expenses......................... (2) (28) (37) -- (67)
Hotel operating expenses........................ (8) (210) (292) -- (510)
Minority interest............................... (1) (2) (3) -- (6)
Interest expense................................ (21) (47) (17) 6 (79)
Dividends on convertible preferred securities... (9) -- -- -- (9)
Corporate expenses.............................. (6) (4) (2) -- (12)
REIT Conversion expenses........................ (8) -- -- -- (8)
Other expenses.................................. (3) -- (1) -- (4)
------ ------- ------- ------- -------
Income from continuing operations before taxes.. (47) (8) 60 3 8
Provision for income taxes...................... 18 2 (26) -- (6)
------ ------- ------- ------- -------
Income from continuing operations............... (29) (6) 34 3 2
Income from discontinued operations............. 2 -- -- -- 2
------ ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEM......................................... $ (27) $ (6) $ 34 $ 3 $ 4
====== ======= ======= ======= =======
</TABLE>
-21-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES........................................ $ 393 $ 471 $ 284 $ (211) $ 937
Depreciation.................................... (41) (105) (55) -- (201)
Property-level expenses......................... (31) (69) (82) -- (182)
Hotel operating expenses........................ -- -- -- -- --
Minority interest............................... (5) (6) (5) -- (16)
Interest expense................................ (108) (168) (68) 19 (325)
Dividends on convertible preferred securities... -- -- -- -- --
Corporate expenses.............................. (4) (11) (7) -- (22)
Other expenses.................................. (6) (3) (1) -- (10)
------- ------- ------- ------- -------
Income before extraordinary gain................ 198 109 66 (192) 181
Extraordinary item-gain on forgiveness of debt.. -- 1 16 -- 17
------- ------- ------- ------- -------
NET INCOME (LOSS)............................... $ 198 $ 110 $ 82 $ (192) $ 198
======= ======= ======= ======= =======
<CAPTION>
Thirty-six Weeks Ended September 11, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES........................................ $ 683 $ 1,160 $ 678 $ (111) $ 2,410
Depreciation.................................... (50) (83) (33) -- (166)
Property-level expenses......................... (43) (91) (55) -- (189)
Hotel operating expenses........................ (352) (740) (448) -- (1,540)
Minority interest............................... (23) (8) (5) -- (36)
Interest expense................................ (58) (141) (54) 22 (231)
Dividends on convertible preferred securities... (26) -- -- -- (26)
Corporate expenses.............................. (11) (15) (7) -- (33)
REIT Conversion expenses........................ (14) -- -- -- (14)
Other expenses.................................. (12) (1) (1) -- (14)
------ ------- ------- ------- --------
Income from continuing operations before taxes.. 94 81 75 (89) 161
Provision for income taxes...................... (2) (35) (32) -- (69)
------ ------- ------- ------- -------
Income from continuing operations............... 92 46 43 (89) 92
Income from discontinued operations............. 8 -- -- -- 8
------ ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEM......................................... $ 100 $ 46 $ 43 $ (89) $ 100
====== ======= ======= ======= =======
</TABLE>
-22-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Cash Flows
(in millions)
<TABLE>
<CAPTION>
Thirty-six Weeks Ended September 10, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Cash (used in) from operations.................... $ 17 $ 147 $ 92 $ 256
--------- ---------- -------- ---------
INVESTING ACTIVITIES
Cash received from sales of assets................ 1 48 -- 49
Capital expenditures.............................. (58) (172) (31) (261)
Acquisitions...................................... -- (12) (5) (17)
Other............................................. (47) -- -- (47)
--------- ---------- --------- ---------
Cash used in investing activities ................ (104) (136) (36) (276)
--------- ---------- -------- ---------
FINANCING ACTIVITIES
Repayment of debt................................. (111) (333) (857) (1,301)
Issuances of debt................................. 290 35 957 1,282
Distributions..................................... (195) -- -- (195)
Issuances of common units......................... 2 -- -- 2
Issuances of Class A Preferred Units.............. 100 -- -- 100
Cost of extinguishment of debt.................... -- -- (2) (2)
Transfers to/from Parent.......................... (198) 344 (146) --
Other............................................. (12) -- -- (12)
--------- ---------- -------- ---------
Cash (used in) from financing activities.......... (124) 46 (48) (126)
--------- ---------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... $ (211) $ 57 $ 8 $ (146)
========= ========== ======== =========
</TABLE>
-23-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Thirty-six Weeks Ended September 11, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Cash from continuing operations......................... $ (2) $ 149 $ 107 $ 254
Cash from discontinued operations....................... 24 -- -- 24
-------- ------- ------- -------
Cash from operations.................................... 22 149 107 278
-------- ------- ------- -------
INVESTING ACTIVITIES
Cash received from sales of assets...................... 211 -- -- 211
Capital expenditures.................................... (38) (96) (25) (159)
Acquisitions............................................ (470) (22) (115) (607)
Sales of short-term marketable securities, net.......... 317 -- -- 317
Other................................................... 5 -- -- 5
-------- ------- ------- -------
Cash from (used in) investing activities from
continuing operations................................ 25 (118) (140) (233)
Cash used in investing activities from discontinued
Operations........................................... (10) -- -- (10)
-------- ------- ------- -------
Cash from (used in) investing activities ............... 15 (118) (140) (243)
-------- ------- ------- -------
FINANCING ACTIVITIES
Repayment of debt....................................... (1,596) (56) (18) (1,670)
Issuances of debt....................................... 1,998 5 1 2,004
Costs of extinguishment of debt......................... (175) -- -- (175)
Transfers to/from Parent................................ (64) 5 59 --
Other................................................... (14) -- -- (14)
-------- ------- ------- -------
Cash from (used in) financing activities from
continuing operations................................ 149 (46) 42 145
Cash used in financing activities from discontinued
operations........................................... (152) -- -- (152)
-------- ------- ------- -------
Cash (used in) from financing activities................ (3) (46) 42 (7)
-------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ 34 $ (15) $ 9 $ 28
======== ======= ======= =======
</TABLE>
15. Contingencies
Courtyard by Marriott II Limited Partnership (CBM II)
-----------------------------------------------------
A group of partners in CBM II filed a lawsuit, Whitey Ford, et al. v. Host
Marriott Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in
the 285th Judicial District Court of Bexar County, Texas against the
Company and others alleging breach of fiduciary duty, breach of contract,
fraud, negligent misrepresentation, tortious interference, violation of
the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in
connection with the formation, operation and management of CBM II and its
hotels. The plaintiffs are seeking unspecified damages. On January 29,
1998, two other limited partners, A.R. Milkes and D.R. Burklew, filed a
petition in intervention seeking to convert the lawsuit into a class
action. The defendants have filed an answer, the class has been certified,
class counsel has been appointed, and discovery is underway. On March 11,
1999, Palm Investors, L.L.C., the assignee of a number of limited
partnership units acquired through various tender offers, filed a plea in
intervention to bring additional claims relating to the 1993 split of
Marriott Corporation and to the 1995 refinancing of CBM II's indebtedness.
The original plaintiffs subsequently filed a second amended complaint on
March 19, 1999 and in a third amended complaint, filed May 24, 1999,
asserted as derivative claims,
-24-
<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
some of the claims previously asserted as individual claims. On March 25,
1999, Equity Resource, an assignee, through various of its funds, of a
number of limited partnership units, also filed a plea in intervention
similar to that which was filed by Palm Investors. A trial date of January
3, 2000 has been set.
On August 17, 1999, the general partner of CBM II appointed an independent
special litigation committee (the "SLC"), comprised of the Honorable
William Webster and the Honorable Charles Renfrew, to investigate the
derivative claims described above and to recommend to the general partner
whether it is in the best interests of CBM II for the derivative
litigation to proceed. The general partner has agreed to adopt the
recommendation of the SLC. Under Delaware law, the recommendation of a
duly appointed independent litigation committee is binding on the general
partner and the limited partners. On August 30, 1999, the court held a
hearing to consider the defendant's motion to stay these proceedings until
the committee makes its recommendation. Similarly, the SLC has asked the
court to postpone the trial for up to six months so that the SLC can
complete its investigation. The court has not yet ruled on these requests.
Courtyard by Marriott Limited Partnership I (CBM I) and CBM II Derivative
-------------------------------------------------------------------------
Action
------
After intervening in the CBM II class action, Palm Investors and Equity
Resource, together with Repp Properties, joined in a complaint filed in
April 1999, Equity Resource Fund X et al. v. CBM One Corporation et al.,
Case No. 99-CI-04765, in the 57th Judicial District Court of Bexar County,
Texas. This action asserted as derivative claims, on behalf of CBM I and
CBM II, the same kind of claims asserted individually in the Ford and
Milkes actions described above. After the appointment of the SLC, this
complaint was withdrawn by the plaintiffs in September 1999.
Texas Multi-Partnership Lawsuits
--------------------------------
On March 16, 1998, limited partners in several limited partnerships
sponsored by Host Marriott or its subsidiaries filed a lawsuit, Robert M.
Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott
International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial
District Court of Bexar County, Texas, alleging that the defendants
conspired to sell hotels to the partnerships for inflated prices and that
they charged the partnerships excessive management fees to operate the
partnerships' hotels. The plaintiffs further allege that the defendants
committed fraud, breached fiduciary duties and violated the provisions of
various contracts. A Marriott International subsidiary manages each of the
hotels involved and, as to some properties, Marriott International, or one
of its subsidiaries, is the ground lessor and collects rent. The Company,
Marriott International, several of their subsidiaries, and J.W. Marriott,
Jr. are among the various named defendants. The plaintiffs are seeking
unspecified damages. Those allegations concerning CBM II have been
transferred to the CBM II lawsuit described above. On March 18, 1999, two
limited partners in CBM I filed a class action petition in intervention
seeking to treat CBM I in a similar manner by converting that portion of
the lawsuit into a class action. On April 29, 1999, the court denied this
petition and refused to certify the class. No trial date has been set.
We are from time to time the subject of, or involved in, judicial
proceedings, including those lawsuits discussed above and also other
lawsuits involving other syndicated partnerships which could, if adversely
decided, result in losses to our Company. We believe that the lawsuits
described above are without merit, and we intend to vigorously defend
against the claims being made against us. We cannot assure you as to the
outcome of these lawsuits and we are uncertain as to any potential loss to
the Company.
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<PAGE>
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
16. Extraordinary Items
In connection with the refinancing of the mortgage and the renegotiation
of the management agreement on the New York Marriott Marquis, we
recognized an extraordinary gain of $13 million on the forgiveness of debt
in the form of accrued incentive management fees in the second quarter. An
extraordinary loss of $3 million representing the write-off of deferred
financing fees occurred in July 1999 when the mortgage debt for eight
properties was refinanced, including the New York Marriott Marquis. In
connection with this refinancing, the interest rate swap agreements
associated with some of the original debt were terminated and a $7 million
extraordinary gain was recognized. In connection with the purchase of the
Old Senior Notes, the Company recognized an extraordinary loss of $148
million in the third quarter of 1998, which represents the bond premium
and consent payments totaling approximately $175 million and the write-off
of deferred financing fees of approximately $52 million related to the Old
Senior Notes, net of taxes.
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
Certain matters discussed herein are forward-looking statements. Certain,
but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "estimates," or "anticipates," or the
negative thereof or other variations thereof or comparable terminology.
All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual transactions,
results, performance or achievements to be materially different from any
future transactions, results, performance or achievements expressed or
implied by such forward-looking statements. Although we believe the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our expectations
will be attained or that any deviations will not be material. We undertake
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events
or circumstances.
Results of Operations
Revenues. Our historical revenues have primarily represented gross
property-level sales from hotels, net gains on property transactions,
interest income and equity in earnings of affiliates. As of January 1,
1999, we lease substantially all of our hotels to subsidiaries of
Crestline Capital Corporation. As a result of these leases, we no longer
record property-level revenues and expenses, rather we recognize rental
income on the leases. Thus, 1999 revenues and expenses are not comparable
with prior periods. Note 3 to the financial statements presents a table
comparing gross hotel sales for all periods presented to facilitate an
investor's understanding of the operation of our properties. The
comparison of the 1999 results with 1998 is also affected by a change in
the reporting period for the Company's hotels not managed by Marriott
International. The 1998 year to date historical results would have to be
adjusted to exclude the results of these hotels for December 1997 and
include August 1998 for the thirty-six weeks ended September 11, 1998 in
order to be comparable to the 1999 period results as reported. Also, for
the third quarter the 1998 historical results would have to be adjusted to
exclude the results of these hotels for May 1998 and include August 1998
for the twelve weeks ended September 11, 1998 in order to be comparable to
the 1999 period results as reported. The change in reporting was required
as part of the REIT conversion.
Year-to-date results for 1999 were primarily driven by the addition of 36
properties in 1998. The increase in hotel sales also reflects the growth
in room revenues generated per available room or REVPAR. For comparable
properties, REVPAR increased 2.8% to $106.45 for the third quarter of
1999. Year-to-date REVPAR increased 3.8% to $115.40. On a comparable
basis, average room rates increased approximately 3% for the third quarter
and year-to-date, while average occupancy decreased less than one
percentage point for the third quarter and increased less than one
percentage point year-to-date.
Interest income decreased as the result of a lower level of cash and
marketable securities held during the first three quarters of 1999
compared to the first three quarters of 1998.
The net gain on property transactions for 1999 primarily resulted from the
$10 million gain on the sale of the 479-room Minneapolis/Bloomington
Marriott for approximately $35 million and the $4 million gain on the sale
of the 221-room Saddle Brook Marriott for approximately $15 million.
Expenses. As discussed above, hotel revenues and hotel operating costs are
not comparable with the prior year. The lessee pays certain direct
property-level costs including management fees and we receive a rent
payment, which is generally calculated as a percentage of revenue, subject
to a minimum
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
level, net of certain property-level owner costs. All of these costs were
our expenses in 1998. Property-level owner costs which are comparable,
including depreciation, property taxes, insurance, ground and equipment
rent increased 8% to $130 million for the third quarter 1999 versus third
quarter 1998 and increased $28 million or 8% to $383 million year-to-date,
primarily reflecting the depreciation from 36 properties acquired during
1998.
Minority Interest. Minority interest expense decreased $3 million to $3
million for the third quarter of 1999 and decreased $20 million to $16
million year-to-date, primarily reflecting the impact of the consolidation
of partnerships which occurred as part of the REIT conversion.
Interest Expense. Interest expense increased 37% to $108 million in the
third quarter of 1999 and increased 41% to $325 million year-to-date,
primarily due to the issuance of senior notes, establishment of a new
credit facility, interest expense on the convertible debt obligation to
Host Marriott Corporation, and additional mortgage debt on properties
acquired in 1998.
Dividends on Convertible Preferred Securities. The dividends on the
Convertible Preferred Securities reflect the amount accrued for the first
three quarters of fiscal year 1998 on the $550 million in 6 3/4%
Convertible Preferred Securities. The Convertible Preferred Securities are
held by the REIT. The dividends paid by the REIT are supported by the $567
million debt obligation to Host Marriott Corporation on our balance sheet.
The Operating Partnership incurs interest expense on the debt obligation,
and, therefore, no dividends are included in the current period statement
of operations.
Corporate Expenses. Corporate expenses decreased $6 million to $6 million
for the third quarter of 1999 and decreased $11 million to $22 million
year-to-date, resulting primarily from lower staffing levels after the
Crestline spin-off, lower costs associated with reduced acquisition
activity and lower costs related to various stock compensation plans.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations
for the third quarter of 1998 and year-to-date 1998 as restated for the
spin-off of Crestline.
Extraordinary Gain (Loss). In connection with the refinancing of the
mortgage and the renegotiation of the management agreement on the New York
Marriott Marquis, we recognized an extraordinary gain of $13 million on
the forgiveness of debt in the form of accrued incentive management fees
in the second quarter. An extraordinary loss of $3 million representing
the write-off of deferred financing fees occurred in July 1999 when the
mortgage debt for eight properties was refinanced, including the New York
Marriott Marquis. In connection with this refinancing, the interest rate
swap agreements associated with some of the original debt were terminated
and a $7 million extraordinary gain was recognized. In connection with the
purchase of the Old Senior Notes, the Company recognized an extraordinary
loss of $148 million in the third quarter of 1998, which represents the
bond premium and consent payments totaling approximately $175 million and
the write-off of deferred financing fees of approximately $52 million
related to the Old Senior Notes, net of taxes.
Net Income. Our net income increased $189 million for the third quarter of
1999 to $45 million and increased $246 million to $198 million for year-
to-date 1999.
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FFO and EBITDA
We consider Funds From Operations or FFO as defined by the National
Association of Real Estate Investment Trusts and our consolidated earnings
before interest expense, income taxes, depreciation, amortization and
other non-cash items or EBITDA to be indicative measures of our operating
performance due to the significance of our long-lived assets. FFO and
EBITDA are also useful in measuring our ability to service debt, fund
capital expenditures and expand our business. Furthermore, management
believes that FFO and EBITDA are meaningful disclosures that will help
shareholders and the investment community to better understand our
financial performance, including comparing our performance to other Real
Estate Investment Trusts. However, FFO and EBITDA as presented may not be
comparable to amounts calculated by other companies. This information
should not be considered as an alternative to net income, operating
profit, cash from operations, or any other operating or liquidity
performance measure prescribed by generally accepted accounting
principles. Cash expenditures for various long-term assets, interest
expense (for EBITDA purposes only) and income taxes have been, and will be
incurred which are not reflected in the EBITDA and FFO presentation.
FFO increased $36 million, or 47%, to $112 million in the third quarter of
1999 over the third quarter of 1998. For periods prior to 1999, the FFO
disclosed represents comparative FFO (FFO plus deferred tax expense). The
following is a reconciliation of income from continuing operations to FFO
(in millions):
<TABLE>
<CAPTION>
Twelve weeks Ended Thirty-six weeks Ended
----------------------------- -------------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Funds from Operations
Income from continuing operations............ $ 41 $ 2 $ 181 $ 92
Depreciation and amortization................ 68 54 203 168
Other real estate activities................. -- (1) (16) (53)
Partnership adjustments...................... 3 (2) 13 (9)
REIT conversion expenses..................... -- 8 -- 14
Deferred taxes............................... -- 7 -- 46
-------- -------- -------- --------
Funds from continuing operations............. 112 68 381 258
Discontinued operations...................... -- 8 -- 24
-------- -------- -------- --------
Funds from operations before distribution on
Class A Preferred Units.................... 112 76 381 282
Distributions on Class A Preferred Units..... (1) -- (1) --
-------- -------- -------- --------
Funds from operations available to common ...
OP unitholders..................................... $ 111 $ 76 $ 380 $ 282
======== ======== ======== ========
</TABLE>
EBITDA increased $56 million, or 36%, to $212 million in the third quarter
of 1999 and $126 million or 22%, to $694 million year-to-date. Hotel
EBITDA increased $43 million, or 26%, to $210 million in the third quarter
of 1999, and $111 million or 19% to $703 million year-to-date, reflecting
comparable hotel EBITDA growth, as well as incremental EBITDA from 1998
acquisitions offset by amounts representing hotel sales which are retained
by Crestline.
The following is a reconciliation of EBITDA to income from continuing operations
(in millions):
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------- ------------------------------
September 10, September 11, September 10, September 11,
1999 1998 1999 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
EBITDA................................................ $ 212 $ 156 $ 694 $ 568
Interest expense...................................... (108) (79) (325) (231)
Dividends on Convertible Preferred Securities......... -- (9) -- (26)
Depreciation and amortization......................... (68) (54) (203) (168)
Minority interest expense............................. (3) (6) (16) (36)
Income taxes.......................................... -- (6) -- (69)
REIT Conversion expense............................... -- (8) -- (14)
Other non-cash charges, net........................... 8 8 31 68
------- ------- ------- -------
Income from continuing operations................... $ 41 $ 2 $ 181 $ 92
======= ======= ======= =======
</TABLE>
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.2 times and 2.4 times year to date for 1999 and 1998, respectively,
and 2.7 times for full year 1998. The ratio of earnings to fixed charges
was 1.6 to 1 through the third quarter of 1999 and 1.7 to 1 through the
third quarter of 1998.
Cash Flows and Financial Condition
We reported a decrease in cash and cash equivalents of $146 million during
the thirty-six weeks ended September 10, 1999. Cash from continuing
operations was $256 million through the third quarter of 1999 and $254
million through the third quarter of 1998. There was no cash activity
related to discontinued operations through the third quarter of 1999;
however, cash from discontinued operations totaled $24 million through the
third quarter of 1998.
Cash used in investing activities from continuing operations was $276
million and $233 million through the third quarter of 1999 and 1998,
respectively. Cash used in investing activities through the third quarter
includes capital expenditures of $261 million and $159 million for 1999
and 1998, respectively, mostly related to renewals and replacements on
existing properties and development projects. In addition, we generated
$49 million of cash from the net sale of assets, primarily the
Minneapolis/Bloomington and Saddle Brook properties. There was no cash
related to investing activities from discontinued operations through the
third quarter 1999; however, cash used in investing activities from
discontinued operations totaled $10 million year-to-date 1998. Property
and equipment balances include $162 million and $78 million for
construction in progress as of September 10, 1999 and December 31, 1998,
respectively. The current balance primarily relates to properties in
Tampa, Orlando, Memphis, Naples and various other expansion and
development projects.
In June 1999, we acquired by merger Timewell Group, L.P. and Timeport,
L.P., which each own limited partnership interests in the partnership that
owns the New York Marriott Marquis. As part of the merger, the general
partners of Timewell Group, L.P. and Timeport, L.P. received 345,559 and
240,218 Class TS Preferred Units, respectively. The Class TS Preferred
Units are convertible into OP Units on a one-for-one basis, subject to
certain adjustments, at any time beginning one year after the merger at
the option of the holders. At any time, beginning two years after the
merger, we can redeem the Class TS Preferred Units for OP Units or cash.
Also as part of the merger, the Company re-paid in cash outstanding
Partner loans totaling $5.9 million on behalf of each of the partnerships.
Cash used in financing activities from continuing operations was $126
million through the third quarter of 1999. Cash from financing activities
from continuing operations was $145 million through the third quarter of
1998. Cash used in financing activities includes $1.3 billion in
prepayment of debt, offset by a similar amount of debt issuances, the
issuance of preferred stock and the payment of distributions.
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The $300 million of 8 3/8% series D senior notes were issued in February
1999 and were used to refinance, or purchase, debt which had been assumed
through the merger of certain partnerships or the purchase of hotel
properties in connection with the REIT conversion in December 1998. In
August 1999, the Series D Senior notes were exchanged on a one-for-one
basis for Series E Senior notes, which are freely transferable by the
holders.
In April 1999, a subsidiary completed the refinancing of the $245 million
mortgage on the New York Marriott Marquis, maturing June 2000. We
subsequently refinanced this mortgage as part of the $665 million
financing agreement completed in the third quarter of 1999. The financing
agreement for $665 million is secured by eight hotels, and is due 2009
with a fixed interest rate of 7.47%. The proceeds from this financing were
used to refinance existing mortgage indebtedness maturing at various times
through 2000 on eight hotels including the New York Marriott Marquis.
Also in June 1999, we refinanced the debt on the San Diego Marriott Hotel
and Marina. The mortgage is for $195 million for a term of 10 years at a
rate of 8.45%. In addition, we completed a 210-room extension of the
Philadelphia Marriott in April 1999 at a cost of approximately $37
million. We established a mortgage on the extension of the Philadelphia
Marriott in July 1999 for $23 million at an interest rate of approximately
8.6%, maturing in 2009.
In August 1999, we repaid $100 million of the outstanding balance on a
$350 million term loan entered into in August 1998 as part of our $1.25
billion line of credit. During the fourth quarter, an additional $50
million repayment was made, reducing the outstanding balance of the term
loan to $200 million. Subsequent to these repayments, the available
capacity under the line of credit balance remains $900 million while the
total line has been permanently reduced to $1.1 billion as a result of the
term loan payments.
In August 1999, the Company made a prepayment of $19 million to pay down
in full the mezzanine mortgage on the Marriott Desert Springs Resort and
Spa. In September 1999, the Company made a prepayment of $45 million to
pay down in full the mortgage note on the Philadelphia Four Seasons Hotel.
Distributions reflect the $69 million in payments for a special
distribution declared in December 1998 as well as the $0.42 distribution
per common unit paid as of September 11, 1999. In addition, on September
23, 1999, the Board of Directors declared a regular cash distribution of
$0.21 per unit. The third quarter distribution was paid on October 15,
1999 to unit holders of record on September 30, 1999. Total distributions
year-to-date are $0.63 per common unit.
In August 1999, Host Marriott sold 4.16 million shares of 10% Class A
Preferred Stock with a $0.01 par value and we issued an equivalent
security, the Class A Preferred Units to Host Marriott Corporation.
Holders of the shares are entitled to receive cumulative cash dividends at
a rate of 10% per annum of the $25.00 per share liquidation preference.
Dividends are payable quarterly in arrears commencing October 15, 1999. A
corresponding distribution on the Class A Preferred Units is also payable
quarterly in arrears commencing October 15, 1999. After August 3, 2004 the
Company has the option to redeem the Class A Preferred Shares for $25.00
per share, plus accrued and unpaid dividends to the date of redemption.
The Class A Preferred Units rank senior to the common units and the Class
TS Preferred Units. The Class A Preferred shareholders generally have no
voting rights.
Cumulative cash distributions on the Class A Preferred Units have been
accrued from the date of issuance, August 3, 1999, through the balance
sheet date. The Company declared a pro rata distribution of $0.50 per unit
on September 23, 1999, which was paid on October 15, 1999.
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HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In September 1999, the Board of Directors of Host Marriott Corporation
approved the repurchase, from time to time on the open market and/or in
privately negotiated transactions, of up to 22 million of the outstanding
shares of Host Marriott common stock or a corresponding amount (based on
the appropriate conversion ratio) of Host Marriott Convertible Preferred
Securities. Based on current market conditions, we believe that the stock
repurchase program reflects the best return on investment for our
shareholders. However, we will continue to look at strategic acquisitions
as well as evaluate our stock repurchase program based on changes in
market conditions and our stock price. The repurchases will be financed in
part through cash from operations and the net proceeds from sales of
assets, prior to their reinvestment in real estate assets, such as the
fourth quarter sale of the Grand Hotel Resort and Golf Club or the
recently announced contract to sell our interest in the Ritz-Carlton
Boston. This is consistent with our strategy of improving the overall
portfolio by selling assets that may be in suburban locations, require
significant capital improvements or do not fit our long-term strategy.
Such repurchases will be made at management's discretion, subject to
market conditions, and may be suspended at any time at our discretion.
Additionally, under the terms of the partnership agreement, an equivalent
number of OP units will also be repurchased on a one-for-one basis from
Host Marriott Corporation. Subsequent to quarter end, we have spent
approximately $7.7 million to repurchase 797,000 units.
On December 30, 1998, we acquired a portfolio of twelve luxury hotels and
other assets from the Blackstone Group, a Delaware limited partnership,
and a series of funds controlled by affiliates of Blackstone Real Estate
Partners. Approximately 467,000 OP Units issued in connection with the
Blackstone Acquisition were redeemed for Host Marriott Corporation common
stock during the third quarter of 1999.
There was no cash related to financing activities from discontinued
operations through the third quarter of 1999; however, cash used in
financing activities from discontinued operations totaled $152 million
through the third quarter of 1998.
Year 2000 Issue
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that
begins with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or create erroneous results. The
following disclosure provides information regarding the current status of
our Year 2000 compliance program.
We have adopted the compliance program because we recognize the importance
of minimizing the number and seriousness of any disruptions that may occur
as a result of the Year 2000 issue. Our compliance program includes an
assessment of our hardware and software computer systems and embedded
systems, as well as an assessment of the Year 2000 issues relating to
third parties with which we have a material relationship or whose systems
are material to the operations of our hotel properties. Our efforts to
ensure that our computer systems are Year 2000 compliant have been
segregated into two separate phases: in-house systems and third-party
systems. Following the REIT conversion, Crestline, as the lessee of most
of our hotels, will deal directly with Year 2000 matters material to the
operation of the hotels, and Crestline has agreed to adopt and implement
the program outlined below with respect to third-party systems for all
hotels for which it is lessee.
In-House Systems. Since the distribution of Marriott International on
October 8, 1993, we have invested in the implementation and maintenance of
accounting and reporting systems and equipment that are intended to enable
us to provide adequately for our information and reporting needs and which
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<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
are also Year 2000 compliant. Substantially all of our in-house systems
have already been certified as Year 2000 compliant through testing and
other mechanisms and we have not delayed any systems projects due to the
Year 2000 issue. We engaged a third party to review our Year 2000 in-house
readiness and found no problems with any mission critical systems.
Management believes that future costs associated with Year 2000 issues for
our in-house systems will be insignificant and therefore not impact our
business, financial condition and results of operations. We have not
developed, and do not plan to develop, a separate contingency plan for our
in-house systems due to their current Year 2000 compliance. We do,
however, have the normal disaster recovery procedures in place should we
have a systems failure.
Third-Party Systems. We rely upon operational and financial systems
provided by third parties, primarily the managers and operators of our
hotel properties, to provide the appropriate property-specific operating
systems, including reservation, phone, elevator, security, HVAC and other
systems, and to provide us with financial information. Based on discussion
with the third parties that are critical to our business, including the
managers and operators of our hotels, we believe that these parties are in
the process of studying their systems and the systems of their respective
vendors and service providers and, in many cases, have begun to implement
changes, to ensure that they are Year 2000 compliant. We continue to
receive verbal and written assurances that these third parties are, or
will be, Year 2000 compliant on time. To the extent these changes impact
property-level systems, we may be required to fund capital expenditures
for upgraded equipment and software. We do not expect these charges to be
material, but we are committed to making these investments as required. To
the extent that these changes relate to a third party manager's
centralized systems, including reservations, accounting, purchasing,
inventory, personnel and other systems, management agreements generally
provide for these costs to be charged to our properties subject to annual
limitations, which costs will be borne by Crestline under the leases. We
expect that the third party managers will incur Year 2000 costs in lieu of
costs for their centralized systems related to system projects that
otherwise would have been pursued and other centralized costs and,
therefore, the overall level of centralized systems charges allocated to
the properties will not materially increase as a result of the Year 2000
compliance effort. We believe that this deferral of certain system
projects will not have a material impact on our future results of
operations, although it may delay certain productivity enhancements at our
properties. We and Crestline will continue to monitor the efforts of these
third parties to become Year 2000 compliant and will take appropriate
steps to address any non-compliance issues. We believe that, in the event
of material Year 2000 non-compliance, we will have the right to seek
recourse against the manager under our third party management agreements.
The management agreements, however, generally do not specifically address
the Year 2000 compliance issue. Therefore, the amount of any recovery in
the event of Year 2000 non-compliance at a property, if any, is not
determinable at this time, and only a portion of such recovery would
accrue to us through increased lease rental payments from Crestline.
We and Crestline will work with the third parties to ensure that
appropriate contingency plans will be developed to address the most
reasonably likely worst case Year 2000 scenarios, which may not have been
identified fully. In particular, we and Crestline have had extensive
discussions regarding the Year 2000 problem with Marriott International,
the manager of a substantial majority of our hotel properties. Due to the
significance of Marriott International to our business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering
understanding of, and commitment to, the problem and its potential risks;
(ii) Inventory: identifying and locating systems and technology components
that may be affected; (iii) Assessment: reviewing these components for
Year 2000 compliance, and assessing the scope of
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HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Year 2000 issues; (iv) Planning: defining the technical solutions and
labor and work plans necessary for each affected system; (v)
Remediation/Replacement: completing the programming to renovate or replace
the problem software or hardware; (vi) Testing and Compliance Validation:
conducting testing, followed by independent validation by a separate
internal verification team; (vii) Implementation: placing the corrected
systems and technology back into the business environment; and (viii)
Quality Assurance: utilizing an internal audit team to review significant
projects for adherence to quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications)--enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS")--systems that
have been initiated by an individual business unit, and that are not
supported by Marriott International's IR organization; and (iii) Building
Systems--non-IT equipment at properties that use embedded computer chips,
such as elevators, automated room key systems and HVAC equipment. Marriott
International is prioritizing its efforts based on how severe an effect
noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
Marriott International measures the completion of each phase based on
documentation and quantified results weighted for System Criticality. As
of September 10, 1999, the Awareness, Inventory, Assessment, and Planning
phases were complete for IT Applications, BIS, and Building Systems. For
IT Applications, the Remediation/Replacement and Testing phases were 95
percent complete. Compliance Validation had been completed for over 90
percent of key systems, with most of the remaining work in its final
stage. For BIS and Building Systems, Remediation/Replacement is over 95
percent complete. For BIS, Testing is approximately 80 percent complete
and Compliance Validation is in progress. Testing is over 95% complete for
Building Systems and Compliance Validation is in progress. Implementation
is approximately 85 percent complete and Quality Assurance is 80 percent
complete for IT Applications. For BIS, Implementation is approximately 85
percent complete while Quality Assurance is in progress. Implementation is
over 95 percent complete and Quality Assurance is in progress for Building
Systems.
Year 2000 compliance communications with Marriott International's
significant third party suppliers, vendors and business partners,
including its franchisees are ongoing. Marriott International's efforts
are focused on the connections most critical to customer service, core
business processes and revenues, including those third parties that
support the most critical enterprise-wide IT Applications, franchisees
generating the most revenues, suppliers of the most widely used Building
Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products and services, and financial institutions providing the most
critical payment processing functions. Responses have been received from a
majority of the firms in this group. A majority of these respondents have
either given assurances of timely Year 2000 compliance or have identified
the necessary actions to be taken by them or Marriott International to
achieve timely Year 2000 compliance for their products. Where Marriott
International has not received satisfactory responses it is addressing the
potential risks of failure through its contingency planning process.
Marriott International has established a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes guidance for operated properties, and a Year
2000 "Toolkit" for franchisees containing relevant Year 2000 compliance
information. Marriott International is also utilizing a Year 2000 best-
practices sharing system. Marriott International is monitoring the
progress of the managed and franchised properties towards Year 2000
-34-
<PAGE>
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
compliance.
Risks. There can be no assurances that Year 2000 remediation by us or
third parties will be properly and timely completed, and failure to do so
could have a material adverse effect on us, our business and our financial
condition. We cannot predict the actual effects to us of the Year 2000
problem, which depends on numerous uncertainties such as: whether
significant third parties properly and timely address the Year 2000 issue
and whether broad-based or systemic economic failures may occur. Moreover,
we are reliant upon Crestline to interface with third parties in
addressing the Year 2000 issue at the hotels leased by Crestline. We are
also unable to predict the severity and duration of any such failures,
which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or
telecommunications services, the loss or disruption of hotel reservations
made on centralized reservation systems and errors or failures in
financial transactions or payment processing systems such as credit cards.
Due to the general uncertainty inherent in the Year 2000 problem and our
dependence on third parties, including Crestline following the REIT
Conversion, we are unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on us. Our
Year 2000 compliance program and Crestline's adoption thereof are expected
to significantly reduce the level of uncertainty about the Year 2000
problem and management believes that the possibility of significant
interruptions of normal operations should be reduced.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have certain financial instruments that are sensitive to changes in
interest rates. The interest recognized on the debt obligations is based
on various LIBOR terms, which were 5.18% and 5.06%, respectively, at
September 10, 1999 and 5.1% and 5% at December 31, 1998, respectively. The
interest rates, fair values and future maturities associated with these
financial instruments have not changed materially from the amounts
reported in our annual report on Form 10-K except for the refinancing and
termination discussed below.
We repaid a $40 million variable rate mortgage with proceeds from the $300
million senior notes offering discussed in Note 8 to the financial
statements during the first quarter of 1999. We terminated the associated
swap agreement incurring a termination fee of approximately $1 million.
In July 1999, we completed the refinancing of approximately $790 million
of outstanding variable rate mortgage debt and terminated the related
interest rate swap agreements. See Note 11 to the condensed consolidated
financial statements. As a result of the refinancing we no longer have any
interest rate swap agreements outstanding. As of September 10, 1999, our
remaining variable debt consists of the credit facility and the mortgage
debt on the Ritz-Carlton Amelia Island property which total $340 million,
$50 million of which has been repaid subsequent to quarter end.
-35-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference to the description of legal proceedings in the
"Contingencies" footnote to the condensed consolidated financial statements set
forth in Part I, "Financial Information."
-36-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT, L.P.
BY: HOST MARRIOTT CORPORATION
Its General Partner
October 19, 1999 /s/ Donald D. Olinger
- ---------------- -----------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HOST
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