<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 8, 2000 Commission File No. 001-14625
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Maryland 53-0085950
-------------------------- -------------------------
(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>
Shares outstanding
Class at October 16, 2000
-------------------------- -------------------------
<S> <C>
Common Stock, $0.01 par value 220,918,011
Purchase share rights for Series A Junior
Participating Preferred Stock, $0.01 par value --
Class A Cumulative Redeemable Preferred Stock, $0.01 par value 4,160,000
Class B Cumulative Redeemable Preferred Stock, $0.01 par value 4,000,000
</TABLE>
================================================================================
<PAGE>
INDEX
-----
Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
Condensed Consolidated Balance Sheets -
September 8, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Twelve Weeks and Thirty-six Weeks Ended
September 8, 2000 and September 10, 1999 4
Condensed Consolidated Statements of Cash Flows -
Thirty-six Weeks Ended
September 8, 2000 and September 10, 1999 6
Notes to Condensed Consolidated Financial Statements 8
Management's Discussion and Analysis of Results of
Operations and Financial Condition 17
Quantitative and Qualitative Disclosures about Market Risk 24
Part II. OTHER INFORMATION AND SIGNATURE 25
-2-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
September 8, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and equipment, net............................................... $7,101 $7,108
Notes and other receivables (including amounts due from
affiliates of $125 million and $127 million, respectively).............. 172 175
Rent receivable........................................................... 72 72
Investments in affiliates................................................. 99 49
Other assets.............................................................. 401 351
Restricted cash........................................................... 155 170
Cash and cash equivalents................................................. 188 277
------ ------
$8,188 $8,202
====== ======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Debt
Senior notes............................................................ $2,540 $2,539
Mortgage debt........................................................... 2,289 2,309
Other................................................................... 272 221
------ ------
5,101 5,069
Accounts payable and accrued expenses..................................... 147 148
Deferred income taxes..................................................... 48 49
Deferred rent............................................................. 366 --
Other liabilities......................................................... 373 426
------ ------
Total liabilities................................................... 6,035 5,692
------ ------
Minority interest......................................................... 431 508
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary whose sole assets are the convertible
subordinated debentures due 2026 ("Convertible Preferred Securities")... 475 497
Shareholders' equity
Cumulative redeemable preferred stock ("Preferred Stock"), 50 million
shares authorized; 8.2 million shares issued and outstanding............. 196 196
Common stock, 750 million shares authorized; 220.8 million shares and
223.5 million shares issued and outstanding, respectively........... 2 2
Additional paid-in capital................................................ 1,822 1,844
Accumulated other comprehensive income.................................... 1 2
Retained deficit.......................................................... (774) (539)
------ ------
Total shareholders' equity......................................... 1,247 1,505
------ ------
$8,188 $8,202
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-3-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions, except per share amounts)
<TABLE>
2000 1999
------ ------
<S> <C> <C>
REVENUES
Rental income............................................................ $ 224 $ 188
Interest income.......................................................... 9 10
Net gains on property transactions....................................... 1 --
Equity in earnings of affiliates......................................... 2 3
Other.................................................................... 3 2
------ ------
Total revenues....................................................... 239 203
------ ------
EXPENSES
Depreciation and amortization............................................ 75 68
Property-level owner expenses............................................ 66 62
Minority interest benefit................................................ (4) (8)
Interest expense......................................................... 100 98
Dividends on Convertible Preferred Securities............................ 8 9
Corporate expenses....................................................... 7 5
Other expenses........................................................... -- --
------ ------
Total expenses....................................................... 252 234
------ ------
LOSS FROM OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS...................................................... (13) (31)
Provision for income taxes................................................ (4) (1)
------ ------
LOSS FROM OPERATIONS BEFORE EXTRAORDINARY ITEMS........................... (17) (32)
Extraordinary gain........................................................ -- 4
------ ------
NET LOSS.................................................................. $ (17) $ (28)
====== ======
Less: Dividends on Preferred Stock...................................... (5) (1)
------ ------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS................................. $ (22) $ (29)
====== ======
BASIC LOSS PER COMMON SHARE:
Loss from operations before extraordinary items........................... $(0.10) $(0.15)
Extraordinary gain........................................................ -- 0.02
------ ------
BASIC LOSS PER COMMON SHARE............................................... $(0.10) $(0.13)
====== ======
DILUTED LOSS PER COMMON SHARE:
Loss from operations before extraordinary items........................... $(0.10) $(0.15)
Extraordinary gain........................................................ -- 0.02
------ ------
DILUTED LOSS PER COMMON SHARE............................................. $(0.10) $(0.13)
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions, except per share amounts)
<TABLE>
2000 1999
------ ------
<S> <C> <C>
REVENUES
Rental income............................................................ $ 580 $ 546
Interest income.......................................................... 26 26
Net gains on property transactions....................................... 4 16
Equity in earnings of affiliates......................................... 5 5
Other.................................................................... 8 5
------ ------
Total revenues....................................................... 623 598
------ ------
EXPENSES
Depreciation and amortization............................................ 224 203
Property-level owner expenses............................................ 191 184
Minority interest benefit................................................ (26) (21)
Interest expense......................................................... 293 298
Dividends on Convertible Preferred Securities............................ 22 26
Corporate expenses....................................................... 27 20
Other expenses........................................................... 9 5
------ ------
Total expenses....................................................... 740 715
------ ------
LOSS FROM OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS...................................................... (117) (117)
Provision for income taxes................................................ (7) (3)
------ ------
LOSS FROM OPERATIONS BEFORE EXTRAORDINARY ITEMS........................... (124) (120)
Extraordinary gain (loss)................................................. (3) 17
------ ------
NET LOSS.................................................................. $ (127) $ (103)
====== ======
Less: Dividends on Preferred Stock....................................... (15) (1)
Add: Gain on repurchase of Convertible Preferred Securities............. 4 --
------ ------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS................................. $ (138) $ (104)
====== ======
BASIC LOSS PER COMMON SHARE:
Loss from operations before extraordinary items........................... $(0.61) $(0.53)
Extraordinary gain (loss)................................................. (0.01) 0.07
------ ------
BASIC LOSS PER COMMON SHARE............................................... $(0.62) $(0.46)
====== ======
DILUTED LOSS PER COMMON SHARE:
Loss from operations before extraordinary items........................... $(0.61) $(0.53)
Extraordinary gain (loss)................................................. (0.01) 0.07
------ ------
DILUTED LOSS PER COMMON SHARE............................................. $(0.62) $(0.46)
====== ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-5-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions)
<TABLE>
2000 1999
----- -------
<S> <C> <C>
OPERATING ACTIVITIES
Loss from operations before extraordinary items........................... $(124) $ (120)
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization.......................................... 224 203
Income taxes........................................................... (20) (20)
Deferred contingent rental income...................................... 366 339
Net gains on property transactions..................................... (4) (16)
Equity in earnings of affiliates....................................... (5) (5)
Changes in operating accounts.......................................... 21 (90)
Other.................................................................. (60) (62)
----- -------
Cash from operations.................................................. 398 229
----- -------
INVESTING ACTIVITIES
Proceeds from sales of assets............................................. -- 49
Acquisitions.............................................................. (40) (17)
Capital expenditures:
Capital expenditures for renewals and replacements..................... (155) (143)
New investment capital expenditures.................................... (88) (102)
Other investments...................................................... (28) (16)
Note receivable collections, net.......................................... 4 (47)
----- -------
Cash used in investing activities..................................... (307) (276)
----- -------
FINANCING ACTIVITIES
Issuances of debt, net.................................................... 292 1,282
Scheduled principal repayments............................................ (27) (26)
Issuances of Class A preferred stock...................................... -- 100
Debt prepayments.......................................................... (245) (1,275)
Costs of extinguishment of debt........................................... -- (2)
Issuances of common stock................................................. 3 2
Repurchases of common stock............................................... (44) --
Dividends................................................................. (154) (168)
Repurchases of Convertible Preferred Securities........................... (15) --
Repurchases and redemptions of OP Units................................... (3) --
Other..................................................................... 13 (12)
----- -------
Cash used in financing activities..................................... (180) (99)
----- -------
DECREASE IN CASH AND CASH EQUIVALENTS..................................... $ (89) $ (146)
===== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements
-6-
<PAGE>
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six Weeks Ended September 8, 2000 and September 10, 1999
(unaudited, in millions)
Supplemental schedule of noncash financing activities:
Approximately 449,000 shares of common stock were issued during the thirty-six
weeks ended September 8, 2000 upon the conversion of outside OP Units valued at
$4.4 million.
Approximately 586,000 Class TS cumulative redeemable preferred limited
partnership units valued at $7.4 million were issued during the third quarter of
1999 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.
Approximately 467,000 shares of common stock were issued during the third
quarter of 1999 upon the conversion of outside OP Units valued at $4.9 million.
See Notes to Condensed Consolidated Financial Statements
-7-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization
Host Marriott Corporation ("Host REIT"), a Maryland corporation operating
through an umbrella partnership structure, is primarily the owner of hotel
properties. Host REIT operates as a self-managed and self-administered real
estate investment trust ("REIT") with its operations conducted through an
operating partnership and its subsidiaries. As REITs are not currently
permitted to derive revenues directly from the operation of hotels, Host
REIT leases substantially all of its hotels to subsidiaries of Crestline
Capital Corporation ("Crestline" or the "Lessee") and certain other lessees.
On December 15, 1998, shareholders of Host Marriott Corporation, ("Host
Marriott"), a Delaware corporation and the predecessor to Host REIT, 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. (the "Operating Partnership" or "Host LP"). Host REIT has elected,
effective January 1, 1999, to be treated as a REIT for federal income tax
purposes, and is the sole general partner of the Operating Partnership. Host
Marriott and its subsidiaries' contribution of its hotels and certain assets
and liabilities to the Operating Partnership and its subsidiaries in exchange
for units of partnership interest in the Operating Partnership ("OP Units")
was accounted for at Host Marriott's historical basis. As of September 8,
2000, Host REIT owned approximately 78% of the Operating Partnership.
In these condensed consolidated financial statements, the "Company" or "Host
Marriott" refers to Host Marriott Corporation and its consolidated
subsidiaries, both before and after the merger and its conversion to a REIT
(the "REIT Conversion").
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 accounting principles generally
accepted in the United States 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, 1999.
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 8, 2000
and the results of operations for the twelve and thirty-six weeks ended
September 8, 2000 and September 10, 1999, and cash flows for the thirty-six
weeks ended September 8, 2000 and September 10, 1999. Interim results are not
necessarily indicative of fiscal year performance because of the impact of
seasonal and short-term variations.
Certain reclassifications were made to the prior year financial statements to
conform to the current presentation.
The Company's leases have initial terms ranging from 2 to 10 years, subject
to earlier termination upon the occurrence of certain contingencies, as
defined. Effective November 15, 1999, the leases with Crestline were amended
to give Crestline the right to renew each of these leases for up to four
additional terms of seven years each. The rent due under each lease is the
greater of base rent or percentage rent,
-8-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
as defined. Percentage rent applicable to room, food and beverage and other
types of hotel sales 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.
Under the REIT Modernization Act, which was passed in December 1999 and is
effective beginning January 1, 2001, the Company will be able to lease its
hotels to a wholly-owned subsidiary that is a taxable corporation and that
elects to be treated as a "taxable REIT subsidiary," rather than to a third
party. Under the terms of the leases with Crestline, the Company has the
right to purchase the leases from Crestline on or after January 1, 2001, for
a price equal to the fair rental value of such leases.
The Company recognizes percentage rent when all contingencies have been met,
that is, when annual thresholds for percentage rent have been met or
exceeded. Percentage rent received pursuant to the leases but not recognized
is included on the balance sheet as deferred rent. Contingent rental revenue
of $75 million and $86 million, respectively, for the twelve weeks ended
September 8, 2000 and September 10, 1999, and $366 million and $339 million,
respectively, for the thirty-six weeks ended September 8, 2000 and September
10, 1999, have been deferred.
3. Earnings Per Share
Basic earnings per common share is computed by dividing net income available
to common shareholders by the weighted average number of shares of common
stock outstanding. Diluted earnings per share is computed by dividing net
income available to common shareholders as adjusted for potentially dilutive
securities, by the weighted average number of shares of common stock
outstanding plus other potentially dilutive securities. Dilutive securities
may include shares granted under comprehensive stock plans and the
Convertible Preferred Securities. Dilutive securities may also include those
common and preferred OP Units issuable or outstanding that are held by
minority partners which are assumed to be converted. No effect is shown for
securities if they are anti-dilutive.
-9-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended
--------------------------------------------------------------------------
September 8, 2000 September 10, 1999
------------------------------------ ------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss...................................... $(17) 220.5 $(.08) $(28) 228.3 $(.12)
Dividends on preferred stock.................. (5) -- (.02) (1) -- (.01)
---- ----- ----- ---- ----- -----
Basic loss available to common
shareholders per share........................ (22) 220.5 (.10) (29) 228.3 (.13)
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price........................ -- -- -- -- -- --
Assuming conversion of minority OP Units
outstanding................................. (5) 63.3 -- (9) 64.6 --
Assuming conversion of preferred
OP Units.................................... -- .6 -- -- .4 --
Assuming conversion of minority OP Units
issuable.................................... -- -- -- -- -- --
Assuming conversion of Convertible
Preferred Securities........................ -- -- -- -- -- --
---- ----- ----- ---- ----- -----
Diluted loss per share........................ $(27) 284.4 $(.10) $(38) 293.3 $(.13)
==== ===== ===== ==== ===== =====
<CAPTION>
Thirty-six Weeks Ended
--------------------------------------------------------------------------
September 8, 2000 September 10, 1999
------------------------------------ ------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss...................................... $(127) 220.7 $(.57) $(103) 227.7 $(.45)
Dividends on preferred stock.................. (15) -- (.07) (1) -- (.01)
Gain on repurchase of Convertible Preferred
Securities.................................. 4 -- .02 -- -- --
----- ----- ----- ----- ----- -----
Basic loss available to common
shareholders per share........................ (138) 220.7 (.62) (104) 227.7 (.46)
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price........................ -- -- -- -- -- --
Assuming conversion of minority OP Units
outstanding................................. (38) 63.5 -- (30) 64.7 --
Assuming conversion of preferred
OP Units.................................... -- .6 -- -- .1 --
Assuming conversion of minority OP Units
issuable.................................... -- -- -- -- -- --
Assuming conversion of Convertible
Preferred Securities........................ -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Diluted loss per share........................ $(176) 284.8 $(.62) $(134) 292.5 $(.46)
===== ===== ===== ===== ===== =====
</TABLE>
4. Stock Repurchases
In September 1999, the Board of Directors 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 the Company's common stock, OP
Units, or a corresponding amount (based on the appropriate conversion ratio)
of the Company's Convertible Preferred Securities. Such repurchases will be
made at
-10-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
management's discretion, subject to market conditions, and may be suspended
at any time at the Company's discretion. During the twelve weeks ended March
24, 2000, the Company repurchased approximately 4.9 million common shares,
325,000 OP Units, and 435,000 shares of the Convertible Preferred Securities
for a total investment of $62 million. No repurchases were made during the
second and third quarters of 2000. Since the inception of the repurchase
program in September 1999, the Company has spent, in the aggregate,
approximately $150 million to repurchase 16.2 million equivalent shares.
5. Dividends and Distributions Payable
On September 19, 2000, the Board of Directors declared a quarterly cash
dividend of $0.23 per share of common stock. The third quarter dividend was
paid on October 16, 2000 to shareholders of record on September 29, 2000.
First and second quarter cash dividends of $0.21 per share of common stock
were paid on April 14 and July 14, 2000.
On September 19, 2000, the Board of Directors declared quarterly dividends of
$0.625 per share of Preferred Stock, which were paid on October 16, 2000, to
shareholders of record on September 29, 2000. First and second quarter
dividends of $0.625 per share of Preferred Stock were paid on April 14 and
July 14, 2000.
6. Acquisitions and Developments
In February 2000, construction of the 717-room Tampa Waterside Marriott
adjacent to the convention center in downtown Tampa, Florida was completed at
a total development cost of approximately $104 million, not including a $16
million tax subsidy provided by the City of Tampa.
On May 16, 2000, the Company acquired a non-controlling partnership interest
in the JWDC Limited Partnership, which owns the JW Marriott Hotel, a 772-room
hotel located on Pennsylvania Avenue in Washington, DC. The Company, which
previously held a small interest in the venture, invested approximately $40
million in the form of a preferred equity contribution.
In late June 2000, an expansion that included the additions of a 500-room
tower and 15,000 square feet of meeting space at the Orlando World Center
Marriott was completed at an approximate development cost of $88 million. The
convention/resort property now offers 2,000 guest rooms.
7. Debt Issuances and Refinancings
In February 2000, the Company refinanced the $80 million mortgage on
Marriott's Harbor Beach Resort property in Fort Lauderdale, Florida. The new
mortgage is for $84 million, at a rate of 8.58%, and matures in March 2007.
During June 2000, the Company modified its bank credit facility. As
modified, the total facility has been permanently reduced to $775 million,
consisting of a $150 million term loan and a $625 million revolver. In
addition, the original term was extended for two additional years, through
August 2003. In connection with the renegotiation of the bank credit
facility, the Company recognized an extraordinary loss of approximately $3
million during the second quarter of 2000, representing the write-off of
deferred financing costs and certain fees paid to the lender. As of September
8, 2000, $176 million was outstanding under the bank credit facility, and the
available capacity under the revolver portion was $599 million.
-11-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In October 2000, the Company issued $250 million of 9 1/4% Series F senior
notes due in 2007, under the same indenture and with the same covenants as
the Series A, Series B, Series C, and Series E senior notes. The net
proceeds to the Company were approximately $245 million, after deduction of
a discount at issuance of approximately $3 million and commissions and
expenses of approximately $2 million. The proceeds have been used for the
$26 million repayment of the outstanding balance on the revolver portion of
the bank credit facility, and the remainder will be used for general
working capital purposes, which may include the purchase of the leases from
Crestline, and litigation settlements, as discussed in Note 11. As a result
of this repayment, the available capacity under the revolver was increased
to $625 million, and total borrowings under the bank credit facility were
reduced to $150 million, representing the term loan portion.
8. Geographic Information
As of September 8, 2000, 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
revenues for each of the geographical areas in which the Company owns
hotels (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------------- --------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
United States..................................... $ 236 $ 199 $ 615 $ 588
International..................................... 3 4 8 10
----- ----- ----- -----
Total........................................... $ 239 $ 203 $ 623 $ 598
===== ===== ===== =====
</TABLE>
9. Comprehensive Income
The Company's other comprehensive income consists of unrealized gains and
losses on foreign currency translation adjustments and the right to receive
cash from Host Marriott Services Corporation subsequent to the exercise of
the options held by certain former and current employees of Marriott
International, pursuant to the distribution agreement between the Company
and Host Marriott Services Corporation. For the twelve and thirty-six weeks
ended September 8, 2000, the comprehensive loss totaled $19 million and
$128 million, respectively. The comprehensive loss was $22 million and $96
million for the twelve and thirty-six weeks ended September 10, 1999,
respectively. As of September 8, 2000 and December 31, 1999 the Company's
accumulated other comprehensive income was approximately $1 million and $2
million, respectively.
10. Summarized Lease Pool Financial Statements
As discussed in Note 2, as of September 8, 2000, almost all the properties
of the Company and its subsidiaries were leased to Crestline. 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
-12-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 1999. The results of
operations for the twelve and thirty-six weeks ended September 8, 2000 and
September 10, 1999 and summarized balance sheet data as of September 8,
2000 and December 31, 1999 of the lease pools in which the Company's hotels
are organized are as follows (in millions):
-13-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Twelve Weeks Ended September 8, 2000
---------------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $147 $156 $137 $141 $581
Food and beverage.......................... 60 66 57 69 252
Other...................................... 14 16 16 19 65
---- ---- ---- ---- ----
Total hotel sales..................... 221 238 210 229 898
Operating Costs and Expenses
Rooms...................................... 36 40 34 33 143
Food and beverage.......................... 49 54 45 54 202
Other...................................... 62 58 57 57 234
Management fees............................ 10 15 10 14 49
Lease expense.............................. 63 67 62 70 262
---- ---- ---- ---- ----
Total operating expenses.............. 220 234 208 228 890
---- ---- ---- ---- ----
Operating Profit................................ 1 4 2 1 8
Corporate and Interest Expenses................. -- -- (1) -- (1)
---- ---- ---- ---- ----
Income before taxes....................... 1 4 1 1 7
Income taxes.............................. (1) (2) -- -- (3)
---- ---- ---- ---- ----
Net Income............................ $ -- $ 2 $ 1 $ 1 $ 4
===== ==== ==== ==== ====
<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
==== ==== ==== ==== ====
</TABLE>
-14-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Thirty six Weeks Ended September 8, 2000
----------------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Hotel Sales
Rooms...................................... $428 $469 $409 $433 $1,739
Food and beverage.......................... 188 219 189 235 831
Other...................................... 44 46 59 60 209
---- ---- ---- ---- ------
Total hotel sales..................... 660 734 657 728 2,779
Operating Costs and Expenses
Rooms...................................... 102 116 96 96 410
Food and beverage.......................... 145 165 140 167 617
Other...................................... 173 167 166 170 676
Management fees............................ 32 50 32 52 166
Lease expense.............................. 200 224 214 237 875
---- ---- ---- ---- ------
Total operating expenses.............. 652 722 648 722 2,744
---- ---- ---- ---- ------
Operating Profit................................ 8 12 9 6 35
Corporate and Interest Expenses................. (1) (1) (1) (1) (4)
---- ---- ---- ---- ------
Income before taxes....................... 7 11 8 5 31
Income taxes.............................. (3) (5) (3) (2) (13)
---- ---- ---- ---- ------
Net Income............................ $ 4 $ 6 $ 5 $ 3 $ 18
==== ==== ==== ==== ======
<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 8, 2000
----------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets.......................................... $37 $34 $40 $37 $148
Liabilities..................................... 30 27 34 34 125
Equity.......................................... 7 7 6 3 23
<CAPTION>
As December 31, 1999
----------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets.......................................... $39 $37 $41 $38 $155
Liabilities..................................... 36 36 40 38 150
Equity.......................................... 3 1 1 -- 5
</TABLE>
-15-
<PAGE>
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. Contingencies
On March 16, 1998, limited partners in several limited partnerships filed a
lawsuit, the Texas Multi-Partnership Lawsuit, naming the Company, Marriott
International Inc. ("Marriott International"), and others as defendants and
claiming that they conspired to sell hotels to the partnerships for
inflated prices, that they charged the partnerships excessive management
fees to operate the partnerships' hotels and otherwise breached their
fiduciary duties. The lawsuit involved the following partnerships:
Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited
Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence
Inn II Limited Partnership, Fairfield Inn by Marriott Limited Partnership,
Desert Springs Marriott Limited Partnership and Atlanta Marriott Marquis
Limited Partnership. Three other lawsuits, collectively, the Partnership
Lawsuits, involving limited partners of some of the aforementioned
partnerships had also been filed, at various dates beginning in June 1996,
and include similar actions naming the Company, Marriott International and
others as defendants.
The Company and Marriott International have executed a definitive
settlement agreement to resolve the Texas Multi-Partnership Lawsuit and the
Partnership Lawsuits. The proposed settlement would involve a resolution of
claims against all defendants in all seven partnerships, except with
respect to those partners who have elected to opt out of the settlement.
The holders of fewer than three units in a single partnership have made
such an election, however. The proposed settlement would include an
acquisition of the limited partner interests in two partnerships by an
unconsolidated joint venture between a non-controlled subsidiary of the
Company and a subsidiary of Marriott International for approximately $372
million plus interest and legal fees, of which the Company will pay
approximately $91 million. The Company's share of funds required to resolve
the litigation with all seven partnerships, including the acquisitions, is
expected to be approximately $124 million. Of this amount, the company
funded the settlement escrow for $31 million cash on September 28, 2000, in
settlement of litigation with the plaintiffs in four of the partnerships.
As part of the settlement, the Company also expects to contribute to the
joint venture its existing interests in the partnerships. All conditions
have been removed and judicial fairness determinations have been obtained
with respect to five of the seven partnerships and they have been severed
by court order from the remaining two settlements. Accordingly, the
defendants have consummated the settlements with respect to those
partnerships by funding the settlement escrows. Various consents remain
conditions to consummation with respect to the other two partnerships, and
there can be no assurance that these settlements will occur. In the event
the Company does not successfully finalize these two settlements, the two
cases could go to trial. As a result of the proposed settlement, the
Company recorded a one-time, non-recurring, pre-tax charge of $40 million
in 1999.
The Company has also been named a defendant in other lawsuits involving
various hotel partnerships. The lawsuits are ongoing, and although the
ultimate resolution of lawsuits is not determinable, the Company does not
believe the outcome will be material to the financial position, statement
of operations or cash flows of the Company. See "Item 1 -- Legal
Proceedings" for further detail regarding current litigation.
12. Subsequent Event
On September 21, 2000, one of our non-controlled subsidiaries acquired for
$4.5 million a 4% preferred equity interest in STSN, a privately held
company that is a provider of in-room, high speed internet access to the
lodging industry, from an affiliate of First Media Corporation. Richard E.
Marriott, a director and officer of the Company is also an officer,
director and controlling shareholder of First Media Corporation. The
purchase price was determined based on First Media's original investment in
STSN in December 1999, plus investment costs and accrued interest through
September 2000.
-16-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
--------------------------
Certain matters discussed herein are forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. 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," "intends," "predicts,"
"projects," "plan," "objective," "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 disclaim any
obligations or undertaking to publicly release any updates or revisions to
any forward-looking statement contained in this quarterly report on Form 10-Q
to reflect any change in our expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based.
Overview
--------
In December 1999, the REIT Modernization Act was passed, effective for
taxable years beginning after December 31, 2000, which significantly amends
the REIT laws applicable to us. Under the REIT Modernization Act, beginning
January 1, 2001, (i) we will be able to lease our hotels to a subsidiary that
is a taxable corporation and that elects to be treated as a "taxable REIT
subsidiary" rather than to a third party such as Crestline and (ii) we will
be permitted to own all of the voting stock of such taxable REIT subsidiary.
In addition, as a result of passage of the REIT Modernization Act, and under
the terms of our leases with Crestline subsidiaries, we have the right to
purchase the leases from Crestline on or after January 1, 2001, for a price
equal to the fair rental value of the lessee's interest in the leases over
their remaining terms based on an agreed upon formula, excluding any option
periods, the amount of which is likely to be between $200 million and $250
million. We currently are engaged in discussions with Crestline regarding a
transaction in which a taxable REIT subsidiary owned by us would purchase all
or substantially all of the leases for our hotels with Crestline
subsidiaries. If any transaction is consummated, we would lease these hotels
to a subsidiary of ours that qualifies as a taxable REIT subsidiary. In
connection therewith, we would recognize the revenues and expenses generated
by the hotels subject to the leases and we would no longer recognize rental
income from these leases. Consummation of a transaction would be subject to
various conditions, including the receipt of any required third party
consents and the negotiation of definitive documentation. We have not reached
a definitive agreement with Crestline with respect to a purchase and there
can be no assurance that we will be able to reach an agreement or that any
purchase, if agreed to, would be consummated. We are also considering
pursuing a transaction with Host Marriott Statutory Employee/Charitable Trust
that would allow us to acquire control of the non-controlled subsidiaries
which we expect would elect to be treated as taxable REIT subsidiaries,
although we have not reached any such agreement and cannot assure you that
any such agreement will be reached.
We and Marriott International have executed a definitive settlement agreement
with plaintiffs to resolve specific pending litigation involving seven
limited partnerships in which we act as general partner. The proposed
settlement would involve an acquisition of the limited partner interests in
two partnerships by a joint venture between one of our affiliates and a
subsidiary of Marriott International, the contribution by our non-controlled
subsidiaries of their general partnership interests in the partnerships and
cash payments to partners in the other five partnerships, in exchange for
resolution of claims against all
-17-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
defendants in all seven partnerships, except with respect to those partners
who have elected to opt out of the settlement. The holders of three units
have made such an election. Our share of the cash required to resolve the
litigation, including the acquisition by a joint venture formed by us and
Marriott International of two of the partnerships, is expected to be
approximately $124 million. Of this amount, $31 million in cash was funded
during September 2000 in settlement of litigation with the plaintiffs from
four of the partnerships. Unitholders from five of the partnerships have
finalized the settlement of their claims with us. The proposed settlement for
the remaining two partnerships is subject to numerous conditions, including
various consents, and no assurance can be given that those settlements will
occur. As a result of the proposed settlement, we recorded a one-time non-
recurring, pre-tax charge of $40 million in the fourth quarter of 1999.
Results of Operations
---------------------
Revenues. Our revenues primarily represent rental income from our leased
hotels, net gains on property transactions, interest income and equity in
earnings of affiliates. As discussed in Note 2 to the condensed consolidated
financial statements, percentage rental revenues of $75 million and $86
million for the twelve weeks ended September 8, 2000 and September 10, 1999,
respectively, and $366 million and $339 for the thirty-six weeks ended
September 8, 2000 and September 10, 1999, respectively, were deferred in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101 ("SAB 101"). Percentage rent will be recognized as income
during the year once specified hotel sales thresholds are achieved.
The table below represents hotel sales from which rental income is computed
as discussed in Note 2 to the condensed consolidated financial statements.
The table is presented in order to facilitate an investor's reconciliation of
hotel sales to rental income.
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------- ----------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
------------ ------------ ------------- --------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Hotel Sales
Rooms............................... $ 656 $ 609 $1,979 $1,881
Food and beverage................... 258 250 862 828
Other............................... 71 66 224 201
----- ----- ------ ------
Total hotel sales.............. $ 985 $ 925 $3,065 $2,910
===== ===== ====== ======
</TABLE>
Rental income increased $36 million, or 19%, to $224 million for the third
quarter of 2000, and increased $34 million, or 6% to $580 million year-to-
date primarily driven by the growth in room revenues generated per available
room or REVPAR for comparable properties, and the completion of the new Tampa
Waterside Marriott in February 2000 and the 500-room expansion at the Orlando
World Center Marriott in June 2000, partially offset by the sale of five
properties in 1999. REVPAR increased 9.4% to $119.74 for the third quarter of
2000 and 6.6% to $124.31 year-to-date for comparable properties, which
consist of the 114 properties owned, directly or indirectly, by us for the
same period of time in each period covered, excluding two properties where
significant expansion at the hotels affected operations and five properties
where reported results were affected by a change in reporting period. On a
comparable basis, average room rates increased approximately 7.9% and 6.3%,
while average occupancy increased one percentage point and less than one
percentage point for the third quarter of 2000 and 2000 year-to-date,
respectively.
Depreciation and Amortization. Depreciation and amortization increased $7
million or 10% for the third quarter of 2000 and increased $21 million or 10%
year-to-date, reflecting an increase in
-18-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
depreciable assets, which is primarily the result of new capital projects
placed in service in 2000, including the Tampa Waterside Marriott and the
expansion at the Orlando World Center Marriott, partially offset by net asset
disposals of approximately $174 million in connection with the sale of five
hotels during 1999.
Property-level Owner Expenses. Property-level owner expenses primarily
consist of property taxes, insurance, and ground and equipment rent. These
expenses increased $4 million or 6% to $66 million for the third quarter of
2000, and increased $7 million or 4% to $191 million year-to-date, primarily
due to an increase in ground lease expense, which is commensurate with the
increase in hotel sales, and an increase in equipment rent expense due to
technology initiatives at the hotels during 2000.
Minority Interest Benefit. For the twelve weeks and thirty-six weeks ended
September 8, 2000 and September 10, 1999, respectively, we recognized a
minority interest benefit of $4 million and $8 million, and $26 million and
$21 million, reflecting the minority owners' share in the net loss for those
periods, which is primarily the result of the deferral of contingent rental
income of $75 million and $86 million, and $366 million and $339 million,
respectively. The benefit will be reversed in the subsequent quarter as we
earn the contingent rent.
Interest Expense. Interest expense increased 2% to $100 million in the third
quarter of 2000, primarily due to a decrease in capitalized interest as the
development projects at the Tampa Waterside Marriott and Orlando World Center
Marriott were completed in February and June 2000, respectively. Interest
expense decreased 2% to $293 million year-to-date, primarily due to
repayments totaling $225 million on the term loan portion of the bank credit
facility during the fourth quarter of 1999.
Corporate Expenses. Corporate expenses were $7 million and $5 million for
the third quarters of 2000 and 1999, respectively, and increased $7 million
to $27 million year-to-date, resulting primarily from an increase in
compensation expense related to employee stock plans.
Extraordinary Gain (Loss). There were no extraordinary items recognized
during the third quarter of 2000. During the twelve weeks ended June 16,
2000, we recorded an extraordinary loss of approximately $3 million
representing the write off of deferred financing costs and certain fees paid
to our lender in connection with the renegotiation of the bank credit
facility.
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 of 1999. An
extraordinary loss of $3 million representing the write-off of deferred
financing fees was recognized during the third quarter of 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.
Net Loss. Our net loss decreased $11 million to $17 million for the third
quarter of 2000 and increased $24 million to $127 million year-to-date as a
result of the items discussed above.
Net Loss Available to Common Shareholders. The net loss available to common
shareholders decreased $7 million to $22 million for the third quarter of
2000 and increased $34 million to $138 million year-to-date. The net loss
available to common shareholders reflects year-to-date dividends of $15
million on Preferred Stock, which was issued during the second half of 1999,
and a $4 million gain, which
-19-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
represents the common shareholders' portion of
the gain on the repurchase of the Convertible Preferred Securities.
FFO and EBITDA
--------------
We consider Comparative Funds From Operations ("Comparative FFO"), which
consists of Funds From Operations, as defined by the National Association of
Real Estate Investment Trusts, plus contingent rent, as well as our
consolidated earnings before interest expense, income taxes, depreciation,
amortization and other non-cash items (including contingent rent) ("EBITDA")
to be indicative measures of our operating performance due to the
significance of our long-lived assets. Comparative FFO and EBITDA are also
useful in measuring our ability to service debt, fund capital expenditures
and expand our business. Furthermore, management believes that Comparative
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, Comparative FFO and EBITDA as presented may not be comparable to FFO
and EBITDA 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 Comparative FFO presentations.
Comparative FFO available to common shareholders increased $13 million, or
15%, to $99 million for the third quarter of 2000 over the third quarter of
1999, and increased $28 million or 9%, to $324 million year-to-date compared
to the same period in 1999. The following is a reconciliation of the loss
from operations before extraordinary items to Comparative FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
------------------------------------ ------------------------------------
September 8, 2000 September 10, September 8, 2000 September 10,
----------------- ----------------- ----------------- ---------------
1999 1999
---- ----
<S> <C> <C> <C> <C>
Funds from Operations
Loss from operations before extraordinary
items......................................... $(17) $(32) $(124) $(120)
Depreciation and amortization.................. 74 68 220 203
Other real estate activities................... (1) -- (2) (16)
Partnership adjustments........................ 3 (7) (19) (16)
---- ---- ----- -----
Funds from operations of Host LP................. 59 29 75 51
Effect on funds from operations of SAB 101..... 74 83 359 330
---- ---- ----- -----
Comparative funds from operations of
Host LP........................................ 133 112 434 381
Dividends on preferred stock................... (5) (1) (15) (1)
---- ---- ----- -----
Comparative funds from operations of Host
LP available to common unitholders............. 128 111 419 380
Comparative funds from operations of
minority partners of Host LP.................. (29) (25) (95) (85)
---- ---- ----- -----
Comparative funds from operations available
to common shareholders of Host REIT............ $ 99 $ 86 $ 324 $ 295
==== ==== ===== =====
</TABLE>
We are the sole general partner in the Operating Partnership and as of
September 8, 2000 held approximately 78% of the outstanding OP Units. The $29
million and $25 million, and $95 million and $85 million, deducted for the
twelve weeks and thirty-six weeks ended September 8, 2000 and September 10,
1999, respectively, represent the Comparative FFO attributable to the
interests in the
-20-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Operating Partnership held by those minority partners. OP Units owned by
holders other than us are redeemable at the option of the holder, generally
commencing one year after the issuance of their OP Units. Upon redemption of
an OP Unit, the holder would receive from the Operating Partnership cash in
an amount equal to the market value of one share of our common stock, or at
our option, a share of our common stock.
EBITDA increased $23 million, or 12%, to $221 million in the third quarter of
2000 and increased $54 million, or 8%, to $707 million year-to-date over the
comparable periods in 1999, reflecting primarily EBITDA growth from owned
properties, partially offset by EBITDA related to assets sold during 1999. In
2000 and 1999, respectively, Hotel EBITDA was $157 million and $124 million
for the third quarters, and $390 million and $362 million year-to-date, which
does not include deferred rental income of $75 million and $86 million, and
$366 million and $339 million, for the quarters and year-to-date,
respectively.
The following schedule presents our EBITDA as well as a reconciliation of
EBITDA to the loss from operations before extraordinary items (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
---------------------------------- ----------------------------------
September 8, September 10, September 8, September 10,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
EBITDA
Hotels.......................................... $ 157 $124 $ 390 $ 362
Office buildings and other investments.......... 2 2 5 3
Interest income................................. 9 10 26 26
Corporate and other expenses.................... (7) (10) (38) (36)
Effect on revenue of SAB 101.................... 75 86 366 339
----- ---- ----- -----
EBITDA of Host LP................................. 236 212 749 694
Distributions to minority interest partners
of Host LP.................................. (15) (14) (42) (41)
----- ---- ----- -----
EBITDA of Host REIT............................... $ 221 $198 $ 707 $ 653
===== ==== ===== =====
<CAPTION>
Twelve Weeks Ended Thirty-six Weeks Ended
----------------------------------------------------------------------
September 8, 2000 September 10, September 8, 2000 September 10,
----------------- -------------- ----------------- -------------
1999 1999
---- ----
<S> <C> <C> <C> <C>
EBITDA of Host REIT............................. $ 221 $198 $ 707 $ 653
Effect on revenue of SAB 101.................... (75) (86) (366) (339)
Interest expense................................ (100) (98) (293) (298)
Income taxes.................................... (4) (1) (7) (3)
Dividends on Convertible Preferred
Securities.................................... (8) (9) (22) (26)
Depreciation and amortization................... (75) (68) (224) (203)
Minority interest benefit....................... 4 8 26 21
Distributions to minority interest partners of
Host LP....................................... 15 14 42 41
Other non-cash charges, net..................... 5 10 13 34
----- ---- ----- -----
Loss from operations before extraordinary
items....................................... $ (17) $(32) $(124) $(120)
===== ==== ===== =====
</TABLE>
Distributions to minority holders of OP Units were $15 million and $14
million, respectively, for the twelve weeks ended September 8, 2000 and
September 10, 1999, and $42 million and $41 million for the thirty-six weeks
ended September 8, 2000 and September 10, 1999, respectively. These OP Units
are convertible into cash or our common stock at our option. Third quarter
distributions of $0.23 and
-21-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
$0.21 per common unit, respectively, were paid on October 16, 2000 and
October 15, 1999, respectively. First and second quarter distributions of
$0.21 per unit were paid on April 14 and July 14, 2000, and April 14 and July
14, 1999.
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.5 times and 2.3 times for the 2000 and 1999 thirty-six week periods,
respectively, and 2.3 times for full-year 1999. The deficiency of earnings to
fixed charges was $145 million through the third quarter of 2000 and $139
million through the third quarter of 1999, which is primarily due to the
deferral of contingent rental revenue of $366 million and $339 million for
the same periods, respectively.
Cash Flows and Financial Condition
----------------------------------
We reported a decrease in cash and cash equivalents of $89 million during the
thirty-six weeks ended September 8, 2000. Cash from operations was $398
million through the third quarter of 2000 and $229 million through the third
quarter of 1999. The $169 million increase in cash from operations primarily
relates to changes in operating accounts. 1999 cash from operations were
affected by the addition of 36 properties as of December 30, 1998 and the
timing of the receipt of cash payments as a result of our hotel leases, which
were effective beginning January 1, 1999 in connection with the REIT
Conversion. 1999 cash from operations was also affected by cash expenditures
incurred in connection with the REIT Conversion and the renegotiation of the
management agreement and ground lease for the New York Marriott Marquis.
Cash used in investing activities was $307 million and $276 million through
the third quarters of 2000 and 1999, respectively. Cash used in investing
activities through the third quarter includes capital expenditures of $271
million and $261 million for 2000 and 1999, respectively, mostly related to
renewals and replacements on existing properties and new development
projects. Property and equipment balances include $101 million and $243
million for construction in progress as of September 8, 2000 and December 31,
1999, respectively. The reduction in construction in progress is due to the
completion of the Tampa Waterside Marriott, which was placed in service in
February 2000, and the expansion at the Orlando World Center Marriott, which
was completed in late June 2000. The current balance primarily relates to
properties in Naples, Chicago, Harbor Beach and various other expansion and
development projects.
On May 16, 2000, we acquired a non-controlling partnership interest in the
JWDC Limited Partnership, which owns the JW Marriott Hotel, a 772-room hotel
located on Pennsylvania Avenue in Washington, DC. The Company, which
previously held a small interest in the venture, invested approximately $40
million in the form of a preferred equity contribution.
Cash used in financing activities was $180 million through the third quarter
of 2000 and $99 million through the third quarter of 1999. Cash used in
financing activities through the third quarter of 2000 includes payments of
dividends and repurchases under our stock buyback program. Increased
borrowings under our bank credit facility of approximately $51 million
primarily funded the investment in the JWDC Limited Partnership discussed
above.
In February 2000, we refinanced the $80 million mortgage on Marriott's Harbor
Beach Resort property in Fort Lauderdale, Florida. The new mortgage is for
$84 million, at a rate of 8.58%, and matures in March 2007.
During June 2000, we modified our bank credit facility. As modified, the
total facility has been permanently reduced to $775 million, consisting of a
$150 million term loan and a $625 million
-22-
<PAGE>
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
revolver. In addition, the original term was extended for two additional
years, through August 2003. As of September 8, 2000, $176 million was
outstanding under the bank credit facility, and the available capacity under
the line of credit balance was $599 million.
In October 2000, we repaid approximately $26 million of the outstanding
balance on the revolver portion of the bank credit facility from a portion of
the proceeds of the bond offering described below. As a result of the
repayment, the available capacity under the revolver was increased to $625
million, and total borrowings under the bank credit facility were reduced to
$150 million.
On September 19, 2000, the Board of Directors declared cash dividends of
$0.23 per common share and $0.625 per share of Preferred Stock, which were
paid on October 16, 2000 to shareholders of record on September 29, 2000. In
addition, on April 14 and July 14, 2000, first and second quarter dividends
of $0.21 per common share and $0.625 per share of Preferred Stock were paid
to shareholders.
During the first quarter of 2000, we continued our stock repurchase program
making repurchases of approximately 4.9 million common shares, 325,000 OP
Units, and 435,000 shares of Convertible referred Securities, for a total
investment of $62 million. No repurchases were made during the second and
third quarters of 2000. Since the inception of the repurchase program in
September 1999, repurchases under the program total 16.2 million common
shares or equivalents for a total investment of $150 million. We will
continue to look at strategic acquisitions offering superior returns, such as
the investment in the JW Marriott Hotel in Washington, DC, as well as stock
repurchases based on market conditions and our stock price. To the extent
they can be made in a manner that is relatively leverage neutral, we
anticipate that any stock repurchases would be made from future asset sale
proceeds, if any, with a portion of any such proceeds being used to pay down
debt. There are no such asset sales pending at this time.
In April 2000, the 222-room resort property in Singer Island, Florida was
renovated to upgrade the property and convert it to the Hilton brand at a
cost of approximately $6 million. The property represents our first property
under the Hilton brand.
On June 21, 2000, an expansion that included the additions of a 500-room
tower and 15,000 square feet of meeting space at the Orlando World Center
Marriott, which now has 2,000 rooms, was completed at an approximate
development cost of $88 million.
In September 2000, we funded approximately $31 million cash in settlement of
litigation with four partnerships. We expect to pay approximately $91 million
in the near future to resolve the litigation with two additional
partnerships, including the acquisition by a joint venture formed by us and
Marriott International of those two partnerships, subject to numerous
conditions, including various consents. See discussion at Part II, Item 1
"Legal Proceedings."
In October 2000, we issued $250 million of 9 1/4% Series F senior notes due
in 2007, under the same indenture and with the same covenants as the Series
A, Series B, Series C, and Series E senior notes. The net proceeds to us
were approximately $245 million, after deduction of a discount at issuance of
approximately $3 million and commissions and expenses of approximately $2
million. A portion of the proceeds have been used for the $26 million
repayment of the outstanding balance under the revolver portion of the bank
credit facility as discussed above, and the remainder will be use for general
working capital purposes, which may include the purchase of the leases from
Crestline and litigation settlements.
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our borrowings under the term loan portion of the bank credit facility as
well as the mortgage on The Ritz-Carlton, Amelia Island are sensitive to
changes in interest rates. The interest rates on these debt obligations,
which were $265 million and $215 million, respectively, at September 8, 2000
and December 31, 1999, are based on various LIBOR terms plus 200 to 225 basis
points. The weighted average interest rate for these financial instruments
are 8.80% for the thirty-six weeks ended September 8, 2000 and 7.58% for the
year ended December 31, 1999.
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in several
limited partnerships sponsored by Host REIT 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. 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. Host REIT, Marriott International, several of
their subsidiaries, and J.W. Marriott, Jr. are among the various named
defendants. The Haas lawsuit originally involved the following partnerships:
1.) Courtyard by Marriott Limited Partnership ("CBM I");
2.) Courtyard by Marriott II Limited Partnership ("CBM II");
3.) Marriott Residence Inn Limited Partnership ("Res I");
4.) Marriott Residence Inn II Limited Partnership ("Res II");
5.) Fairfield Inn by Marriott Limited Partnership ("Fairfield");
6.) Desert Springs Marriott Limited Partnership ("Desert Springs"); and
7.) Atlanta Marriott Marquis Limited Partnership ("AMMLP").
Host REIT has settled the claims of the AMMLP unitholders as part of a
settlement of a separate class action suit, pursuant to which settlement we paid
$4.25 million in return for a release of all claims. This settlement, which has
been finalized, is not contingent on any portion of the Partnership Litigation
Settlement, discussed more fully below. In addition, we consummated settlements
with the unitholders of Res I, Res II, Fairfield and Desert Springs, under the
umbrella of the Partnership Litigation Settlement. The CBM I and CBM II
settlements remain to be completed, as described below.
Courtyard by Marriott II Limited Partnership (CBM II). CBM II is a Delaware
limited partnership formed in 1987 to own 70 Courtyard by Marriott hotels. A
subsidiary of ours is the sole general partner of CBM II and Marriott
International or one of its subsidiaries manages all of the hotels owned by 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 Host REIT, Marriott
International, 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
that converted the Whitey Ford lawsuit into a class action with a certified
class of limited partners. This case is separate from the CBM II lawsuit, filed
as part of the Haas lawsuit; however it will be resolved by the Partnership
Litigation Settlement described below.
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Courtyard by Marriott Limited Partnership (CBM I). CBM I is a Delaware limited
partnership formed in 1986 to own 50 Courtyard by Marriott hotels. A subsidiary
of ours is the sole general partner of CBM I and Marriott International or one
of its subsidiaries manages all of the hotels owned by CBM I. Two members of an
ad hoc committee of CBM I limited partners, Marvin Schick and Jack Hirsch, filed
a putative class action lawsuit, Marvin Schick, et al. v. Host Marriott
Corporation, et al., Civil Action No. 15991, in the Delaware Court of Chancery
against Host REIT, Marriott International, and others on October 16, 1997,
regarding the 1995 refinancing of CBM I's mortgage debt. The complaint contains
allegations of breach of fiduciary duty, breach of contract, tortious
interference, and aiding and abetting liability in connection with the
refinancing. This lawsuit will be mooted upon consummation of the Partnership
Litigation Settlement described below.
Pursuant to the terms of the Partnership Litigation Settlement, CBM I and CBM II
are currently subject to the tender offers described below, the completion of
which will release us and the other defendants from all claims by CBM I and CBM
II unitholders who have not opted out of these settlements. The holders of three
units have elected such treatment.
Partnership Litigation Settlement. On March 9, 2000, Host REIT and Marriott
International entered into a settlement agreement that will resolve the Texas
Multi-Partnership (the Haas case), the CBM II (including the Whitey Ford/Milkes
case), and the CBM I (the Schick case) litigation. Under this settlement, we and
Marriott International have settled with the Res I, Res II, Fairfield and Desert
Springs Plaintiffs for an aggregate payment of approximately $62 million (of
which we and our subsidiaries have paid approximately $31 million) in return for
a general release of all claims. The Res I, Res II, Fairfield and Desert Springs
settlements were severed from the CBM I and CBM II settlements by a court order
dated September 25, 2000. This settlement is subject to a thirty day appeal
period beginning September 28, 2000, during which time any class members can
appeal the settlement.
We are currently in the process of finalizing the settlements for the CBM I and
CBM II partnerships. The principal feature of the proposed settlements is the
acquisition of all CBM I and CBM II limited partner units by a joint venture
formed by us (through non-controlled subsidiaries) and Marriott International
and a full release of all claims from all limited partners (other than those who
have opted out of the class settlement) for an aggregate payment of
approximately $372 million plus interest and attorneys' fees of the plaintiffs'
counsels (of which we will pay approximately $91 million). The joint venture
would acquire CBM I and CBM II by acquiring partnership units pursuant to a
tender offer for such units followed by a merger of each of CBM I and CBM II
with and into subsidiaries of the joint venture. The joint venture will finance
the acquisition of CBM I and CBM II with mezzanine indebtedness borrowed from
Marriott International and with cash and other assets contributed to it by us
(through our non-controlled subsidiaries) and Marriott International. Upon
consummation of the acquisition of CBM I and CBM II, we will own a 50% interest
in the joint venture.
We and Marriott International may terminate the settlement with respect to CBM I
and CBM II if we and Marriott International fail to receive any necessary third
party consents to the merger. The CBM I and CBM II settlements are mutually
conditioned on each other, so that, we and Marriott International will not be
required to consummate the settlement with respect to one partnership if the
settlement with respect to the other partnership is not successfully completed.
The condition is waivable by us and Marriott International in our sole
discretion.
The consent solicitation periods expired with sufficient votes to complete the
mergers. The fairness hearing for the CBM II settlement was held on September
28, 2000 and the settlement with respect to CBM II was approved. The fairness
hearing for CBM I was held on October 19, 2000 and the settlement with respect
to
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CBM I was approved. The CBM I and CBM II settlements remain subject to certain
third party consents. If these third party consents are not obtained, the CBM I
and CBM II settlements would be terminated and the cases would go to trial,
unless we and Marriott International waive the condition. These settlements, if
finalized by court orders, will be subject to thirty day appeal periods running
from the entry of the court's judgment orders (presently expected to coincide
with the receipt of the third party consents) during which time any class member
may appeal the approval of the settlements.
Marriott Hotel Properties II Limited Partnership (MHP). Limited partners of MHP
II have filed putative class action lawsuits in Palm Beach County Circuit Court
on May 10, 1996, Leonard Rosenblum, as Trustee of the Sylvia Bernice Rosenblum
Trust, et. al. v. Marriott MHP Two Corporation, et. al., Case No. CL-96-4087-
AD, and, in the Delaware Court of Chancery on April 24, 1996, Cary W. Salter,
Jr., et. al. v. MHP II Acquisition Corp., et. al., respectively, against Host
REIT and certain of its affiliates alleging that the defendants violated their
fiduciary duties and engaged in fraud and coercion in connection with the tender
offer for MHP II units and with our acquisition of MHP II in connection with the
REIT conversion. The plaintiffs in these actions are seeking unspecified
damages.
In the Florida case, the defendants removed the case to the United States
District Court for the Southern District of Florida and, after hearings on
various procedural motions, the District Court remanded the case to state court
on July 25, 1998. In light of the court's decision in the Delaware case,
detailed below, the defendants in the Florida action filed a supplemental
memorandum in support of their motions to dismiss, and attached a copy of the
Delaware opinion to the memorandum. The Florida court has not yet ruled on the
motions.
In the Delaware case, the Delaware Court of Chancery initially granted the
plaintiffs' motion to voluntarily dismiss the case with the proviso that the
plaintiffs could refile in the aforementioned action in federal court in
Florida. After the District Court's remand of the Florida action back to Florida
state court, two of the three original Delaware plaintiffs asked the Court of
Chancery to reconsider its order granting their voluntary dismissal. The Court
of Chancery refused to allow the plaintiffs to join the Florida action and,
instead, reinstated the Delaware case, now styled In Re Marriott Hotel
Properties II Limited Partnership Unitholders Litigation, Consolidated Civil
Action No. 14961. On January 29, 1999, Cary W. Salter, one of the original
plaintiffs, alone filed an Amended Consolidated Class Action Complaint in the
Delaware action, adding the allegations that related to our acquisition of MHP
II in connection with the REIT conversion. On January 24, 2000, the Delaware
Court of Chancery issued a memorandum opinion in which the court dismissed all
but one of the plaintiff's claims, concerning the adequacy of disclosure during
the initial tender offer.
A subsequent lawsuit, Accelerated High Yield Growth Fund, Ltd., et al. v. HMC
Hotels Properties II Limited Partnership, et. al., C.A. No. 18254NC, was filed
on August 23, 2000 in the Delaware Court of Chancery by the MacKenzie Patterson
group of funds, one of the three original Delaware plaintiffs, against Host REIT
and certain of its affiliates alleging breach of contract, fraud and coercion in
connection with the acquisition of MHP II during the REIT conversion. The
plaintiffs allege that our acquisition of MHP II by merger in connection with
the REIT conversion violated the partnership agreement and that our subsidiary
acting as the general partner of MHP II breached its fiduciary duties by
allowing it to occur. The plaintiffs in this action are seeking unspecified
damages. The defendants filed their original answers to the complaint on October
16, 2000.
Marriott Suites Limited Partnership (MSLP). On December 10, 1999, KSK Hawaii
Co., Ltd. ("KSK"), a limited partner in MSLP, filed a lawsuit, KSK Hawaii Co.,
Ltd. v. Marriott SBM One Corporation, et al., Civil Action No. 17657-NC, in the
Delaware Court of Chancery. This lawsuit relates to a 1996 recapitalization of
MSLP by our subsidiary, the general partner of MSLP, and the merger of MSLP into
Host
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HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REIT in 1998. KSK claims that it was coerced into selling 19 of its 20
partnership units in the 1996 recapitalization and alleges that the 1998 merger
was a `freeze-out' merger that was designed solely to eliminate KSK's interest
in MSLP. KSK maintains that it lost slightly more than $15 million as a result
of its investment in MSLP. The defendants have filed their answer, and this case
is in the early stages of discovery.
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. ("O'Hare Suites").
On October 5, 2000, Joseph S. Roth and Robert M. Niedelman, limited partners in
O'Hare Suites, filed a putative class action lawsuit, Joseph S. Roth, et al., v.
MOHS Corporation, et al., Case No. 00CH14500, in the Circuit Court of Cook
County, Illinois, Chancery Division, against Host REIT, Host LP, Marriott
International, and MOHS Corporation, a subsidiary of Host LP and a former
general partner of O'Hare Suites. The plaintiffs allege that an improper
calculation of the hotel manager's incentive management fees resulted in
inappropriate payments in 1997 and 1998, and, consequently, in an inadequate
appraised value for their limited partner units in connection with the roll-up
of O'Hare Suites into Host LP. The plaintiffs are seeking damages of
approximately $13 million.
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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 CORPORATION
October 17, 2000 /s/ Donald D. Olinger
---------------- -------------------------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
