<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 March 26, 1999 Commission File No. 1-14635
CRESTLINE CAPITAL CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(240) 694-2000
Maryland 52-2151967
- ------------------------ -----------------------
(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 _____
-----
Shares outstanding
Class at April 23, 1999
- --------------------- -----------------
Common Stock, $.01
par value per share 22,315,000
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<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - 3
March 26, 1999 and January 1, 1999
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Condensed Consolidated Statements of Cash Flows - 5
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of 9
Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Part II. OTHER INFORMATION AND SIGNATURE 17
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 26, January 1,
1999 1999
--------- ---------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net...................................... $669,820 $655,745
Hotel working capital............................................ 94,444 95,114
Due from hotel managers.......................................... 80,418 --
Due from Marriott Senior Living Services, Inc.................... 13,174 8,884
Other assets..................................................... 35,122 32,231
Cash and cash equivalents........................................ 60,801 66,779
-------- --------
$953,779 $858,753
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt................................................... $182,090 $183,059
Other debt...................................................... 29,759 30,017
-------- --------
211,849 213,076
Hotel working capital notes payable to Host Marriott............. 94,444 95,114
-------- --------
Total debt..................................................... 306,293 308,190
Accounts payable and accrued expenses............................ 13,277 6,438
Other liabilities................................................ 21,312 23,518
Due to Host Marriott............................................. 88,011 --
Deferred income taxes............................................ 61,816 61,353
-------- --------
Total liabilities.............................................. 490,709 399,499
-------- --------
Shareholders' equity:
Common stock, 75 million shares authorized, 22.3 million and
21.9 million shares issued and outstanding, respectively,
$.01 par value................................................. 223 219
Additional paid-in capital...................................... 453,071 452,762
Retained earnings............................................... 14,170 6,273
Treasury stock, .3 million shares............................... (4,394) --
-------- --------
Total shareholders' equity..................................... 463,070 459,254
-------- --------
$953,779 $858,753
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended March 26, 1999 and March 27, 1998
(unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------- ----------
1999 1998 1998
----------- -------- ----------
<S> <C> <C> <C>
REVENUES
Hotels
Rooms................................................... $582,896 $ -- $558,756
Food and beverage....................................... 256,450 -- 251,445
Other................................................... 64,638 -- 55,861
-------- ------- --------
Total hotel revenues................................. 903,984 -- 866,062
-------- ------- --------
Senior living
Routine................................................. 51,505 48,304 48,470
Ancillary............................................... 5,448 6,750 6,752
-------- ------- --------
Total senior living revenues......................... 56,953 55,054 55,222
-------- ------- --------
Asset management revenues................................. 1,188 -- 1,038
Equity in earnings of affiliates.......................... 223 -- --
-------- ------- --------
Total revenues.......................................... 962,348 55,054 922,322
-------- ------- --------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms................................................ 132,583 -- 127,073
Food and beverage.................................... 187,971 -- 184,487
Other................................................ 227,690 -- 216,028
Other operating costs and expenses
Management fees...................................... 58,305 -- 55,824
Lease expense........................................ 286,670 -- 274,151
-------- ------- --------
Total hotel operating costs and expenses........... 893,219 -- 857,563
-------- ------- --------
Senior living
Property-level operating costs and expenses
Routine.............................................. 32,402 30,251 30,333
Ancillary............................................ 4,107 5,246 5,247
Other operating costs and expenses
Depreciation and amortization........................ 5,069 4,793 4,820
Management fees paid to Marriott International....... 3,422 2,970 2,978
Property taxes and other............................. 1,681 1,765 1,777
-------- ------- --------
Total senior living operating costs and expenses... 46,681 45,025 45,155
-------- ------- --------
Asset management operating costs and expenses............. 1,067 -- 1,038
-------- ------- --------
Total operating costs and expenses................... 940,967 45,025 903,756
-------- ------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................ 21,381 10,029 18,566
Corporate expenses........................................ (3,962) (754) (4,010)
Interest expense.......................................... (5,106) (6,519) (5,210)
Interest income........................................... 1,072 322 460
-------- ------- --------
INCOME BEFORE INCOME TAXES................................ 13,385 3,078 9,806
Provision for income taxes................................ (5,488) (1,262) (4,020)
-------- ------- --------
NET INCOME................................................ $ 7,897 $ 1,816 $ 5,786
======== ======= ========
BASIC AND DILUTED EARNINGS PER COMMON SHARE............... $ .35 $ .08 $ .26
======== ======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve weeks ended March 26, 1999 and March 27, 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income..................................................... $ 7,897 $ 1,816
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization................................ 5,285 4,793
Amortization of debt premiums................................ (358) (358)
Income taxes................................................. 4,910 1,262
Other........................................................ 83 --
Change in other operating accounts........................... 2,946 (6,632)
-------- -------
Cash from operations........................................... 20,763 881
-------- -------
INVESTING ACTIVITIES
Acquisitions.................................................. -- (1,000)
Purchase of minority interests................................ (6,888) --
Expansions.................................................... (14,005) --
Other capital expenditures.................................... (1,321) (954)
Change in capital improvement reserve......................... 1,326 (42)
-------- -------
Cash used in investing activities.............................. (20,888) (1,996)
-------- -------
FINANCING ACTIVITIES
Repayments of debt............................................ (870) (447)
Repurchases of common stock................................... (4,394) --
Change in financing reserves.................................. (487) (96)
Other......................................................... (102) --
-------- -------
Cash used in financing activities.............................. (5,853) (543)
-------- -------
Decrease in cash and cash equivalents.......................... (5,978) (1,658)
Cash and cash equivalents, beginning of period................. 66,779 17,644
-------- -------
Cash and cash equivalents, end of period....................... $ 60,801 $15,986
======== =======
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott:
Property and equipment....................................... $ -- $21,332
Acquisition of minority interests paid by Host Marriott...... -- 6,276
Debt prepayment paid by Host Marriott........................ -- 26,405
Other........................................................ -- 1,074
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of Crestline
Capital Corporation and subsidiaries (the "Company") have been prepared by
the Company 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 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 January 1, 1999.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal and recurring adjustments) necessary to present fairly the financial
position of the Company as of March 26, 1999 and the results of operations
and cash flows for the twelve weeks ended March 26, 1999 and March 27, 1998.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
Approximately one-fourth of the Company's leased full-service hotels have
managers that have a different accounting calendar from the Company. For
these hotels, which record revenues on a monthly basis versus the four week
period for the Company, the accompanying condensed consolidated financial
statements reflect only two months of operations. The Company will record
three months of operations in each of the second and third quarters and four
months of operations in the fourth quarter.
2. On December 29, 1998 (the "Distribution Date"), the Company became a publicly
traded company when Host Marriott Corporation ("Host Marriott") completed its
plan of reorganizing its business operations by spinning-off the Company to
the shareholders of Host Marriott (the "Distribution"), as part of a series
of transactions pursuant to which Host Marriott elected to be considered a
real estate investment trust ("REIT"). As part of the Distribution, Host
Marriott distributed 20.5 million, or 94%, of the outstanding shares of
common stock of the Company to the Host Marriott shareholders. The remaining
1.4 million, or six percent, of the outstanding shares were used by Host
Marriott as part of the consideration paid on December 30, 1998 for Host
Marriott's acquisition of certain hotel properties. The shares were
distributed on the basis of one share of the Company's common stock for every
ten shares of Host Marriott common stock. On December 31, 1998, the Company
entered into lease and sublease agreements to lease substantially all of Host
Marriott's hotels with the existing management agreements of the leased and
subleased hotels assigned to the Company. As of March 26, 1999, the Company
leased or subleased 120 full-service and 71 limited-service hotels and owned
31 senior living communities.
3. Prior to the Distribution Date, the Company's historical operating results
consist only of the operations of the senior living communities and do not
reflect the operations related to the leases or subleases of the 120 full-
service and 71 limited-service hotels entered into in conjunction with the
Distribution. The unaudited pro forma condensed consolidated statement of
operations for the twelve weeks ended March 27, 1998 reflect the following
transactions as if such transactions had been completed at the beginning of
fiscal year 1998:
. 1998 spin-off of the Company by Host Marriott and the concurrent lease of
120 full-service hotels and sublease of 71 limited-service hotels from
Host Marriott;
. 1998 acquisition of one senior living community;
. 1998 retirement of $26 million of debt;
. 1998 repayment and forgiveness of $92 million of unsecured debt and a $15
million intercompany note with Host Marriott;
. asset management fee charged to Host Marriott; and
. adjustment to corporate expenses as if the Company were operated on a
stand-alone basis.
-6-
<PAGE>
4. Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted
earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding plus other potentially
dilutive securities. For the twelve weeks ended March 27, 1998, the weighted
average number of outstanding common shares is based on Host Marriott's
weighted average number of outstanding common shares, adjusted for the one-
for-ten distribution ratio.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended
-----------------------------------
March 26, March 27, March 27,
1999 1998 1998
Historical Historical Pro Forma
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Weighted average number of common shares outstanding...... 22,294 21,573 21,938
Assuming distribution of common shares granted under
the comprehensive stock plan, less shares assumed
purchased at average market price........................ 95 -- --
------ ------ ---------
Shares utilized for the calculation of diluted earnings
per share................................................ 22,389 21,573 21,938
====== ====== =========
</TABLE>
5. On March 29, 1999, the Company acquired a 74% limited partnership interest in
the Marriott Residence Inn USA Limited Partnership (the "Partnership") from a
Japanese investor for $34.4 million in cash and the consolidation of $54.6
million of debt for a total consideration of $89 million. The Partnership
owns eleven Residence Inn limited-service hotels that are managed by Marriott
International. Host Marriott owns a 5% general partner interest in the
Partnership.
6. In the first quarter of 1999, the Company announced a plan to repurchase up
to 1.5 million shares of its common stock. Over an extended period of time,
the Company intends to purchase shares through open market and privately
negotiated transactions at prices deemed advantageous to the Company. These
purchases will be subject to market conditions, applicable legal requirements
and other factors; however, the Company has no commitment or obligation to
purchase any particular amount of common stock and the stock repurchase
program could be suspended at any time at the Company's discretion. During
the first quarter of 1999, the Company repurchased 328,000 shares of its
common stock for approximately $4.4 million. Subsequent to March 26, 1999,
the Company has repurchased an additional 462,000 shares for approximately
$6.7 million.
7. During the first quarter of 1999, the Company acquired the remaining 7%
limited partnership interests in Forum Retirement Partners, LP, a partnership
that owns nine senior living communities, for $6.7 million.
8. On April 15, 1999, Crestline Ventures LLC ("Ventures"), an indirectly wholly
owned subsidiary of the Company, entered into a secured, three-year $100
million revolving credit facility (the "Credit Facility") for funding future
investments in the lodging and senior living industries and for general
corporate purposes. The Credit Facility bears interest at a Eurodollar rate
plus 2.75%. An annual fee of .25% is charged on the unused portion of the
commitment. The Credit Facility is secured by substantially all of the
assets of Ventures and its subsidiaries, consisting of eight senior living
communities, and is also guaranteed by the Company and certain subsidiaries
of the Company. In the second quarter of 1999, the Company made a $10
million draw on the Credit Facility.
9. The Company operates in two business segments: hotel leasing and ownership
and senior living community ownership. The Company's full-service hotels are
operated under the Marriott or Ritz-Carlton brands as well as, among others,
Four Seasons, Hyatt and Swissotel brands. The Company's limited-service
hotels are operated under the Courtyard by Marriott and Residence Inn brands.
The Company's senior living communities are operated under Marriott brands.
-7-
<PAGE>
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated Federal
income tax return of the Company and its affiliates and are allocated based
upon the relative contribution to the Company's consolidated taxable income
or loss and changes in temporary differences. The allocation of income taxes
is not evaluated at the segment level and, therefore, the Company does not
believe the information is material to the condensed consolidated financial
statements.
<TABLE>
<CAPTION>
Twelve Weeks Ended March 26, 1999
---------------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
---------- -------------- ------------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues....................................... $903,984 $ 56,953 $ 1,411 $962,348
Operating profit............................... 10,765 10,272 344 21,381
Interest income................................ 108 325 639 1,072
Interest expense............................... (1,137) (3,945) (24) (5,106)
Other.......................................... (1,829) (640) (1,493) (3,962)
Income (loss) before income taxes.............. 7,907 6,012 (534) 13,385
Twelve Weeks Ended March 27, 1998
----------------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
--------- ------------- ----------------- ------------
(in thousands)
Revenues....................................... $ -- $ 55,054 $ -- $ 55,054
Operating profit............................... -- 10,029 -- 10,029
Interest income................................ -- 322 -- 322
Interest expense............................... -- (6,519) -- (6,519)
Other.......................................... -- (754) -- (754)
Income before income taxes..................... -- 3,078 -- 3,078
Total assets for the segments are as follows:
March 26, January 1,
1999 1999
-------- --------
(in thousands)
Hotels........................................ $221,244 $131,473
Senior living................................. 712,714 702,308
Corporate and other........................... 49,821 54,972
Eliminations.................................. (30,000) (30,000)
-------- --------
$953,779 $858,753
======== ========
</TABLE>
-8-
<PAGE>
CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
- --------------------------
Certain matters discussed herein or delivered in connection with this Form
10-Q are forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995. Certain, but not necessarily all, of such 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 comparable terminology. All forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
transactions, results, performance or achievements of the Company to be
materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. These may
include: (i) national and local economic and business conditions or
governmental regulations that will affect demand, prices, wages or other costs
for hotels and senior living communities; (ii) the level of rates and occupancy
that can be achieved by such properties; (iii ) the Company's ability to compete
effectively in areas such as access, location, quality of properties and rate
structures; (iv) the ability to maintain the properties in a first-class manner
(including meeting capital expenditure requirements); (v) the availability and
terms of financing; (vi) governmental actions and initiatives including tax law
changes that may eliminate the need for a lease structure by lodging and senior
living REITs; (vii) changes to the public pay systems for medical care and the
need for compliance with environmental, licensure and safety requirements; and
(viii) the effect on the Company of the Year 2000 issue. Although the Company
believes the expectations reflected in such forward-looking statements are based
upon reasonable assumptions and business opportunities, it can give no
assurance that its expectations will be attained or that any deviations will not
be material. The Company undertakes 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 (Historical 1999 Compared to Pro Forma 1998)
- ------------------------------------------------------------------
As described in Notes 2 and 3 to the accompanying condensed consolidated
financial statements, the Company's 1998 historical results consist only of the
senior living communities and do not reflect the operations related to the
leases or subleases on 120 full-service and 71 limited-service hotels and
certain other transactions. Management believes that due to the substantial
differences in comparability between the Company's 1999 and 1998 historical
results, the use of pro forma results for 1998 provides a more meaningful basis
for comparison because the pro forma results assume that the leases and
subleases and other transactions described in Note 3 occurred at the beginning
of 1998.
Revenues. Revenues primarily represent gross revenues from leased and
subleased hotels and owned senior living communities and asset management fees.
Revenues increased by $40 million, or 4.3%, to $962 million for the first
quarter of 1999 from $922 million for 1998.
Hotel revenues increased $37.9 million, or 4.4%, to $904 million in the
first quarter of 1999. Improved results for the Company's leased full-service
hotels were driven by strong increases in REVPAR of 4.3% to $117.06 for the
first quarter of 1999. Average room rates increased 2.9%, while average
occupancy increased one percentage point to 78.1% for the full-service
properties. REVPAR for the Company's subleased Courtyard by Marriott hotel
properties increased 2.1% to $73.08 due to an increase in average room rates of
nearly .6% and an increase in average occupancy of over one percentage point to
79.1%. REVPAR for the Company's subleased Residence Inn properties decreased
4.2% to $81.84 due to a decrease in average room rates of 2.4% and a decrease in
occupancy of one and one half percentage points to 81.2% reflecting the
additional supply that has entered into the market.
-9-
<PAGE>
Senior living community revenues increased by $1.7 million, or 3.1%, to $57
million in the first quarter of 1999. The average per diem increased 5.2% to
$92.30, while average occupancy decreased over one percentage point to 90.3% due
mostly to the impact of the fill-up period for the expansions added in 1999. On
a comparable basis (excluding communities which added units during 1998 or
1999), the average occupancy increased slightly to 91.7%. The revenue growth is
due to the addition of 285 expansion units in 1998 and 1999 and the growth in
the average per diem. These factors driving revenue growth were partially
offset by a significant decrease in ancillary revenues due to a reduction in
therapy services in response to a change in the Medicare billing process.
Operating Costs and Expenses. Hotel operating costs and expenses
principally consist of hotel property-level operating costs and expenses plus
hotel management fees and lease expenses. Senior living community operating
costs and expenses consist of property-level expenses plus management fees,
depreciation, property taxes, ground rent, insurance and certain other costs.
Asset management operating costs and expenses principally consist of salary and
related costs and expenses. Total operating costs and expenses increased $37.2
million, or 4.1%, to $941 million for the first quarter of 1999.
Overall hotel operating costs and expenses increased $35.7 million, or
4.2%, to $893 million in the first quarter of 1999. Hotel property-level
operating costs and expenses increased $20.7 million, or 3.9% to $548 million.
Hotel management fees increased $2.5 million, or 4.4%, to $58 million, while
lease expense increased $12.5 million, or 4.6%, to $287 million.
Overall senior living operating costs and expenses increased $1.5 million,
or 3.4%, to $47 million for the first quarter of 1999. Senior living community
property-level operating costs and expenses increased $0.9 million, or 2.6%, to
$37 million, while other operating costs and expenses increased $0.6 million, or
6.2%, to $10.2 million for the first quarter of 1999. The property-level
operating costs and expenses have been adversely impacted by the low national
unemployment as the communities experienced a significant increase in labor
costs particularly in their nursing departments. Other operating costs and
expenses were impacted in the first quarter of 1999 by the payment of central
administrative fees to Marriott International in 1999 of $0.6 million that were
waived for the first year of operations.
Operating Profit. As a result of the changes in revenues and operating
costs and expenses discussed above, the Company's total operating profit
increased $2.8 million, or 15.2%, to $21.4 million for the first quarter of
1999.
Hotel operating profit increased $2.3 million, or 26.7%, to $10.8 million
for the first quarter of 1999. Specifically, the New York, Los Angeles and
Washington, D.C. markets, as well as the Ritz-Carlton brand hotels reported
significant improvements for 1999.
Senior living community operating profit increased $.2 million, or 2%, to
$10.3 million in the first quarter of 1999. The increase in operating profit is
primarily due to increases in residency fees due to the increase in the average
per diem, offset by lower operating profit for the communities with newly opened
expansions due to the fill-up period, increased healthcare expenses and the
central administrative service fees beginning in the third quarter of 1998. The
Forum at Tucson, Park Summit, and Lexington at Country Place senior living
communities performed particularly well. The Company's independent living
components posted strong results while the assisted living and healthcare
components did not show significant gains due mostly to the over-supply in the
assisted living market.
Corporate Expenses. Corporate expenses remained unchanged at $4.0
million, or 0.4% of total revenues, for the first quarter of 1999.
Interest Expense. Interest expense decreased slightly to $5.1 million in
the first quarter of 1999. Interest expense includes $1.1 million in both the
first quarters of 1999 and 1998, respectively, related to interest on the hotel
working capital notes payable to Host Marriott.
-10-
<PAGE>
Interest Income. Interest income increased $.6 million to $1.1 million
for the first quarter of 1999 due to higher cash balances in 1999.
Net Income. Net income for the first quarter of 1999 was $7.9 million, or
$.35 per share, compared to $5.8 million, or $.26 per share, for the first
quarter of 1998.
EBITDA
The Company's earnings before interest expense, taxes, depreciation and
amortization and other non-cash items ("EBITDA") increased $3.6 million, or
18.9%, to $22.7 million in the first quarter of 1999 as compared to the pro
forma results for the first quarter of 1998.
The following is a reconciliation of EBITDA to the Company's net income:
<TABLE>
<CAPTION>
First Quarter
-------------------
Pro
Forma
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
EBITDA........................................ $22,722 $19,111
Interest expense.............................. (5,106) (5,210)
Hotel working capital note interest expense... 1,137 1,122
Depreciation and amortization................. (5,285) (4,993)
Income taxes.................................. (5,488) (4,020)
Other non-cash charges, net................... (83) (224)
------- -------
Net income.................................. $ 7,897 $ 5,786
======= =======
</TABLE>
The Company's interest coverage was 5.3 times for the first quarter of 1999
compared to 4.3 times for the first quarter of 1998, on a pro forma basis.
Interest coverage is calculated as EBITDA divided by cash interest expense,
which is defined as GAAP interest expense less amortization of deferred
financing costs, amortization of debt premiums and the interest on the hotel
working capital notes. The ratio of earnings to fixed charges was 1.08 to 1.0
for the first quarter of 1999 and 1.06 to 1.0 for the first quarter of 1998, on
a pro forma basis.
EBITDA data is presented because such data is used by certain investors to
determine the Company's ability to meet debt service requirements. The Company
considers EBITDA to be an indicative measure of the Company's operating
performance due to the significance of the Company's long-lived assets and
because EBITDA can be used to measure the Company's ability to service debt,
fund capital expenditures and expand its business; however, such information
should not be considered as an alternative to net income, operating profit, cash
flows from operations, or any other operating or liquidity performance measure
prescribed by GAAP. In addition, EBITDA as calculated by the Company may not be
comparable to similarly titled measures reported by other companies. Cash
expenditures for various long-term assets, interest expense and income taxes
have been, and will be, incurred which are not reflected in the EBITDA
presentation.
-11-
<PAGE>
Cash Flows and Financial Condition
- ----------------------------------
As of March 26, 1999, the Company has cash and cash equivalents of $61
million and restricted cash of $16 million, which is included in other assets on
the accompanying condensed consolidated financial statements. The Company's
restricted cash consists of funds transferred into segregated escrow accounts
for (i) debt service, fixed asset, real estate tax and insurance reserves
pursuant to the Company's secured debt agreements for certain of the senior
living communities, and (ii) fixed asset reserves pursuant to the Company's
senior living operating agreements.
Cash from operations was $20.8 million for the first quarter of 1999. Cash
used in investing activities was $20.9 million in the first quarter of 1999. The
cash used in investing activities principally consists of capital expenditures
for renewals and replacements and expansions for its senior living communities,
as well as the purchase of the remaining limited partnership interest in
subsidiaries that own some of the Company's senior living communities. Cash used
in financing activities was $5.9 million for the first quarter of 1999. The
Company's cash used in financing activities consists primarily of debt principal
repayments and repurchases of the Company's common stock.
On March 29, 1999, the Company acquired a 74% limited partnership interest
in the Marriott Residence Inn USA Limited Partnership (the "Partnership") from a
Japanese investor for $34.4 million in cash and the consolidation of $54.6
million of debt for a total consideration of $89 million. The Partnership owns
eleven Residence Inn limited-service hotels that are managed by Marriott
International. Host Marriott owns a 5% general partner interest in the
Partnership.
During the first quarter of 1999, the Company acquired the remaining 7%
limited partnership interest in Forum Retirement Partners, LP, a partnership
that owns nine senior living communities, for $6.7 million.
During the first quarter of 1999, the Company opened 211 expansion units at
four of its senior living communities. The Company expended $14.0 million in
the first quarter of 1999 and $5.3 million in the second quarter of 1999 related
to the expansion units. The addition of these expansion units increased the
Company's total number of units to 7,465 at 31 senior living communities.
On April 15, 1999, Crestline Ventures LLC ("Ventures"), an indirectly
wholly owned subsidiary of the Company, entered into a secured, three-year $100
million revolving credit facility (the "Credit Facility") for funding future
investments in the lodging and senior living industries and for general
corporate purposes. The Credit Facility bears interest at a Eurodollar rate plus
2.75%. An annual fee of .25% is charged on the unused portion of the
commitment. The Credit Facility is secured by substantially all of the assets
of Ventures and its subsidiaries, consisting of eight senior living communities,
and is also guaranteed by the Company and certain subsidiaries of the Company.
In the second quarter of 1999, the Company made a $10 million draw on the Credit
Facility.
In the first quarter of 1999, the Company announced a plan to repurchase up
to 1.5 million shares of its common stock. Over an extended period of time, the
Company intends to purchase shares through open market and privately negotiated
transactions at prices deemed advantageous to the Company. These purchases will
be subject to market conditions, applicable legal requirements and other
factors; however, the Company has no commitment or obligation to purchase any
particular amount of common stock and the stock repurchase program could be
suspended at any time at the Company's discretion. During the first quarter of
1999, the Company repurchased 328,000 shares of its common stock for
approximately $4.4 million. In April 1999, the Company repurchased an
additional 462,000 shares for approximately $6.7 million.
In addition, the Company commenced a voluntary program through which
shareholders of record as of March 4, 1999 holding fewer than 100 shares of the
company's common stock, may sell all of their shares to the Company. The
Company repurchased approximately 150,000 shares for approximately $2 million in
the second quarter of 1999. The program has been extended until May 21, 1999.
-12-
<PAGE>
On April 28, 1999, the Real Estate Investment Trust Modernization Act of
1999 was introduced in the House of Representatives. The bill's central feature
would allow a REIT to own up to 100% of the stock of taxable REIT subsidiaries.
If the bill becomes law, Host Marriott could establish taxable REIT subsidiaries
which could directly operate the hotels currently leased to the Company and Host
Marriott could terminate the hotel leases by paying the fair market value of the
remaining terms of the leases. There is no certainty that this bill or the
provisions similar to those contained in the bill will become law.
Year 2000 Problem
The "Year 2000 Problem" has 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 Company's compliance program includes an assessment of its hardware and
software computer systems and embedded systems, as well as an assessment of the
Year 2000 issues relating to third parties with which the Company has a material
relationship or whose systems are material to the operations of the Company's
hotel or senior living properties. The Company's efforts to ensure that its
computer systems are Year 2000 compliant have been segregated into two separate
phases: in-house systems and third-party systems.
In-House Systems. The Company has invested in the implementation and
maintenance of accounting and reporting systems and equipment that are intended
to enable it to provide adequately for its information and reporting needs and
which are also Year 2000 compliant. Substantially all of the Company's in-house
systems have already been certified as Year 2000 compliant through testing and
other mechanisms. The Company will engage a third party to review its Year 2000
in-house compliance during 1999.
Third-Party Systems. The Company relies upon operational and accounting
systems provided by third parties, primarily the managers and operators of its
hotel and senior living properties, to provide the appropriate property-specific
operating systems (including reservation, phone, elevator, security, HVAC,
emergency call and other systems) and to provide it with financial information.
Based on discussions with the third parties that are critical to the Company's
business, including the managers and operators of its hotels and senior living
properties, the Company believes 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. To the extent these changes impact hotel property-
level systems, Host Marriott may be required to fund capital expenditures for
upgraded equipment and software. However, to the extent these changes impact the
owned senior living property-level systems, the Company may be required to fund
capital expenditures for upgraded equipment and software. To the extent that
these changes relate to a third party manager's centralized systems (including
reservations, accounting, purchasing, inventory, personnel and other systems),
the Company's management agreements generally provide for these costs to be
charged to the properties subject to annual limitations which costs will be
borne by the Company. The Company expects that the third party managers will
incur Year 2000 costs for its centralized systems in lieu of costs related to
system projects that otherwise would have been pursued and therefore its overall
level of centralized system charges allocated to the properties will not
materially increase as a result of the Year 2000 compliance effort. The Company
believes that this deferral of certain system projects will not have a material
impact on their respective future results of operations, although it may delay
certain productivity enhancements at its properties. The Company 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. The Company
believes that in the event of material Year 2000 non-compliance caused by a
breach of the manager's duties, the Company will have the right to seek recourse
against the manager under its 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.
-13-
<PAGE>
The Company will work with the third parties to ensure that appropriate
contingency plans will be developed. In particular, the Company has had
extensive discussions regarding the Year 2000 problem with Marriott
International, the manager of a substantial majority of its leased and subleased
hotel properties and all of its senior living communities. Due to the
significance of Marriott International to the Company's 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 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 and test 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, emergency call 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 completion of each phase based on
documentation and quantified results weighted for System Criticality. The
following table reflects the status of Marriott International's Year 2000
readiness process at March 26, 1999.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Step IT Application BIS Building Systems
- --------------------------------------------------------------------------------------------------------------------------------
Awareness Complete Complete Complete
- --------------------------------------------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
- --------------------------------------------------------------------------------------------------------------------------------
Assessment Complete Substantially complete Substantially complete
- --------------------------------------------------------------------------------------------------------------------------------
Planning Complete Substantially complete Substantially complete
- --------------------------------------------------------------------------------------------------------------------------------
Remediation/Replacement Over 95 percent complete Substantially complete Substantially complete;
critical
systems targeted for completion
by September 1999
- --------------------------------------------------------------------------------------------------------------------------------
Testing and Testing over 95 percent Testing is in progress.* Initial testing is
Compliance Validation complete; Compliance Compliance Validation is in approximately
Validation completed for progress 80 percent complete*, for which
approximately 75 percent of key less than 10 percent require
systems, with most remaining further remediation/
work in its final stage replacement and re-testing.
Substantial completion for
critical systems targeted for
September 1999; Compliance
Validation is in progress.
- --------------------------------------------------------------------------------------------------------------------------------
Implementation Approximately 80 percent of Approximately 40 percent In progress
implementation projects complete; on track for
complete, with rollout to completion by the end of the
business locations underway second quarter 1999
- --------------------------------------------------------------------------------------------------------------------------------
Quality Assurance In progress for approximately In progress In progress
80 percent of IT applications
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Testing for third party BIS and Building Systems may consist of Marriott
International's receipt anddocumentation and, where evaluation of vendor
compliance appropriate, further verification by Marriott International of
compliance.
-14-
<PAGE>
Marriott International's Year 2000 compliance communications with its
significant third party suppliers, vendors and business partners, including its
franchisees are ongoing. Marriott International is focusing its efforts on the
connections most critical to its 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.
Marriott International is also establishing 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.
The Company has also held discussions with each of its other hotel managers
and based on those discussions the Company is not aware of any significant
deficiencies related to Year 2000 that would be material to the Company.
Risks. There can be no assurances that Year 2000 remediation by the
Company or third parties will be properly and timely completed, and failure to
do so could have a material adverse effect on the Company, its business and its
financial condition since the Company is responsible for interfacing with third
parties in addressing Year 2000 issues at the hotels leased or subleased by the
Company and the Communities owned by the Company. The Company cannot predict
the actual effects to it of the Year 2000 problem, which depends on numerous
uncertainties such as: (i) whether significant third parties properly and
timely address the Year 2000 issue; and (ii) whether broad-based or systemic
economic failures may occur. The Company is 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 in financial transactions or payment processing systems such
as credit cards. Due to the general uncertainty inherent in the Year 2000
problem and the Company's responsibilities to Host Marriott and dependence upon
third parties, the Company is unable to determine at this time whether the
consequences of Year 2000 failure will have a material impact on the Company.
Although the Company's efforts to coordinate with its hotel and senior living
managers in implementing their Year 2000 compliance programs are expected to
significantly reduce the level of uncertainty concerning Year 2000 issues and
management believes that the possibility of significant interruptions of normal
operations should be reduced, there is no assurance that this will be the case.
The Company estimates the capital expenditure costs to be incurred by the
Company to be Year 2000 compliant will be less than $1 million.
-15-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have significant market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risks, and the
Company does not hold any financial instruments for trading purposes. As of
March 26, 1999, all of the Company's debt is fixed rate.
In conjunction with the acquisition of Forum Group, Inc. on June 21, 1997,
the Company recorded the debt assumed at its fair value, which exceeded the face
value by approximately $19 million. The Company is amortizing this adjustment
to interest expense over the remaining life of the related debt. As of March
26, 1999, the Company has $196 million of debt outstanding, excluding the hotel
working capital notes payable to Host Marriott of approximately $94 million and
debt premiums of $16 million. Excluding these items, the weighted average
interest rate is 9.6% and the average maturity is thirteen years.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
. February 11, 1999 - Report of the Board of Directors' approval of
changes to the Company's executive compensation and director
compensation plans.
. March 23, 1999 - Report of the amendment to Current Report on Form 8-K
dated February 11, 1999 to clarify the amount of certain options
awarded to Bruce D. Wardinski, President and Chief Executive Officer
of the Company, pursuant to the executive compensation plan.
. March 31, 1999 - Report of the announcement that the Company acquired
a 74% limited partnership interest in a partnership that owns eleven
Residence Inn limited-service hotels.
-17-
<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.
CRESTLINE CAPITAL CORPORATION
May 10, 1999 By:/s/ Larry K. Harvey
- ------------ -------------------
Date Larry K. Harvey
Senior Vice President and Corporate
Controller
(Chief Accounting Officer)
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CRESTLINE CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF
OPERATIONS AS OF THE TWELVE WEEK PERIOD ENDED MARCH 26, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> MAR-26-1999
<CASH> 60,801
<SECURITIES> 0
<RECEIVABLES> 93,592
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 707,822
<DEPRECIATION> 38,002
<TOTAL-ASSETS> 953,779
<CURRENT-LIABILITIES> 0
<BONDS> 306,293
0
0
<COMMON> 223
<OTHER-SE> 462,847
<TOTAL-LIABILITY-AND-EQUITY> 953,779
<SALES> 962,348
<TOTAL-REVENUES> 962,348
<CGS> 940,967
<TOTAL-COSTS> 940,967
<OTHER-EXPENSES> 3,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,106
<INCOME-PRETAX> 13,385
<INCOME-TAX> 5,488
<INCOME-CONTINUING> 7,897
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,897
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
