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 27, 1998 Commission File No. 1-5664
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 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
Shares outstanding
Class at April 24, 1998
----- -----------------
Common Stock, $1.00
par value per share 204,246,000
- ------------------- -----------
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX
-----
Page No.
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Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
March 27, 1998 and January 2, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 27, 1998 and
March 28, 1997
Condensed Consolidated Statements of Cash Flows - 5
Twelve Weeks Ended March 27, 1998 and
March 28, 1997
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of 11
Operations and Financial Condition
Part II. OTHER INFORMATION AND SIGNATURE 18
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<CAPTION>
March 27, January 2,
1998 1998
--------- ----------
(unaudited)
ASSETS
------
<S> <C> <C>
Property and Equipment, net............................................................ $ 5,528 $ 5,217
Notes and Other Receivables (including amounts due from
affiliates of $9 million and $23 million, respectively).............................. 40 54
Due from Managers...................................................................... 142 93
Investments in Affiliates.............................................................. 6 13
Other Assets........................................................................... 329 284
Short-Term Marketable Securities....................................................... 161 354
Cash and Cash Equivalents.............................................................. 556 511
-------- --------
$ 6,762 $ 6,526
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior Notes issued by the Company or its Subsidiaries............................... $ 1,585 $ 1,585
Mortgage Debt........................................................................ 2,112 1,979
Other................................................................................ 217 219
-------- --------
3,914 3,783
Accounts Payable and Accrued Expenses.................................................. 106 97
Deferred Income Taxes.................................................................. 505 508
Other Liabilities...................................................................... 459 388
-------- --------
Total Liabilities................................................................. 4,984 4,776
-------- --------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Holding Company Substantially
All of Whose Assets are the Convertible Subordinated Debentures
due 2026 ("Convertible Preferred Securities")........................................ 550 550
-------- --------
Shareholders' Equity
Common Stock, 600 million shares authorized; 204.2 million
shares and 203.8 million shares issued and outstanding,
respectively....................................................................... 204 204
Additional Paid-in Capital........................................................... 935 937
Retained Earnings.................................................................... 79 49
Accumulated Other Comprehensive Income............................................... 10 10
-------- --------
Total Shareholders' Equity........................................................ 1,228 1,200
-------- --------
$ 6,762 $ 6,526
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended March 27, 1998 and March 28, 1997
(unaudited, in millions, except per common share amounts)
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
REVENUES
Hotels............................................................................. $ 321 $ 248
Senior living communities ........................................................ 20 --
Net gains on property transactions ............................................... 1 1
Equity in earnings of affiliates ................................................. 1 1
Other ............................................................................ 2 2
----- -----
Total revenues .................................................................. 345 252
----- -----
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$55 million and $42 million in 1998 and 1997, respectively) ..................... 173 151
Senior living communities (including Marriott International
management fees of $3 million in 1998) .......................................... 9 --
Other ............................................................................ 5 10
----- -----
Total operating costs and expenses .............................................. 187 161
----- -----
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST...................................................... 158 91
Minority interest...................................................................... (16) (11)
Corporate expenses..................................................................... (12) (9)
Interest expense....................................................................... (83) (63)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (9) (9)
Interest income........................................................................ 14 12
----- -----
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...................................... 52 11
Provision for income taxes............................................................. (22) (5)
----- -----
INCOME BEFORE EXTRAORDINARY ITEM....................................................... 30 6
Extraordinary item - Gain on extinguishment of debt
(net of income taxes of $3 million).................................................. -- 5
----- -----
NET INCOME............................................................................. $ 30 $ 11
===== =====
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item....................................................... $ .15 $ .03
Extraordinary item - Gain on extinguishment of debt (net of income taxes).............. -- .02
----- -----
NET INCOME............................................................................. $ .15 $ .05
===== =====
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item....................................................... $ .14 $ .03
Extraordinary item - Gain on extinguishment of debt (net of income taxes).............. -- .02
----- -----
NET INCOME............................................................................. $ .14 $ .05
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
<TABLE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve weeks ended March 27, 1998 and March 28, 1997
(unaudited, in millions)
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary item ...................................................... $ 30 $ 6
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization ..................................................... 58 51
Income taxes ...................................................................... 18 1
Equity in (earnings) losses of affiliates ......................................... (1) (1)
Changes in operating accounts ..................................................... (25) 8
Other ............................................................................. 19 25
----- -----
Cash from operations .............................................................. 99 90
----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets ......................................................... 1 3
Acquisitions .......................................................................... (145) (115)
Capital expenditures:
Renewals and replacements ......................................................... (41) (35)
New development projects .......................................................... (12) --
New investment capital expenditures ............................................... (9) (7)
Purchase of short-term marketable securities .......................................... (53) --
Sales of short-term marketable securities ............................................. 246 --
Note receivable collections ........................................................... -- 1
Affiliate collections (advances), net ................................................. 14 4
Other ................................................................................. (6) 14
----- -----
Cash used in investing activities ................................................. (5) (135)
----- -----
FINANCING ACTIVITIES
Issuances of debt ..................................................................... 1 90
Issuances of common stock ............................................................. -- 2
Scheduled principal repayments ........................................................ (6) (4)
Debt prepayments ..................................................................... (28) (222)
Other ................................................................................. (16) 5
----- -----
Cash used in financing activities ................................................. (49) (129)
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... $ 45 $(174)
===== =====
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase of
controlling interests in, certain hotel properties and senior living
communities...................................................................... $ 164 $ 231
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of Host
Marriott Corporation and subsidiaries (the "Company" or "Host Marriott")
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
2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of March 27, 1998
and January 2, 1998, and the results of operations and cash flows for the
twelve weeks ended March 27, 1998 and March 28, 1997. Interim results are
not necessarily indicative of fiscal year performance because of the impact
of seasonal and short-term variations.
2. In April 1998, the Company reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire interests in 13 world-class luxury
hotels in the U.S. and certain other assets in a transaction valued at
approximately $1.775 billion, including the assumption of debt. The Company
expects to pay approximately $835 million in cash and assumed debt and to
issue approximately 47 million Operating Partnership units of the new
operating partnership (the "Operating Partnership"), to be formed as part
of the Company's reorganization, described below. Each Operating
Partnership unit will be exchangeable for one share of Host Marriott common
stock (or its cash equivalent). Upon completion of the acquisition,
Blackstone will own approximately 19% of the shares outstanding of Host
Marriott common stock on a fully converted basis. The Blackstone portfolio
consists of two Ritz-Carltons, three Four Seasons, one Grand Hyatt, three
Hyatt Regencies and four Swissotel properties. The acquisition of one of
the Four Seasons hotels is subject to a letter of intent. Should the
Company be unable to complete a definitive agreement for the acquisition of
that property, its interest would consist of a mortgage note secured by the
hotel. There is no assurance that the Company will be able to reach a
definitive agreement.
In addition, the Company's board of directors (the "Board") has authorized
the Company to reorganize its remaining business operations to qualify as a
real estate investment trust ("REIT"), effective as of January 1, 1999, and
to spin-off its senior living communities business ("SLC") through a
taxable stock dividend to its shareholders. After the REIT reorganization,
which is subject to shareholder and final Board approval, the Company
intends to operate as an "UPREIT," with all of its assets and operations
conducted through the newly formed Operating Partnership of which Host
Marriott will be the general partner.
Host Marriott will distribute shares in SLC to its shareholders at the time
of the REIT reorganization and Host Marriott expects to make a cash
distribution at that time. The projected aggregate value of these
distributions, which are expected to be treated as taxable dividends to
shareholders, is currently estimated between $400 million and $550 million.
An additional taxable distribution may be required in 1999. SLC is expected
to own Host Marriott's portfolio of senior living properties. This
portfolio currently consists of 31 retirement communities, totaling 7,218
units in 13 states. The communities will continue to be managed by Marriott
International. In addition, SLC will lease substantially all of the hotels
owned by the REIT and its affiliates. SLC will operate independently of
Host Marriott. In order to facilitate the transition, there may initially
be some board of directors overlap, which will be eliminated over time.
Following the REIT reorganization, Host Marriott will own Operating
Partnership units in the Operating Partnership equal to the number of
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<PAGE>
outstanding shares of Host Marriott common stock at the time of the
conversion. The UPREIT structure will not affect the ownership by
shareholders of their existing Host Marriott shares. As part of the
reorganization, limited partners in Host Marriott's full-service hotel
partnerships and joint ventures are expected to be given an opportunity to
receive, on a tax-deferred basis, Operating Partnership units in the new
Operating Partnership in exchange for their current partnership interests.
Furthermore, Host Marriott anticipates repurchasing or exchanging its
approximately $1.55 billion of outstanding debt securities, adjusting the
conversion ratio of its Convertible Preferred Securities to reflect the
distribution of SLC and cash to Company stockholders, and issuing
additional debt and equity securities.
The Blackstone transaction is expected to close simultaneously with the
reorganization of Host Marriott as a real estate investment trust. At that
time, Blackstone's hotels and other assets will be contributed into the
Operating Partnership. The hotels will continue to be managed under the
existing management contracts.
The REIT expects to qualify as a real estate investment trust under federal
income tax law, beginning January 1, 1999. However, consummation of the
REIT reorganization is subject to significant contingencies that are
outside the control of the Company, including final Board approval, consent
of shareholders, partners, bondholders, lenders, and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be
no assurance that the REIT reorganization will be completed or that it will
be effective as of January 1, 1999. Consummation of the Blackstone
transaction is also subject to certain conditions, including consummation
of the REIT reorganization by March 31, 1999.
3. Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, net gains (losses) on property
transactions, and equity in earnings (losses) of affiliates. House profit
reflects the net revenues flowing to the Company as property owner and
represents gross hotel and senior living communities' operating revenues,
less gross property-level expenses, excluding depreciation, management
fees, real and personal property taxes, ground and equipment rent,
insurance and certain other costs, which are classified as operating costs
and expenses.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
Twelve Weeks Ended
------------------------
March 27, March 28,
1998 1997
-------- --------
<S> <C> <C>
(in millions)
Sales
Rooms............................................................................ $ 509 $ 408
Food & Beverage.................................................................. 222 171
Other............................................................................ 56 41
------ ------
Total Hotel Sales.............................................................. 787 620
------ ------
Department Costs
Rooms............................................................................ 114 92
Food & Beverage.................................................................. 163 127
Other............................................................................ 28 21
------ ------
Total Department Costs......................................................... 305 240
------ ------
Department Profit................................................................... 482 380
Other Deductions.................................................................... 161 132
------ ------
House Profit................................................................... $ 321 $ 248
====== ======
House profit generated by the Company's senior living communities for 1998 consists of (in
millions):
Sales............................................................................... $ 55
Department Costs.................................................................... 35
------
House Profit................................................................... $ 20
======
</TABLE>
- 7 -
<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. Diluted earnings per common share has not
been adjusted for the impact of the Convertible Preferred Securities as
they are anti-dilutive.
A reconciliation of the number of shares utilized for the calculation of
dilutive earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------
March 27, March 28,
1998 1997
-------- --------
(in millions)
<S> <C> <C>
Weighted average number of common shares outstanding.............................. 203.9 202.3
Assuming distribution of common shares granted under the comprehensive stock
plan, less shares assumed purchased at average market price.................... 4.4 5.2
Assuming distribution of common shares issuable for warrants, less shares
assumed purchased at average market price...................................... .3 .3
----- -----
Shares utilized for the calculation of diluted earnings per share............ 208.6 207.8
===== =====
</TABLE>
5. As of March 27, 1998, the Company had minority interests in 19 affiliates
that own an aggregate of 241 properties, 21 of which are full-service
properties, managed primarily by Marriott International, Inc. The Company's
equity in earnings of affiliates was $1 million for each of the twelve
weeks ended March 27, 1998 and March 28, 1997, respectively.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended
----------------------
March 27, March 28,
1998 1997
-------- --------
(in millions)
<S> <C> <C>
Revenues.......................................................................... $ 124 $ 141
Operating expenses:
Cash charges (including interest).............................................. 79 94
Depreciation and other non-cash charges........................................ 35 50
------ ------
Income (loss) before extraordinary item........................................... 10 (3)
Extraordinary item - forgiveness of debt.......................................... 4 18
------ ------
Net income..................................................................... $ 14 $ 15
====== ======
</TABLE>
In the first quarter of 1998, the Company obtained a controlling interest
in the partnership that owns the 1,671-room Atlanta Marriott Marquis for
approximately $239 million, including $164 million in assumed mortgage
debt. The Company previously owned a 1.3% general and limited partnership
interest.
In the second quarter of 1998, the Company acquired the partnership that
owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24
million. The Company previously owned a 1% managing general partner
interest and a note receivable interest of approximately $5 million.
6. In the first quarter of 1998, the Company acquired a controlling interest
in, and will become the managing general partner for, the partnership that
owns the 359-room Albany Marriott, the 350-room San Diego Marriott Mission
Valley and the 320-room Minneapolis Marriott Southwest for approximately
$50 million. The Company also entered into an agreement to purchase the
397-room Ritz-Carlton, Tysons Corner located in Northern Virginia.
- 8 -
<PAGE>
Also during the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two
Marriott Brighton Gardens assisted living communities in Denver and
Colorado Springs, Colorado, for $35 million in 1999 after the anticipated
completion of construction, if they achieve certain operating performance
criteria. All three of these communities would be operated by Marriott
Senior Living Services, Inc. ("MSLS") under long-term operating agreements.
Also in the second quarter of 1998, the Company sold the 662-room New York
Marriott East Side for approximately $191 million and recorded a pre-tax
gain of approximately $40 million. The Company also sold the 192-room Napa
Valley Marriott for approximately $21 million and recorded a pre-tax gain
of approximately $10 million.
7. In March 1997, the Company purchased 100% of the outstanding bonds secured
by a first mortgage on the San Francisco Marriott Hotel. The Company
purchased the bonds for $219 million, an $11 million discount to the face
value of $230 million. In connection with the redemption and defeasance of
the bonds, the Company recognized an extraordinary gain of $5 million,
which represents the $11 million discount and the write-off of deferred
financing fees, net of taxes.
8. The Company operates in two business segments in the lodging industry:
hotels and senior living communities. The Company's hotels are primarily
operated under the Marriott or Ritz-Carlton brands. The Company's senior
living communities are operated under Marriott brands.
The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest
expense. The Company's income taxes are included in the consolidated
Federal income tax return of the Company and its affiliates and is
allocated based upon the relative contribution to the Company's
consolidated taxable income 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 27, 1998
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 321 $ 20 $ 4 $ 345
Operating profit (loss)............................ 148 11 (1) 158
Interest income.................................... 14 -- -- 14
Interest expense................................... (75) (7) (1) (83)
Other.............................................. (16) -- (21) (37)
Income (loss) before income taxes.................. 71 4 (23) 52
</TABLE>
<TABLE>
<CAPTION>
Twelve Weeks Ended March 28, 1997
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues........................................... $ 248 $ -- $ 4 $ 252
Operating profit (loss)............................ 97 -- (6) 91
Interest income.................................... 9 -- 3 12
Interest expense................................... (61) -- (2) (63)
Other.............................................. (12) -- (17) (29)
Income (loss) before income taxes.................. 33 -- (22) 11
</TABLE>
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<PAGE>
As of March 27, 1998 and March 28, 1997, the Company's foreign operations
consist of four full- service hotel properties located in Canada and two
full-service hotel properties located in Mexico. 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 operates
(in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended
---------------------------------
March 27, 1998 March 28, 1997
-------------- --------------
<S> <C> <C>
United States ........................... $ 335 $ 244
International............................ 10 8
------ ------
Total.......................... $ 345 $ 252
====== ======
</TABLE>
9. In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," ("SFAS 130"). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in
financial statements. The objective of SFAS 130 is to report a measure of
all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner
changes in equity.
The Company's only component of other comprehensive income is the right to
receive up to 1.4 million shares of Host Marriott Services Corporation's
common stock or an equivalent cash value subsequent to exercise of the
options held by certain former and current employees of Marriott
International. For the twelve weeks ended March 27, 1998 and March 28,
1997, the Company had no other comprehensive income. Therefore,
comprehensive income is equivalent to net income for all periods presented.
As of March 27, 1998 and January 2, 1998, the Company's accumulated other
comprehensive income was approximately $10 million.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
The Company is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of its hotels and senior
living communities from its statements of operations (see Note 3). If the
Company concludes that EITF 97-2 should be applied to its hotels and senior
living communities, it could require that the Company include operating
results of those managed operations in its statements of operations.
Application of EITF 97-2 to the Company's consolidated financial statements
as of and for the twelve weeks ended March 27, 1998 would have increased
both revenues and operating expenses by $501 million and would have had no
impact on operating profit, net income or earnings per share.
10. In the second quarter of 1998, the Company prepaid $92 million of 9%
unsecured debt provided by Marriott International related to the Company's
senior living communities.
- 10 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
- --------------------------
Certain matters discussed in this Form 10-Q include forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995, including
without limitation, statements related to the proposed REIT conversion, the
terms, structure and timing thereof, and the expected effects of the proposed
REIT conversion and the Blackstone Portfolio acquisition. All forward-looking
statements involve known and unknown risks, uncertainties, and other factors,
many of which are not within the control of the Company, that may cause 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. Certain of the transactions
described herein are subject to certain consents of shareholders, lenders, debt
holders and partners of the Company and its affiliates and of other third
parties and various other conditions and contingencies, and future results,
performance and achievements will be affected by general economic, business and
financing conditions, competition and governmental actions. These and other
factors are described in more detail in the Company's current report on Form 8-K
filed April 17, 1998 relating to the proposed REIT conversion and in its other
filings with the Securities and Exchange Commission. While the Company believes
that the expectations reflected in these forward-looking statements are based
upon reasonable assumptions, it can give no assurance that its performance or
other expectations will be attained, that the transactions described herein will
be consummated or that the terms of the transactions or the timing or effects
thereof will not differ materially from those described herein. 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
- ---------------------
Revenues. Revenues primarily represent house profit from the Company's hotel
properties and senior living communities, net gains (losses) on property
transactions and equity in earnings (losses) of affiliates. Revenues increased
$93 million, or 37%, to $345 million for the first quarter of 1998 from $252
million for the first quarter of 1997. The Company's revenue and operating
profit were impacted by:
o improved lodging results for comparable full-service hotel properties;
o the addition of 18 full-service hotel properties during 1997 and four
full-service properties during the first quarter of 1998; and
o the addition of 30 senior living communities in 1997 and one senior living
community in the first quarter of 1998.
Hotel revenues increased $73 million, or 29%, to $321 million in the first
quarter of 1998 due to growth in room revenues generated per available room
("REVPAR") and the addition of 22 full-service properties acquired in 1997 and
the first quarter of 1998.
Hotel sales (gross hotel sales, including room sales, food and beverage sales,
and other ancillary sales such as telephone sales) increased $167 million, or
27%, to $787 million in the first quarter of 1998, reflecting the REVPAR
increases for comparable units and the addition of full-service properties in
1997 and 1998. Improved results for the Company's full-service hotels were
driven by strong increases in REVPAR for comparable units of 9% to $116.20 for
the 1998 first quarter. Results were further enhanced by a one
- 11 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
percentage point increase in the house profit margin for comparable full-service
properties. On a comparable basis for the Company's full-service hotel
properties, average room rates increased almost nine percent, while average
occupancy increased slightly.
Revenues generated from the Company's 31 senior living communities totaled $20
million. During the first quarter of 1998, average occupancy of the communities
was almost 92% and the average per diem rate was almost $88, which resulted in
revenue per available unit ("REVPAU") of $80.49. Overall occupancies for the
first quarter of 1998 were lower than the historical and anticipated future
occupancies due to the significant number of expansion units added during late
1997 and the 1998 first quarter, the overall disruption to the communities as a
result of the construction and the time required to fill the expansion units.
Senior living communities' sales totaled $55 million for the first quarter of
1998.
Operating Costs and Expenses. Operating costs and expenses principally consist
of depreciation, management fees, real and personal property taxes, ground,
building and equipment rent, insurance and certain other costs. Operating costs
and expenses increased $26 million to $187 million in the first quarter of 1998
from $161 million in the first quarter of 1997, primarily representing increased
hotel and senior living communities operating costs, including depreciation and
management fees. Hotel operating costs increased $22 million to $173 million for
the first quarter of 1998 primarily due to the addition of 22 full- service
properties during 1997 and through the first quarter of 1998 and increased
management fees and rentals tied to improved property results. As a percentage
of hotel revenues, hotel operating costs and expenses decreased to 54% of
revenues in the first quarter of 1998 from 61% of revenues in the first quarter
of 1997 due to the significant increases in REVPAR discussed above, as well as
the operating leverage as a result of a significant portion of the Company's
hotel operating costs and expenses being fixed. The Company's senior living
communities' operating costs and expenses were $9 million (45% of revenues) for
the first quarter of 1998.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $67 million,
or 74%, to $158 million for the first quarter of 1998. Hotel operating profit
increased $51 million, or 53%, to $148 million, or 46% of hotel revenues, for
the first quarter of 1998 from $97 million, or 39% of hotel revenues, for the
first quarter of 1997. Specifically, hotels in New York City, Toronto and
Atlanta reported significant improvements for the 1998 first quarter. Properties
on the Pacific coast and Florida reported some minor softness in results due to
exceptionally rainy weather in 1998. Results in 1998 for the New Orleans
Marriott have been adversely impacted by a rooms renovation at the hotel and the
Superbowl (which was held in New Orleans in 1997).
The Company's senior living communities generated $11 million (55% of revenues)
of operating profit for the first quarter of 1998.
Minority Interest. Minority interest expense increased $5 million to $16 million
for the first quarter of 1998, primarily reflecting the impact of the
consolidation of affiliated partnerships and the acquisition of controlling
interests in newly-formed partnerships during 1997 and the first quarter of
1998.
Corporate Expenses. Corporate expenses increased $3 million to $12 million for
the 1998 first quarter. As a percentage of revenues, corporate expenses
decreased to 3.5% of revenues in the first quarter of 1998 from 3.6% in the
first quarter of 1997, reflecting the Company's efforts to control its corporate
expenses in spite of the substantial growth in revenues.
- 12 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Interest Expense. Interest expense increased 32% to $83 million in the first
quarter of 1998, primarily due to the additional debt of approximately $580
million assumed in connection with the 1997 and 1998 additions of full-service
hotels, approximately $300 million assumed in connection with the acquisition of
senior living communities, as well as the issuance of $600 million of 8 7/8%
senior notes in July 1997.
Dividends on Convertible Preferred Securities. The Dividends on Convertible
Preferred Securities reflect the dividends accrued during the first twelve weeks
of fiscal year 1998 and 1997 on the $550 million in 6.75% Convertible Preferred
Securities issued by the Company in December 1996.
Interest Income. Interest income increased $2 million to $14 million for the
first quarter of 1998, primarily reflecting interest earned on cash held for
future hotel investments.
Income before Extraordinary Item. Income before extraordinary item for the first
quarter of 1998 was $30 million, compared to $6 million for the first quarter of
1997.
Extraordinary gain. In March 1997, the Company purchased 100% of the outstanding
bonds secured by a first mortgage on the San Francisco Marriott Hotel. The
Company purchased the bonds for $219 million, which was an $11 million discount
to the face value of $230 million. In connection with the redemption and
defeasance of the bonds, the Company recognized an extraordinary gain of $5
million, which represents the $11 million discount and the write-off of deferred
financing fees, net of taxes.
Net Income. The Company's net income for the first quarter of 1998 was $30
million compared to $11 million for the first quarter of 1997. Basic and diluted
earnings per common share were $.15 and $.14, respectively, for the first
quarter of 1998 and $.05 for the first quarter of 1997.
EBITDA and Comparative FFO
- --------------------------
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $64
million, or 42%, to $218 million in the 1998 first quarter from $154 million in
the 1997 first quarter.
Hotel EBITDA increased $51 million, or 34%, to $203 million in the first quarter
of 1998 from $152 million in the first quarter of 1997 reflecting comparable
full-service hotel EBITDA growth, as well as incremental EBITDA from 1997 and
1998 acquisitions. Full-service hotel EBITDA from comparable hotel properties
increased over 14% on a REVPAR increase of 9%. The Company's senior living
communities contributed $15 million of EBITDA during the 1998 first quarter.
- 13 -
<PAGE>
<TABLE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a reconciliation of EBITDA to the Company's income before
extraordinary item (in millions):
<CAPTION>
Twelve Weeks Ended
------------------------
March 27, March 28,
1998 1997
-------- --------
<S> <C> <C>
EBITDA.......................................................................... $ 218 $ 154
Interest expense................................................................ (83) (63)
Dividends on Convertible Preferred Securities................................... (9) (9)
Depreciation and amortization................................................... (58) (51)
Minority interest expense....................................................... (16) (11)
Income taxes.................................................................... (22) (5)
Other non-cash charges, net..................................................... - (9)
------ ------
Income before extraordinary item............................................. $ 30 $ 6
====== ======
</TABLE>
For the first quarter, the Company's interest coverage, defined as EBITDA
divided by cash interest expense, improved to 2.8 times from 2.6 times for the
1997 first quarter and 2.5 times for full year 1997. The ratio of earnings to
fixed charges was 1.7 to 1.0 for the first quarter of 1998 and 1.3 to 1.0 for
the first quarter of 1997.
The Company also believes that Comparative Funds From Operations ("Comparative
FFO," which represents Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts, plus deferred tax expense) is a
meaningful disclosure that will help the investment community to better
understand the financial performance of the Company, including enabling its
shareholders and analysts to more easily compare the Company's performance to
Real Estate Investment Trusts ("REIT"). Comparative FFO increased $31 million,
or 52%, to $91 million in the first quarter of 1998. The following is a
reconciliation of the Company's income before extraordinary item to Comparative
FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended
------------------------
March 27, March 28,
1998 1997
-------- --------
<S> <C> <C>
Income before extraordinary item................................................ $ 30 $ 6
Depreciation and amortization................................................... 58 51
Other real estate activities.................................................... (1) 4
Partnership adjustments......................................................... (6) (3)
Deferred taxes.................................................................. 10 2
------ -----
Comparative Funds From Operations............................................ $ 91 $ 60
====== =====
</TABLE>
The Company considers EBITDA and Comparative FFO to be indicative measures of
the Company's operating performance due to the significance of the Company's
long-lived assets and because such data is considered useful by the investment
community to better understand the Company's results, and 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 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 presentation.
- 14 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cash Flows and Financial Condition
- ----------------------------------
The Company reported an increase in cash and cash equivalents of $45 million
during the twelve weeks ended March 27, 1998. Cash flow from operations for the
first quarter of 1998 increased $9 million to $99 million principally due to
improved lodging results partially offset by seasonal fluctuations in working
capital.
Cash used in investing activities was $5 million for the first quarter of 1998
and $135 million for the first quarter of 1997. Cash used in investing
activities for the first quarter of 1998 includes capital expenditures of $62
million, primarily related to renewals and replacements on existing properties,
and $145 million for the acquisition of four full-service hotel properties and
one senior living community. In addition, the Company generated $193 million of
cash from the net sales of short-term marketable securities.
During the first quarter of 1998, the Company acquired a controlling interest
in, and became the managing general partner for, the partnership that owns the
359-room Albany Marriott, the 350-room San Diego Marriott Mission Valley and the
320-room Minneapolis Marriott Southwest for approximately $50 million. In
addition, the Company obtained a controlling interest in the partnership that
owns the 1,671-room Atlanta Marriott Marquis for approximately $239 million,
including a $164 million in assumed mortgage debt. The Company previously owned
a 1.3% general and limited partnership interest. The Company also entered into
an agreement to purchase the 397-room Ritz-Carlton, Tysons Corner located in
Northern Virginia.
Also during the first quarter of 1998, the Company acquired the Gables at
Winchester in suburban Boston, a 124-unit senior living community, for $21
million and entered into conditional purchase agreements to acquire two Marriott
Brighton Gardens assisted living communities in Denver and Colorado Springs,
Colorado, for $35 million in 1999 after the anticipated completion of
construction, if they achieve certain operating performance criteria. All three
of these communities would be operated by MSLS under long-term operating
agreements.
During the second quarter of 1998, the Company acquired the partnership that
owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million.
The Company previously owned a 1% managing general partnership interest and a
note receivable interest of approximately $5 million.
Also in the second quarter of 1998, the Company sold the 662-room New York
Marriott East Side for $191 million and recorded a pre-tax gain of approximately
$40 million. The Company also sold the 192-room Napa Valley Marriott for
approximately $21 million and recorded a pre-tax gain of approximately $10
million.
Cash used in financing activities was $49 million for the first quarter of 1998
and $129 million for the first quarter of 1997. Cash used in financing
activities for the first quarter of 1998 includes a $28 million prepayment of
debt and a $16 million increase in debt service reserves related to the
assumption of debt for certain hotel properties. Cash used in financing
activities for the first quarter of 1997 includes the $219 million prepayment of
the outstanding bonds secured by the San Francisco Marriott Hotel, partially
offset by the $90 million in mortgage financing obtained on the Philadelphia
Marriott Hotel.
In April 1998, the Company reached a definitive agreement with various
affiliates of The Blackstone Group and Blackstone Real Estate Partners
(collectively, "Blackstone") to acquire interests in 13 world-class luxury
- 15 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
hotels in the U.S. and certain other assets in a transaction valued at
approximately $1.775 billion, including the assumption of debt. The Company
expects to pay approximately $835 million in cash and assumed debt and to issue
approximately 47 million Operating Partnership units of the new operating
partnership (the "Operating Partnership"), to be formed as part of the Company's
reorganization, described below. Each Operating Partnership unit will be
exchangeable for one share of Host Marriott common stock (or its cash
equivalent). Upon completion of the acquisition, Blackstone will own
approximately 19% of the shares outstanding of Host Marriott common stock on a
fully converted basis. The Blackstone portfolio consists of two Ritz-Carltons,
three Four Seasons, one Grand Hyatt, three Hyatt Regencies and four Swissotel
properties. The acquisition of one of the Four Seasons hotels is subject to a
letter of intent. Should the Company be unable to complete a definitive
agreement for the acquisition of that property, its interest would consist of a
mortgage note secured by the hotel. There is no assurance that the Company will
be able to reach a definitive agreement.
In addition, the Company's board of directors (the "Board") has authorized the
Company to reorganize its remaining business operations to qualify as a real
estate investment trust ("REIT"), effective as of January 1, 1999, and to
spin-off its senior living communities business ("SLC") through a taxable stock
dividend to its shareholders. After the REIT reorganization, which is subject to
shareholder and final Board approval, the Company intends to operate as an
"UPREIT," with all of its assets and operations conducted through the newly
formed Operating Partnership of which Host Marriott will be the general partner.
Host Marriott will distribute shares in SLC to its shareholders at the time of
the REIT reorganization and Host Marriott expects to make a cash distribution at
that time. The projected aggregate value of these distributions, which are
expected to be treated as taxable dividends to shareholders, is currently
estimated between $400 million and $550 million. An additional taxable
distribution may be required in 1999. SLC is expected to own Host Marriott's
portfolio of senior living properties. This portfolio currently consists of 31
retirement communities, totaling 7,218 units in 13 states. The communities will
continue to be managed by Marriott International. In addition, SLC will lease
substantially all of the hotels owned by the REIT and its affiliates. SLC will
operate independently of Host Marriott. In order to facilitate the transition,
there may initially be some board of directors overlap, which will be eliminated
over time.
Following the REIT reorganization, Host Marriott will own Operating Partnership
units in the Operating Partnership equal to the number of outstanding shares of
Host Marriott common stock at the time of the conversion. The UPREIT structure
will not affect the ownership by shareholders of their existing Host Marriott
shares. As part of the reorganization, limited partners in Host Marriott's
full-service hotel partnerships and joint ventures are expected to be given an
opportunity to receive, on a tax-deferred basis, Operating Partnership units in
the new Operating Partnership in exchange for their current partnership
interests. Furthermore, Host Marriott anticipates repurchasing or exchanging its
approximately $1.55 billion of outstanding debt securities, adjusting the
conversion ratio of its Convertible Preferred Securities to reflect the
distribution of SLC and cash to Host Marriott stockholders, and issuing
additional debt and equity securities.
The Blackstone transaction is expected to close simultaneously with the
reorganization of Host Marriott as a real estate investment trust. At that time,
Blackstone's hotels and other assets will be contributed into the Operating
Partnership. The hotels will continue to be managed under the existing
management contracts.
- 16 -
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
reorganization is subject to significant contingencies that are outside the
control of the Company, including final Board approval, consent of shareholders,
partners, bondholders, lenders, and ground lessors of Host Marriott, its
affiliates and other third parties. Accordingly, there can be no assurance that
the REIT reorganization will be completed or that it will be effective as of
January 1, 1999. Consummation of the Blackstone transaction is also subject to
certain conditions, including consummation of the REIT reorganization by March
31, 1999.
On April 20, 1998, the Company filed a Shelf Registration on Form S-3 with the
Securities and Exchange Commission for $2.5 billion in securities, which may
include debt, equity or a combination thereof. The Company anticipates that any
net proceeds from the sale of offered securities (including the potential
issuance of perpetual preferred stock) will be used for refinancing of the
Company's indebtedness, including approximately $1.55 billion of the Company's
outstanding long- term debt securities, the potential refinancing of portions of
the Company's approximately $2 billion of mortgage debt and potential future
acquisitions.
In the second quarter of 1998, the Company prepaid $92 million of 9% unsecured
debt provided by Marriott International related to the Company's senior living
communities.
- 17 -
<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:
o April 17, 1998 -- Report of the announcement that the Company
intends to reorganize its business operations to qualify as a
real estate investment trust, effective as of January 1, 1999. As
part of the REIT reorganization, the Company intends to spin-off
its senior living communities business through a stock dividend
to its shareholders. The Company also announced that its has
agreed to acquire interests in 13 luxury hotels and certain other
assets owned by affiliates of The Blackstone Group and Blackstone
Real Estate Partners.
- 18 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT CORPORATION
May 11, 1998 /s/ Donald D. Olinger
- ------------ ----------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Host
Marriott Corporation's condensed consolidated balance sheets and condensed
consolidated statements of operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000314733
<NAME> Host Marriott Corporation
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<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> MAR-27-1998
<EXCHANGE-RATE> 1
<CASH> 556
<SECURITIES> 161
<RECEIVABLES> 142
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,425
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0
<COMMON> 204
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<TOTAL-LIABILITY-AND-EQUITY> 6,762
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</TABLE>
