<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 June 19, 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 July 17, 1998
- --------------------- ----------------
Common Stock, $1.00
par value per share 204,371,866
================================================================================
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
June 19, 1998 and January 2, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Twenty-four Weeks Ended
June 19, 1998 and June 20, 1997
Condensed Consolidated Statements of Cash Flows - 6
Twenty-four Weeks Ended June 19, 1998 and
June 20, 1997
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 14
Operations and Financial Condition
Part II. OTHER INFORMATION AND SIGNATURE 22
</TABLE>
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
June 19, January 2,
1998 1998
-------- ----------
(unaudited)
<S> <C> <C>
ASSETS
------
Property and Equipment, net............................................................ $ 5,698 $ 5,217
Notes and Other Receivables (including amounts due from
affiliates of $5 million and $23 million, respectively).............................. 33 54
Due from Managers...................................................................... 104 93
Investments in Affiliates.............................................................. 5 13
Other Assets........................................................................... 364 284
Short-Term Marketable Securities....................................................... 46 354
Cash and Cash Equivalents.............................................................. 515 511
-------- --------
$ 6,765 $ 6,526
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior Notes Issued by the Company or its Subsidiaries............................... $ 1,585 $ 1,585
Mortgage Debt........................................................................ 2,074 1,979
Other................................................................................ 125 219
-------- --------
3,784 3,783
Accounts Payable and Accrued Expenses.................................................. 79 97
Deferred Income Taxes.................................................................. 526 508
Other Liabilities...................................................................... 528 388
-------- --------
Total Liabilities................................................................. 4,917 4,776
-------- --------
Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust 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........................................................... 938 937
Retained Earnings.................................................................... 145 49
Accumulated Other Comprehensive Income............................................... 11 10
-------- --------
Total Shareholders' Equity........................................................ 1,298 1,200
-------- --------
$ 6,765 $ 6,526
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended June 19, 1998 and June 20, 1997
(unaudited, in millions, except per common share amounts)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
REVENUES
Hotels............................................................................. $ 331 $ 264
Senior living communities.......................................................... 19 --
Net gains on property transactions................................................. 51 1
Equity in earnings (losses) of affiliates.......................................... (2) 2
Other.............................................................................. 3 3
--------- --------
Total revenues................................................................... 402 270
--------- --------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$47 million and $36 million in 1998 and 1997, respectively)...................... 170 140
Senior living communities (including Marriott International
management fees of $3 million in 1998)........................................... 11 --
Other.............................................................................. 5 6
--------- --------
Total operating costs and expenses............................................... 186 146
--------- --------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
AND REIT CONVERSION EXPENSES AND INTEREST............................................ 216 124
Minority interest...................................................................... (14) (13)
Corporate expenses..................................................................... (9) (9)
REIT Conversion expenses............................................................... (6) --
Interest expense....................................................................... (79) (59)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (8) (8)
Interest income........................................................................ 11 10
--------- --------
INCOME BEFORE INCOME TAXES............................................................. 111 45
Provision for income taxes............................................................. (45) (19)
--------- --------
NET INCOME............................................................................. $ 66 $ 26
========= ========
BASIC EARNINGS PER COMMON SHARE........................................................ $ .32 $ .13
========= ========
DILUTED EARNINGS PER COMMON SHARE...................................................... $ .30 $ .13
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-four weeks ended June 19, 1998 and June 20, 1997
(unaudited, in millions, except per common share amounts)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
REVENUES
Hotels............................................................................. $ 652 $ 512
Senior living communities.......................................................... 39 --
Net gains (losses) on property transactions........................................ 52 2
Equity in earnings (losses) of affiliates.......................................... (1) 3
Other.............................................................................. 5 5
--------- --------
Total revenues................................................................... 747 522
--------- --------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$102 million and $78 million in 1998 and 1997, respectively)..................... 343 291
Senior living communities (including Marriott International
management fees of $6 million in 1998).......................................... 20 --
Other.............................................................................. 10 16
--------- --------
Total operating costs and expenses............................................... 373 307
--------- --------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
AND REIT CONVERSION EXPENSES AND INTEREST............................................ 374 215
Minority interest...................................................................... (30) (24)
Corporate expenses..................................................................... (21) (18)
REIT Conversion expenses............................................................... (6) --
Interest expense....................................................................... (162) (122)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (17) (17)
Interest income........................................................................ 25 22
--------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...................................... 163 56
Provision for income taxes............................................................. (67) (24)
--------- --------
INCOME BEFORE EXTRAORDINARY ITEM....................................................... 96 32
Extraordinary item - gain on extinguishment of debt
(net of income taxes of $3 million in 1997).......................................... -- 5
--------- --------
NET INCOME............................................................................. $ 96 $ 37
========= ========
BASIC EARNINGS PER COMMON SHARE:
Income before extraordinary item....................................................... $ .47 $ .16
Extraordinary item..................................................................... -- .02
--------- --------
NET INCOME............................................................................. $ .47 $ .18
========= ========
DILUTED EARNINGS PER COMMON SHARE:
Income before extraordinary item....................................................... $ .45 $ .16
Extraordinary item..................................................................... -- .02
--------- --------
NET INCOME............................................................................. $ .45 $ .18
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four weeks ended June 19, 1998 and June 20, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Income before extraordinary item....................................................... $ 96 $ 32
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization...................................................... 125 102
Income taxes....................................................................... 45 --
Gains on sales of hotel properties................................................. (51) --
Equity in (earnings) losses of affiliates.......................................... 1 (3)
Changes in operating accounts...................................................... (33) 24
Other.............................................................................. 23 38
-------- ---------
Cash from operations............................................................... 206 193
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets.......................................................... 209 6
Acquisitions........................................................................... (387) (156)
Capital expenditures:
Renewals and replacements.......................................................... (79) (60)
New development projects........................................................... (18) --
New investment capital expenditures................................................ (14) (18)
Purchases of short-term marketable securities.......................................... (97) --
Sales of short-term marketable securities.............................................. 405 --
Note receivable collections............................................................ 3 4
Affiliate collections, net............................................................. 14 10
Other.................................................................................. (25) 14
-------- ---------
Cash provided by (used in) investing activities.................................... 11 (200)
-------- ---------
FINANCING ACTIVITIES
Issuances of debt...................................................................... 5 84
Issuances of common stock.............................................................. 1 3
Scheduled principal repayments......................................................... (19) (44)
Debt prepayments ...................................................................... (168) (236)
Other.................................................................................. (32) 5
-------- ---------
Cash used in financing activities.................................................. (213) (188)
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... $ 4 $ (195)
======== =========
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 $ 258
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-6-
<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 June 19, 1998
and January 2, 1998, and the results of operations for the twelve and
twenty-four weeks ended June 19, 1998 and June 20, 1997 and cash flows for
the twenty-four weeks ended June 19, 1998 and June 20, 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 controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the U.S. and
certain other assets in a transaction valued at approximately $1.735
billion. The Company expects to pay approximately $862 million in cash and
assumed debt and to issue approximately 43.7 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 18% of the outstanding
shares of Host Marriott common stock on a fully converted basis. The
Blackstone portfolio consists of two Ritz-Carltons, two Four Seasons, one
Grand Hyatt, three Hyatt Regencies, four Swissotel properties and a
mortgage on a third Four Seasons.
The Blackstone transaction is expected to close immediately after the REIT
Conversion, as described below. 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. Consummation of the Blackstone transaction is also subject to
certain conditions, including consummation of the REIT Conversion by March
31, 1999.
3. The Company's board of directors (the "Board") has authorized the Company
to reorganize its 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 (collectively, the "REIT Conversion"). After
the REIT Conversion, 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 Conversion 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 Operating Partnership. SLC will operate
independently of Host Marriott. In order
-7-
<PAGE>
to facilitate the transition, there may initially be limited board of
directors overlap, which will be eliminated over time.
Following the REIT Conversion, Host Marriott will own Operating
Partnership units ("OP Units") equal to the number of outstanding shares
of Host Marriott common stock at the time of the REIT Conversion. The
UPREIT structure will not affect the ownership by shareholders of their
existing Host Marriott shares.
In June 1998, as part of the REIT Conversion, the Company filed a
preliminary Prospectus/Consent Solicitation with the Securities and
Exchange Commission. This Prospectus/Consent Solicitation Statement
describes a proposal whereby the Operating Partnership will acquire by
merger (the "Mergers") eight limited partnerships (the "Partnerships")
that own full-service hotels in which the Company or its subsidiaries are
general partners. As more fully described in this Prospectus/Consent
Solicitation Statement, limited partners of those Partnerships that
participate in the Mergers will receive either OP Units or, at their
election, unsecured notes due December 15, 2005 issued by the Operating
Partnership ("Notes"), in exchange for their partnership interests in such
Partnerships.
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 Conversion 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 Conversion will be
completed or that it will be effective as of January 1, 1999.
On April 20, 1998, the Company and certain of its subsidiaries filed a
shelf registration on Form S-3 (the "Shelf Registration") with the
Securities and Exchange Commission for $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 will be used for
refinancing of the Company's indebtedness, including the Existing Senior
Notes (as defined below), the potential refinancing of portions of the
Company's approximately $2 billion of mortgage debt, potential future
acquisitions and general corporate purposes.
In June 1998, HMH Properties, Inc., ("HMH Properties") an indirect
wholly-owned subsidiary of the Company, commenced offers to purchase any
and all of HMH Properties' (i) $600 million in 9 1/2% senior notes due
2005, (ii) $350 million in 9% senior notes due 2007 and (iii) $600 million
in 8 7/8% senior notes due 2007 (collectively, the "Existing Senior
Notes"). Concurrently with each offer to purchase, HMH Properties is
soliciting consents from registered holders of the Existing Senior Notes
to certain amendments to eliminate or modify substantially all of the
restrictive covenants and certain other provisions contained in the
indentures pursuant to which the Existing Senior Notes were issued.
As of July 14, 1998, HMH Properties received valid tenders and executed
consents to substantially all of its Existing Senior Notes. HMH
Properties' obligation to purchase the Existing Senior Notes remains
subject to satisfaction or waiver of certain conditions, including
consummation of the $1.4 billion offering of New Senior Notes (as defined
below) and obtaining the new credit facility discussed below. The tender
offer expires on July 27, 1998, unless extended.
On July 17, 1998, HMH Properties filed a supplement to the Shelf
Registration for an offering (the "Offering") of $1.4 billion of senior
notes (the "New Senior Notes"). The New Senior Notes are expected to be
issued in two series, $400 million due in 2005 and $1 billion due in 2007.
The New Senior Notes will be guaranteed by the Company and certain of its
subsidiaries.
The Company is negotiating with a number of financial institutions with
respect to a $1.25 billion credit facility (the "Credit Facility") to be
provided to HMH Properties by a syndicate of lenders. The Credit Facility
will replace the Company's existing $500 million credit facility (the
"Existing Credit Facility"). The net proceeds from the Offering and
borrowings under the Credit Facility will be used by the Company to
purchase the Existing Senior Notes and to make bond premium and consent
payments and other expenses expected to total approximately $178 million.
These costs, along with the write-off of deferred financing fees of
approximately $55 million related to the Existing Senior Notes and the
Existing Credit Facility, will be recorded as a pre-tax extraordinary loss
on the extinguishment of debt in the third quarter of 1998 if the
transactions are consummated. The Credit Facility will be guaranteed by
the Company and certain of its subsidiaries.
-8-
<PAGE>
4. 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 all 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 Twenty-four Weeks Ended
------------------------ -------------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Sales
Rooms .................................................. $ 511 $ 423 $1,020 $ 831
Food & Beverage ........................................ 222 175 444 346
Other .................................................. 54 39 110 80
------ ------ ------ ------
Total Hotel Sales .................................... 787 637 1,574 1,257
------ ------ ------ ------
Department Costs
Rooms .................................................. 113 95 227 187
Food & Beverage ........................................ 158 128 321 255
Other .................................................. 27 19 55 40
------ ------ ------ ------
Total Department Costs ............................... 298 242 603 482
------ ------ ------ ------
Department Profit ......................................... 489 395 971 775
Other Deductions .......................................... 158 131 319 263
------ ------ ------ ------
House Profit ......................................... $ 331 $ 264 $ 652 $ 512
====== ====== ====== ======
</TABLE>
House profit generated by the Company's senior living communities for 1998
consists of (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
June 19, 1998 June 19, 1998
------------------ -----------------------
<S> <C> <C>
Sales....................................................... $ 55 $ 110
Department Costs............................................ 36 71
------------ -----------
House Profit........................................... $ 19 $ 39
============ ===========
</TABLE>
5. 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 plus
dividends by the weighted average number of shares of common stock
outstanding plus other potentially dilutive securities. Diluted earnings
per common share was not adjusted for the impact of the Convertible
Preferred Securities in 1997 as they were anti-dilutive.
-9-
<PAGE>
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
----------------------- ---------------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------- ------- -------- -------
(in millions)
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding ........................................... 204.2 202.8 204.0 202.6
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price ......................................... 4.2 4.8 4.3 5.0
Assuming distribution of common shares upon
redemption of Convertible Preferred Securities ............... 29.6 -- 29.6 --
Assuming distribution of common shares
issuable for warrants, less shares assumed
purchased at average market price ............................ .1 .3 .1 .3
----- ----- ----- -----
Shares utilized for the calculation of diluted
earnings per share ....................................... 238.1 207.9 238.0 207.9
===== ===== ===== =====
</TABLE>
6. As of June 19, 1998, the Company had minority interests in 18 affiliates
that own an aggregate of 240 properties, 20 of which are full-service
properties, managed primarily by Marriott International, Inc. The
Company's equity in losses of affiliates was $2 million and $1 million for
the twelve weeks and twenty-four weeks ended June 19, 1998, respectively.
The Company's equity in earnings of affiliates was $2 million and $3
million for the twelve and twenty-four weeks ended June 20, 1997,
respectively.
Combined summarized operating results reported by affiliates follows:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- ---------------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------- -------- -------- -------
(in millions)
<S> <C> <C> <C> <C>
Revenues .......................................................... $ 131 $ 162 $ 255 $ 303
Operating expenses:
Cash charges (including interest) .............................. 73 91 152 185
Depreciation and other non-cash charges ........................ 34 45 69 95
----- ----- ----- -----
Income before extraordinary item .................................. 24 26 34 23
Extraordinary item - forgiveness of debt .......................... -- (6) 4 12
----- ----- ----- -----
Net income ................................................... $ 24 $ 20 $ 38 $ 35
===== ===== ===== =====
</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 held a note receivable interest of approximately $5 million.
7. In 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. 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
-10-
<PAGE>
will be operated by Marriott Senior Living Services, Inc. ("MSLS") under
long-term operating agreements.
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 191-room Napa
Valley Marriott for approximately $21 million and recorded a pre-tax gain
of approximately $10 million. Also, during the second quarter of 1998, the
Company acquired the 397-room Ritz-Carlton, Tysons Corner for $96 million
and the 281-room Ritz-Carlton, Phoenix for $75 million. In addition, the
Company acquired the 487-room Torrance Marriott near Los Angeles,
California for $52 million.
8. In March 1997, the Company purchased 100% of the outstanding bonds secured
by a first mortgage on the San Francisco Marriott. 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.
9. 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>
Twenty-four Weeks Ended June 19, 1998
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 652 $ 39 $ 56 $ 747
Operating profit.......................... 309 19 46 374
Interest income........................... 24 1 -- 25
Interest expense.......................... (150) (10) (2) (162)
Other..................................... (30) -- (44) (74)
Income before income taxes................ 153 10 -- 163
<CAPTION>
Twenty-four Weeks Ended June 20, 1997
-------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------ ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 512 $ -- $ 10 $ 522
Operating profit (loss)................... 221 -- (6) 215
Interest income........................... 16 -- 6 22
Interest expense.......................... (119) -- (3) (122)
Other..................................... (24) -- (35) (59)
Income (loss) before income taxes......... 94 -- (38) 56
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Twelve Weeks Ended June 19, 1998
--------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 331 $ 19 $ 52 $ 402
Operating profit.......................... 161 8 47 216
Interest income........................... 10 1 -- 11
Interest expense.......................... (75) (3) (1) (79)
Other..................................... (14) -- (23) (37)
Income before income taxes................ 82 6 23 111
<CAPTION>
Twelve Weeks Ended June 20, 1997
--------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $ 264 $ -- $ 6 $ 270
Operating profit.......................... 124 -- -- 124
Interest income........................... 7 -- 3 10
Interest expense.......................... (58) -- (1) (59)
Other..................................... (12) -- (18) (30)
Income (loss) before income taxes......... 61 -- (16) 45
</TABLE>
As of June 19, 1998 and June 20, 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 Twenty-four Weeks Ended
------------------------ -----------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
United States........................... $ 393 $ 264 $ 728 $ 508
International........................... 9 6 19 14
--------- ---------- --------- ---------
Total.............................. $ 402 $ 270 $ 747 $ 522
========= ========== ========= =========
</TABLE>
10. 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 non-owner
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
("HMSC") 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 and twenty-four weeks ended June 19, 1998,
other comprehensive income was $1 million and consisted of the unrealized
gain on the appreciation of the HMSC common stock. For the twelve and
twenty-four weeks ended June 19, 1998, comprehensive income was $67
million and $97 million, respectively. For the twelve and twenty-four
weeks ended June 20, 1997, other comprehensive income was $3 million. For
the twelve and twenty-four weeks ended June 20, 1997, comprehensive income
was $29 million and $40 million, respectively. As of June 19, 1998 and
January 2, 1998, the Company's accumulated other comprehensive income was
approximately $11 million and $10 million, respectively.
11. 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.
12. In December 1996, Host Marriott Financial Trust (the "Issuer"), a
wholly-owned subsidiary trust of the Company, issued 11 million shares of
6 3/4% convertible quarterly income preferred securities (the "Convertible
Preferred Securities"), with a liquidation preference of $50 per share
(for a total liquidation amount of $550 million). The Convertible
Preferred Securities represent an undivided beneficial interest in the
assets of the Issuer. The payment of distributions out of moneys held by
the Issuer and payments on liquidation of the Issuer or the redemption of
the Convertible Preferred Securities are guaranteed by the Company to the
extent the Issuer has funds available therefor. This guarantee, when taken
together with the Company's obligations under the indenture pursuant to
which
-12-
<PAGE>
the Debentures were issued, the Debentures, the Company's obligations
under the Trust Agreement and its obligations under the indenture to pay
costs, expenses, debts and liabilities of the Issuer (other than with
respect to the Convertible Preferred Securities) provides a full and
unconditional guarantee of amounts due on the Convertible Preferred
Securities. Proceeds from the issuance of the Convertible Preferred
Securities were invested in 6 3/4% Convertible Subordinated Debentures
(the "Debentures") due December 2, 2026 issued by the Company. The Issuer
exists solely to issue the Convertible Preferred Securities and its own
common securities (the "Common Securities") and invest the proceeds
therefrom in the Debentures, which is its sole asset. Separate financial
statements of the Issuer are not presented because of the Company's
guarantee described above; the Company's management has concluded that
such financial statements are not material to investors and the Issuer is
wholly-owned and essentially has no independent operations.
Each of the Convertible Preferred Securities is convertible at the option
of the holder into shares of Company common stock at the rate of 2.6876
shares per Convertible Preferred Security (equivalent to a conversion
price of $18.604 per share of Company common stock). The Debentures are
convertible at the option of the holders into shares of Company common
stock at a conversion rate of 2.6876 shares for each $50 in principal
amount of Debentures. The Issuer will only convert Debentures pursuant to
a notice of conversion by a holder of Convertible Preferred Securities.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and
payable quarterly in arrears thereafter. The distribution rate and the
distribution and other payment dates for the Convertible Preferred
Securities will correspond to the interest rate and interest and other
payment dates on the Debentures. The Company may defer interest payments
on the Debentures for a period not to exceed 20 consecutive quarters. If
interest payments on the Debentures are deferred, so too are payments on
the Convertible Preferred Securities. Under this circumstance, the Company
will not be permitted to declare or pay any cash distributions with
respect to its capital stock or debt securities that rank pari passu with
or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of
the Debentures after December 2, 1999. Upon repayment at maturity or as a
result of the acceleration of the Debentures upon the occurrence of a
default, the Debentures shall be subject to mandatory redemption, from
which the proceeds will be applied to redeem Convertible Preferred
Securities and Common Securities, together with accrued and unpaid
distributions.
-13-
<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
$132 million, or 49%, to $402 million for the second quarter of 1998 from $270
million for the second quarter of 1997. Year-to-date revenues rose $225 million,
or 43%, to $747 million. The Company's revenue and operating profit were
impacted by:
. improved lodging results for comparable full-service hotel properties;
. the addition of 18 full-service hotel properties during 1997 and eight
full-service properties during the first half of 1998;
. the addition of 30 senior living communities in 1997 and one senior living
community in the first half of 1998; and
. the gain on the sales of two hotel properties in the second quarter of
1998.
Hotel revenues increased $67 million, or 25%, to $331 million in the second
quarter of 1998 and $140 million, or 27%, to $652 million for year-to-date 1998
due to growth in room revenues generated per available room ("REVPAR") and the
addition of 26 full-service properties acquired in 1997 and through the first
half of 1998.
Hotel sales (gross hotel sales, including room sales, food and beverage sales,
and other ancillary sales such as telephone sales) increased $150 million, or
24%, to $787 million in the second quarter of 1998 and $317 million, or 25%, to
nearly $1.6 billion year-to-date, 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 7.6% to $117.90 for the 1998 second quarter and
8.2% to $116.66 year-to-date. Results were further enhanced by a one percentage
point increase in the house profit margin for comparable full-service properties
for the quarter
-14-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
and year-to-date. On a comparable basis for the Company's full-service hotel
properties, average room rates increased over 8% for the 1998 second quarter and
year-to-date, while average occupancy decreased one-half percentage point for
the 1998 second quarter and decreased slightly year-to-date. Second quarter
hotel results were adversely impacted by the Easter holiday, which fell fully
into the second quarter of 1998 versus being split between the first and second
quarters in 1997. Accordingly, the first quarter of 1998 was positively impacted
for the same reason.
Revenues generated from the Company's 31 senior living communities totaled $19
million for the 1998 second quarter and $39 million year-to-date. During the
second quarter of 1998, average occupancy of the communities was almost 92% and
the average per diem rate was $88, which resulted in revenue per available unit
("REVPAU") of $80.87. On a year-to-date basis, average occupancy was almost 92%
and the average per diem rate was almost $88, which resulted in REVPAU of
$80.65. Senior living communities' sales totaled $55 million for the second
quarter of 1998 and $110 million for year-to-date 1998.
Revenues were also impacted by the gains on the sales of two hotel properties.
The New York East Side Marriott was sold for $191 million resulting in a pre-tax
gain of approximately $40 million. The Napa Valley Marriott was sold for $21
million resulting in a pre-tax gain of approximately $10 million.
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 $40 million to $186 million in the second quarter of 1998
from $146 million in the second quarter of 1997, primarily representing
increased hotel and senior living communities operating costs, including
depreciation and management fees. Year-to-date operating costs and expenses
increased $66 million to $373 million. Hotel operating costs increased $30
million to $170 million for the second quarter of 1998 and $52 million to $343
million year-to-date, primarily due to the addition of 26 full-service hotel
properties during 1997 and through the first half 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 51% and 53%
of revenues in the second quarter of 1998 and year-to-date, respectively, from
53% and 57% of revenues in the second quarter of 1997 and year-to-date 1997,
respectively, 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 $11 million for the second
quarter of 1998 and $20 million for year-to-date 1998.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $92 million,
or 74%, to $216 million for the second quarter of 1998 and $159 million, or 74%,
to $374 million year-to-date. Hotel operating profit increased $37 million, or
30%, to $161 million, or 49% of hotel revenues, for the second quarter of 1998
from $124 million, or 47% of hotel revenues, for the second quarter of 1997.
Year-to-date hotel operating profit increased $88 million, or 40%, to $309
million, or 47% of hotel revenues, for 1998 compared to $221 million, or 43% of
hotel revenues, for 1997. Specifically, hotels in New York City, Toronto and
Atlanta reported significant improvements for the 1998 second quarter. Results
in Mexico City have also improved as the Mexican economy continues to
strengthen. Properties in Florida experienced some minor softness in results due
to exceptionally poor weather in 1998.
The Company's senior living communities generated $8 million of operating profit
for the second quarter of 1998 and $19 million of operating profit for
year-to-date 1998.
-15-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Minority Interest. Minority interest expense increased $1 million to $14 million
for the second quarter of 1998 and $6 million to $30 million for year-to-date
1998, primarily reflecting the impact of the consolidation of affiliated
partnerships and the acquisition of controlling interests in newly-formed
partnerships during 1997 and through the second quarter of 1998.
Corporate Expenses. Corporate expenses remained at $9 million for the 1998
second quarter and increased $3 million to $21 million for year-to-date 1998. As
a percentage of revenues, corporate expenses decreased to 2.2% of revenues in
the second quarter of 1998 and 2.8% of revenues for year-to-date 1998 from 3.4%
of revenues in both the second quarter of 1997 and year-to-date 1997, reflecting
the Company's efforts to control its corporate expenses in spite of the
substantial growth in revenues.
REIT Conversion Expenses. REIT Conversion expenses reflect the professional fees
and other expenses associated with the Company's conversion to a REIT.
Interest Expense. Interest expense increased 34% to $79 million in the second
quarter of 1998 and 33% to $162 million year-to-date, 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 half of
fiscal years 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 $1 million to $11 million for the
second quarter of 1998. On a year-to-date basis, interest income increased $3
million to $25 million, primarily reflecting interest earned on cash held for
future hotel investments.
Income before Extraordinary Item. Income before extraordinary item for the
second quarter of 1998 was $66 million, compared to $26 million for 1997. The
1998 year-to-date income before extraordinary item was $96 million compared to
$32 million for 1997.
Extraordinary gain. In March 1997, the Company purchased 100% of the outstanding
bonds secured by a first mortgage on the San Francisco Marriott. 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 second quarter of 1998 was $66
million compared to $26 million for 1997. Net income for year-to-date 1998 was
$96 million compared to $37 million for 1997. Basic and diluted earnings per
common share were $.32 and $.30, respectively, for the second quarter of 1998
and $.13 for 1997. On a year-to-date basis, basic and diluted earnings per
common share were $.47 and $.45, respectively, for 1998 and $.18 for 1997.
-16-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
EBITDA and Comparative FFO
- --------------------------
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased $49
million, or 28%, to $223 million in the 1998 second quarter and $113 million, or
34%, to $441 million year-to-date.
Hotel EBITDA increased $47 million, or 27%, to $222 million in the second
quarter of 1998 and $98 million, or 30%, to $425 million year-to-date,
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 10% and almost 12%, respectively, on
REVPAR increases of 7.6% and 8.2%, respectively, for the 1998 second quarter and
year-to-date. The Company's senior living communities contributed $15 million of
EBITDA during the 1998 second quarter and $30 million of EBITDA for 1998 year-
to-date.
The following is a reconciliation of EBITDA to the Company's income before
extraordinary item (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- -----------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------- --------- --------- --------
<S> <C> <C> <C> <C>
EBITDA ............................................................. $ 223 $ 174 $ 441 $ 328
Interest expense ................................................... (79) (59) (162) (122)
Dividends on Convertible Preferred Securities ...................... (8) (8) (17) (17)
Depreciation and amortization ...................................... (67) (51) (125) (102)
Minority interest expense .......................................... (14) (13) (30) (24)
REIT Conversion expenses ........................................... (6) -- (6) --
Income taxes ....................................................... (45) (19) (67) (24)
Other non-cash charges, net ........................................ 62 2 62 (7)
----- ----- ----- -----
Income before extraordinary item ................................ $ 66 $ 26 $ 96 $ 32
===== ===== ===== =====
</TABLE>
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, was 2.9 times for year-to-date 1998 compared to 2.8 times for
year-to-date 1997. On a full year basis, management anticipates that the
interest coverage will be 2.5 times for 1998, which is comparable to 1997. The
ratio of earnings to fixed charges was 2.0 to 1.0 for the second quarter of 1998
and 1.5 to 1.0 for the second 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 $30 million,
or 35%, to $115 million in the second quarter of 1998 and $61 million, or 42%,
to $206 million year-to-date.
-17-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a reconciliation of the Company's income before extraordinary
item to Comparative FFO (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------- ------------------------
June 19, June 20, June 19, June 20,
1998 1997 1998 1997
-------- -------- --------- --------
<C> <S> <S> <S> <S>
Income before extraordinary item .................................... $ 66 $ 26 $ 96 $ 32
Depreciation and amortization ....................................... 67 50 125 101
Other real estate activities ........................................ (51) (2) (52) 2
Partnership adjustments ............................................. (2) 3 (8) --
REIT expenses ....................................................... 6 -- 6 --
Deferred taxes ...................................................... 29 8 39 10
----- ----- ----- -----
Comparative Funds From Operations ................................ $ 115 $ 85 $ 206 $ 145
===== ===== ===== =====
</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.
Cash Flows and Financial Condition
- ----------------------------------
The Company reported an increase in cash and cash equivalents of $4 million
during the twenty-four weeks ended June 19, 1998. Cash flow from operations
through the second quarter of 1998 increased $13 million to $206 million
principally due to improved lodging results partially offset by seasonal
fluctuations in working capital.
Cash provided by investing activities was $11 million through the second quarter
of 1998, while cash used in investing activities was $200 million through the
second quarter of 1997. Cash from investing activities through the second
quarter of 1998 includes capital expenditures of $111 million, primarily related
to renewals and replacements on existing properties, and $387 million for the
acquisition of eight full-service hotel properties and one senior living
community. The Company also received proceeds of $209 million from the sale of
two hotel properties in the second quarter of 1998. In addition, the Company
generated $308 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. 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.
-18-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 held
a note receivable interest of approximately $5 million. In addition, the Company
acquired the 397-room Ritz-Carlton, Tysons Corner for $96 million and the
281-room Ritz- Carlton, Phoenix for $75 million. The Company also acquired the
487-room Torrance Marriott near Los Angeles, California for $52 million.
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 191-room Napa Valley Marriott for
approximately $21 million and recorded a pre-tax gain of approximately $10
million.
Cash used in financing activities was $213 million through the second quarter of
1998 and $188 million through the second quarter of 1997. Cash used in financing
activities through the second quarter of 1998 includes $168 million in
prepayments of debt and a $32 million increase in debt service and capital
expenditure reserves that relate to debt assumed for certain hotel properties
and planned capital improvements. Cash used in financing activities through the
second quarter of 1997 includes the $219 million prepayment of the outstanding
bonds secured by the San Francisco Marriott, partially offset by the $90 million
in mortgage financing obtained on the Philadelphia Marriott.
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 controlling interests in 12 luxury
hotels and a first mortgage interest in another hotel in the U.S. and certain
other assets in a transaction valued at approximately $1.735 billion. The
Company expects to pay approximately $862 million in cash and assumed debt and
to issue approximately 43.7 million Operating Partnership units of the new
operating partnership (the "Operating Partnership"), to be formed as part of the
Company's REIT Conversion, described below. Each Operating Partnership unit ("OP
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 18% of the outstanding shares of Host Marriott common stock on a
fully converted basis. The Blackstone portfolio consists of two Ritz-Carltons,
two Four Seasons, one Grand Hyatt, three Hyatt Regencies, four Swissotel
properties and a mortgage on a third Four Seasons.
The pending acquisition of the Blackstone properties represents the first
acquisitions in the Company's multi-brand strategy by establishing relationships
with other high-quality, well-recognized brands such as Four Seasons, Hyatt and
Swissotel. This multi-brand strategy will allow the Company to diversify its
existing hotel portfolio (as many markets already have a strong representation
of Marriott brand hotels) and increase the Company's pool of potential
acquisitions. The Company will focus on upscale and luxury full-service hotels
in difficult-to-duplicate locations with high barriers to entry, such as hotels
located in downtown, airport and resort/convention locations, which are operated
by quality managers.
The Blackstone transaction is expected to close immediately after the REIT
Conversion. At that time, the Blackstone hotels and other assets will be
contributed into the Operating Partnership. The hotels will continue to be
managed under the existing management contracts. Consummation of the Blackstone
transaction is subject to certain conditions, including consummation of the REIT
Conversion by March 31, 1999.
-19-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In addition, the Company's board of directors (the "Board") has authorized the
Company to reorganize its 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 (collectively, the "REIT Conversion"). After the REIT
Conversion, 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 Conversion 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 Operating Partnership. 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 Conversion, Host Marriott will own OP Units equal to the
number of outstanding shares of Host Marriott common stock at the time of the
REIT Conversion. The UPREIT structure will not affect the ownership by
shareholders of their existing Host Marriott shares.
In June 1998, as part of the REIT Conversion, the Company filed a preliminary
Prospectus/Consent Solicitation with the Securities and Exchange Commission.
This Prospectus/ Consent Solicitation Statement describes a proposal whereby the
Operating Partnership will acquire by merger (the "Mergers") eight limited
partnerships (the "Partnerships") that own full-service hotels in which the
Company or its subsidiaries are general partners. As more fully described in
this Prospectus/Consent Solicitation Statement, limited partners of those
Partnerships that participate in the Mergers will receive either OP Units or, at
their election, unsecured notes due December 15, 2005 issued by the Operating
Partnership ("Notes"), in exchange for their partnership interests in such
Partnerships.
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
Conversion 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 Conversion will be completed or that it will be effective as of January
1, 1999.
On April 20, 1998, the Company and certain of its subsidiaries filed a shelf
registration on Form S-3 (the "Shelf Registration") with the Securities and
Exchange Commission for $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 will be used for refinancing of the
Company's indebtedness, including the Existing Senior Notes (as defined below),
the potential refinancing of portions of the Company's approximately $2 billion
of mortgage debt, potential future acquisitions and general corporate purposes.
In June 1998, HMH Properties, Inc., an indirect wholly-owned subsidiary of the
Company, announced that it has commenced offers to purchase any and all of the
Company's (i) $600 million in 9 1/2% senior notes due 2005, (ii) $350 million in
9% senior notes due 2007 and (iii) $600 million in 8 7/8% senior notes due 2007
(collectively, the "Existing Senior Notes"). Concurrently with each offer to
purchase, the Company
-20-
<PAGE>
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
is soliciting consents from registered holders of the Existing Senior Notes to
certain amendments to eliminate or modify substantially all of the restrictive
covenants and certain other provisions contained in the indentures pursuant to
which the Existing Senior Notes were issued.
As of July 14, 1998, HMH Properties received valid tenders and executed consents
to substantially all of its Existing Senior Notes. HMH Properties' obligation to
purchase the Existing Senior Notes remains subject to satisfaction or waiver of
certain conditions, including consummation of the $1.4 billion offering of New
Senior Notes (as defined below) and obtaining the new credit facility discussed
below. The tender offer expires on July 27, 1998, unless extended.
On July 17, 1998, HMH Properties filed a supplement to the Shelf Registration
for an offering (the "Offering") of $1.4 billion of senior notes (the "New
Senior Notes"). The New Senior Notes are expected to be issued in two series,
$400 million due in 2005 and $1 billion due in 2007. The New Senior Notes will
be guaranteed by the Company and certain of its subsidiaries. The Company has
received a rating of BB on the New Senior Notes from Standard & Poor's. The
Existing Senior Notes were rated BB-.
The Company is negotiating with a number of financial institutions with respect
to a $1.25 billion credit facility (the "Credit Facility") to be provided to HMH
Properties by a syndicate of lenders. The Credit Facility will replace the
Company's existing $500 million credit facility (the "Existing Credit
Facility"). The net proceeds from the Offering and borrowings under the Credit
Facility will be used by the Company to purchase the Existing Senior Notes and
to make bond premium and consent payments and other expenses expected to total
$178 million. These costs, along with the write-off of deferred financing fees
of approximately $55 million related to the Existing Senior Notes and the
Existing Credit Facility, will be recorded as a pre-tax extraordinary loss on
the extinguishment of debt in the third quarter of 1998 if the transactions are
consummated. The Credit Facility will be guaranteed by the Company and certain
of its subsidiaries.
-21-
<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:
. 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 Conversion, 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.
. July 16, 1998 -- Report that includes information that the
Company believes is material to its investors. This includes
the following:
- The condensed financial statements of the Parent Company
(as defined) which represents the investment in, and
operations of subsidiaries with restricted net assets
accounted for on the equity method of accounting.
- The consolidated financial statements of Host Marriott
Hotels (as defined) which represents the assets and
liabilities expected to be included in the Company's
contribution of certain assets and liabilities to the
Operating Partnership (as defined herein) in conjunction
with the Company's contemplated REIT Conversion (as
defined herein).
-22-
<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
July 21, 1998 /s/ Donald D. Olinger
- ------------- --------------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<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
<MULTIPLIER> 1,000,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> JUN-19-1998
<EXCHANGE-RATE> 1
<CASH> 515
<SECURITIES> 46
<RECEIVABLES> 104
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6650
<DEPRECIATION> 452
<TOTAL-ASSETS> 6765
<CURRENT-LIABILITIES> 0
<BONDS> 3784
550
0
<COMMON> 204
<OTHER-SE> 1094
<TOTAL-LIABILITY-AND-EQUITY> 6765
<SALES> 0
<TOTAL-REVENUES> 747
<CGS> 0
<TOTAL-COSTS> 363
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> 163
<INCOME-TAX> 67
<INCOME-CONTINUING> 96
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96
<EPS-PRIMARY> .47
<EPS-DILUTED> .45
</TABLE>
