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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 17, 1998
Desert Springs Marriott Limited Partnership
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(Exact name of registrant as specified in its charter)
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Delaware 0-16777 52-1508601
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(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
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10400 Fernwood Road, Bethesda, Maryland 20817
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 380-2070
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Item 5. Other Events.
On April 17, 1998, Host Marriott Corporation (the "Company"), the
parent company of the general partner of Desert Springs Marriott Limited
Partnership (the "Partnership"), announced that its Board of Directors has
authorized the Company to reorganize its business operations to qualify as a
real estate investment trust (the "REIT Conversion"), effective as of January 1,
1999, as more particularly described in the Summary of the Proposed REIT
Conversion, Spin-off of Senior Living Business and Blackstone Hotel Portfolio
Transaction (the "Summary") which is attached hereto as Exhibit 99.2 and
incorporated herein by reference. Contemporaneously with the REIT Conversion,
the Company intends to spin-off its senior living communities business through a
stock dividend to its shareholders, as more particularly described in the
Summary.
The Company also announced that it has agreed to acquire interests in
thirteen luxury hotels and certain other assets owned by affiliates of The
Blackstone Group and Blackstone Real Estate Partners, for an aggregate
consideration of up to approximately $1.775 billion, including the assumption of
debt, as more particularly described in the Summary.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits
99.1 Press Release, dated April 17, 1998, entitled "Host Marriott
Corporation to Add World-Class Luxury Hotel Portfolio for $1.775
Billion; Reorganization as Real Estate Investment Trust, Spin-Off of
Senior Living Business Planned."
99.2 Summary of Proposed REIT Conversion, Spin-off of Senior Living
Business and Blackstone Hotel Portfolio Transaction.
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SIGNATURES
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 hereunto duly authorized.
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
By: MARRIOTT DESERT SPRINGS CORPORATION, its general
partner
Date: May 7, 1998 By: /s/ Patricia K. Brady
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Name: Patricia K. Brady
Title: Vice President, Chief Accounting Officer
and Treasurer (Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Description
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99.1 Press Release, dated April 17, 1998, entitled "Host
Marriott Corporation to Add World-Class Luxury Hotel
Portfolio for $1.775 Billion; Reorganization as Real Estate
Investment Trust, Spin-Off of Senior Living Business
Planned."
99.2 Summary of Proposed REIT Conversion, Spin-off of Senior
Living Business and Blackstone Hotel Portfolio Transaction.
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EXHIBIT 99.1
FOR IMMEDIATE RELEASE
Host Marriott Corporation
Terence C. Golden, President & CEO
(301) 380-7774
Christopher J. Nassetta, Executive Vice President and COO
(301) 380-6138
Robert E. Parsons, Jr. Executive Vice President & CFO
(301) 380-7209
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Investors: Media: The Blackstone Group:
Jim Francis, Assistant Treasurer Owen Blicksilver Stephen A. Schwarzman, President & CEO
(301) 380-1974 (212) 303-7603 (212) 836-9823
Geoffrey Wendt, Mgr. Investor Relations Doug Donsky Thomas J. Saylak, Senior Managing Director
(301) 380-5694 (212) 303-7608 (212) 836-9895
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HOST MARRIOTT CORPORATION TO ADD
WORLD-CLASS LUXURY HOTEL PORTFOLIO FOR $1.775 BILLION;
THE BLACKSTONE GROUP TO CONTRIBUTE INTERESTS IN
13 U.S. HOTELS IN EXCHANGE FOR A SIGNIFICANT EQUITY STAKE IN HOST MARRIOTT;
REORGANIZATION AS REAL ESTATE INVESTMENT TRUST,
SPIN OFF OF SENIOR LIVING BUSINESS PLANNED
- -- Addition of Blackstone Hotel Portfolio Launches Multi-Branding Strategy
- -- Strategic Initiatives Expected to Add $0.26 Per Share to 1999 FFO
BETHESDA, MD, April 17, 1998 Host Marriott Corporation (NYSE: HMT) announced
today that it has 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. Following the transaction, Blackstone will have the
largest ownership interest in Host Marriott on a fully diluted basis.
This strategic combination will solidify Host Marriott's reputation as the
nation's leading owner of luxury hotels and launches a new multi-branding
strategy for the Company.
In addition, Host Marriott announced that its Board of Directors 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 (the "Senior Living Communities
Company") through a taxable stock dividend to its shareholders.
"Today is an historic moment in our Company's history," said Terence C.
Golden, President and Chief Executive Officer of Host Marriott. "As a result of
these strategic initiatives, the Company has dramatically increased its growth
potential, further solidified its position as the leading owner of luxury
hotels, significantly strengthened its financial position, and increased its
overall competitiveness by lowering its cost of capital. Host Marriott
continues to foster its reputation as the nation's preeminent `blue chip' hotel
ownership company."
THE BLACKSTONE HOTEL PORTFOLIO
Host Marriott 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
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Partnership") to be formed as part of the REIT conversion at $20 per Operating
Partnership unit (subject to adjustments to reflect any partial interests). 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 primary shares outstanding of Host
Marriott common stock on a fully converted basis. John Schreiber, co-chairman of
the Blackstone Real Estate Partners' Investment Committee, will join the Board
of Directors of Host Marriott in the next 60 days.
The Blackstone portfolio is one of the premier collections of hotel real
estate properties. It includes two Ritz-Carltons, three Four Seasons, one Grand
Hyatt, three Hyatt Regencies and four Swissotel properties. The Blackstone
transaction is expected to close simultaneously with the reorganization of Host
Marriott as a REIT. At that time, Blackstone's hotels and other assets will be
contributed into the Operating Partnership. The hotels will continue to be
managed under existing management contracts.
"The Blackstone portfolio is one of the highest quality collections of
properties in the world. These hotels are located in major urban and
convention/resort markets with significant barriers to new competition. Given
the quality of this portfolio and the lack of new competition, we anticipate
significant upside in the performance of these properties," said Christopher J.
Nassetta, Executive Vice President and Chief Operating Officer of Host Marriott.
"This transaction more than triples our acquisition target for 1998, and greatly
accelerates the implementation of our multi-brand strategy."
Stephen A. Schwarzman, President & CEO of The Blackstone Group, commented,
"We are big believers in the prospects for Host's multi-brand full-service hotel
strategy and see this transaction as a way of broadening and diversifying our
asset base with an experienced, savvy management team."
Located in eight states, the Blackstone hotels in which Host Marriott will
acquire a controlling interest include: The Ritz-Carlton, Amelia Island (449
rooms); The Ritz-Carlton, Boston (275 rooms); Hyatt Regency Burlingame at San
Francisco Airport (793 rooms); Hyatt Regency Cambridge, Boston (469 rooms);
Hyatt Regency Reston, Virginia (514 rooms); Grand Hyatt Atlanta (439 rooms);
Four Seasons Philadelphia (365 rooms); Four Seasons Atlanta (246 rooms); The
Drake (Swissotel) New York (494 rooms); Swissotel Chicago (630 rooms); Swissotel
Boston (498 rooms); and Swissotel Atlanta (348 rooms). Additionally, the
transaction includes: the first mortgage loan on the Four Seasons Beverly Hills
(285 Rooms) as well as a letter of intent to purchase the equity interest in the
property; two office buildings in Atlanta -- The offices at The Grand (97,879
sq. ft.) and the offices at the Swissotel (67,110 sq. ft.); and a 25% interest
in the Swissotel U.S. Management Company.
The purchase is expected to be accretive to funds from operations (FFO) and
to generate earnings before interest expense, taxes, depreciation, amortization
and other non-cash items (EBITDA) of approximately $183 million in 1999, the
first full year the assets will be owned by Host Marriott.
Host Marriott's acquisition of the Blackstone portfolio is subject to
certain conditions, including Host Marriott's conversion to a REIT by March 31,
1999.
Merrill Lynch acted as advisor on the transaction for the Company. Bear
Stearns & Company, Inc. advised Blackstone on the transaction.
REIT REORGANIZATION
After the REIT reorganization, which is subject to stockholder and final
Board of Directors approval, Host Marriott Corporation 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.
Marriott International's role in managing Marriott hotels owned by Host Marriott
will be unchanged.
"The proposed REIT reorganization will maximize shareholder value, both
over the short- and long-term," said Mr. Golden. "After an extensive analysis
of alternatives, we concluded that the REIT structure would provide superior
results through changing economic conditions and all phases of the hotel cycle."
In connection with the reorganization, Host Marriott anticipates
repurchasing or exchanging its approximately $1.55 billion of outstanding debt
securities, adjusting the conversion ratio of its Quarterly Income Preferred
Securities ("QUIPS") to reflect the distribution of the Senior Living
Communities Company stock and cash to Host Marriott stockholders, and issuing
additional debt and equity securities.
"This step will further improve our financial flexibility and allow us to
continue to strengthen our balance sheet," added Robert E. Parsons, Jr.,
Executive Vice President and Chief Financial Officer of Host Marriott. "We will
be able to compete more effectively with other public lodging real estate
companies, which already are organized as REITs, and to improve investor
understanding of Host Marriott, thus making performance comparisons with our
peers more meaningful. With our initial dividend yield expected to be
approximately 4%, we believe our shareholder base will expand to include
investors attracted by yield and asset quality."
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OPERATING PARTNERSHIP
Following the 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 stockholders of their existing Host Marriott
shares.
As part of the reorganization, limited partners in Host Marriott 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.
As a REIT, Host Marriott will continue its strategy of aggressively
acquiring and owning high quality lodging real estate with prospects for
significant long-term capital appreciation. The Company has added 68 hotels
with an aggregate investment value of $3.5 billion from the beginning of 1994
through the end of 1997. Management intends to continue growing the Company's
portfolio through acquisitions of Marriott hotels and of multi-branded full
service lodging properties, expansion of existing hotels and selected new
development where market conditions offer favorable economics.
"We believe this conversion will help us significantly in reaching our
growth targets," said Mr. Nassetta. "We will continue to acquire hotels in the
Marriott and Ritz-Carlton pipeline, properties where we can add value by
conversion to the Marriott brand, and select non-Marriott hotels, such as those
in the Blackstone portfolio, that meet our quality and performance standards."
SENIOR LIVING SPIN-OFF
Host Marriott will distribute shares in the Senior Living Communities
Company to Host Marriott stockholders at the time of the REIT reorganization.
Host Marriott also 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 and $550 million. An additional taxable distribution may be required in
1999.
The Senior Living Communities Company is expected to own Host Marriott's
approximately $700 million portfolio of senior living properties. This
portfolio currently consists of 31 retirement communities, totaling 7,218 units
in 12 states. The communities will continue to be managed by Marriott
International. In addition, the Senior Living Communities Company will lease
substantially all of the hotels owned by the REIT and its affiliates.
The Senior Living Communities Company will operate independently of Host
Marriott, will be publicly listed, and will pursue its own growth opportunities.
In order to facilitate the transition, there may initially be some Board of
Directors overlap, which will be eliminated over time. In order to comply with
REIT rules, each company will limit ownership of its stock by single investors
and related parties and groups to less than 10%.
"Senior living is a high growth industry supported by favorable demographic
trends," said Mr. Golden. "The new company will be in an excellent position to
build on Host Marriott's current leadership position in the upper tier segment
of the senior living market. Initially 67% of Senior Living Communities Company
EBITDA will be generated by its senior living properties."
"The Senior Living Communities Company will grow through the acquisition of
new and existing communities, as well as new development," Mr. Golden continued.
"In addition, it will benefit from Marriott International's targeted expansion
of senior living properties, which is expected to nearly triple its number of
properties over the next five years, providing a valuable pipeline of upper tier
properties that fit the acquisition profile. The company will also pursue
expansion into other attractive real estate areas."
FINANCIAL OUTLOOK
Mr. Parsons said: "In reorganizing as a REIT, acquiring the Blackstone
portfolio and spinning off our senior living communities business, we currently
anticipate FFO per share in 1999, for the two companies combined, to be $0.26
above current consensus estimates of $2.15 per share."
The Company expects no layoffs as a result of the reorganization, and both
companies will maintain headquarters in Bethesda, Md.
BT Wolfensohn, Merrill Lynch and PaineWebber are serving as advisors on the
REIT reorganization and spin-off of the Senior Living Communities Company.
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COMPANY BACKGROUNDS/ FORWARD LOOKING STATEMENTS
Host Marriott is a lodging real estate company which owns 100 upscale and
luxury full service hotels operated primarily under the Marriott and Ritz-
Carlton brand names. Additionally, the company owns 31 senior living
communities all of which are managed by Marriott International. The company
also serves as general partner and holds minority interests in various
unconsolidated partnerships which own 240 lodging properties, 20 of which are
full service hotels.
For further information on Host Marriott Corporation, please visit our
website at http://www.hostmarriott.com. For further information on the proposed
REIT conversion, Blackstone portfolio transaction and Senior Living Communities
spinoff, see Host Marriott's current report on Form 8-K filed with the
Securities and Exchange Commission.
The Blackstone Group is a private New York-based investment bank founded in
1985 by its current Chairman, Peter G. Peterson, and its current CEO and
President, Stephen A. Schwarzman. Blackstone's real estate activities are led
by Senior Managing Directors Thomas J. Saylak and John Z. Kukral, as well as
John G. Schreiber, who together with Mr. Schwarzman, co-chairs the Blackstone
Real Estate Partners' Investment Committee. Real Estate is one of five areas of
business focus at Blackstone. The others are Private Equity Investing in
corporate situations (where Blackstone Capital Partners III, with nearly $4
billion in equity capital, was the largest such fund raised in 1997); Mergers &
Acquisitions Advisory; Restructuring & Reorganization Advisory; and Liquid
Alternative Asset Management.
Certain matters discussed in this press release include forward-looking
statements within the meaning of the Private Securities 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 on FFO,
EBITDA, and business and operating strategies in the future. All forward-
looking statements involve known and unknown risks, uncertainties and other
factors, many of which are not in control of Host Marriott, 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 the forward-looking statements. The transactions
described herein are subject to certain consents of shareholders, lenders, debt
holders and partners of Host Marriott 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 Host Marriott's current report on Form
8-K relating to the proposed REIT conversion and in its other filings with the
Securities and Exchange Commission. While Host Marriott believes that the
expectations reflected in these forward-looking statements are based on
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.
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EXHIBIT 99.2
HOST MARRIOTT CORPORATION
SUMMARY OF PROPOSED REIT CONVERSION,
SPIN-OFF OF SENIOR LIVING BUSINESS AND
BLACKSTONE HOTEL PORTFOLIO TRANSACTION
OVERVIEW
Host Marriott Corporation ("HMC") has adopted a plan to reorganize its
business operations so that it will qualify as a real estate investment trust (a
"REIT") focused primarily on the ownership and acquisition of upscale and luxury
full-service hotels. As part of the reorganization of HMC's business operations
to permit HMC to qualify as a REIT (the "REIT Conversion"), HMC and its
consolidated subsidiaries will contribute their full-service hotel properties
and certain other businesses and assets to Host Marriott, L.P. (the "Operating
Partnership"), a newly formed Delaware limited partnership, in exchange for
units of limited partnership interest in the Operating Partnership ("OP Units")
and the assumption of certain liabilities. The sole general partner of the
Operating Partnership will be Host Marriott Trust, which will be the entity
resulting from the conversion of HMC from a Delaware corporation to a Maryland
REIT ("Host REIT").
Contemporaneously with the REIT Conversion, HMC intends to spin off its
senior living communities business through a taxable distribution to its
shareholders of shares of Senior Living Communities, Inc. ("SLC"). Shares of
Host REIT and SLC will thereafter be separately traded public securities, and
the companies will operate independently. SLC is expected to own and continue
to expand HMC's $700 million portfolio of senior living properties. This
portfolio currently consists of 31 retirement communities, totaling 7,218 units
in 12 states. Contributing the senior living properties to SLC will serve the
dual purposes of focusing Host REIT on the ownership and acquisition of upscale
and luxury full-service hotels while at the same time providing SLC with
substantial business and growth opportunities. Because REITs are not permitted
under current federal income tax law to derive revenues directly from the
operation of hotels, SLC or its subsidiaries also will lease substantially all
of the hotels owned by Host REIT and will operate the hotels under the existing
management agreements with third-party managers and pay rent to the Operating
Partnership, as more fully described herein.
In addition, HMC and the Operating Partnership have entered into an
agreement with various affiliates of The Blackstone Group and Blackstone Real
Estate Partners (collectively, "Blackstone") to acquire interests in 13 luxury
and deluxe hotels, totaling 5,805 rooms, as well as two office buildings
connected to two of the hotels and a 25% interest in the Swissotel Management
Company, in a transaction having an aggregate value of up to approximately
$1.775 billion, including the assumption of debt (the "Blackstone Transaction").
Following the REIT Conversion and the Blackstone Transaction, HMC expects
that the Operating Partnership and its subsidiaries will own outright, or own
controlling
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interests in, approximately 125 full-service hotels operating primarily under
the Marriott and Ritz-Carlton brand names, including the two Ritz-Carlton, three
Four Seasons, one Grand Hyatt, three Hyatt Regency and four Swissotel properties
included in the Blackstone portfolio.
At the time of its merger into Host REIT, HMC will distribute the common
stock of SLC to its shareholders together with a substantial cash distribution.
The expected aggregate value of these distributions is currently expected to be
approximately $400 to $550 million. HMC is making these distributions to its
shareholders, which will be treated as taxable dividends, to eliminate its
estimated accumulated earnings and profits, as required to be eligible for REIT
status. An additional taxable distribution may be required in 1999. The
amount of both the initial distribution and any such additional distribution is
subject to a number of contingencies and uncertainties at this time. The
amount of these distributions will be based upon HMC's estimates, at such time,
of its accumulated earnings and profits for tax purposes, which could be
affected by a number of factors (including, for example, actual operating
results prior to REIT conversion, extraordinary capital transactions, including
those in connection with the REIT conversion, and any adjustment resulting from
routine ongoing audits of HMC.)
In the REIT Conversion, each outstanding share of HMC common stock will be
converted into one common share of beneficial interest (a "Common Share") of
Host REIT. Following the closing of the REIT Conversion, the Common Shares will
continue to be listed on the New York Stock Exchange.
HMC, like most REITs, would have a prohibition on any person, entity or
group acquiring more than 9.8% of the outstanding HMC stock. SLC also would have
a prohibition on any person, entity or group acquiring more than 9.8% of the SLC
outstanding stock. The Operating Partnership would have a prohibition on any
person, entity or group other than Host REIT acquiring more than 4.9% of the
outstanding OP Units.
In connection with the REIT Conversion, HMC expects to offer partners in
public and private partnerships that own full service hotels in which HMC or its
subsidiaries are general partners the opportunity to receive OP Units in
exchange for their interests in these hotel partnerships. Blackstone also will
receive OP Units in the Blackstone Transaction. Beginning one year after the
REIT Conversion, partners receiving OP Units other than Host REIT will have the
right to redeem their OP Units and receive, at the election of Host REIT, either
Common Shares on a one-for-one basis (subject to adjustment) or cash in an
amount equal to the market value of such shares. OP Units issued to Blackstone
will be redeemable on the same basis at various times and amounts commencing
July 1, 1999.
HMC estimates that the REIT Conversion (including, among other things,
consummation of the consolidation of substantially all public and private
partnerships and refinancing of public bonds), the Blackstone Transaction and
the spin-off of SLC will result in combined funds from operations (FFO) of HMC
and SLC for the full-year 1999 of approximately $2.41 per share, of which $0.06
per share is attributable to the Blackstone Transaction.
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Host 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 HMC, including final board approval, consent of stockholders,
partners, bondholders, lenders, and ground lessors of HMC, 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.
Consummation of the Blackstone Transaction is also subject to certain
conditions, including consummation of the REIT Conversion by March 31, 1999.
MAJOR STEPS IN REIT CONVERSION AND THE SLC SPIN-OFF
The following are the major steps in the REIT Conversion and the spin-off
of SLC:
. Formation of UPREIT by HMC
--------------------------
HMC will contribute its full-service hotel assets and certain other assets
(excluding its senior living assets) to the Operating Partnership in
exchange for (i) a number of OP Units equal to the number of outstanding
shares of common stock of HMC and (ii) the assumption by the Operating
Partnership of certain liabilities of HMC and its subsidiaries. Following
the REIT Conversion, the assets and operations of Host REIT will be held by
or conducted through the Operating Partnership, of which Host REIT (or a
wholly owned subsidiary thereof) will be the general partner. The initial
limited partners would be former partners of public and private hotel
partnerships that are "rolled up" into the Operating Partnership as well as
Blackstone. This structure is commonly referred to as an umbrella
partnership real estate investment trust ("UPREIT"). As is customary, HMC,
as general partner, will have absolute control of the Operating
Partnership.
As described below, HMC will solicit consents from partners in various
public partnerships controlled by HMC that own full service hotels for
mergers of those partnerships with subsidiaries of the Operating
Partnership. HMC also will negotiate with partners in various private
partnerships in which HMC is a general partner that own full service hotels
to obtain consent to mergers of those partnerships with the Operating
Partnership or, alternatively, a restructuring of those partnerships on a
standalone basis into a structure permitting a lease of their hotels to SLC
or a subsidiary thereof. In the event HMC is unsuccessful in any of these
negotiations, HMC likely would contribute its interest to one or more
taxable Special Subsidiaries as described below.
. Merger of HMC into Host REIT
----------------------------
HMC, a Delaware corporation, will be reorganized as a Maryland REIT through
a merger into Host REIT upon obtaining stockholder approval of the merger.
Pursuant to the merger agreement, HMC stockholders will receive, for each
share of HMC common stock, one Host REIT Common Share, a fraction of a
share of common stock of SLC and an amount of cash to be determined (the
aggregate value of such distributions currently estimated to total
approximately $400 to $550 million). The amount of cash will equal the
estimated amount of accumulated earnings and profits of HMC as of the
closing date less the equity
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value of the common stock of SLC, as determined by the Board of Directors
of HMC.
. Spin-off of SLC Stock to HMC Stockholders
-----------------------------------------
As part of its merger into Host REIT, HMC will distribute the stock of SLC
(or another corporation owning SLC) to its existing stockholders in a
taxable distribution. Thereafter, shares of the two companies will trade
separately. The companies will pursue independent growth strategies. The
stockholders of Host REIT and SLC initially will be identical, but because
both companies will be publicly traded, the commonality of stockholders is
expected to decline over time. Initially there also may be a partial
overlap among the boards of HMC and SLC, but this overlap is expected to be
eliminated over time.
. Lease of Hotels to Subsidiaries of SLC
--------------------------------------
SLC will be capitalized with various HMC assets, including all of HMC's
senior living properties. SLC or its subsidiaries will lease lodging
properties from the Operating Partnership and related parties. The lessees
will become parties to the management agreements with the existing hotel
managers. SLC or its subsidiaries will operate these lodging properties
under the existing management agreements with the existing hotel managers
and pay rent to the Operating Partnership. Each lease would provide for
payment of a fixed annual base rent and percentage rent that is based upon
a percentage of total sales by each hotel.
. Formation of Special Subsidiaries for Unqualified Assets
--------------------------------------------------------
The Operating Partnership will organize one or more taxable corporations
(the "Special Subsidiaries") that will own various assets that the
Operating Partnership and its other subsidiaries cannot own without
conflicting with HMC's REIT status. These assets could include interests in
partnerships that HMC is unable to convert to a lease structure, the stock
in the tenants of the contemplated "limited service/extended stay" REIT
that may be organized in connection with the Limited Service UPREIT
Transaction (as described below) and FF&E at some of the hotels leased to
SLC that HMC cannot own directly under the REIT rules. The Operating
Partnership would own nonvoting common stock representing 95% of the equity
in the Special Subsidiaries, and it is currently expected that an
affiliate(s) of HMC would own voting common stock representing 5% of such
equity.
. Limited Service Partnerships Transaction
----------------------------------------
There are several alternatives being pursued for the six partnerships that
own limited service or extended stay hotels in which subsidiaries of HMC
are general partners. One alternative is to provide the six partnerships
the opportunity to consolidate in a newly created limited service UPREIT
that would be separate from Host REIT. In this proposed transaction (the
"Limited Service UPREIT Transaction"), HMC's subsidiaries would obtain
limited partner interests in the operating partnership for the limited
service UPREIT in exchange for their respective interests in the six hotel
partnerships and HMC subsidiaries would
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serve as lessees of the hotels. In connection with the REIT Conversion, HMC
would contribute the partnership interests it receives in the limited
service UPREIT and the stock of the lessees to the Operating Partnership,
and the Operating Partnership would contribute the stock of the lessees to
a Special Subsidiary.
Other alternatives also are being considered for these partnerships.
Although no proposals have yet developed, the general partners continue to
pursue the possibility of a potential sale of the underlying assets or a
merger of the partnerships with an existing publicly traded company.
. Roll Up of Hotel Partnerships
-----------------------------
As part of the REIT Conversion, the Operating Partnership expects to
propose the consolidation of 8 limited partnerships that own full-service
hotels in which HMC or subsidiaries of HMC are general partners (the
"Public Partnerships") with the hotels owned by 5 private partnerships in
which subsidiaries of HMC are general partners (together with the Public
Partnerships, the "Hotel Partnerships") and the hotels contributed by HMC
to the Operating Partnership. Limited partners (other than those affiliated
with HMC) in those Hotel Partnerships that participate in the consolidation
will exchange their partnership interests in such Hotel Partnerships for OP
Units. Each of these transactions will require the consent of the limited
partners in order to participate in the consolidation. Assuming all of the
Hotel Partnerships participate in this consolidation on terms currently
expected by HMC, outside partners would receive OP Units with an aggregate
value of approximately $400 million, while deferring recognition of at
least a substantial portion of any built-in taxable gain on their interests
in the Hotel Partnerships.
. Refinancing of HMH Properties Bonds and Other Debt
--------------------------------------------------
Prior to consummation of the REIT Conversion, HMH Properties, Inc. ("HMH
Properties"), a wholly owned subsidiary of HMC, expects to refinance its
$1.55 billion of outstanding public bonds through an offer to purchase the
public bonds for cash and a concurrent solicitation of consents to amend
the terms of the debt securities to permit the REIT Conversion. The funds
for the refinancing are expected to be obtained through the issuance of new
debt securities by the Operating Partnership and through additional funds
of HMC to the extent necessary. The Operating Partnership will assume the
liability with respect to any untendered bonds of HMH Properties, in
connection with the REIT Conversion. The terms of the refinancing have not
been finalized and will be based upon market conditions at the time of the
refinancing.
HMC plans to modify its existing revolving credit facility and likely will
keep most other project specific financing in place following the REIT
Conversion. HMC will seek the consent of mortgage lenders to the REIT
Conversion, including the leases to SLC of hotels that are financed by
mortgage loans.
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The Operating Partnership will assume the obligations of HMC under
approximately $34.8 million of senior unsecured public bonds issued by HMC
and $83.8 million of tax exempt bonds.
. Adjustment to Terms of QUIPS
----------------------------
In the REIT Conversion, it is anticipated that the Operating Partnership
will assume primary liability for repayment of the convertible debentures
of HMC underlying the $550 million of Quarterly Income Preferred Securities
("QUIPS") of a subsidiary trust of HMC. Host REIT also will remain liable
on the debentures and the debentures will be convertible into Common Shares
of Host REIT. It is anticipated that the conversion ratio of the QUIPS will
be adjusted as a result of the distribution of SLC stock and cash to HMC
stockholders in the merger of HMC into Host REIT.
BLACKSTONE PORTFOLIO ACQUISITION
On April 16, 1998, HMC, the Operating Partnership and Blackstone
entered into a Contribution Agreement (the "Contribution Agreement") which
provides for the transfer of interests in thirteen hotels and other assets in
exchange for cash, OP Units in the Operating Partnership, common stock in SLC
and the assumption or repayment of certain outstanding third-party loans. The
hotels are: The Ritz-Carlton, Amelia Island; Hyatt Regency Cambridge, Boston;
Hyatt Regency Reston, Virginia; Grand Hyatt Atlanta; Four Seasons Beverly Hills;
Four Seasons Philadelphia; Four Seasons Atlanta; The Drake (Swissotel) New York;
Swissotel Chicago; Swissotel Boston; Swissotel Atlanta; Hyatt Regency
Burlingame, San Francisco; and The Ritz-Carlton, Boston. Also included are two
office buildings in Atlanta, The Offices at The Grand and The Offices at the
Swissotel, and a 25% interest in the Swissotel Management Company. The
interests to be acquired in The Ritz-Carlton, Boston will be a first mortgage
loan secured by the property and a general partner interest in the owner of the
hotel. The parties currently expect that the interests to be acquired in the
Four Seasons Beverly Hills will be a first mortgage loan pursuant to the
Contribution Agreement and the equity interest in the owner of the hotel
pursuant to a nonbinding letter of intent.
The aggregate value of the consideration for these assets is expected
to be approximately $1.775 billion, subject to adjustment. The consideration is
expected to consist of (i) a combination of cash and the assumption or repayment
of debt in an aggregate amount of approximately $835 million, and (ii) OP Units
with an estimated aggregate value of approximately $940 million (approximately
47 million OP Units at a fixed price of $20.00 per OP Unit). In addition, for
each OP Unit received, Blackstone would receive an amount of cash and SLC common
stock equal to the amount that a holder of one share of HMC common stock will
receive in the SLC spin-off distribution by HMC or, at Blackstone's option,
additional OP Units of equivalent value.
Within 60 days of the execution of the Contribution Agreement, HMC
will cause the size of its board of directors to be increased by one or more
directors, and John G. Schreiber, Co-Chairman of the Blackstone Real Estate
Partners' Investment Committee (or another person selected by Blackstone and
reasonably acceptable to the board of directors of HMC), will be appointed to
serve as a director of HMC. HMC and Host REIT will include the Blackstone board
designee on the slate for election by shareholders for so long
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as Blackstone and its affiliates own at least five percent of the outstanding OP
Units. In addition, at all times and for so long as the board of directors of
SLC has more than two members who are also members of the board of directors of
HMC (or Host REIT if the REIT Conversion is consummated), Blackstone will be
entitled to designate an individual to serve on SLC's board of directors.
The OP Units issued in the Blackstone Transaction will be redeemable
for Host REIT Common Shares on a one-for-one basis or, at the election of Host
REIT, the cash equivalent thereof, as follows: 50% of the OP Units will be
redeemable beginning July 1, 1999, an additional 25% will be redeemable
beginning October 1, 1999, and the balance will be redeemable beginning January
1, 2000. HMC and Host REIT will grant certain registration rights with respect
to any Common Shares received upon the exercise of the redemption right.
In the event that the REIT Conversion is not consummated, Blackstone
will have the right to elect to receive in lieu of OP Units, units in a newly-
formed partnership owned by HMC and Blackstone on terms generally comparable to
the above terms, except that the units in the newly-formed partnership will be
redeemable for HMC common shares. In either event, upon completion of the
Blackstone Transaction, Blackstone is expected to own approximately 19% of the
pro forma HMC common stock outstanding on a fully diluted basis.
Consummation of the Blackstone Transaction pursuant to the
Contribution Agreement is subject to HMC's consummation of the REIT Conversion,
to closing prior to March 31, 1999, to obtaining certain consents of third
parties and to various other conditions and contingencies. Consummation of the
acquisition of the equity interest in the Four Seasons Beverly Hills is subject
to execution of a definitive contribution agreement and satisfaction of
conditions set forth therein.
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REIT OWNERSHIP STRUCTURE
Upon consummation of the REIT Conversion (and assuming all of the related
transactions occur in the manner described herein), the structure of, and
ownership of interests in, Host REIT and the Operating Partnership and the
leasing arrangements will be substantially as shown in the following diagram.
[STRUCTURE DIAGRAM APPEARS HERE]
(1) Immediately following the distribution of SLC common stock to HMC's
shareholders and the merger of HMC into Host REIT, the public shareholders
of Host REIT and SLC will be the same. The ownership of the two public
companies, however, will diverge over time.
(2) The Operating Partnership will own 100% of the equity interests in the
public partnerships that participate in the "rollup" and certain private
partnerships, both directly and through other direct or indirect, wholly
owned subsidiaries of the Operating Partnership, as well as the hotel and
office assets to be acquired in the Blackstone Transaction. The Operating
Partnership or one or more Special Subsidiaries also will own partial
partnership interests in those hotel partnerships whose partners have not
elected to exchange their interests for OP Units and in certain other
partnerships.
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FORWARD-LOOKING STATEMENTS; SIGNIFICANT CONTINGENCIES
Certain matters discussed in this summary include forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Certain, but not necessarily all, of such forward-looking statements can
be identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereof or comparable terminology. All statements other than
historical facts or descriptions of agreements included herein, 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 Transaction on FFO, EBITDA, financial
implications and business and operating strategies in the future, are forward-
looking statements. All forward-looking statements involve known and unknown
risks, uncertainties and other factors, many of which are not within the control
of HMC, 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 the forward-looking statements.
Consummation of the transactions described herein is subject to a
number of significant conditions and contingencies, including, among others:
(a) the need to obtain required consents of stockholders, lenders, debt holders,
partners and ground lessors of HMC and its affiliates and of other third
parties; (b) if HMC does not complete the necessary reorganization of its
operations in time to elect REIT status effective January 1, 1999, it likely
would not be able to qualify as a REIT until January 1, 2000; (c) the terms and
structure of the REIT conversion (including, among others, the particular assets
to be owned by the Operating Partnership, its taxable Special Subsidiaries and
SLC, the magnitude of HMC's earnings and profits and the value of the
distribution of SLC stock and cash required to be made by HMC, the terms of the
leases between the Operating Partnership and SLC, the form of the Limited
Service Partnerships transaction and whether or not a Special Subsidiary will be
the lessee of their hotels, the identity of the private and public partnerships
that will participate in the rollup of their partnerships into the Operating
Partnership and the consequences if one or more do not elect to do so, the terms
of the refinancing of the HMH Properties' bonds and other debt of HMC and its
affiliates, and the magnitude and effect of the QUIPS conversion ratio
adjustment) have not yet been finalized and will be affected by events and
circumstances outside HMC's control; (d) the effects of potential tax
legislative or regulatory action; and (e) consummation of the Blackstone
Transaction is subject to HMC's consummation of the REIT Conversion, to closing
prior to March 31, 1999 and to various other conditions and contingencies, and
acquisition of the equity interest in the Four Seasons Beverly Hills is subject
to execution of a definitive agreement and satisfaction of conditions set forth
therein. Likewise, future results, performance and achievements of HMC, Host
REIT and SLC will be affected by the foregoing factors as well as a number of
additional factors, including, among others: (i) national and local economic and
business conditions that will, among other things, affect demand for hotels,
senior living properties and other properties, the level of rates and occupancy
that can be achieved by such properties and the availability and terms of
financing; (ii) the ability to maintain the properties in a first-class manner
(including funding of maintenance and capital expenditures); (iii) competition;
(iv) acquisition and development risks; (v) governmental approvals, actions and
initiatives,
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including the need for compliance with environmental/safety requirements, and
changes in laws and regulations or the interpretation thereof; (vi) in the case
of Host REIT, the need to satisfy complex rules in order to qualify for taxation
as a REIT for federal income tax purposes and to effectively operate within the
limitations imposed by these rules. Other factors are described in other
filings of HMC with the Securities and Exchange Commission.
While HMC believes that the expectations reflected in these forward-
looking statements are based on reasonable assumptions, it can give no assurance
that its performance of 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.
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