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 20, 1997 Commission File No. 33-95058
HMH PROPERTIES, INC.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-1822042
(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
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C>
PART I. FINANCIAL INFORMATION (Unaudited):
Condensed Combined Consolidated Balance Sheets - 3
June 20, 1997 and January 3, 1997
Condensed Combined Consolidated Statements of Operations - 4
Twelve and Twenty-Four Weeks Ended June 20, 1997
and June 14, 1996
Condensed Combined Consolidated Statements of Cash Flows - 6
Twenty-Four Weeks Ended June 20, 1997 and
June 14, 1996
Notes to Condensed Combined Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 13
Operations and Financial Condition
PART II. OTHER INFORMATION AND SIGNATURE 17
</TABLE>
- 2 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
<TABLE>
<CAPTION>
June 20, January 3,
1997 1997
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.................................................... $ 1,555 $ 1,473
Note receivable from affiliate................................................. 139 140
Due from hotel managers........................................................ 40 35
Investments in affiliate ...................................................... 18 17
Other assets................................................................... 53 66
Cash and cash equivalents...................................................... 86 141
-------- --------
$ 1,891 $ 1,872
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes................................................................... $ 950 $ 950
Notes secured by real estate assets............................................ 97 98
Other notes.................................................................... 33 34
-------- --------
Total debt................................................................ 1,080 1,082
Deferred income taxes.......................................................... 89 87
Other liabilities.............................................................. 98 77
-------- --------
Total liabilities......................................................... 1,267 1,246
-------- --------
Shareholder's equity
Common stock, 100 shares issued and outstanding, no par value............. -- --
Additional paid-in capital................................................ 626 626
Retained deficit......................................................... (2) --
-------- --------
Total shareholder's equity ........................................... 624 626
-------- --------
$ 1,891 $ 1,872
======== ========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
- 3 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended June 20, 1997 and June 14, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
REVENUES
Hotels ............................................................................. $ 97 $ 73
Equity in earnings of affiliate..................................................... 1 1
--------- --------
Total revenues.................................................................. 98 74
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 17 14
Base and incentive management fees (including Marriott International
management fees of $15 million and $11 million in 1997 and 1996, respectively).... 16 11
Property taxes...................................................................... 7 5
Ground rent, insurance and other.................................................... 9 9
--------- --------
Total operating costs and expenses.............................................. 49 39
--------- --------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST..................................................... 49 35
Corporate expenses.................................................................... (3) (3)
Interest expense...................................................................... (23) (23)
Interest income....................................................................... 5 6
--------- --------
INCOME BEFORE INCOME TAXES............................................................ 28 15
Provision for income taxes............................................................ (12) (6)
--------- --------
NET INCOME............................................................................ $ 16 $ 9
========= ========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
- 4 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-Four Weeks Ended June 20, 1997 and June 14, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
REVENUES
Hotels ............................................................................. $ 192 $ 142
Equity in earnings of affiliate..................................................... 3 2
--------- --------
Total revenues.................................................................. 195 144
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 35 29
Base and incentive management fees (including Marriott International
management fees of $29 million and $21 million in 1997 and 1996,
respectively)..................................................................... 32 22
Property taxes...................................................................... 13 11
Ground rent, insurance and other.................................................... 21 13
--------- --------
Total operating costs and expenses.............................................. 101 75
--------- --------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST..................................................... 94 69
Corporate expenses.................................................................... (6) (6)
Interest expense...................................................................... (46) (46)
Interest income....................................................................... 9 11
--------- --------
INCOME BEFORE INCOME TAXES............................................................ 51 28
Provision for income taxes............................................................ (21) (12)
--------- --------
NET INCOME............................................................................ $ 30 $ 16
========= ========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
- 5 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-Four Weeks Ended June 20, 1997 and June 14, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................... $ 30 $ 16
Adjustments to reconcile to cash from operations:
Depreciation and amortization..................................................... 35 29
Income taxes...................................................................... 21 12
Changes in operating accounts..................................................... (6) 1
Other............................................................................. 1 (1)
-------- ---------
Cash provided by operations.................................................... 81 57
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets........................................................ -- 342
Less noncash proceeds.............................................................. -- (33)
-------- ---------
Cash received from sales of assets .................................................. -- 309
Acquisitions......................................................................... (89) (132)
Capital expenditures................................................................. (25) (46)
Other ............................................................................... 12 (61)
-------- ---------
Cash provided by (used in) investing activities................................ (102) 70
FINANCING ACTIVITIES
Dividends to Host Marriott Corporation and affiliates................................ (32) (15)
Repayment of debt.................................................................... (2) (1)
Other ............................................................................... -- (2)
-------- ---------
Cash used in financing activities.............................................. (34) (18)
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... $ (55) $ 109
======== =========
</TABLE>
See Notes to Condensed Combined Consolidated Financial Statements.
- 6 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed combined consolidated financial statements of
HMH Properties, Inc. and subsidiaries (the "Company" or "Properties"), a
wholly-owned direct subsidiary of Host Marriott Hospitality, Inc.
("Hospitality"), have been prepared by the Company without audit.
Hospitality is a wholly-owned subsidiary of Host Marriott Corporation
("Host Marriott"). During the third quarter of 1997, the Company completed
a consent solicitation with holders of its senior notes to amend certain
provisions of the senior notes indenture. A similar consent solicitation
was conducted by HMC Acquisition Properties, Inc. ("Acquisitions")
(together, the "Consent Solicitations"). The Consent Solicitations
facilitated the merger of Acquisitions, a wholly-owned indirect subsidiary
of Host Marriott, which owns 17 full-service hotel properties, with and
into the Company (the "Merger"). The financial statements of the Company
present the combined consolidated financial position, results of operations
and cash flows of Properties and Acquisitions for all periods presented.
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 combined consolidated financial
statements should be read in conjunction with the Company's annual report
on Form 10-K for the fiscal year ended January 3, 1997.
In the opinion of the Company, the accompanying unaudited condensed
combined consolidated financial statements reflect all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of June 20, 1997 and January 3, 1997
and the results of operations for the twelve and twenty-four weeks ended
June 20, 1997 and June 14, 1996 and cash flows for the twenty- four weeks
ended June 20, 1997 and June 14, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. Revenues represent house profit from the Company's hotel properties and
equity in earnings of an affiliate. House profit reflects the net revenues
flowing to the Company as property owner and represents hotel operating
results less property-level expenses excluding depreciation and
amortization, real and personal property taxes, ground rent, insurance,
lease payments and management fees which are classified as operating costs
and expenses.
House profit generated by the Company's hotels for 1997 and 1996 consists
of:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
------------------ -----------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
-------- -------- --------- --------
(in millions)
<S> <C> <C> <C> <C>
Sales
Rooms.............................................. $ 166 $ 129 $ 328 $ 258
Food & Beverage.................................... 64 50 128 98
Other.............................................. 12 12 28 25
------- -------- ------- -------
Total Hotel Sales............................... 242 191 484 381
------- -------- ------- -------
Department Costs
Rooms.............................................. 39 30 75 61
Food & Beverage.................................... 48 37 97 75
Other.............................................. 6 8 14 14
------- -------- ------- -------
Total Department Costs.......................... 93 75 186 150
------- -------- ------- -------
Department Profit.................................... 149 116 298 231
Other Deductions..................................... 52 43 106 89
------- -------- ------- -------
House Profit.................................... $ 97 $ 73 $ 192 $ 142
======= ======== ======= =======
</TABLE>
- 7 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. The Company's 49% limited partner interest in an affiliate that owns a
Marriott hotel in Santa Clara, California is accounted for using the equity
method. The Company's 49% interest in the operating profits (income before
interest costs) of the partnership is included in equity in earnings of
affiliate and was $1 million for each of the twelve weeks ended June 20,
1997 and June 14, 1996, respectively, and $3 million and $2 million for the
twenty-four weeks ended June 20, 1997 and June 14, 1996, respectively.
4. The Company acquired the 306-room Ritz-Carlton Hotel Marina del Rey for $57
million in the first quarter of 1997. In the second quarter of 1997, the
Company acquired a controlling interest in the 404-room Norfolk Waterside
Marriott for $33 million.
5. The Company paid dividends to Host Marriott of $19 million during the
second quarter of 1997 and $32 million year-to-date as permitted under the
senior notes indentures.
6. In addition to the Merger, the Consent Solicitations increased the ability
of the Company to acquire, through certain subsidiaries, additional
properties subject to non-recourse indebtedness and controlling interests
in corporations, partnerships and other entities holding attractive
properties and increased the threshold for distributions to affiliates to
the excess of the Company's earnings before interest expense, income taxes,
depreciation and amortization and other non-cash items ("EBITDA")
subsequent to the Consent Solicitations over 220% of the Company's interest
expense. Fees totalling approximately $12 million were paid to certain
holders of the senior notes for the Consent Solicitations.
Concurrent with the Consent Solicitations and the Merger, the Company
issued $600 million of 8 7/8% senior notes (the "New Senior Notes") at par
maturing in 2007 (the "Offering"). The Company received net proceeds from
the Offering of approximately $570 million, which will be used to fund
future acquisitions of, or the purchase of interests in, full-service
hotels and other lodging-related properties, which may include senior
living communities, as well as for general corporate purposes. The New
Senior Notes are guaranteed on a joint and several basis by certain of the
Company's subsidiaries and rank pari passu in right of payment with all
other existing and future senior indebtedness of the Company.
7. The Company is required to adopt Statement Financial Accounting Standards
("SFAS") No. 130 "Reporting Comprehensive Income," and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information" in
fiscal year 1998. The adoption of these statements is not expected to have
a material impact on the Company's combined consolidated financial
statements.
8. All but four of the subsidiaries of the Company guarantee the senior notes.
The separate financial statements of each guaranteeing subsidiary (each, a
"Guarantor Subsidiary") are not presented because the Company's management
has concluded that such financial statements are not material to investors.
The guarantee of each Guarantor Subsidiary is full and unconditional and
joint and several and each Guarantor Subsidiary is a wholly- owned
subsidiary of the Company. The non-guarantor subsidiaries (the
"Non-Guarantor Subsidiaries") are the owners of the Marriott World Trade
Center, the Pittsburgh Marriott City Center, the Norfolk Waterside Marriott
and HMH HPT Residence Inn, Inc., the lessee of the Residence Inn
properties. At June 20, 1997, there is no subsidiary of the Company the
capital stock of which comprises a substantial portion of the collateral
for the senior notes within the meaning of Rule 3-10 of Regulation S-X.
The following condensed, consolidating financial information sets forth the
combined financial position as of June 20, 1997 and January 3, 1997 and the
results of operations for the twelve and twenty-four weeks ended June 20,
1997 and June 14, 1996 and cash flows for the twenty-four weeks ended June
20, 1997 and June 14, 1996 of the parent, the Guarantor Subsidiaries and
the Non-Guarantor Subsidiaries.
- 8 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Balance Sheets
---------------------------------------------------
(in millions)
June 20, 1997
-------------
(unaudited)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net................................... $ 940 $ 415 $ 200 $ 1,555
Note receivable from affiliate................................ -- 139 -- 139
Investment in affiliate....................................... 18 -- -- 18
Other assets.................................................. 44 23 26 93
Cash and cash equivalents..................................... 86 -- -- 86
------- ------- ------ -------
Total assets............................................... $ 1,088 $ 577 $ 226 $ 1,891
======= ======= ====== =======
Debt.......................................................... $ 926 $ 79 $ 75 $ 1,080
Deferred income taxes......................................... 29 57 3 89
Other liabilities............................................. 16 24 58 98
------- ------- ------ -------
Total liabilities.......................................... 971 160 136 1,267
Owner's equity ............................................... 117 417 90 624
------- ------- ------ -------
Total liabilities and owner's equity....................... $ 1,088 $ 577 $ 226 $ 1,891
======= ======= ====== =======
January 3, 1997
---------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net................................... $ 895 $ 410 $ 168 $ 1,473
Note receivable from affiliate................................ -- 140 -- 140
Investment in affiliate....................................... 17 -- -- 17
Other assets.................................................. 49 28 24 101
Cash and cash equivalents..................................... 141 -- -- 141
------- ------- ------ -------
Total assets............................................... $ 1,102 $ 578 $ 192 $ 1,872
======= ======= ====== =======
Debt.......................................................... $ 927 $ 80 $ 75 $ 1,082
Deferred income taxes......................................... 39 47 1 87
Other liabilities............................................. 30 23 24 77
------- ------- ------ -------
Total liabilities.......................................... 996 150 100 1,246
Owner's equity................................................ 106 428 92 626
------- ------- ------ -------
Total liabilities and owner's equity....................... $ 1,102 $ 578 $ 192 $ 1,872
======= ======= ====== =======
</TABLE>
- 9 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
-------------------------------------------------------------
(in millions)
(unaudited)
Twelve Weeks Ended June 20, 1997
--------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 58 $ 24 $ 16 $ 98
OPERATING COSTS AND EXPENSES.................................. 26 10 13 49
------- ------- ------ -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 32 14 3 49
Corporate expenses............................................ (2) (1) -- (3)
Interest expense.............................................. (21) (1) (1) (23)
Interest income............................................... 2 3 -- 5
------- ------- ------ -------
INCOME BEFORE INCOME TAXES.................................... 11 15 2 28
Provision for income taxes.................................... (5) (6) (1) (12)
------- ------- ------ -------
NET INCOME ................................................... $ 6 $ 9 $ 1 $ 16
======= ======= ====== =======
Twelve Weeks Ended June 14, 1996
--------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES ..................................................... $ 42 $ 21 $ 11 $ 74
OPERATING COSTS AND EXPENSES.................................. 21 10 8 39
--------- ------- ------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 21 11 3 35
Corporate expenses............................................ (1) (1) (1) (3)
Interest expense.............................................. (21) (1) (1) (23)
Interest income............................................... 3 3 -- 6
--------- ------- ------- -------
INCOME BEFORE INCOME TAXES.................................... 2 12 1 15
Provision for income taxes.................................... -- (6) -- (6)
--------- ------- -------- --------
NET INCOME.................................................... $ 2 $ 6 $ 1 $ 9
========= ======= ======== ========
</TABLE>
- 10 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
-------------------------------------------------------------
(in millions)
(unaudited)
Twenty-Four Weeks Ended June 20, 1997
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 117 $ 50 $ 28 $ 195
OPERATING COSTS AND EXPENSES.................................. 56 22 23 101
------- ------- ------ -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 61 28 5 94
Corporate expenses............................................ (3) (2) (1) (6)
Interest expense.............................................. (41) (3) (2) (46)
Interest income............................................... 3 6 -- 9
------- ------- ------ -------
INCOME BEFORE INCOME TAXES.................................... 20 29 2 51
Provision for income taxes.................................... (9) (11) (1) (21)
------- ------- ------ -------
NET INCOME.................................................... $ 11 $ 18 $ 1 $ 30
======= ======= ====== =======
Twenty-Four Weeks Ended June 14, 1996
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES .................................................... $ 91 $ 40 $ 13 $ 144
OPERATING COSTS AND EXPENSES.................................. 47 18 10 75
--------- ------- ------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 44 22 3 69
Corporate expenses............................................ (3) (2) (1) (6)
Interest expense.............................................. (42) (2) (2) (46)
Interest income............................................... 5 6 -- 11
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES.................................... 4 24 -- 28
Provision for income taxes.................................... (2) (10) -- (12)
-------- -------- -------- -------
NET INCOME.................................................... $ 2 $ 14 $ -- $ 16
======== ======== ======== =======
</TABLE>
- 11 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
------------------------------------------------------------
(in millions)
(unaudited)
Twenty-Four Weeks Ended June 20, 1997
-------------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................... $ 37 $ 38 $ 6 $ 81
------- ------- ------ -------
INVESTING ACTIVITIES
Acquisitions............................................... (56) -- (33) (89)
Capital expenditures....................................... (13) (11) (1) (25)
Other...................................................... 12 -- -- 12
------- ------- ------ -------
Cash used in investing activities....................... (57) (11) (34) (102)
------- ------- ------ -------
FINANCING ACTIVITIES
Repayment of debt.......................................... (2) -- -- (2)
Transfers to/from Parent................................... (1) (27) 28 --
Dividends to Host Marriott Corporation and affiliates...... (32) -- -- (32)
------- ------- ------ -------
Cash provided by (used in) financing activities......... (35) (27) 28 (34)
------- ------- ------ -------
DECREASE IN CASH AND CASH EQUIVALENTS......................... $ (55) $ -- $ -- $ (55)
======= ======= ====== =======
Twenty-Four Weeks Ended June 14, 1996
-------------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................... $ 15 $ 36 $ 6 $ 57
-------- -------- -------- --------
INVESTING ACTIVITIES
Cash received from sales of assets, net.................... 309 -- -- 309
Acquisitions............................................... (91) (25) (16) (132)
Capital expenditures....................................... (32) (12) (2) (46)
Other ..................................................... (60) -- (1) (61)
-------- -------- -------- -------
Cash provided by (used in) investing activities......... 126 (37) (19) 70
-------- -------- -------- -------
FINANCING ACTIVITIES
Repayment of debt.......................................... (1) -- -- (1)
Transfers to/from Parent................................... (14) 1 13 --
Dividends to Host Marriott Corporation and affiliates...... (15) -- -- (15)
Other ..................................................... (2) -- -- (2)
-------- -------- -------- -------
Cash provided by (used in) financing activities......... (32) 1 13 (18)
-------- -------- -------- -------
INCREASE IN CASH AND CASH EQUIVALENTS......................... $ 109 $ -- $ -- $ 109
======== ======== ======== ========
</TABLE>
- 12 -
<PAGE>
HMH PROPERTIES, INC. 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 are forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 and as such may
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission. 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
The following discussion and analysis of operations and financial condition
presents the combined consolidated results of the Company as if the merger
discussed in footnote 1 to the financial statements was effective for all
periods presented.
REVENUES. Revenues consist of house profit from the Company's hotel properties
and equity in earnings of an affiliate. The Company's second quarter 1997
revenues of $98 million represented a $24 million, or 32%, increase from the
second quarter of 1996. Year-to-date revenues increased $51 million, or 35%, to
$195 million. The Company's revenue and operating profit were impacted by:
. improved lodging results from comparable properties;
. the addition of eleven full-service hotel properties during 1996 and 1997;
. the 1996 sale and leaseback of 18 of the Company's Residence Inn
properties; and
. the sale of 16 of the Company's Courtyard properties during 1996.
Hotel revenues increased $24 million, or 33%, to $97 million in the second
quarter of 1997. Year-to-date 1997 hotel revenues increased $50 million, or 35%
to $192 million. The 1997 hotel revenue increases reflect the addition of eleven
full-service hotel properties in 1996 and 1997 and overall improved lodging
results, partially offset by the sale of 16 Courtyard properties in the first
and second quarters of 1996. The Company's full-service hotels and Residence Inn
properties reported growth in revenue per available room ("REVPAR") for
comparable hotels. REVPAR is a commonly used indicator of market performance for
hotels which represents the combination of the average daily room rate charged
and the average daily occupancy achieved. REVPAR does not include food and
beverage or other ancillary revenues generated by the property.
Overall second quarter revenues for nearly all of the Company's full-service
hotels were improved or comparable to second quarter of 1996 results. Improved
results were driven by strong increases in REVPAR of nearly 13% for comparable
units for the second quarter and 15% year-to-date. The Company's 1997
year-to-date results were substantially impacted by the exclusion of the New
Year's holiday from the 1997 results due to the timing of the Company's fiscal
year-end and the milder winter weather in 1997. Hotel sales increased $51
million, or 27%, to $242 million for the quarter, and $103 million, or 27%, to
$484 million year-to-date, reflecting REVPAR increases for comparable units and
the increase in full-service properties during 1996 and 1997. On a comparable
basis, average room rates increased 12% for the quarter and year-to-date, while
average occupancy increased one percentage point for the quarter and two
percentage points year-to-date because the Company's hotels are obtaining better
operating leverage as a result of increased room rates. Results were further
enhanced by an increase in the house profit margin for comparable properties of
two percentage points for the quarter and three percentage points
- 13 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
year-to-date. Management believes REVPAR will continue to grow through steady
increases in average room rates, combined with minor changes in occupancy rates.
However, there can be no assurance that REVPAR will continue to increase in the
future.
The Company's extended-stay Residence Inn properties, reported a 9% increase in
REVPAR for second quarter 1997 due primarily to an increase in average room
rates of 12%, while average occupancy decreased over two percentage points.
Year-to-date REVPAR increased 8% with an increase in average room rates of 11%,
partially offset by a decrease in occupancy of almost three percentage points.
Due to the high occupancy of these properties, the Company expects future
increases in REVPAR to be driven by room rate increases, rather than occupancy
increases. However, there can be no assurance that REVPAR will continue to
increase in the future.
OPERATING COSTS AND EXPENSES. Operating costs and expenses consist of
depreciation, amortization, management fees, real and personal property taxes,
ground and equipment rent, insurance, lease payments and certain other costs.
The Company's operating costs and expenses increased $10 million to $49 million
for the second quarter of 1997. Year-to-date operating costs and expenses
increased $26 million to $101 million primarily reflecting the addition of
eleven full-service properties during 1996 and 1997, increased management fees
and rentals tied to improved operating results and the impact of the lease
payments on the Residence Inn properties which have been sold and leased back.
As a percentage of hotel revenues, hotel operating costs and expenses were 51%
and 53% of revenues for second quarter 1997 and 1996, respectively. Hotel
operating costs and expenses were 53% of revenues for both year-to-date 1997 and
1996.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased by $14
million to $49 million, or 50% of revenues, in the second quarter of 1997 from
$35 million, or 47% of revenues, in the second quarter of 1996. Year-to-date
operating profit increased $25 million to $94 million, or 48% of revenues. Most
of the Company's hotels recorded substantial improvements in operating results.
Several hotels, including the Bethesda Marriott, the Denver Marriott West, the
Denver Marriott Tech Center, the Marriott World Trade Center, the Marina Beach
Marriott and the San Francisco Airport Marriott posted particularly significant
improvements in operating profit for the quarter, which were partially offset by
a decrease in the results for some of the Company's suburban Atlanta properties
due to higher activity in 1996 related to the Summer Olympics.
CORPORATE EXPENSES. Corporate expenses remained unchanged at $3 million for the
second quarter of 1997 and $6 million year-to-date. As a percentage of revenues,
corporate expenses decreased to 3% of revenues for the 1997 second quarter and
year-to-date, respectively, compared to 4% of revenues for the prior year
periods.
INTEREST EXPENSE. Interest expense remained unchanged at $23 million for the
second quarter of 1997 and $46 million year-to-date.
NET INCOME. The Company's net income for the second quarter of 1997 increased $7
million to $16 million, or 16% of revenues, compared to net income of $9
million, or 12% of revenues, for the second quarter of 1996. Year- to-date net
income for 1997 was $30 million, or 15% of revenues, compared to $16 million, or
11% of revenues for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported a decrease in cash and cash equivalents of $55 million for
the twenty-four weeks ended June 20, 1997 compared to an increase of $109
million for the twenty-four weeks ended June 14, 1996. This decrease for 1997 is
primarily due to the use of funds for the acquisition of one full-service
property and a controlling interest in one full-service property, partially
offset by cash generated from operations. Cash flow provided by operations
increased $24 million to $81 million for the twenty-four weeks ended June 20,
1997.
- 14 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cash used in investing activities was $102 million for the twenty-four weeks
ended June 20, 1997, compared to cash provided by investing activities of $70
million for the twenty-four weeks ended June 14, 1996. The second quarter 1997
results primarily reflect the acquisition of the 306-room Ritz-Carlton Marina
del Rey for $57 million and the acquisition of a controlling interest in the
404-room Norfolk Waterside Marriott for $33 million and capital expenditures on
existing properties.
Cash used in financing activities increased $16 million to $34 million for the
twenty-four weeks ended June 20, 1997, compared to cash used in financing
activities of $18 million for the twenty-four weeks ended June 14, 1996. The
year-to-date results reflect dividends of $32 million to Host Marriott as
permitted under the senior notes indentures.
In addition to the Merger, the Consent Solicitations increased the ability of
the Company to acquire, through certain subsidiaries, additional properties
subject to non-recourse indebtedness and controlling interests in corporations,
partnerships and other entities holding attractive properties and increased the
threshold for distributions to affiliates to the excess of the Company's
earnings before interest expense, income taxes, depreciation and amortization
and other non-cash items ("EBITDA") subsequent to the Consent Solicitations over
220% of the Company's interest expense.
Concurrent with the Consent Solicitations and the Merger, the Company issued
$600 million of 8 7/8% senior notes (the "New Senior Notes") at par maturing in
2007 (the "Offering"). The Company received net proceeds from the Offering of
approximately $570 million, which will be used to fund future acquisitions of,
or the purchase of interest in, full-service hotels and other lodging-related
properties, which may include senior living communities, as well as for general
corporate purposes. The New Senior Notes are guaranteed on a joint and several
basis by certain of the Company's subsidiaries and rank pari passu in right of
payment with all other existing and future senior indebtedness of the Company.
EBITDA
The Company's consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items (principally non-cash
writedowns of lodging properties and equity in earnings of an affiliate, net of
distributions received) ("EBITDA") increased $15 million, or 29%, to $67 million
for the second quarter of 1997 as compared to the second quarter of 1996.
Year-to-date EBITDA increased $29 million, or 28% to $131 million. The Company
believes that EBITDA is a meaningful measure of the Company's operating
performance due to the significance of the Company's long-lived assets (and the
related depreciation thereon) and because EBITDA can be used to measure the
Company's ability to service debt, fund capital expenditures and expand its
business and is used in the senior notes indentures as part of the tests
determining the Company's ability to incur debt and to make certain restricted
payments. EBITDA 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.
Hotel EBITDA increased $17 million, or 36%, to $64 million for the second
quarter of 1997 over 1996 second quarter results. Year-to-date hotel EBITDA
increased $30 million, or 32%, to $126 million. Full-service hotel EBITDA
increased $18 million, or 41%, to $63 million for the 1997 second quarter and
increased $40 million, or 48%, to $124 million year-to-date. On a comparable
basis, full-service hotel EBITDA increased 20% and 23%, respectively, on REVPAR
increases of 13% and 15%, respectively, for the 1997 second quarter and
year-to-date.
- 15 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a reconciliation of EBITDA to net income:
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
--------------------- -----------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
EBITDA............................................ $ 67 $ 52 $ 131 $ 102
Interest expense.................................. (23) (23) (46) (46)
Depreciation and amortization..................... (17) (14) (35) (29)
Income taxes applicable to operations............. (12) (6) (21) (12)
Gain (loss) on dispositions of assets
and other non-cash charges, net................ 1 -- 1 1
--------- --------- ---------- ---------
Net income . . . .............................. $ 16 $ 9 $ 30 $ 16
========= ========= ========== =========
</TABLE>
The Company interest coverage, defined as EBITDA divided by cash interest
expense was 2.9 to 1.0 and 2.2 to 1.0 for the twenty-four weeks ended June 20,
1997 and June 14, 1996, respectively. The ratio of earnings to fixed charges was
1.5 to 1.0 and 1.3 to 1.0 for the twenty-four weeks ended June 20, 1997 and June
14, 1996, respectively.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On July 10, 1997 the Company completed a consent solicitation (the
"Properties Consent") with holders of its senior notes to amend certain
items in the senior notes indentures which increased the ability of the
Company to acquire, through certain subsidiaries, additional properties
subject to non-recourse indebtedness and controlling interests in
corporations, partnerships and other entities holding attractive properties
and increased the threshold for distributions to affiliates as described in
the footnotes to the financial statements. A similar consent solicitation
was conducted by HMC Acquisition Properties, Inc. (the "Acquisition
Consent") which, subsequent to the completion of the solicitations, was
merged with and into the Company.
The results of the Properties Consent were 98.07% for and 1.93% votes
withheld. The results of the Acquisitions Consent were 99.96% for and .04%
withheld. Fees totalling approximately $12 million were paid to holders of
the senior notes for the consent solicitations.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
July 24, 1997 - Report of the announcement of the merger of HMC
Acquisition Properties, Inc. with and into the Company and the
issuance of $600 million in new senior notes maturing in 2007.
- 17 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMH PROPERTIES, INC.
July 31, 1997 /s/ Donald D. Olinger
- -------------- --------------------------------
Date Donald D. Olinger
Vice President and
Corporate Controller
(Principal Accounting Officer)
- 18 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HMH
Properties Inc. and Subsidiaries' Condensed Combined Consolidated Balance Sheet
and Condensed Combined Consolidated Statements of Operations as of an for the
twenty-four weeks ended June 20, 1997 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000905038
<NAME> HMH PROPERTIES, INC.
<MULTIPLIER> 1,000,000
<CURRENCY> $
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Jan-2-1998
<PERIOD-START> Jan-4-1997
<PERIOD-END> Jun-20-1997
<EXCHANGE-RATE> 1
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 40
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,846
<DEPRECIATION> 291
<TOTAL-ASSETS> 1,891
<CURRENT-LIABILITIES> 0
<BONDS> 950
0
0
<COMMON> 0
<OTHER-SE> 624
<TOTAL-LIABILITY-AND-EQUITY> 1,891
<SALES> 0
<TOTAL-REVENUES> 195
<CGS> 0
<TOTAL-COSTS> 101
<OTHER-EXPENSES> 6
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 51
<INCOME-TAX> 21
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
