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 September 12, 1997
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
Page
No.
PART I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
September 12, 1997 and January 3, 1997
Condensed Consolidated Statements of Operations - 4
Twelve and Thirty-six Weeks Ended September 12, 1997
and September 6, 1996
Condensed Consolidated Statements of Cash Flows - 6
Thirty-six Weeks Ended September 12, 1997 and
September 6, 1996
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 14
Operations and Financial Condition
PART II. OTHER INFORMATION AND SIGNATURE 18
- 2 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
<TABLE>
<CAPTION>
September 12, January 3,
1997 1997
------------- ----------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.................................................... $ 1,571 $ 1,473
Note receivable from affiliate................................................. 137 140
Due from hotel managers........................................................ 42 35
Investments in affiliate ...................................................... 17 17
Other assets................................................................... 81 66
Cash and cash equivalents...................................................... 615 141
-------- --------
$ 2,463 $ 1,872
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes................................................................... $ 1,550 $ 950
Notes secured by real estate assets............................................ 96 98
Other notes.................................................................... 34 34
-------- --------
Total debt................................................................ 1,680 1,082
Deferred income taxes.......................................................... 89 87
Other liabilities.............................................................. 85 77
-------- --------
Total liabilities......................................................... 1,854 1,246
-------- --------
Shareholder's equity
Common stock, 100 shares issued, authorized and
outstanding, no par value............................................... -- --
Additional paid-in capital................................................ 626 626
Retained deficit.......................................................... (17) --
-------- --------
Total shareholder's equity ........................................... 609 626
-------- --------
$ 2,463 $ 1,872
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended September 12, 1997 and September 6, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
REVENUES
Hotels ............................................................................. $ 87 $ 64
Equity in earnings of affiliate..................................................... 1 1
Net gains on property transactions.................................................. 1 --
--------- --------
Total revenues.................................................................. 89 65
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 18 14
Base and incentive management fees (including Marriott International
management fees of $16 million and $10 million in 1997
and 1996, respectively)........................................................... 17 10
Property taxes...................................................................... 7 5
Ground rent, insurance and other.................................................... 10 10
--------- --------
Total operating costs and expenses.............................................. 52 39
--------- --------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST..................................................... 37 26
Corporate expenses.................................................................... (2) (4)
Interest expense...................................................................... (34) (24)
Interest income....................................................................... 9 7
--------- --------
INCOME BEFORE INCOME TAXES............................................................ 10 5
Provision for income taxes............................................................ (3) (2)
--------- --------
NET INCOME............................................................................ $ 7 $ 3
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-Six Weeks Ended September 12, 1997 and September 6, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
REVENUES
Hotels ............................................................................. $ 279 $ 206
Equity in earnings of affiliate..................................................... 4 3
Net gains on property transactions.................................................. 1 --
--------- --------
Total revenues.................................................................. 284 209
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 53 43
Base and incentive management fees (including Marriott International
management fees of $45 million and $31 million in 1997 and 1996,
respectively)..................................................................... 49 32
Property taxes...................................................................... 20 16
Ground rent, insurance and other.................................................... 31 23
--------- --------
Total operating costs and expenses.............................................. 153 114
--------- --------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND INTEREST..................................................... 131 95
Corporate expenses.................................................................... (8) (10)
Interest expense...................................................................... (80) (70)
Interest income....................................................................... 18 18
--------- --------
INCOME BEFORE INCOME TAXES............................................................ 61 33
Provision for income taxes............................................................ (24) (14)
--------- --------
NET INCOME............................................................................ $ 37 $ 19
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-Six Weeks Ended September 12, 1997 and September 6, 1996
(unaudited, in millions)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................... $ 37 $ 19
Adjustments to reconcile to cash from operations:
Depreciation and amortization..................................................... 53 43
Income taxes...................................................................... (20) 14
Changes in operating accounts..................................................... 11 17
Other............................................................................. 2 1
-------- ---------
Cash provided by operations.................................................... 83 94
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets........................................................ 16 362
Less noncash proceeds.............................................................. -- (33)
-------- ---------
Cash received from sales of assets .................................................. 16 329
Acquisitions......................................................................... (122) (152)
Capital expenditures:
Renewals and replacements...................................................... (22) (24)
Other.......................................................................... (9) (35)
Other ............................................................................... 15 (41)
--------- ---------
Cash provided by (used in) investing activities................................ (122) 77
--------- ---------
FINANCING ACTIVITIES
Issuances of debt, net of related expenses........................................... 569 --
Dividends to Host Marriott Corporation and affiliates................................ (54) (24)
Repayment of debt.................................................................... (2) (1)
Other ............................................................................... -- (2)
-------- ---------
Cash provided by (used in) financing activities................................ 513 (27)
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS................................................ $ 474 $ 144
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed 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 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 consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
for the fiscal year ended January 3, 1997.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 12, 1997 and the results
of operations for the twelve and thirty-six weeks ended September 12, 1997
and September 6, 1996 and cash flows for the thirty-six weeks ended
September 12, 1997 and September 6, 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 Thirty-Six Weeks Ended
------------------------ -------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
------------- ------------ ------------- ------------
(in millions)
<S> <C> <C> <C> <C>
Sales
Rooms.............................................. $ 168 $ 129 $ 496 $ 387
Food & Beverage.................................... 59 45 187 143
Other.............................................. 14 12 42 37
------- -------- ------- -------
Total Hotel Sales............................... 241 186 725 567
------- -------- ------- -------
Department Costs
Rooms.............................................. 38 32 113 92
Food & Beverage.................................... 49 39 146 115
Other.............................................. 10 4 24 18
------- -------- ------- -------
Total Department Costs.......................... 97 75 283 225
------- -------- ------- -------
Department Profit.................................... 144 111 442 342
Other Deductions..................................... 57 47 163 136
------- -------- ------- -------
House Profit.................................... $ 87 $ 64 $ 279 $ 206
======= ======== ======= =======
</TABLE>
- 7 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 September
12, 1997 and September 6, 1996, respectively, and $4 million and $3 million
for the thirty-six weeks ended September 12, 1997 and September 6, 1996,
respectively.
4. During the third quarter of 1997, the Company acquired a controlling
interest in a newly-formed partnership that acquired the 380-room Manhattan
Beach Radisson Plaza in Manhattan Beach, California for $38 million. The
property was immediately converted to the Marriott brand. The Company also
acquired the remaining 17% interest in the 250-room Newport Beach Marriott
Suites for $4 million. The Company had previously acquired, through
foreclosure, an 83% controlling interest in the property. Also, during the
third quarter of 1997, the Company sold the Sheraton Elk Grove Suites for
net cash proceeds of $16 million.
In the second quarter of 1997, the Company acquired a controlling interest
in the 404-room Norfolk Waterside Marriott for $33 million. The Company
acquired the 306-room Ritz-Carlton Hotel Marina del Rey for $57 million in
the first quarter of 1997.
5. On September 10, 1997, Host Marriott successfully completed the purchase of
98.6% of the limited partnership units in Chesapeake Hotel Limited
Partnership ("CHLP"), increasing its ownership of CHLP to 99.9%. CHLP owns
six hotels, the Key Bridge Marriott, the Chicago Marriott O'Hare, the
Boston Marriott Newton, the Denver Marriott Southeast, the Minneapolis
Airport Marriott and the Saddle Brook Marriott. The Company acquired a
controlling interest in CHLP along with certain receivables from Host
Marriott on October 10, 1997 for $135 million and will consolidate CHLP in
the fourth quarter. The Company already owned the non- recourse second
mortgages on the properties (totalling $137 million at September 12, 1997).
6. The Company paid dividends to Host Marriott of $21 million during the third
quarter of 1997 and $54 million year-to-date as permitted under the senior
notes indentures.
7. 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 cash
interest expense as defined in the senior notes indenture.
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 $569 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.
8. 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 consolidated financial statements.
9. All but five 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, the Manhattan Beach Marriott and HMH HPT Residence Inn, Inc., the
lessee of the Residence Inn properties. At September 12, 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.
- 8 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following condensed, consolidating financial information sets forth the
combined financial position as of September 12, 1997 and January 3, 1997
and the results of operations for the twelve and thirty-six weeks ended
September 12, 1997 and September 6, 1996 and cash flows for the thirty-six
weeks ended September 12, 1997 and September 6, 1996 of the parent, the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries.
- 9 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Balance Sheets
(in millions)
September 12, 1997
(unaudited)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property and equipment, net................................... $ 934 $ 400 $ 237 $ 1,571
Note receivable from affiliate................................ -- 137 -- 137
Investment in affiliate....................................... 17 -- -- 17
Other assets.................................................. 76 20 27 123
Cash and cash equivalents..................................... 615 -- -- 615
------- ------- ------ -------
Total assets............................................... $ 1,642 $ 557 $ 264 $ 2,463
======= ======= ====== =======
Debt.......................................................... $ 1,526 $ 79 $ 75 $ 1,680
Deferred income taxes......................................... 29 57 3 89
Other liabilities............................................. 30 17 38 85
------- ------- ------ -------
Total liabilities.......................................... 1,585 153 116 1,854
Owner's equity ............................................... 57 404 148 609
------- ------- ------ -------
Total liabilities and owner's equity....................... $ 1,642 $ 557 $ 264 $ 2,463
======= ======= ====== =======
January 3, 1997
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------ ------------
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>
- 10 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
(in millions)
(unaudited)
Twelve Weeks Ended September 12, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 51 $ 21 $ 17 $ 89
OPERATING COSTS AND EXPENSES.................................. 28 12 12 52
------- ------- ------ -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 23 9 5 37
Corporate expenses............................................ (2) -- -- (2)
Interest expense.............................................. (30) (2) (2) (34)
Interest income............................................... 6 3 -- 9
------- ------- ------ -------
INCOME (LOSS) BEFORE INCOME TAXES............................. (3) 10 3 10
Benefit (provision) for income taxes.......................... 2 (4) (1) (3)
------- ------- ------ -------
NET INCOME (LOSS) ............................................ $ (1) $ 6 $ 2 $ 7
======= ======= ====== =======
Twelve Weeks Ended September 6, 1996
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
--------- ------------ ------------ ------------
REVENUES .................................................... $ 36 $ 16 $ 13 $ 65
OPERATING COSTS AND EXPENSES.................................. 19 9 11 39
--------- ------- ------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 17 7 2 26
Corporate expenses............................................ (3) (1) -- (4)
Interest expense.............................................. (20) (2) (2) (24)
Interest income............................................... 4 3 -- 7
-------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES............................. (2) 7 5
Provision for income taxes.................................... -- (2) -- (2)
-------- ------- ------- -------
NET INCOME (LOSS)............................................. $ (2) $ 5 $ -- $ 3
======== ======= ======= =======
</TABLE>
- 11 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statements of Operations
(in millions)
(unaudited)
Thirty-Six Weeks Ended September 12, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 168 $ 71 $ 45 $ 284
OPERATING COSTS AND EXPENSES.................................. 84 34 35 153
------- ------- ------ -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 84 37 10 131
Corporate expenses............................................ (5) (2) (1) (8)
Interest expense.............................................. (71) (5) (4) (80)
Interest income............................................... 9 9 -- 18
------- ------- ------ -------
INCOME BEFORE INCOME TAXES.................................... 17 39 5 61
Provision for income taxes.................................... (6) (16) (2) (24)
------- ------- ------ -------
NET INCOME.................................................... $ 11 $ 23 $ 3 $ 37
======= ======= ====== =======
Thirty-Six Weeks Ended September 6, 1996
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES .................................................... $ 127 $ 56 $ 26 $ 209
OPERATING COSTS AND EXPENSES.................................. 66 27 21 114
---------- ------- ------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 61 29 5 95
Corporate expenses............................................ (6) (3) (1) (10)
Interest expense.............................................. (62) (4) (4) (70)
Interest income............................................... 9 9 -- 18
---------- ------- ------- --------
INCOME BEFORE INCOME TAXES.................................... 2 31 -- 33
Provision for income taxes.................................... (2) (12) -- (14)
---------- ------- ------- --------
NET INCOME.................................................... $ -- $ 19 $ -- $ 19
========== ======= ======= ========
</TABLE>
- 12 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
(in millions)
(unaudited)
Thirty-Six Weeks Ended September 12, 1997
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................... $ 37 $ 38 $ 8 $ 83
------- ------- ------ -------
INVESTING ACTIVITIES
Cash received from sales of assets, net.................... -- 16 -- 16
Acquisitions............................................... (61) -- (61) (122)
Capital expenditures....................................... (15) (14) (2) (31)
Other...................................................... 12 3 -- 15
------- ------- ------ -------
Cash provided by (used in) investing activities......... (64) 5 (63) (122)
------- ------- ------ -------
FINANCING ACTIVITIES
Issuances of debt, net of related expenses................. 569 -- -- 569
Repayment of debt.......................................... (1) (1) -- (2)
Transfers to/from Parent................................... (13) (42) 55 --
Dividends to Host Marriott Corporation and affiliates...... (54) -- -- (54)
------- ------- ------ -------
Cash provided by (used in) financing activities......... 501 (43) 55 513
------- ------- ------ -------
INCREASE IN CASH AND CASH EQUIVALENTS......................... $ 474 $ -- $ -- $ 474
======= ======= ====== ======
Thirty-Six Weeks Ended September 6, 1996
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
CASH PROVIDED BY OPERATIONS................................... $ 41 $ 44 $ 9 $ 94
-------- -------- -------- --------
INVESTING ACTIVITIES
Cash received from sales of assets, net.................... 329 -- -- 329
Acquisitions............................................... (111) (25) (16) (152)
Capital expenditures....................................... (36) (17) (6) (59)
Other ..................................................... (40) -- (1) (41)
-------- -------- -------- -------
Cash provided by (used in) investing activities......... 142 (42) (23) 77
-------- -------- -------- -------
FINANCING ACTIVITIES
Repayment of debt.......................................... (1) -- -- (1)
Transfers to/from Parent................................... (12) (2) 14 --
Dividends to Host Marriott Corporation and affiliates...... (24) -- -- (24)
Other ..................................................... (2) -- -- (2)
-------- -------- -------- -------
Cash provided by (used in) financing activities......... (39) (2) 14 (27)
-------- -------- -------- -------
INCREASE IN CASH AND CASH EQUIVALENTS......................... $ 144 $ -- $ -- $ 144
======== ======== ======== ========
</TABLE>
- 13 -
<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 consolidated results of the Company as if the merger discussed in
footnote 1 to the condensed consolidated 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 third quarter 1997
revenues of $89 million represented a $24 million, or 37%, increase from the
third quarter of 1996. Year-to-date revenues increased $75 million, or 36%, to
$284 million. The Company's revenue and operating profit were impacted by:
. improved lodging results from comparable properties;
. the addition of twelve full-service hotel properties during 1996 and 1997;
Hotel revenues increased $23 million, or 36%, to $87 million in the third
quarter of 1997. Year-to-date 1997 hotel revenues increased $73 million, or 35%
to $279 million. The 1997 hotel revenue increases reflect the addition of twelve
full-service hotel properties in 1996 and 1997 and overall improved lodging
results. The Company's full- service hotels and leased Residence Inn properties
reported strong 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 third quarter revenues for nearly all of the Company's full-service
hotels were improved or comparable to third quarter of 1996 results. Improved
results were driven by strong increases in REVPAR of nearly 11% for comparable
units for the third quarter and 14% 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 $55
million, or 30%, to $241 million for the quarter, and $158 million, or 28%, to
$725 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 8% for the third quarter and 11%
year-to-date, while average occupancy increased two percentage points for both
the quarter and year-to-date. Results were further enhanced by a two percentage
point increase in the house profit margin for comparable properties for the
quarter and three percentage point increase year-to-date because the Company's
hotels are obtaining better leverage at the hotel department operating level as
a result of increased room rates. Comparisons to the Company's 1997 third
quarter to the 1996 third quarter were impacted by the effect of the 1996 Summer
Olympics in Atlanta. Excluding the comparable Atlanta properties, REVPAR
increased 13% for the 1997 third quarter. 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.
- 14 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company continues its strategy of focusing on the full-service segment of
the lodging industry. As such, the Company's leased limited-service properties
represented 10% of total revenues through the third quarter of 1997 as compared
to 15% through the third quarter of 1996. The limited-service properties
contributed $3 million or 3%, of total year-to-date operating profit in 1997 and
$9 million, or 16% in 1996. The Company does not expect the leased
limited-service properties to contribute a significant portion of operating
profit in the future.
Operating Costs and Expenses. Operating costs and expenses consist of
depreciation and amortization, base and incentive management fees, property
taxes, ground and equipment rent, insurance, lease payments and certain other
costs. The Company's operating costs and expenses increased $13 million to $52
million for the third quarter of 1997. Year-to-date operating costs and expenses
increased $39 million to $153 million primarily reflecting the addition of
twelve full-service properties during 1996 and 1997 and increased management
fees and rentals tied to improved operating results. As a percentage of hotel
revenues, hotel operating costs and expenses were 60% and 61% of revenues for
third quarter 1997 and 1996, respectively. Hotel operating costs and expenses
were 55% of revenues for both year-to-date 1997 and 1996, respectively.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased by $11
million to $37 million, or 42% of revenues, in the third quarter of 1997 from
$26 million, or 40% of revenues, in the third quarter of 1996. Year-to-date
operating profit increased $36 million to $131 million, or 46% of revenues. Most
of the Company's hotels recorded substantial improvements in operating results.
Several hotels, including the JW Marriott Hotel in Houston, the Houston Airport
Marriott, the Marriott World Trade Center, the Marina Beach Marriott, the
Newport Beach Marriott, Marriott's Mountain Resort at Vail and the San Francisco
Airport Marriott posted particularly significant improvements in operating
profit for the quarter and year-to-date, which were partially offset by a
decrease in the results for the Company's comparable Atlanta properties, (three
properties totalling 1,022 rooms), due to exceptional activity in 1996 related
to the Summer Olympics.
Corporate Expenses. Corporate expenses for the third quarter decreased $2
million to $2 million for the third quarter of 1997 and $2 million to $8 million
year-to-date due to a decrease in corporate expenses allocated to the Company by
Host Marriott. As a percentage of revenues, corporate expenses decreased to 2%
of revenues for the third quarter of 1997 and 3% of revenues year-to-date,
respectively, compared to 6% of revenues for the third quarter of 1996 and 5%
year-to-date.
Interest Expense. Interest expense increased $10 million to $34 million for the
third quarter of 1997 and $10 million to $80 million year-to-date due primarily
to the issuance of the $600 million of New Senior Notes in July 1997.
Net Income. The Company's net income for the third quarter of 1997 increased $4
million to $7 million, or 8% of revenues, compared to net income of $3 million,
or 5% of revenues, for the third quarter of 1996. Year-to-date net income for
1997 was $37 million, or 13% of revenues, compared to $19 million, or 9% of
revenues for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company reported an increase in cash and cash equivalents of $474 million
for the thirty-six weeks ended September 12, 1997. This increase for 1997 is
primarily due to net proceeds of approximately $569 million from the New Senior
Notes and cash from operations, partially offset by the use of funds for the
acquisition of one full- service property, the acquisition of controlling
interests in two full-service properties and payments to Host Marriott for
income taxes. Cash flow provided by operations decreased $11 million to $83
million for the thirty-six weeks ended September 12, 1997.
Cash used in investing activities was $122 million for the thirty-six weeks
ended September 12, 1997, compared to cash provided by investing activities of
$77 million for the thirty-six weeks ended September 6, 1996, primarily
reflecting the 1997 acquisition of the 306-room Ritz-Carlton Marina del Rey for
$57 million and the acquisition of
- 15 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
controlling interests in the 404-room Norfolk Waterside Marriott for $33
million, the 380-room Manhattan Beach Radisson for $29 million and capital
expenditures on existing properties. During the fourth quarter of 1997, the
Company acquired a controlling interest in the Chesapeake Hotel Limited
Partnership ("CHLP"), which owns six full-service properties with a total of
3,054 rooms, along with certain CHLP receivables from Host Marriott for
approximately $135 million. The Company already owned the non-recourse second
mortgages on the properties (totalling $137 million at September 12, 1997).
Cash provided by financing activities was $513 million for the thirty-six weeks
ended September 12, 1997, compared to cash used in financing activities of $27
million for the thirty-six weeks ended September 6, 1996. The year-to-date
results reflect net proceeds from the New Senior Notes partially offset by
dividends of $54 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 cash interest expense as defined in the senior notes
indentures.
Concurrent with the Consent Solicitations and the Merger, the Company issued
$600 million of 8 7/8% senior notes at par maturing in 2007. The Company
received net proceeds from the Offering of approximately $569 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.
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 $19 million, or 41%, to $65 million
for the third quarter of 1997 as compared to the third quarter of 1996.
Year-to-date EBITDA increased $48 million, or 32% to $196 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 $14 million, or 35%, to $53 million for the third quarter
of 1997 over 1996 third quarter results. Year-to-date hotel EBITDA increased $44
million, or 33%, to $179 million. On a comparable basis, full- service hotel
EBITDA increased 12% and 20%, respectively, on REVPAR increases of 11% and 14%,
respectively, for the 1997 third quarter and year-to-date. Comparisons of the
Company's 1997 third quarter to the 1996 third quarter were substantially
impacted by the effect of the 1996 Summer Olympics in Atlanta. Excluding results
from the comparable Atlanta properties, comparable full-service EBITDA increased
17% on a 13% increase in REVPAR for the 1997 third quarter.
- 16 -
<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 Thirty-Six Weeks Ended
-------------------------- --------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
------------- ------------ ------------ -------------
(in millions)
<S> <C> <C> <C> <C>
EBITDA............................................ $ 65 $ 46 $ 196 $ 148
Interest expense.................................. (34) (24) (80) (70)
Depreciation and amortization..................... (18) (14) (53) (43)
Income taxes...................................... (3) (2) (24) (14)
Loss on dispositions of assets
and other non-cash charges, net................ (3) (3) (2) (2)
--------- --------- ---------- ---------
Net Income . . . .............................. $ 7 $ 3 $ 37 $ 19
========= ========= ========== =========
</TABLE>
The Company interest coverage, defined as EBITDA divided by cash interest
expense, was 2.5 to 1.0 and 2.2 to 1.0 for the thirty-six weeks ended September
12, 1997 and September 6, 1996, respectively. The ratio of earnings to fixed
charges was 1.7 to 1.0 and 1.4 to 1.0 for the thirty-six weeks ended September
12, 1997 and September 6, 1996, respectively.
- 17 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
- 18 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HMH PROPERTIES, INC.
October 23, 1997 /s/ Donald D. Olinger
Date Donald D. Olinger
Vice President and Corporate Controller
(Principal Accounting Officer)
- 19 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HMH
Properties, Inc. and subsidiaries condensed consolidated balance sheet and
condensed consolidated statements of operations as of and for the thirty-six
weeks ended September 12, 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> 9-mos
<FISCAL-YEAR-END> Jan-2-1998
<PERIOD-START> Jan-4-1997
<PERIOD-END> Sep-12-1997
<EXCHANGE-RATE> 1
<CASH> 615
<SECURITIES> 0
<RECEIVABLES> 42
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,859
<DEPRECIATION> 289
<TOTAL-ASSETS> 2,463
<CURRENT-LIABILITIES> 0
<BONDS> 1,550
0
0
<COMMON> 0
<OTHER-SE> 609
<TOTAL-LIABILITY-AND-EQUITY> 2,463
<SALES> 0
<TOTAL-REVENUES> 284
<CGS> 0
<TOTAL-COSTS> 153
<OTHER-EXPENSES> 8
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<INCOME-TAX> 24
<INCOME-CONTINUING> 37
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<NET-INCOME> 37
<EPS-PRIMARY> 0
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</TABLE>
