SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 27, 1998 Commission File No. 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> <C>
PART I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
March 27, 1998 and January 2, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 27, 1998 and March 28, 1997
Condensed Consolidated Statements of Cash Flows - 5
Twelve Weeks Ended March 27, 1998 and March 28, 1997
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of 12
Operations and Financial Condition
PART II. OTHER INFORMATION AND SIGNATURE 16
</TABLE>
- 2 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
<TABLE>
<CAPTION>
March 27, January 2,
1998 1998
----------- ------------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net.................................................... $ 2,260 $ 1,960
Due from hotel managers........................................................ 64 31
Investments in affiliate ...................................................... 18 18
Other assets................................................................... 142 92
Short-term marketable securities............................................... 98 191
Cash and cash equivalents...................................................... 220 240
-------- --------
$ 2,802 $ 2,532
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Senior notes................................................................... $ 1,550 $ 1,550
Notes secured by real estate assets............................................ 382 219
Other notes.................................................................... 32 34
-------- --------
Total debt................................................................ 1,964 1,803
Deferred income taxes.......................................................... 119 111
Other liabilities.............................................................. 177 100
-------- --------
Total liabilities......................................................... 2,260 2,014
-------- --------
Shareholder's equity
Common stock, 100 shares issued, authorized and
outstanding, no par value................................................. -- --
Additional paid-in capital.................................................. 527 525
Retained earnings (deficit)................................................. 15 (7)
-------- --------
Total shareholder's equity ............................................... 542 518
-------- --------
$ 2,802 $ 2,532
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended March 27, 1998 and March 28, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
--------- --------
REVENUES
Hotels ............................................................................. $ 143 $ 95
Equity in earnings of affiliate..................................................... 2 2
--------- --------
Total revenues.................................................................... 145 97
--------- --------
OPERATING COSTS AND EXPENSES
Depreciation and amortization....................................................... 23 19
Base and incentive management fees (including Marriott International
management fees of $22 million and $14 million in 1998
and 1997, respectively)........................................................... 23 16
Property taxes...................................................................... 10 7
Ground rent, insurance and other.................................................... 14 10
--------- --------
Total operating costs and expenses.............................................. 70 52
--------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............................... 75 45
Corporate expenses.................................................................... (4) (3)
Interest expense...................................................................... (40) (23)
Interest income....................................................................... 6 4
--------- --------
INCOME BEFORE INCOME TAXES............................................................ 37 23
Provision for income taxes............................................................ (15) (9)
--------- --------
NET INCOME............................................................................ $ 22 $ 14
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve Weeks Ended March 27, 1998 and March 28, 1997
(unaudited, in millions)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
-------- ---------
OPERATING ACTIVITIES
Net income........................................................................... $ 22 $ 14
Adjustments to reconcile to cash from operations:
Depreciation and amortization..................................................... 23 19
Income taxes...................................................................... 15 9
Changes in operating accounts..................................................... (14) 14
Other............................................................................. 2 --
-------- ---------
Cash provided by operations.................................................... 48 56
-------- ---------
INVESTING ACTIVITIES
Acquisitions......................................................................... (123) (57)
Capital expenditures:
Renewals and replacements......................................................... (15) (9)
Other............................................................................. (6) (4)
Sale of short-term marketable securities............................................. 93 --
Other................................................................................ -- 12
-------- --------
Cash used in investing activities.............................................. (51) (58)
-------- --------
FINANCING ACTIVITIES
Dividends to Host Marriott Corporation and affiliates................................ -- (13)
Repayment of debt.................................................................... (2) (1)
Deposits into debt service reserves.................................................. (15) --
Cash used in financing activities.............................................. (17) (14)
-------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS................................................ $ (20) $ (16)
======== =========
Non-cash Financing Activities:
Assumption of mortgage debt for the purchase of
controlling interest in one property........................................... $ 164 $ --
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<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 its 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 owned 17 full-service hotel properties, with and
into the Company (the "Merger"). The financial statements of the Company
present the condensed 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 Company's Annual Report on Form 10- K for
the fiscal year ended January 2, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of March 27, 1998 and the results of
operations and cash flows for the twelve weeks ended March 27, 1998 and
March 28, 1997. Interim results are not necessarily indicative of fiscal
year performance because of the impact of seasonal and short-term
variations.
2. On April 17, 1998, Host Marriott announced that its Board of Directors (the
"Board") had authorized Host Marriott to reorganize its business operations
to qualify as a real estate investment trust ("REIT"), effective as of
January 1, 1999, and to spin-off its senior living communities business
("SLC") through a taxable stock dividend to its shareholders. After the
REIT reorganization, which is subject to shareholder and final Board
approval, Host Marriott intends to operate as an "UPREIT," with all of its
assets and operations, including the Company, conducted through the newly
formed Operating Partnership of which Host Marriott will be the general
partner. As part of the reorganization, Host Marriott anticipates
repurchasing or exchanging the approximately $1.55 billion of outstanding
debt securities of HMH Properties and issuing additional debt and equity
securities of Host Marriott.
As part of the reorganization, Host Marriott filed a shelf registration
statement with the Securities and Exchange Commission for $2.5 billion in
securities which may include debt, equity or a combination thereof. Host
Marriott anticipates that any net proceeds from the sale of offered
securities (including the potential issuance of perpetual preferred stock
by Host Marriott) will be used for refinancing of Host Marriott's
indebtedness, including HMH Properties' approximately $1.55 billion in
outstanding senior notes, the potential refinancing of portions of Host
Marriott's approximately $2 billion of mortgage debt and potential future
acquisitions.
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
reorganization is subject to significant contingencies that are outside the
control of Host Marriott, including final Board approval, consent of
shareholders, partners, bondholders, lenders, and ground lessors of Host
Marriott, its affiliates and other third parties. Accordingly, there can be
no assurance that the REIT reorganization will be completed or that it will
be effective as of January 1, 1999.
- 6 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Revenues include house profit from the Company's hotel properties because
the Company has delegated substantially all of the operating decisions
related to the generation of house profit from its hotels to the managers.
Revenues also include net gains (losses) on property transactions 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, management fees, property taxes, ground and equipment rent,
insurance and lease payments which are classified as operating costs and
expenses.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity
in its financial statements.
The Company is assessing the impact of EITF 97-2 on its policy of excluding
the property-level revenues and operating expenses of its hotels from its
statements of operations. If the Company concludes that EITF 97-2 should be
applied to its hotels, it could be required to include operating results of
those managed operations in its financial statements. Application of EITF
97-2 to financial statements as of and for the twelve weeks ended March 27,
1998, would have increased both revenues and operating expenses by
approximately $218 million and would have had no impact on operating profit
or net income.
House profit generated by the Company's hotels for 1998 and 1997 consists
of:
<TABLE>
<CAPTION>
Twelve Weeks Ended
March 27, March 28,
1998 1997
---------- ---------
(in millions)
<S> <C> <C>
Sales
Rooms........................................... $ 231 $ 162
Food & Beverage................................. 103 64
Other........................................... 27 16
------- ------
Total Hotel Sales............................ 361 242
------- ------
Department Costs
Rooms........................................... 52 36
Food & Beverage................................. 76 49
Other........................................... 14 8
------- ------
Total Department Costs....................... 142 93
------- ------
Department Profit.................................. 219 149
Other Deductions................................... 76 54
------- ------
House Profit................................. $ 143 $ 95
======= ======
</TABLE>
4. During the first quarter of 1998, the Company acquired a controlling
interest in the partnership that owns the 1,671-room Atlanta Marriott
Marquis for $239 million, including the assumption of $164 million in
mortgage debt. The Company also acquired a controlling interest in a newly
formed partnership that owns the 359-room Albany Marriott, the 320-room
Minneapolis Marriott Southwest and the 350-room San Diego Marriott Mission
Valley for $50 million. During the second quarter of 1998, the Company sold
the 192-room Napa Valley Marriott for approximately $21 million and
recorded a pre-tax gain of approximately $10 million.
- 7 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. The Company adopted Statement Financial Accounting Standards ("SFAS") No.
130 "Reporting Comprehensive Income in 1998. The adoption of this statement
did not have a material impact on the Company's consolidated financial
statements.
6. The Company operates in the full-service segment of the lodging industry.
The Company evaluates the performance of its segment based primarily on
operating profit before depreciation, corporate expenses and interest
expense. The allocation of income taxes is not evaluated at the segment
level and, therefore, the Company does not believe the information is
material to the condensed consolidated financial statements.
The following table presents revenues and other financial information by
business segment for the twelve weeks ended March 27, 1998 and March 28,
1997 (in millions):
<TABLE>
<CAPTION>
Twelve Weeks Ended March 27, 1998
---------------------------------------
Corporate
Hotels & Other Consolidated
--------- --------- ------------
<S> <C> <C> <C>
Revenues................................................. $ 143 $ 2 $ 145
Operating profit......................................... 73 2 75
Corporate expense .................................... -- (4) (4)
Interest expense......................................... (40) -- (40)
Interest income.......................................... 6 -- 6
Income before taxes...................................... 39 (2) 37
Total assets............................................. 2,784 18 2,802
Twelve Weeks Ended March 28, 1997
---------------------------------------
Corporate
Hotels & Other Consolidated
--------- --------- -------------
Revenues................................................. $ 95 $ 2 $ 97
Operating profit......................................... 43 2 45
Corporate expense..................................... -- (3) (3)
Interest expense......................................... (23) -- (23)
Interest income.......................................... 4 -- 4
Income before taxes...................................... 24 (1) 23
Total assets............................................. 1,883 19 1,902
</TABLE>
7. All but eight 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 Marriott Manhattan Beach, Marriott's Desert Springs Resort
and Spa, the Atlanta Marriott Marquis, the Albany Marriott, the Minneapolis
Marriott Southwest, the San Diego Marriott Mission Valley, and HMH HPT
Residence Inn, Inc., the lessee of the Residence Inn properties. At March
27, 1998, 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 March 27, 1998 and January 2, 1998 and
the results of operations and cash flows for the twelve weeks ended March
27, 1998 and March 28, 1997 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)
March 27, 1998
--------------
(unaudited)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Property and equipment, net................................... $ 982 $ 569 $ 709 $ 2,260
Investment in affiliate....................................... 18 -- -- 18
Other assets.................................................. 81 29 96 206
Short-term marketable securities.............................. 98 -- -- 98
Cash and cash equivalents..................................... 203 9 8 220
------- ------- ------ -------
Total assets............................................... $ 1,382 $ 607 $ 813 $ 2,802
======= ======= ====== =======
Debt.......................................................... $ 1,174 $ 429 $ 361 $ 1,964
Deferred income taxes......................................... 40 47 32 119
Other liabilities............................................. 40 61 76 177
------- ------- ------ -------
Total liabilities.......................................... 1,254 537 469 2,260
Owner's equity ............................................... 128 70 344 542
------- ------- ------ -------
Total liabilities and owner's equity....................... $ 1,382 $ 607 $ 813 $ 2,802
======= ======= ====== =======
January 2, 1998
--------------- Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
Property and equipment, net................................... $ 987 $ 569 $ 404 $ 1,960
Investment in affiliate....................................... 18 -- -- 18
Other assets.................................................. 67 18 38 123
Short-term marketable securities.............................. 191 -- -- 191
Cash and cash equivalents..................................... 219 7 14 240
------- ------- ------ -------
Total assets............................................... $ 1,482 $ 594 $ 456 $ 2,532
======= ======= ====== =======
Debt.......................................................... $ 1,176 $ 429 $ 198 $ 1,803
Deferred income taxes......................................... 39 47 25 111
Other liabilities............................................. 23 54 23 100
------- ------- ------ -------
Total liabilities.......................................... 1,238 530 246 2,014
Owner's equity................................................ 244 64 210 518
------- ------- ------ -------
Total liabilities and owner's equity....................... $ 1,482 $ 594 $ 456 $ 2,532
======= ======= ====== =======
</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 March 27, 1998
---------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES...................................................... $ 67 $ 38 $ 40 $ 145
OPERATING COSTS AND EXPENSES.................................. 32 18 20 70
------- ------- ------ -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 35 20 20 75
Corporate expenses............................................ (2) (1) (1) (4)
Interest expense.............................................. (26) (9) (5) (40)
Interest income............................................... 6 -- -- 6
------- ------- ------ -------
INCOME BEFORE INCOME TAXES.................................... 13 10 14 37
Provision for income taxes.................................... (6) (4) (5) (15)
------- ------- ------ -------
NET INCOME ................................................... $ 7 $ 6 $ 9 $ 22
======= ======= ====== =======
Twelve Weeks Ended March 28, 1997
---------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ -------------- ------------
REVENUES...................................................... $ 59 $ 26 $ 12 $ 97
OPERATING COSTS AND EXPENSES.................................. 30 12 10 52
-------- -------- -------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
AND INTEREST............................................... 29 14 2 45
Corporate expenses............................................ (1) (1) (1) (3)
Interest expense.............................................. (16) (6) (1) (23)
Interest income............................................... 1 3 -- 4
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................................... 13 10 -- 23
Provision for income taxes.................................... (5) (4) -- (9)
-------- -------- -------- --------
NET INCOME.................................................... $ 8 $ 6 $ -- $ 14
======== ======== ======== ========
</TABLE>
- 10 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Condensed Consolidating Statement of Cash Flows
(in millions)
(unaudited)
Twelve Weeks Ended March 27, 1998
---------------------------------
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATIONS................................... $ 22 $ 11 $ 15 $ 48
INVESTING ACTIVITIES
Acquisitions............................................... -- -- (123) (123)
Capital expenditures....................................... (9) (6) (6) (21)
Sale of short-term marketable securities................... 93 -- -- 93
------- ------- ------ ------
Cash provided by (used in) investing activities......... 84 (6) (129) (51)
------- ------- ------ ------
FINANCING ACTIVITIES
Repayment of debt.......................................... (2) -- -- (2)
Transfers to/from Parent................................... (120) (3) 123 --
Deposits into debt service reserves........................ -- -- (15) (15)
------- ------- ------ ------
Cash provided by (used in) financing activities......... (122) (3) 108 (17)
------- ------- ------ ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.......................................... $ (16) $ 2 $ (6) $ (20)
======= ======= ====== =======
Twelve Weeks Ended March 28, 1997
---------------------------------
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ ------------- ------------
CASH PROVIDED BY OPERATIONS................................... $ 43 $ 12 $ 1 $ 56
-------- -------- -------- --------
INVESTING ACTIVITIES
Acquisitions............................................... (57) -- -- (57)
Capital expenditures....................................... (6) (6) (1) (13)
Other ..................................................... 12 -- -- 12
-------- -------- -------- --------
Cash used in investing activities....................... (51) (6) (1) (58)
-------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of debt.......................................... (1) -- -- (1)
Transfers to/from Parent................................... 6 (6) -- --
Dividends to Host Marriott Corporation and affiliates...... (13) -- -- (13)
-------- -------- -------- --------
Cash used in financing activities...................... (8) (6) -- (14)
-------- -------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS......................... $ (16) $ -- $ -- $ (16)
======== ======== ======== ========
</TABLE>
- 11 -
<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 include forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995, including
without limitation, statements related to the proposed REIT conversion, the
terms, structure and timing thereof, and the expected effects of the proposed
REIT conversion. All forward-looking statements involve known and unknown risks,
uncertainties, and other factors many of which are not within the control of the
Company, that may cause the actual transactions, results, performance or
achievements of the Company to be materially different from any future
transactions, results, performance or achievements expressed or implied by such
forward-looking statements. Certain of the transactions described herein are
subject to certain consents of shareholders, lenders, debt holders and partners
of the Company and its affiliates and of other third parties and various other
conditions and contingencies, and future results, performance and achievements
will be affected by general economic, business and financing conditions,
competition and governmental actions. While the Company believes the
expectations reflected in these 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
Note 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 first quarter 1998
revenues of $145 million represented a $48 million, or 49%, increase from the
first quarter of 1997.
Hotel revenues increased $48 million, or 51%, to $143 million in the first
quarter 1998 as the Company reported strong growth in revenue per available room
("REVPAR") and the addition of fifteen full-service hotel properties in 1997 and
the first quarter of 1998.
Hotel sales (gross hotel sales, including room sales, food and beverage, and
other ancillary sales such as telephone sales) increased $119 million, or 49%,
to $361 million for the quarter reflecting the REVPAR increases for comparable
units and the addition of full-service properties in 1997 and 1998. Improved
results were driven by strong increases in REVPAR of nearly 8% to $101.75 for
comparable units for the 1998 first quarter. Results were further enhanced by a
one percentage point increase in the house profit margin for comparable
properties. On a comparable basis, average room rates increased nearly 9% for
the quarter, while average occupancy decreased one percentage point. 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.
OPERATING COSTS AND EXPENSES. Operating costs and expenses principally consist
of depreciation and amortization, management fees, property taxes, ground,
building and equipment rent, insurance, lease payments and certain other costs.
Operating costs and expenses increased $18 million to $70 million for the first
quarter of 1998 primarily due to the addition of fifteen full-service properties
during 1997 and the first quarter of 1998, and management fees and rentals tied
to improved operating results as well as depreciation. As a percentage of hotel
revenues, operating costs and expenses were 49% and 55% of revenues for first
quarter of 1998 and 1997, respectively, due to the significant increase in
REVPAR discussed above as well as the increase in operating leverage as a result
of a significant portion of the Company's operating cost and expenses being
fixed.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased by $30
million to $75 million, or 52% of revenues, in the first quarter of 1998
- 12 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
from $45 million, or 46% of revenues, in the first quarter of 1997. Most of the
Company's hotels recorded substantial improvements in operating results. Several
hotels, including the Atlanta Northwest Marriott, the New York World Trade
Center Marriott, the JW Marriott Houston, the Plaza San Antonio Marriott, the
San Antonio Riverwalk Marriott, the Washington Dulles Airport Marriott and the
Toronto Delta Meadowvale posted particularly significant improvements in
operating profit for the quarter.
CORPORATE EXPENSES. Corporate expenses for the first quarter increased $1
million to $4 million due to an increase in corporate expenses allocated to the
Company by Host Marriott. As a percentage of revenues, corporate expenses
decreased slightly to 2.8% of revenues for the first quarter of 1998 from 3.1%
for the first quarter of 1997.
INTEREST EXPENSE. Interest expense increased $17 million to $40 million for the
first quarter of 1998 due primarily to the issuance of $600 million of senior
notes in July 1997.
NET INCOME. The Company's net income for the first quarter of 1998 increased $8
million to $22 million, or 15% of revenues, compared to net income of $14
million, or 14% of revenues, for the first quarter 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company reported a decrease in cash and cash equivalents of $20 million for
the first quarter of 1998. This decrease is primarily due to the use of funds
for the acquisition of controlling interests in four full-service hotel
properties, partially offset by cash provided by operations. Cash flow provided
by operations decreased $8 million to $48 million for the twelve weeks ended
March 27, 1998, primarily due to the timing of payments due from hotel managers
for operations.
Cash used in investing activities was $51 million and $58 million for the first
quarter of 1998 and 1997, respectively. The Company's cash used in investing
primarily consists of acquisitions of hotel properties, capital expenditures for
conversions, improvements and renewal and replacements, partially offset by the
sale of short-term marketable securities. During the first quarter of 1998, the
Company acquired controlling interests in the 1,671-room Atlanta Marriott
Marquis for $239 million, including the assumption of $164 million of mortgage
debt and in a newly-formed partnership that owns three hotels (the 359-room
Albany Marriott, the 320-room Minneapolis Marriott Southwest and the 350-room
San Diego Marriott Mission Valley) for $50 million. During the second quarter of
1998, the Company sold the 192-room Napa Valley Marriott for approximately $21
million and recorded a pre-tax gain of approximately $___ million.
Cash used in financing activities was $17 million and $14 million for first
quarter of 1998 and 1997, respectively. Company financing activity in the first
quarter of 1998 reflects an increase in debt service reserves associated with
the assumption of debt for certain hotel properties. The first quarter of 1997
results reflect a $13 million dividend to Host Marriott as permitted under the
senior notes indentures. During the second quarter of 1998, the Company paid a
$3 million dividend to Host Marriott.
On April 17, 1998, Host Marriott announced that its Board of Directors (the
"Board") has authorized Host Marriott to reorganize its business operations to
qualify as a real estate investment trust ("REIT"), effective as of January 1,
1999, and to spin-off its senior living communities business ("SLC") through a
taxable stock dividend to its shareholders. After the REIT reorganization, which
is subject to shareholder and final Board approval, Host Marriott intends to
operate as an "UPREIT," with all of its assets and operations, including the
Company, conducted through the newly formed Operating Partnership of which Host
Marriott will be the general partner.
As part of the reorganization, Host Marriott filed a shelf registration
statement with the Securities and Exchange Commission for $2.5 billion in
securities which may include debt, equity or a combination thereof. Host
Marriott anticipates that any net proceeds from the sale of offered securities
(including the potential issuance of perpetual preferred stock by Host Marriott)
will be used for refinancing of Host Marriott's indebtedness, including HMH
Properties' approximately $1.55 billion in outstanding senior notes, the
potential refinancing of portions of Host Marriott's approximately $2 billion of
mortgage debt and potential future acquisitions.
- 13 -
<PAGE>
HMH PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The REIT expects to qualify as a real estate investment trust under federal
income tax law beginning January 1, 1999. However, consummation of the REIT
reorganization is subject to significant contingencies that are outside the
control of the Company, including final Board approval, consent of shareholders,
partners, bondholders, lenders, and ground lessors of Host Marriott, its
affiliates and other third parties. Accordingly, there can be no assurance that
the REIT reorganization will be completed or that it will be effective as of
January 1, 1999.
EBITDA
- ------
The Company believes that consolidated earnings before interest expense, taxes,
depreciation, amortization and other non-cash items (principally non-cash write
downs of lodging properties and equity in earnings of an affiliate, net of
distributions received) ("EBITDA") is a meaningful measure of its operating
performance due to the significance of the Company's long-lived assets (and the
related depreciation thereon). 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.
EBITDA increased $36 million, or 56%, to $100 million for the first quarter of
1998 over the first quarter of 1997 results. Hotel EBITDA increased $34 million
to $96 million in the first quarter of 1998. The increase in hotel EBITDA is due
to the increase in comparable full-service EBITDA of 10%, as well as incremental
EBITDA from the addition of 15 full-service hotels in 1997 and 1998.
The Company interest coverage, defined as EBITDA divided by cash interest
expense, was 2.6 to 1.0 and 2.8 to 1.0 for the first quarter of 1998 and 1997,
respectively. The ratio of earnings to fixed charges was 1.9 to 1.0 for each of
the first quarter of 1998 and 1997.
The following is a reconciliation of EBITDA to net income:
<TABLE>
<CAPTION>
Twelve Weeks Ended
---------------------
March 27, March 28,
1998 1997
--------- ---------
(in millions)
<S> <C> <C>
EBITDA............................................ $ 100 $ 64
Interest expense.................................. (40) (23)
Depreciation and amortization..................... (23) (19)
Income taxes...................................... (15) (9)
Loss on dispositions of assets
and other non-cash charges, net................ -- 1
--------- --------
Net income..................................... $ 22 $ 14
========= ========
</TABLE>
- 14-
<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.
- 15-
<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.
May 11, 1998 /s/ Donald D. Olinger
- ---------------- --------------------------
Date Donald D. Olinger
Vice President and Corporate Controller
(Principal Accounting Officer)
- 16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial infomration extracted from HMH
Properties, Inc.'s Condensed Consolidated Balance Sheets and Condensed
COnsolidated Statements of Operations and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000905038
<NAME> HMH Properties, Inc.
<MULTIPLIER> 1,000,000
<CURRENCY> Dollars ($)
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jan-1-1999
<PERIOD-START> Jan-3-1998
<PERIOD-END> Mar-27-1998
<EXCHANGE-RATE> 1
<CASH> 220
<SECURITIES> 0
<RECEIVABLES> 64
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,597
<DEPRECIATION> 337
<TOTAL-ASSETS> 2,802
<CURRENT-LIABILITIES> 0
<BONDS> 1,550
0
0
<COMMON> 0
<OTHER-SE> 542
<TOTAL-LIABILITY-AND-EQUITY> 2,802
<SALES> 0
<TOTAL-REVENUES> 145
<CGS> 0
<TOTAL-COSTS> 70
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40
<INCOME-PRETAX> 37
<INCOME-TAX> 15
<INCOME-CONTINUING> 22
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
