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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                                   FORM 10-K
 
     [X] ANNUAL 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 Fiscal Year Ended December 31, 1998       Commission File No. 001-14625
 
                           HOST MARRIOTT CORPORATION
 
               Maryland                              53-0085950
       (State of Incorporation)            (I.R.S. Employer Identification
                                                       Number)
 
                              10400 Fernwood Road
                           Bethesda, Maryland 20817
                                (301) 380-9000
 
          Securities registered pursuant to Section 12(b) of the Act:
 
Name of each exchange Title of each class on which registered ----------------------------------------- --------------------------- Common Stock, $.01 par value (227,669,276 shares New York Stock Exchange outstanding as of March 19, 1999) Chicago Stock Exchange Purchase Share rights for Series A Junior Participating Pacific Stock Exchange Preferred Stock, $.01 par value Philadelphia Stock Exchange
The aggregate market value of shares of common stock held by non-affiliates at March 19, 1999 was $2,561,000,000. Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Document Incorporated by Reference Notice of 1999 Annual Meeting and Proxy Statement - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS Certain matters discussed herein are forward-looking statements. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as "believes," "expects," "may," "will," "should," "estimates" or "anticipates" or the negative thereof or other variations thereof or comparable terminology. All forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual transactions, results, performance or achievements to be materially different from any future transactions, results, performance or achievements expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that any deviations will not be material. We undertake 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. The following risk factors should be considered by prospective investors who should carefully consider the material risks described below. We do not control our hotel operations and are dependent on the managers and lessees of our hotels Because federal income tax laws restrict real estate investment trusts and "publicly traded" partnerships from deriving revenues directly from operating a hotel, we operate virtually none of our hotels. Instead, we lease virtually all of our hotels to subsidiaries of Crestline which, in turn, retain managers to manage our hotels pursuant to management agreements. Thus, we are dependent on the lessees but, under the hotel leases, we have little influence over how the lessees operate our hotels. Similarly, we are dependent on the managers, principally Marriott International, Inc., but we have virtually no influence over how the managers manage our hotels. We have no recourse if we believe that the hotel managers do not maximize the revenues from our hotels, which in turn will maximize the rental payments we receive under the leases. We may seek redress under most leases only if the lessee violates the terms of the lease and then only to the extent of the remedies set forth in the lease. Each lessee's ability to pay rent accrued under its lease depends to a large extent on the ability of the hotel manager to operate the hotel effectively and to generate gross sales in excess of its operating expenses. Our rental income from the hotels may therefore be adversely affected if the managers fail to provide quality services and amenities and competitive room rates at our hotels or fail to maintain the quality of the hotel brand names. Although the lessees have primary liability under the management agreements while the leases are in effect, we remain liable under the leases for all obligations that the lessees do not perform. We may terminate a lease if the lessee defaults, but terminating the lease could, unless another suitable lessee is found, impair our ability to qualify as a REIT for federal income tax purposes and the ability of the operating partnership (as defined in the business and properties section) to qualify as a partnership for federal income tax purposes unless another suitable lessee is found. As described below, our inability to qualify as a REIT or the operating partnership's inability to qualify as a partnership for federal income tax purposes would have a material adverse effect on us. We do not control certain assets held by the non-controlled subsidiaries We own economic interests in certain taxable corporations, which we refer to as non-controlled subsidiaries. These non-controlled subsidiaries hold various assets which, under our credit facility may not exceed, in the aggregate, 15% of the value of our assets. These assets consist primarily of interests in certain partnerships and hotels which are not leased, and certain FF&E (as defined below) used in our hotels. Ownership of these assets by us could jeopardize our REIT status and the operating partnership's status as a partnership for federal income tax purposes. Although we own approximately 95% of the total economic interests of the non-controlled subsidiaries, all of the voting common stock, representing approximately 5% of the total economic interests, is owned by Host Marriott Statutory Employee/Charitable Trust, the beneficiaries of which are a trust formed for the benefit of a number of our employees and the J. Willard and Alice S. Marriott Foundation. These voting stockholders elect the directors who are responsible for overseeing the operations of the non-controlled subsidiaries. The directors are currently employees of the operating partnership, although this is not required. As a result, we have no control over the operation or management of the hotels or other assets owned by the non- 1 controlled subsidiaries, even though we depend upon the non-controlled subsidiaries for a significant portion of our revenues. Also, the activities of non-controlled subsidiaries could cause us to be in default under our principal debt facilities. We are dependent on the ability of Crestline and the lessees to meet their rent payment obligations The lessees' rent payments are the primary source of our revenues. Crestline guarantees the obligations of its subsidiaries under the hotel leases, but Crestline's liability is limited to a relatively small portion of the aggregate rent obligation of its subsidiaries. Crestline's and each of its subsidiaries' ability to meet its obligations under the leases will determine the amount of our revenue and, likewise, our ability to meet our obligations. We have no control over Crestline or any of its subsidiaries and cannot assure you that Crestline or any of its subsidiaries will have sufficient assets, income and access to financing to enable them to satisfy their obligations under the leases or to make payments of fees under the management agreements. Although the lessees have primary liability under the management agreements while the leases are in effect, we and our subsidiaries remain liable under the management agreements for all obligations that the lessees do not perform. Because of our dependence on Crestline, our credit rating will be affected by its creditworthiness. Our revenues and the value of our properties could be adversely affected by conditions affecting the lodging industry If our assets do not generate income sufficient to pay our expenses, service our debt and maintain our properties, we will be unable to make expected distributions to our stockholders. Factors that could adversely affect our revenues and the economic performance and value of our properties include: . changes in the national, regional and local economic climate, . local conditions such as an oversupply of hotel properties or a reduction in demand for hotel rooms, . the attractiveness of our hotels to consumers and competition from comparable hotels, . the quality, philosophy and performance of the managers of our hotels, primarily Marriott International, Inc., . the ability of any hotel lessee to maximize rental payments, . changes in room rates and increases in operating costs due to inflation and other factors and . the need to periodically repair and renovate our hotels. Our expenses may remain constant even if our revenues drop The expenses of owning a property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property. If a property is mortgaged and we are unable to meet the mortgage payments, the lender could foreclose and take the property. Our financial condition and ability to service debt and make distributions to our stockholders could be adversely affected by: .interest rate levels, .the availability of financing, .the cost of compliance with government regulation, including zoning and tax laws and .changes in laws and governmental regulations, including those governing usage, zoning and taxes. New acquisitions may fail to perform as expected or we may be unable to make acquisitions on favorable terms We intend to acquire additional full service hotels and other types of real estate. Newly acquired properties may fail to perform as expected, which could adversely affect our financial condition. We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position. We expect to acquire hotels and other types of real estate with cash from secured or unsecured financings and 2 proceeds from offerings of equity or debt, to the extent available. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms. Competition for attractive investment opportunities may increase prices for hotel properties, thereby decreasing the potential return on our investment. In addition, in order to maintain our status as a REIT we must lease virtually all of the properties we acquire. We cannot guarantee that the leases for newly acquired hotels will be as favorable to us as the existing leases. Competition for acquisitions may result in increased prices for hotels Other major investors with significant capital compete with us for attractive investment opportunities. These competitors include other REITs and hotel companies, investment banking firms and private institutional investment funds. This competition may increase prices for hotel properties, thereby decreasing the potential return on our investment. The seasonality of the hotel industry may affect the ability of the lessees to make timely rent payments The seasonality of the hotel industry may, from time to time, affect either the amount of rent that accrues under the hotel leases or the ability of the lessees to make timely rent payments under the leases. A lessee's or Crestline's inability to make timely rent payments to us could adversely affect our financial condition and ability to service debt and make distributions to our stockholders. We may be unable to sell properties when appropriate because real estate investments are illiquid Real estate investments generally cannot be sold quickly. We may not be able to vary our portfolio promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to service debt and make distributions to our stockholders. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell hotels. We may be unable to renew leases or find other lessees Our current hotel leases have terms generally ranging from seven to ten years. There can be no assurance that upon expiration of our leases, our hotels will be relet to the current lessees, or if relet, will be relet on terms favorable to us. If our hotels are not relet, we will be required to find other lessees who meet certain requirements of the management agreements and of the federal income tax rules that govern REITs. We cannot assure you that we would be able to find satisfactory lessees or that the terms of any new leases would be favorable. Failure to find satisfactory lessees could cause us to lose our REIT status, and cause the operating partnership to be considered a "publicly traded partnership" taxable as a "C" corporation. Under these circumstances the operating partnership would have to pay substantial federal income taxes as well as distribute more cash to us to enable us to meet our tax burden. This would significantly impair, if not eliminate, our ability to raise additional capital. Failure to enter leases on satisfactory terms could also result in reduced cash available for servicing debt and for distributions to stockholders. A significant number of our hotels are subject to ground leases As of December 31, 1998, we leased 54 of our hotels pursuant to ground leases. These ground leases generally require increases in ground rent payments every five years. Our ability to make cash distributions to our stockholders could be adversely affected to the extent that the rents payable by the lessees under the leases do not increase at the same or a greater rate as the increases under the ground leases. In addition, if we were to sell a hotel encumbered by a ground lease, the buyer would have to assume the ground lease, which could result in a lower sales price. 3 Some potential losses are not covered by insurance We carry comprehensive liability, fire, flood, extended coverage and rental loss (for rental losses extending up to 12 months) insurance with respect to all of our hotels. We believe the policy specifications and insured limits of these policies are of the type customarily carried for similar hotels. Certain types of losses, such as from earthquakes and environmental hazards, however, may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Leases and management agreements could impair the sale or other disposition of our hotels Each lease with a subsidiary of Crestline generally requires us to make a termination payment to the lessee if we terminate the lease prior to the expiration of its term. A termination payment is required even if we terminate a lease because of a change in the federal income tax laws that either would make continuation of the lease jeopardize our REIT status or would enable us to operate our hotels ourselves. The termination fee generally is equal to the fair market value of the lessee's leasehold interest in the remaining term of the lease, which could be a significant amount. In addition, if we decide to sell a hotel, we may be required to terminate its lease, and the payment of the termination fee under such circumstances could impair our ability to sell the hotel and would reduce the net proceeds of any sale. Under the terms of the management agreements, we generally may not sell, lease or otherwise transfer the hotels unless the transferee assumes the related management agreements and meets certain other conditions. Our ability to finance, refinance or effect a sale of any of the properties managed by Marriott International or another manager may, depending upon the structure of such transactions, require the manager's consent. If Marriott International or other manager did not consent, we would be prohibited from consummating the financing, refinancing or sale without breaching the management agreement. The acquisition contracts relating to certain hotels limit our ability to sell or refinance such hotels For reasons relating to federal income tax considerations of the former owners of certain of our hotels, we have agreed to restrictions on selling certain hotels or repaying or refinancing the mortgage debt thereon for lock- out periods which vary depending on the hotel. We anticipate that, in certain circumstances, we may agree to similar restrictions in connection with future hotel acquisitions. As a result, even if it were in our best interests to sell such hotels or refinance their mortgage debt, it may be difficult or impossible to do so during their respective lock-out periods. Marriott International's and Crestline's operation of their respective businesses could result in decisions not in our best interest Marriott International, a public company in the business of hotel management, manages a significant number of our hotels. In addition, Marriott International manages hotels owned by others that compete with our hotels. As a result, Marriott International may make decisions regarding competing lodging facilities which it manages that would not necessarily be in our best interests. Further, J.W. Marriott, Jr., a member of our Board of Directors, and Richard E. Marriott, our Chairman of the Board and J.W. Marriott, Jr.'s brother, serve as directors, and, in the case of J.W. Marriott, Jr., also an officer, of Marriott International. J.W. Marriott, Jr. and Richard E. Marriott also beneficially owned approximately 10.6% and 10.4%, respectively, as of January 1, 1999 of the outstanding shares of common stock of Marriott International, and approximately 5.7% and 6.0%, respectively, as of March 24, 1999 of the outstanding shares of common stock of Crestline, but neither serves as an officer or director of Crestline. As a result, J.W. Marriott, Jr. and Richard E. Marriott have potential conflicts of interest as directors of Host Marriott when making decisions regarding Marriott International, including decisions relating to the management agreements involving the hotels, Marriott International's management of competing lodging properties and Crestline's leasing and other businesses. 4 Our Board of Directors and Marriott International's Board of Directors follow appropriate policies and procedures to limit the involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott in conflict situations, including requiring them to abstain from voting as directors of either company or their subsidiaries on certain matters which present a conflict between the companies. If appropriate, these policies and procedures will apply to other directors and officers. Provisions of our charter and bylaws could inhibit changes in control that could be beneficial to our stockholders Certain provisions of our charter and bylaws may delay or prevent a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their shares or which might otherwise be in their best interests. These include a staggered Board of Directors and the ownership limit described below. Also, any future class or series of stock may have certain voting provisions that could delay or prevent a change in control or other transaction that might involve a premium price or otherwise be good for our stockholders. The Marriott International purchase right may discourage a takeover that could be beneficial to our stockholders Marriott International has the right to purchase up to 20% of each class of our outstanding voting shares at the then fair market value upon the occurrence of specified certain change of control events. We refer to this right as the Marriott International purchase right. The Marriott International purchase right will continue in effect until June 2017, subject to certain limitations intended to protect the our REIT status. The Marriott International purchase right may have the effect of discouraging someone from attempting to take us over, because any person considering acquiring a substantial or controlling block of our common stock will face the possibility that its ability to obtain or exercise control would be impaired or made more expensive by the exercise of the Marriott International purchase right. We have adopted Maryland law limitations on changes in control Maryland corporate law prohibits certain "business combinations" between a Maryland corporation and any person who owns 10% or more of the voting power of the corporation's then outstanding shares of stock (an "Interested Stockholder") or an affiliate of the Interested Stockholder unless a business combination is approved by the board of directors any time before an Interested Stockholder first becomes an Interested Stockholder. The prohibition lasts for five years after the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be approved by stockholders under certain special voting requirements. We will be subject to such provisions although we may elect to "opt-out" in the future. As a result, a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their shares or which might otherwise be in their best interests may be prevented or delayed. Our Board of Directors has exempted from this statute the acquisition of shares by Marriott International pursuant to the terms of the Marriott International purchase right as well as any other transactions involving us and Marriott International or our respective subsidiaries, or J.W. Marriott, Jr. or Richard E. Marriott, provided that, if any such transaction is not in the ordinary course of business, it must be approved by a majority of our directors present at a meeting at which a quorum is present, including a majority of the disinterested directors, in addition to any vote of stockholders required by other provisions of Maryland corporate law. Maryland control share acquisition law could delay or prevent a change in control Under Maryland corporate law, unless a corporation elects not to be subject thereto, "control shares" acquired in a "control share acquisition" have no voting rights except to the extent approved by stockholders by a vote of two- thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror and by officers or directors who are employees of the corporation. "Control shares" are voting shares which would entitle the acquiror to exercise voting power in electing directors within certain specified ranges of voting power. 5 A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. We are subject to these control share provisions of Maryland law and, as a result, a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their shares or which might otherwise be in their best interests may be delayed or prevented. Our bylaws contain an exemption from this statute for any shares acquired by Marriott International, together with its successors and permitted assignees, pursuant to the Marriott International purchase right. We have adopted a rights agreement which could delay or prevent a change in control Our rights agreement provides, among other things, that upon the occurrence of certain events, stockholders will be entitled to purchase shares of our stock, subject to the ownership limit. These purchase rights would cause substantial dilution to a person or group that acquires or attempts to acquire 20% or more of our common stock on terms not approved by the Board of Directors and, as a result, could delay or prevent a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their shares or which might otherwise be in their best interests. We have a stock ownership limit primarily for REIT tax purposes Primarily to facilitate maintenance of our REIT qualification, our charter imposes an ownership limit on our common stock and preferred stock. The attribution provisions of the federal tax laws that are used in applying the ownership limit are complex. They may cause one stockholder to be considered to own the stock of a number of related stockholders. As a result, these provisions may cause a stockholder whose direct ownership of stock does not exceed the ownership limit to, in fact, exceed the ownership limit. The ownership limit could delay or prevent a change in control and, therefore, could adversely affect stockholders' ability to realize a premium over the then-prevailing market price for the common stock in connection with such transaction. The large number of shares available for future sale could adversely affect the market price of our publicly traded securities In connection with our REIT conversion at the end of 1998, we reserved approximately 96.4 million shares of our common stock for future issuance of which approximately 20 million shares were issued in February 1999. Such common stock will be freely transferable upon receipt. The balance of the reserved common stock may be issued upon the redemption of units of limited partnership interest in our operating partnership. These limited partnership units will become redeemable at various times over the next year, with approximately 23.9 million limited partnership units becoming redeemable beginning on July 1, 1999, pursuant to each holder's right under the operating partnership's partnership agreement to redeem them for shares of our common stock or, at our election, the cash equivalent thereof. In addition, we have reserved a substantial number of shares of our common stock for issuance pursuant to benefit plans or outstanding options, and such shares of our common stock will be available for sale in the public markets from time to time. Moreover, we may issue additional shares of our common stock in the future. We cannot predict the effect that future sales of shares of our common stock, or the perception that such sales could occur, will have on the market prices of our equity securities. Our FFO and cash distributions will affect the market price of our publicly traded securities We believe that the market value of a REIT's equity securities is based primarily upon the market's perception of the REIT's growth potential, including its prospects for accretive acquisitions and development, and its current and potential future cash distributions, and is secondarily based upon the real estate market value of the underlying assets. For that reason, our common stock may trade at prices that are higher or lower than the net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market's expectations with regard to future FFO and cash distributions would likely adversely affect the market price of our publicly traded securities. 6 Market interest rates may have an effect on the value of our publicly traded securities One of the factors that investors consider important in deciding whether to buy or sell shares of a REIT is the distribution rate on such shares, as a percentage of the price of such shares relative to market interest rates. If market interest rates go up, prospective purchasers of our equity securities may expect a higher dividend yield. Higher interest rates would not, however, result in more funds for us to distribute and, in fact, would likely increase our borrowing costs and potentially decrease cash available for distribution to the extent that our indebtedness has floating interest rates. Thus, higher market interest rates could cause the market price of our publicly traded securities to go down. We are dependent on external sources of capital To qualify as a REIT, we must distribute to our stockholders each year at least 95% of our net taxable income, excluding any net capital gain. Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs, including acquisitions, from income from operations. We therefore will have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital depends upon a number of factors, including general market conditions, the market's perception of our growth potential, our current and potential future earnings and cash distributions and the market price of our common stock. Moreover, additional equity offerings may result in substantial dilution of stockholders' interests, and additional debt financing may substantially increase our leverage. Our degree of leverage could limit our ability to obtain additional financing Our debt-to-total market capitalization ratio was approximately 59% as of December 31, 1998. We have a policy of incurring debt only if, immediately following such incurrence, our debt-to-total market capitalization ratio on a pro forma basis would be 60% or less. Our degree of leverage could affect our ability to obtain financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes and to refinancing borrowings on favorable terms. Our leveraged capital structure also makes us more vulnerable to a downturn in our business or in the economy generally. Moreover, there are no limitations in our organizational documents that limit the amount of indebtedness that we may incur, although our existing debt instruments contain certain restrictions on the amount of indebtedness that we may incur. Accordingly, our Board of Directors could alter or eliminate the 60% policy without stockholder approval to the extent permitted by our debt agreements. If this policy were changed, we could become more highly leveraged, resulting in an increase in debt service payments that could adversely affect our cash flow and consequently our ability to service our debt and make distributions to stockholders. Rental revenues from hotels are subject to prior rights of lenders The mortgages on certain of our hotels require that rent payments under the leases on such hotels be used first to pay the debt service on such mortgage loans. Consequently, only the cash flow remaining after debt service will be available to satisfy other obligations, including property taxes and insurance, FF&E reserves for the hotels and capital improvements, and debt service on unsecured debt, and to make distributions to stockholders. We depend on our key personnel We depend on the efforts of our executive officers and other key personnel. While we believe that we could find replacements for these key personnel, the loss of their services could have a significant adverse effect on our operations. We do not intend to obtain key-man life insurance with respect to any of our personnel. The REIT conversion could result in litigation Over the last several years, business reorganizations involving the combination of several partnerships into a single entity have occasionally given rise to investor lawsuits. These lawsuits have involved claims against the 7 general partners of the participating partnerships, the partnerships themselves and related persons involved in the structuring of, or benefiting from, the conversion or reorganization, as well as claims against the surviving entity and its directors and officers. If any lawsuits are filed in connection with the partnership mergers or other transactions in connection with our REIT Conversion, such lawsuits could result in substantial damage claims against us, as successor to the liabilities of our predecessors. Such lawsuits, if successful, could adversely affect our financial condition and our ability to service our debt and make distributions to stockholders. Joint venture investments have additional risks Instead of purchasing hotel properties directly, we may invest as a co- venturer. Joint venturers often share control over the operation of the joint venture assets. Actions by a co-venturer could subject such assets to additional risk. Our co-venturer in an investment might have economic or business interests or goals that are inconsistent with our interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Although we generally will seek to maintain sufficient control of any joint venture to permit our objectives to be achieved, we might not be able to take action without the approval of our joint venture partners. Also, our joint venture partners could take actions binding on the joint venture without our consent. A joint venture partner could go bankrupt, leaving us liable for its share of joint venture liabilities. Also, the requirement that we lease our assets to qualify as a REIT may make it more difficult for us to enter into joint ventures in the future. The year 2000 problem may adversely impact our business and financial condition Year 2000 issues have arisen because many existing computer programs and chip-based embedded technology systems use only the last two digits to refer to a year, and therefore do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. Our potential year 2000 problems include issues relating to our in-house hardware and software computer systems, as well as issues relating to third parties with which we have a material relationship or whose systems are material to the operations of our hotels. In-House systems Since October of 1993, we have invested in the implementation and maintenance of accounting and reporting systems and equipment that are intended to enable us to provide adequately for our information and reporting needs and which are also year 2000 compliant. Substantially all of our in-house systems have already been certified as year 2000 compliant through testing and other mechanisms. We have not delayed any systems projects due to the year 2000 issue. We have engaged a third party to review our year 2000 in-house compliance. Third-Party systems We rely upon operational and accounting systems provided by third parties, primarily the managers of our hotels, to provide the appropriate property-specific operating systems, including reservation, phone, elevator, security, HVAC and other systems, and to provide us with financial information. We will continue to monitor the efforts of these third parties to become year 2000 compliant and will take appropriate steps to address any non-compliance issues. Risks We believe that future costs associated with year 2000 issues for its in- house systems will be insignificant and therefore not impact our business, financial condition and results of operations. However, the actual effect that year 2000 issues will have on our business will depend significantly on whether other companies and governmental entities properly and timely address year 2000 issues and whether broad-based or systemic failures occur. We cannot predict the severity or duration of any such failures, which could include disruptions in passenger transportation or transportation systems generally, loss of utility and/or telecommunications services, the loss or disruption of hotel reservations made on centralized reservation systems and errors or failures in financial transactions or payment processing systems such as credit cards. 8 Moreover, we are dependent upon Crestline to interface with third parties in addressing year 2000 issues at our hotels leased to its subsidiaries. Due to the general uncertainty inherent with respect to year 2000 issues and our dependence on third parties, including Crestline, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on us. Although our joint year 2000 compliance program with Crestline is expected to significantly reduce uncertainties arising out of year 2000 issues and the possibility of significant interruptions of normal operations, we cannot assure you that this will be the case. Environmental problems are possible and can be costly We believe that our properties are in compliance in all material respects with applicable environmental laws. Unidentified environmental liabilities could arise, however, and could have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property. The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred. In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. Environmental laws also govern the presence, maintenance and removal of asbestos. These laws require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos, that they notify and train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building. These laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers. Compliance with other government regulations can also be costly. Our hotels are subject to various forms of regulation, including Title III of the Americans with Disabilities Act, building codes and regulations pertaining to fire safety. Compliance with such laws and regulations could require substantial capital expenditures. We do not believe, however, that substantial non-budgeted capital expenditures will be required with respect to our existing hotels based on existing laws and regulations. Such regulations may be changed from time to time, or new regulations adopted, resulting in additional or unexpected costs of compliance. Any such increased costs could reduce the cash available for servicing of debt and distributions to stockholders. We intend to qualify as a REIT, but we cannot guarantee that we will qualify We intend to operate to qualify as a REIT for tax purposes beginning in 1999. If we qualify as a REIT, we generally will not be taxed on income that we distribute to our stockholders so long as we distribute currently at least 95% of our net taxable income, excluding net capital gain. We cannot guarantee, however, that we will qualify as a REIT in 1999 or in any future year. Many of the REIT requirements are highly technical and complex. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to qualify as a REIT, at least 95% of our gross income must be income specified in the REIT tax laws, such as "rents from real property." We are also required to distribute to shareholders at least 95% of our REIT taxable income, excluding capital gains. The fact that we hold our assets through the operating partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the IRS might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT. In addition, it is possible that 9 even if we do qualify as a REIT, new tax rules will change the way we are taxed. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates. In this event, we may cause the operating partnership to distribute adequate amounts to us and its other unitholders to permit us to pay our tax liabilities and our ability to raise additional capital could be impaired. This would significantly reduce the cash we would have available to service debt. Furthermore, our failure to qualify as a REIT could create a default under some of our debt instruments, including our credit facility. If we fail to qualify as a REIT, then unless certain specific statutory provisions apply, we will be disqualified from treatment as a REIT for the next four taxable years. If the operating partnership is treated as a corporation, we will fail to qualify as a REIT The operating partnership intends to qualify as a partnership for federal income tax purposes. However, it will be treated as a corporation, instead of a partnership, for federal income tax purposes if it is a "publicly traded partnership" unless at least 90% of its income is qualifying income as defined in the tax code. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most, but not all, respects. Qualifying income for the 90% test generally includes passive income, such as specified types of real property rents, dividends and interest. However, real property rent will not be qualifying income if the operating partnership or one or more actual or constructive owners of 5% of the operating partnership actually or constructively own 10% or more of the tenant. The partnership agreement of the operating partnership contains ownership restrictions intended to prevent the disqualification of income based on these ownership restrictions. We believe that it will meet this qualifying income test, but we cannot guarantee that it will. If it were to be taxed as a corporation, it would incur substantial tax liabilities, we would fail to qualify as a REIT for tax purposes, we may require it to distribute adequate amounts to us to permit us to pay our tax liabilities, and our and its ability to raise additional capital could be impaired. The operating partnership may need to borrow money or issue additional equity in order for us to qualify as a REIT A REIT must distribute to its shareholders at least 95% of its net taxable income, excluding any net capital gain. The source of the distributions we make to our stockholders will be money distributed to us by the operating partnership. We intend to meet this 95% requirement, but there are a number of reasons why the operating partnership's cash flow alone may be insufficient for us to meet this requirement. First, as a result of some of the transactions of certain of our predecessor entities, the operating partnership and its subsidiaries, we expect to recognize large amounts of taxable income in future years for which the operating partnership will have no corresponding cash flow or earnings before interest, taxes, depreciation and other non cash items which is referred to as EBITDA. This type of income is often referred to as "phantom income." Second, in order to qualify as a REIT in 1999, we need to distribute to our stockholders, prior to the end of 1999, all of the "earnings and profits" that accumulated prior to 1999. If we do not meet this requirement by virtue of the distributions declared in connection with the REIT Conversion, we will be required to make further distributions prior to the end of 1999. The operating partnership may not have cash flow that corresponds to these distributions. Third, the seasonality of the hospitality industry could cause a further mismatch of our income and cash flow. In addition, even if a REIT meets the 95% requirement, it may still be subject to a 4% nondeductible excise tax. This excise tax applies to the amount by which certain of the REIT's distributions in a given calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and any undistributed taxable income from prior years. We intend to make distributions to our stockholders so that we will not be subject to this excise tax, but for the reasons described above, the operating partnership's cash flow alone may be insufficient for it to distribute to us the funds we will need. The operating partnership's partnership agreement requires it to distribute enough cash to us for us to meet the 95% distribution requirement and avoid the 4% excise tax, and the operating partnership has to make proportionate distributions to its other equityholders. If its cash flow alone is insufficient for it to distribute to us the money we need to meet the 95% distribution requirement or to avoid the 4% excise tax, it may need to issue additional equity or borrow money. We cannot guarantee that these sources of funds will be available to it on favorable terms or even at all. Any problems the operating partnership has in borrowing money could be 10 exacerbated by two factors. First, it will need to distribute most if not all of our earnings to us and other holders of its partnership units. Therefore, it will be unable to retain these earnings. Accordingly, it generally will need to refinance its maturing debt with additional debt or equity and rely on third-party sources to fund future capital needs. Second, its borrowing needs will be increased if we are required to pay taxes or liabilities attributable to prior years. If the operating partnership is unable to raise the money necessary to permit us to meet the 95% distribution requirement, we will fail to qualify as a REIT. If the operating partnership is able to raise the money, but only on unfavorable terms, then our financial performance may be damaged. We are required to distribute all of our prior earnings and profits, but we cannot guarantee that we will be able to do so In order to qualify as a REIT for 1999, we are required to distribute to our stockholders, prior to the end of 1999, all of our earnings and profits that we accumulated prior to 1999. We believe that we will meet this requirement. However, it is very hard to determine the exact level of our pre-1999 earnings and profits because the determination depends on an extremely large number of factors. The complexity of the determination is compounded by the fact that we started accumulating earnings and profits in 1929. Also, it is difficult to value our distributions which have not been cash, such as the distribution of Crestline common stock we made in December 1998. Therefore, we cannot guarantee that we will meet this requirement. If we do not meet this requirement, then we will not qualify as a REIT at least for 1999. We will qualify as a REIT only if the rent from the leases meets a number of tests, but we cannot guarantee that it will A REIT's income must meet certain tests relating to its source. If the income meets the tests, it is called "good income." Almost all of our income will be rent from the hotel leases. This rent will be good income only if the leases are respected as true leases for federal income tax purposes. If the leases are treated as service contracts, joint ventures or some other type of arrangement, then this rent will not be good income and we will fail to qualify as a REIT. In addition, the rent from any particular hotel lease will be good income only if we own less than 10% of the lessee of the hotel. For purposes of this test, we are treated as owning both any interests that we hold directly and the interests owned by a person who owns more than 10% of our stock. In determining who owns more than 10% of our stock, a person may be treated as owning the stock of another person who is either a relative or has common financial interests. We will not directly own more than 10% of any of the lessees. In addition, we intend to enforce the ownership limit in our charter, which restricts the amount of our capital stock that any person can own. If the ownership limit is effective, then no person will ever own more than 10% of our capital stock and we should never own more than 10% of the lessees. However, we cannot guarantee that the ownership limit will be effective. If the ownership limit is not effective, our ownership in the lessees may exceed the 10% limit. As a result, the rent from our leases would not be good income and we would fail to qualify as a REIT. Furthermore, rent from any particular hotel lease will be good income only if no portion of the rent is based on the income or profits of the lessee of the hotel. The rent, however, can be based on the gross revenues of the lessees, unless the arrangement does not conform to normal business practice or is being used as a device to base rent on the income or profits of the lessees. The rent from the current leases, other than the Harbor Beach Resort lease, is based on the gross revenues of the lessees. We believe that the leases conform to normal business practice and, other than the Harbor Beach Resort lease, are not being used as a device to base rent on the income or profits of the lessees. We cannot guarantee that the IRS will agree with our position. If rent from leases in addition to the Harbor Beach Resort lease is found to be based on the income or profits of the lessees, the rent would not be good income and we would fail to qualify as a REIT. Host Marriott will qualify as a REIT and, if we are a "publicly traded partnership," we would qualify as a partnership only if the personal property arrangements are respected by the IRS Rent that is attributable to personal property is not good income under the REIT rules or the rules applicable to "publicly traded partnerships." Hotels contain significant personal property. Therefore, in order to protect our 11 ability to qualify as a REIT and the operating partnership's ability to qualify as a partnership, we sold an estimated $59 million of personal property associated with some of our hotels to the non-controlled subsidiaries. The non-controlled subsidiaries lease the personal property associated with each hotel directly to the lessee that is leasing the hotel. Under each personal property lease, the non-controlled subsidiary receives rent payments directly from the applicable lessee. We believe the amount of the rent represents the fair rental value of the personal property. If for any reason these lease arrangements are not respected by the IRS for federal income tax purposes and we were treated as the lessor, we would not qualify as a REIT and, if the operating partnership is considered a "publicly traded partnership," it likely would not qualify as a partnership. We will be subject to taxes even if we qualify as a REIT Even if we qualify as a REIT, we will be subject to some federal, state and local taxes on our income and property. For example, we will have to pay tax on income that we do not distribute. We also will be liable for any tax that the IRS successfully asserts against our predecessors for corporate income taxes for years prior to 1999. Furthermore, we will derive income from the non-controlled subsidiaries and they will be subject to regular corporate taxes. In addition, we and our subsidiaries contributed a large number of assets to the operating partnership with a value that was substantially greater than our tax basis in the assets. We refer to these assets as assets with "built-in gain." We will be subject to tax on the built-in gain if the operating partnership sells these assets prior to the end of 2008. We also have substantial deferred tax liabilities that we or one of the non-controlled subsidiaries will recognize, without the receipt by us of any corresponding cash. Even if the operating partnership does not sell the built-in gain assets prior to the end of 2008, there are a number of other transactions that likely would cause us to be subject to the tax on the built-in gain. In connection with this gain, neither we nor the operating partnership will receive any corresponding cash. Proposed legislation, if enacted, could require us to restructure our ownership of the non-controlled subsidiaries The Clinton Administration's fiscal year 2000 budget proposal, announced February 1, 1999, includes a proposal that would limit a REIT's ability to own more than 10%, by vote or value, of the stock of another corporation. Currently, a REIT cannot own more than 10% of the outstanding voting securities of any one issuer. A REIT can, however, own more than 10% of the value of the stock of a corporation provided no more than 25% of the value of the REIT's assets consists of subsidiaries that conduct impermissible activities and that the stock of any one single corporation does not account for more than 5% of the total value of the REIT's assets. The budget proposal would allow a REIT to own all of the voting stock and value of a "taxable REIT subsidiary" provided all of a REIT's taxable subsidiaries do not represent more that 15% of the REIT's total assets. In addition, under the budget proposal, a "taxable REIT subsidiary" would not be entitled to deduct any interest on debt funded directly or indirectly by the REIT. The budget proposal, if enacted in its current form, may require that we restructure our ownership of the non-controlled subsidiaries because we currently own more than 10% of the value of the non-controlled subsidiaries. The budget proposal, if enacted in its current form, would be effective after the date of its enactment and would provide transition rules to allow corporations, like the non-controlled subsidiaries, to convert into "taxable REIT subsidiaries" tax- free. It is presently uncertain whether any proposal regarding REIT subsidiaries, including the budget proposal, will be enacted, or if enacted, what the terms of such proposal (including its effective date) will be. Items 1 & 2. Business and Properties We are a self-managed and self-administered real estate investment trust, or "REIT," owning full service hotel properties. Through our subsidiaries, we currently own 125 hotels, representing approximately 58,000 rooms located throughout the United States and Canada. These hotels are generally operated under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names, which are among the most respected and widely recognized brand names in the lodging industry. As described more fully below, our hotels are held by our 12 subsidiaries and leased by our subsidiaries to lessees, principally subsidiaries of Crestline Capital Corporation. The hotels are managed on behalf of the lessees by subsidiaries of Marriott International and other companies. We were formed as a Maryland corporation in 1998, under the name HMC Merger Corporation, as a wholly owned subsidiary of Host Marriott Corporation, a Delaware corporation, in connection with Host Marriott's efforts to reorganize its business operations to qualify as a REIT for federal income tax purposes. As part of this reorganization, which we refer to as the REIT conversion, and which is described below in more detail, on December 29, 1998, we merged with Host Marriott and changed our name to Host Marriott Corporation. As a result, we have succeeded to the hotel ownership business formerly conducted by Host Marriott, which is described more fully below. The REIT conversion During 1998, Host Marriott and its subsidiaries and affiliates consummated a series of transactions intended to enable us to qualify as a REIT for federal income tax purposes. As a result of these transactions the hotel ownership business formerly conducted by Host Marriott and its subsidiaries and other affiliates is conducted as an umbrella partnership REIT, or UPREIT through Host Marriott, L.P., a Delaware limited partnership in which we are the sole general partner, and its subsidiaries. In this Form 10-K, we refer to Host Marriott, L.P. as the operating partnership. We intend to elect to be treated as a REIT for federal income tax purposes effective January 1, 1999. Certain of the transactions comprising the REIT conversion are described below. Reorganization of lodging assets under the operating partnership. During 1998, Host Marriott reorganized its hotel ownership assets and certain other assets so that they were owned by the operating partnership and its subsidiaries. In exchange for the hotel ownership business, Host Marriott received a number of units of limited partnership interests in the operating partnership (which we refer to as "OP Units") equal to the number of then- outstanding shares of Host Marriott common stock, and the operating partnership and its subsidiaries assumed substantially all of the liabilities of Host Marriott and its subsidiaries. As a result of this reorganization, our merger with Host Marriott and related transactions as described below, we are the sole general partner in the operating partnership and hold approximately 78% of the outstanding OP Units. Our hotel ownership business is conducted by the operating partnership and its subsidiaries. Host Marriott did not transfer to the operating partnership (and the operating partnership therefore does not own) certain other assets formerly held by Host Marriott and its subsidiaries (principally consisting of 31 retirement communities and controlling interests in the entities that lease our hotels). Most of these assets are owned by Crestline, formerly a wholly owned subsidiary of Host Marriott. Crestline became a separate publicly traded company on December 29, 1998 as part of the shareholder distribution discussed below. Acquisitions by the operating partnership. Prior to the REIT conversion, Host Marriott and several of its separate direct and indirect wholly owned subsidiaries were the sole general partners of eight publicly traded limited partnerships and four private partnerships in which Host Marriott or a subsidiary owned or held a controlling interest in 28 full-service hotels operating under the Marriott brand. The following table lists each of these partnerships and the hotel properties owned by it or in which it holds a controlling interest.
Partnership Hotel Properties Rooms ----------- ----------------------------- ------ Public Atlanta Marriott Marquis II Limited Partnership (1) Atlanta Marriott Marquis 1,671 Desert Springs Marriott Limited Partnership (1) Desert Springs Resort and Spa 884 Hanover Marriott Limited Partnership (1) Hanover, New Jersey 353
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Partnership Hotel Properties Rooms ----------- -------------------------------------- ------ Public (continued) Marriott Diversified American Hotels Limited Partnership Dayton, Ohio 399 Fairview Park, Virginia 395 Livonia, Michigan 224 Fullerton, California 224 Research Triangle Park, North Carolina 224 Southfield, Michigan 226 Marriott Hotel Properties Limited Partnership (1) Orlando World Center 1,503 Harbor Beach Resort, Florida 624 Marriott Hotel Properties II Limited Partnership (1) San Antonio Rivercenter 999 New Orleans 1,292 San Ramon, California 368 Santa Clara, California 754 Mutual Benefit Chicago Marriott Suite Hotel Limited Partnership Chicago O'Hare Suites 256 Potomac Hotel Limited Partnership Albuquerque, New Mexico 411 Greensboro/High Point, North Carolina 299 Houston Medical Center 386 Mountain Shadows Resort, Arizona 337 Miami Biscayne Bay 605 Raleigh Crabtree, North Carolina (2) 375 Seattle Sea-Tac Airport 459 Tampa Westshore (2) 309 Private HMC BN Limited Partnership (3) Ritz-Carlton, Buckhead, Georgia 553 Ritz-Carlton, Naples, Florida 463 Ivy Street Hotel Limited Partnership (3) Atlanta Marriott Marquis 1,671 Times Square Marquis Hotel Limited Partnership (3) New York Marriott Marquis 1,919 HMC/RGI Hartford Limited Partnership (3) Hartford/Farmington 380
- -------- (1) We owned or had a controlling interest in these partnerships prior to the REIT conversion. These properties were previously consolidated by Host Marriott. (2) We consolidated these properties through our investments including the ownership of mortgage notes prior to the REIT conversion. (3) We acquired substantially all of the unaffiliated partnership interests prior to the REIT conversion. These properties were previously consolidated by Host Marriott. In addition to the partnerships listed above, we own controlling interests in certain private partnerships which we had previously consolidated. Certain of the minority partners in these partnerships retain the right to exchange their interests in these partnerships for OP Units subject to certain conditions. We estimate that as many as approximately 7 million OP Units could be issued at various points in time in the event that all such minority partners were to elect to exchange their partnership interests. As part of the REIT conversion, the operating partnership, directly and through its subsidiaries, acquired all of the publicly-traded partnerships and the four private partnerships identified on the table above in exchange for approximately 25 million OP Units. Approximately 8.5 million of these OP Units have been converted into shares of our common stock. Additionally, certain limited partners of the publicly-traded partnerships elected to exchange OP Units for approximately $3 million aggregate principal amount unsecured notes due December 15, 2005 issued by the operating partnership. The operating partnership also acquired on December 30, 1998 from the Blackstone Group, a Delaware limited partnership, and a series of funds controlled by affiliates of Blackstone Real Estate Partners (together, the "Blackstone Entities"), ownership of or a controlling interest in 12 upscale and luxury full-service hotels in the U.S. and a mortgage loan secured by a thirteenth hotel and certain other assets. As part of the Blackstone acquisition, the operating partnership also acquired a 25% interest in the U.S. Swissotel management company 14 which was sold in turn to Crestline at book value. In exchange for these assets, the operating partnership issued to the Blackstone Entities approximately 43.9 million OP Units, which OP Units are redeemable for cash (or at our option, our common shares), assumed debt and made cash payments totaling approximately $920 million and distributed approximately 1.4 million shares of Crestline common stock and other consideration to the Blackstone Entities. The actual number of OP Units to be issued to the Blackstone Entities will fluctuate based upon certain adjustments to be determined at the close of business on March 31, 1999. Based on current stock prices, the operating partnership will be required to issue to the Blackstone Entities in April 1999 approximately 3.7 million additional OP Units pursuant to such adjustments. As a result of the consummation of the Blackstone Acquisition, after all the adjustments the Blackstone Entities will own approximately 16.4% of the outstanding OP Units. The Blackstone hotel portfolio consists of two Ritz-Carlton, two Four Seasons, one Grand Hyatt, three Hyatt Regency and four Swissotel properties. John G. Schreiber, co-chairman of Blackstone Real Estate Partners' investment committee, is a member of our Board of Directors. Contribution of assets to non-controlled subsidiaries. In connection with the REIT conversion, two taxable corporations were formed in which the operating partnership owns approximately 95% of the economic interest but none of the voting interest--Rockledge Hotel Properties, Inc. and Fernwood Hotel Assets, Inc. (we refer to these two subsidiaries as the non-controlled subsidiaries). The non-controlled subsidiaries hold various assets which were originally contributed by Host Marriott and its subsidiaries to the operating partnership, the direct ownership of which by the operating partnership or its other subsidiaries would jeopardize our status as a REIT and the operating partnership's status as a partnership for federal income tax purposes. These assets primarily consist of interests in certain partnerships or other interests in hotels which are not leased, and certain furniture, fixtures and equipment (also known as FF&E) used in the hotels and certain international hotels. The operating partnership has no control over the operation or management of the hotels or other assets owned by the non-controlled subsidiaries. The Host Marriott Statutory Employee/Charitable Trust, the beneficiaries of which are a trust formed for the benefit of certain employees of the operating partnership and the J. Willard and Alice S. Marriott Foundation, acquired all of the voting common stock of each non-controlled subsidiary, representing, in each case, the remaining approximately 5% of the total economic interests in each non-controlled subsidiary. Leases of hotels. Under current federal income tax law, a REIT cannot derive income from the operation of hotels but can derive rental income by leasing hotels. Therefore, as part of the REIT conversion the operating partnership and its subsidiaries have leased virtually all of their hotel properties to certain subsidiaries of Crestline. Generally, there is a separate lessee for each hotel property or there is a separate lessee for each group of hotel properties that has separate mortgage financing or has owners in addition to the operating partnership and its wholly owned subsidiaries. Each lessee is generally a limited liability company whose purpose is limited to acting as lessee under an applicable lease. The lessees under leases of hotels that are managed by subsidiaries of Marriott International are owned 100% by a wholly owned subsidiary of Crestline, although Marriott International or its appropriate subsidiary has a non-economic voting interest on certain matters. The LLC operating agreement or the limited partnership agreement, as applicable, for such lessees provides that the Crestline subsidiary or general partner of the lessee will have full control over the management of the business of the lessee, except with respect to certain decisions for which the consent of members or partners and the manager will be required. The hotel management agreements to which Host Marriott or its subsidiaries were parties were assigned to the lessees for the term of the applicable leases. Although the lessees have primary liability under the management agreements while the leases are in effect, the operating partnership retains contingent liability under the management agreements for all obligations that the lessees do not perform. The operating partnership also remains primarily liable for certain obligations under the management agreements. From time to time, legislation has been proposed that would have the effect of enabling a REIT to lease hotels to a wholly owned subsidiary corporation that could operate hotels directly, provided that the subsidiary contracts out the management functions to independent third parties. In the event that legislation is enacted that would have the effect of enabling the operating partnership to lease its hotels to a wholly owned subsidiary, then 15 Host Marriott, at its discretion, may elect to terminate the leases of its hotels with Crestline subsidiaries and pay certain termination fees. The shareholder distributions. As part of the REIT conversion, Host Marriott made certain taxable distributions to its shareholders in which they received, for each share of common stock, (1) one-tenth of one share of common stock of Crestline and, (2) either $1 cash or 0.087 share of Host Marriott common stock at the election of the shareholder. The aggregate value of the Crestline common stock, the common stock and cash distributed to shareholders of Host Marriott was approximately $510 million. Operations as a REIT We are the sole general partner of the operating partnership and manage all aspects of the business of the operating partnership. This includes decisions with respect to, sales and purchases of hotels, the financing of the hotels, the leasing of the hotels, and capital expenditures for the hotels (subject to the terms of the leases and the management agreements described below). Under current federal income tax law, REITs are restricted in their ability to derive revenues directly from the operations of hotels. Therefore, the operating partnership and its subsidiaries lease virtually all of their hotels to certain entities we refer to as the "lessees." The lessees pay rent to the operating partnership and its subsidiaries generally equal to a specified minimum rent plus rent based on specified percentages of different categories of aggregate sales at the relevant hotels to the extent such "percentage rent" would exceed the minimum rent. The lessees operate the hotels pursuant to management agreements with the managers. Each of the management agreements provides for certain base and incentive management fees, plus reimbursement of certain costs, as further described below. Such fee and cost reimbursements are the primary obligation of the lessees and not the operating partnership or its subsidiaries (although operating partnership or its subsidiaries remain liable under the management agreements and the obligation of the lessees to pay such fees could adversely affect the ability of the lessees to pay the required rent to the operating partnership or its subsidiaries). A summary of the material terms of these leases and management agreements is provided below. The leases, through the sales percentage rent provisions, are designed to allow the operating partnership and its subsidiaries to participate in any growth above specified levels in room sales at the hotels, which management expects can be achieved through increases in room rates and occupancy levels. Although the economic trends affecting the hotel industry will be the major factor in generating growth in lease revenues, the abilities of the lessees and the managers will also have a material impact on future sales growth. In addition to external growth generated by new acquisitions, the operating partnership intends to carefully and periodically review its portfolio to identify opportunities to selectively enhance existing assets to improve operating performance through major capital improvements. The leases of the operating partnership and its subsidiaries provide the operating partnership and its subsidiaries with the right to approve and finance major capital improvements. Business Strategy Our primary objective is to acquire upscale and luxury full service hotel lodging properties and achieve long-term sustainable growth in "Funds from Operations" (i.e., net income computed in accordance with generally accepted accounting principles, excluding gains or losses from debt restructuring and sales of properties, plus real estate related depreciation and amortization, and after adjustments for less than 100% owned partnerships and joint ventures) per common share and cash flow. Since the beginning of 1994 through the date hereof, we have grown our hotel portfolio, directly or through our respective subsidiaries, by 105 full-service hotels representing more than 48,000 rooms for an aggregate purchase price of approximately $6.2 billion. Based upon data provided by Smith Travel Research, we believe that our full- service hotels outperform the industry's average occupancy rate by a significant margin. Our full-service hotels averaged 78.8% occupancy for 1998, for comparable properties, compared to a 71.1% average occupancy for our competitive set. Our competitive set 16 refers to hotels in the upscale and luxury full-service segment of the lodging industry, the segment which is most representative of our full-service hotels, and consists of Marriott Hotels, Resorts and Suites; Crowne Plaza; Doubletree; Hyatt; Hilton; Radisson; Red Lion; Sheraton; Westin; and Wyndham. One commonly used indicator of market performance for hotels is REVPAR, which measures daily room revenues generated on a per room basis. This does not include food and beverage or other ancillary revenues generated by the property. REVPAR represents the product of the average daily room rate charged and the average daily occupancy achieved. The relatively high occupancy rates of our hotels, along with increased demand for full-service hotel rooms, have allowed the managers of our hotels to increase average daily room rates by selectively raising room rates and by replacing certain discounted group business with higher-rate group and transient business. As a result, on a comparable basis, REVPAR for our full-service properties increased approximately 7.3% and 12.6% in 1998 and 1997, respectively. Although competition for acquisitions has increased, we believe that the upscale and luxury full-service segments of the market offer opportunities to acquire assets at attractive multiples of cash flow and at discounts to replacement value. We intend to increase our pool of potential acquisition candidates by considering acquisitions of select non-Marriott and non-Ritz- Carlton hotels that offer long-term growth potential and are consistent with the overall quality of our current portfolio. We will focus on upscale and luxury full-service properties in difficult to duplicate locations with high barriers to entry, such as hotels located in downtown, airport and resort/convention locations, which are operated by quality managers. We believe this ability to acquire hotel properties operated by a variety of quality managers under long-term contracts represents a strategic advantage over a number of competitors. For example, in December 1998, we consummated the Blackstone Acquisition for approximately $1.55 billion in a combination of OP Units, assumed debt, and other consideration. In certain circumstances, we have improved the results of under-performing hotels by converting them to the Marriott brand. In general, based upon data provided by Smith Travel Research, we believe that the Marriott brand has consistently outperformed the industry. Demonstrating the strength of the Marriott brand name, our comparable properties generated a 26% REVPAR premium over our competitive set for 1998. Accordingly, management anticipates that any additional full-service properties acquired in the future and converted from other brands to the Marriott brand should achieve higher occupancy rates and average room rates than has previously been the case for those properties as the properties begin to benefit from Marriott's brand name recognition, reservation system and group sales organization. Of our 105 full-service hotels acquired from the beginning of 1994 through the date hereof, sixteen were converted to the Marriott brand following their acquisition although such opportunities have been more limited recently. We also plan to selectively develop new upscale and luxury full-service hotels in major urban markets and convention/resort locations with strong growth prospects, unique or difficult to duplicate sites, high barriers to entry for other new hotels and limited new supply. We intend to target only development projects that show promise of providing financial returns that represent a premium to acquisitions. In 1997, Host Marriott announced that it would develop the 717-room Tampa Convention Center Marriott for $104 million, including a $16 million subsidy provided by the City of Tampa. We believe we are well qualified to pursue our acquisition and development strategy. Management has extensive experience in acquiring and financing lodging properties and believes its industry knowledge, relationships and access to market information provide a competitive advantage with respect to identifying, evaluating and acquiring hotel assets. Recent Acquisitions, Dispositions and Developments In January 1998, one of our subsidiaries acquired an additional interest in Atlanta Marquis, which owns an interest in the 1,671-room Atlanta Marriott Marquis Hotel, for approximately $239 million, including the assumption of approximately $164 million of mortgage debt. It previously owned a 1.3% general and limited partnership interest. As noted above, the remaining limited partner interests in Atlanta Marquis were acquired as part of the REIT conversion. 17 In March 1998, one of our subsidiaries acquired a controlling interest in the partnership that owns three hotels: the 359-room Albany Marriott, the 350- room San Diego Marriott Mission Valley and the 320-room Minneapolis Marriott Southwest for approximately $50 million. In the second quarter of 1998, one of our subsidiaries acquired the partnership that owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million. It previously owned a 1% managing general partner interest and a note receivable interest in such partnership. In addition, our subsidiary acquired the 281-room Ritz-Carlton, Phoenix for $75 million, the 397-room Ritz-Carlton, Tysons Corner in Virginia for $96 million and the 487-room Torrance Marriott near Los Angeles, California for $52 million. In the third quarter of 1998, Host Marriott acquired the 308-room Ritz-Carlton, Dearborn for approximately $65 million; a subsidiary of Host Marriott also acquired the 336-room Ritz-Carlton, San Francisco for approximately $161 million, and Host Marriott acquired the 404- room Memphis Crowne Plaza (which was converted to the Marriott brand upon acquisition) for approximately $16 million. These assets are currently held by the operating partnership and its subsidiaries. As noted above, in December 1998, we completed acquisitions of eight public partnerships and interests in four private partnerships which own or control 28 properties and we consummated the Blackstone Acquisition. The Blackstone hotel portfolio is one of the premier collections of hotel real estate properties which includes: the 449-room Ritz-Carlton, Amelia Island; the 275- room Ritz-Carlton, Boston; the 793-room Hyatt Regency Burlingame at San Francisco Airport; the 469-room Hyatt Regency Cambridge, Boston; the 514-room Hyatt Regency Reston, Virginia; the 439-room Grand Hyatt Atlanta; the 365-room Four Seasons Philadelphia; the 246-room Four Seasons Atlanta; the 494-room Drake (Swissotel) New York; the 630-room Swissotel Chicago; the 498-room Swissotel Boston and the 348-room Swissotel Atlanta. Additionally, the transaction included: a $65.6 million first mortgage loan on the 285-room Four Seasons Beverly Hills; two office buildings in Atlanta--the offices at The Grand (97,879 sq. ft.) and the offices at the Swissotel (67,110 sq. ft.); and a 25% interest in the Swissotel U.S. management company (which was transferred to Crestline). During 1997, we or our subsidiaries acquired, or purchased controlling interests in, 17 full-service hotels, containing 8,624 rooms, for an aggregate purchase price of approximately $765 million (including the assumption of approximately $418 million of debt). Our subsidiaries also completed the acquisition of the 504-room New York Marriott Financial Center following the acquisition of the mortgage on the hotel for $101 million in late 1996. In 1997, we or our subsidiaries acquired, or obtained controlling interests in, five affiliated partnerships, adding 10 hotels to our portfolio. In January 1997, a subsidiary of Host Marriott acquired a controlling interest in MHP. MHP owns the 1,503-room Marriott Orlando World Center and a 50.5% interest in the 624-room Marriott Harbor Beach Resort. In April, a subsidiary of Host Marriott acquired a controlling interest in the 353-room Hanover Marriott. In the fourth quarter, a subsidiary of Host Marriott acquired the Chesapeake Hotel Limited Partnership. This partnership owns the 430-room Boston Marriott Newton; the 681-room Chicago Marriott O'Hare; the 595-room Denver Marriott Southeast; the 588-room Key Bridge Marriott in Virginia; the 479-room Minneapolis Airport Marriott in Minnesota; and the 221-room Saddle Brook Marriott in New Jersey. In December 1997, a subsidiary obtained a controlling interest in the partnership that owns the 884-room Marriott's Desert Springs Resort and Spa in California and acquired the remaining interests in December 1998 as part of the REIT conversion. In addition to investments in partnerships in which we already held minority interests, we have been successful in adding properties to our portfolio through partnership arrangements with either the seller of the property or the incoming managers (typically Marriott International or a Marriott franchisee). We have the financial flexibility and, due to our existing private partnership investment portfolio, the administrative infrastructure in place to accommodate such arrangements. We view this ability as a competitive advantage and expect to enter into similar arrangements to acquire additional properties in the future. Through subsidiaries, we currently own four Canadian properties, with 1,636 rooms, and will continue to evaluate other attractive acquisition opportunities in Canada. In addition, the overbuilding and economic stress currently being experienced in some European and Pacific Rim countries may eventually lead to additional 18 international acquisition opportunities. We will acquire international properties only when such acquisitions achieve satisfactory returns after adjustments for currency and country risks and tax consequences. We may also expand certain existing hotel properties where strong performance and market demand exists. Expansions to existing properties create a lower risk to us as the success of the market is generally known and development time is significantly shorter than new construction. We recently began construction on a 500-room expansion and an additional 15,000 square feet of meeting space to the 1,503-room Marriott Orlando World Center, which is due to be completed in early 2000. In July 1998, a subsidiary purchased a 13-acre parcel of land for the development of a 295-room Ritz-Carlton that will serve as an extension of the 463-room Ritz-Carlton, Naples, which was purchased in September 1996. The existing hotel just completed room, restaurant and public space refurbishment and is in the process of adding a world-class spa. In addition, a subsidiary of one of the non-controlled subsidiaries has entered into a joint venture through which it owns 49% of the surrounding newly developed 27-hole world-class Greg Norman designed golf course development. The golf course joint venture was transferred to a non- controlled subsidiary in connection with the REIT conversion. The total investment by the operating partnership in expansions and improvements of the Ritz-Carlton, Naples property is expected to be approximately $97 million. In February 1999, we sold the Minneapolis/Bloomington Marriott for $35 million and recorded a gain on the sale of approximately $13 million. We also may selectively dispose of other hotel assets where we believe we can earn higher returns on our invested capital. Hotel Lodging Industry The lodging industry posted strong gains in 1998 as higher average daily rates drove increases in revenue per available room, or REVPAR. Over the last five years, the lodging industry has benefited from a favorable supply/demand imbalance, driven in part by low construction levels in our submarkets combined with high gross domestic product (GDP) growth. Recently, however, supply has begun to moderately outpace demand, causing slight declines in occupancy rates in the upscale and luxury full-service segments in which we operate. According to Smith Travel Research, supply in our competitive set increased 1.2% for the year ended December 31, 1998 versus the same period one year ago while demand in our competitive set decreased 0.3% for the same period. At the same time, occupancy declined 1.5% in our competitive set for the year ended December 31, 1998 versus the same period one year ago. These declines in occupancy, however, were more than offset by increases in average daily rates which generated higher REVPAR. According to Smith Travel Research, for the year ended December 31, 1998, average daily rate and REVPAR for our competitive set increased 6.5% and 5.0%, respectively, versus the same period one year ago. The current amount of excess supply in the lodging industry is relatively moderate and much less severe than that experienced in the lodging industry beginning in 1989, in part because of the greater financial discipline and lending practices imposed by financial institutions and public markets today relative to those during the late 1980's. Within the upscale and luxury full-service segment, our hotels have outperformed the overall sector. The attractive locations of our hotels, the limited availability of new building sites for new construction of competing full-service hotels, and the lack of availability of financing for new full- service hotels has allowed us to maintain REVPAR and average daily rate premiums over our competitors in these service segments. On a comparable basis, average daily rates for our full service hotels increased 6.9% during 1998 compared with 1997. The increase in average daily rate helped generate a strong increase in comparable hotel REVPAR of 7.3% for the same period. Furthermore, because our lodging operations have a high fixed-cost component, increases in REVPAR generally yield greater percentage increases in EBITDA. While we do not benefit directly from increases in EBITDA levels at our properties due to the structure of our leases, we should benefit from such increases due to expected higher market valuations of our properties based on such elevated EBITDA levels. 19 We believe that the current environment of excess supply will most likely continue over the next twelve to eighteen months, although any excess supply is expected to be moderate given the fact that demand is expected to grow at the same 1% to 2% rate as projected GDP and new construction has been limited by capital constraints. Given the relatively long lead time to develop urban, convention and resort hotels, we believe that growth in room supply in upscale and luxury full-service sub-markets in which we operate will remain moderate through the year 2000. However, there can be no assurance that growth in supply will remain moderate or that REVPAR and EBITDA will continue to improve. Hotel Lodging Properties Our lodging portfolio currently consists of 125 upscale and luxury full service hotels with approximately 58,000 rooms. Our hotel lodging properties represent quality assets in the upscale and luxury full-service lodging segments. All but thirteen of our hotel properties are currently operated under the Marriott or Ritz-Carlton brand names. To maintain the overall quality of our lodging properties, each property undergoes refurbishments and capital improvements on a regularly scheduled basis. Typically, refurbishing has been provided at intervals of five years, based on an annual review of the condition of each property. For the fiscal years 1998, 1997 and 1996, we spent $165 million, $129 million and $87 million, respectively, on capital improvements to existing properties. As a result of these expenditures, we will be able to maintain high quality rooms at our properties. Our hotels average nearly 465 rooms. Thirteen of our hotels have more than 750 rooms. Hotel facilities typically include meeting and banquet facilities, a variety of restaurants and lounges, swimming pools, gift shops and parking facilities. Our hotels primarily serve business and pleasure travelers and group meetings at locations in downtown and suburban areas, near airports and at resort convention locations throughout the United States. The properties are generally well situated in locations where there are significant barriers to entry by competitors including downtown areas of major metropolitan cities at airports and resort/convention locations where there are limited or no development sites. Marriott International serves as the manager for 99 of our 125 hotels and all but 13 are part of Marriott International's full-service hotel system. The Marriott brand name has consistently delivered occupancy and REVPAR premiums over other brands. Based upon data provided by Smith Travel Research, our comparable properties have an eight percentage point occupancy premium and a 26% REVPAR premium over the competitive set for 1998. The average age of our properties is sixteen years, although several of the properties have had substantial, more recent renovations or major additions. In 1998, a subsidiary substantially completed a two-year $25 million dollar capital improvement program at the New Orleans Marriott which included renovations to all guest rooms, refurbishment of ballrooms and restaurant updates. In early 1998, a subsidiary of Host Marriott completed a $15 million capital improvement program at the Denver Marriott Tech Center. The program included replacement of guestroom interiors, remodeling of the lobby, ballroom, meeting rooms and corridors, as well as renovations to the exterior of the building. A number of our full-service hotel acquisitions such as the Memphis Marriott which was acquired in 1998 were converted to the Marriott brand upon acquisition. The conversion of these properties to the Marriott brand is intended to increase occupancy and room rates as a result of Marriott International's nationwide marketing and reservation systems, its Marriott Rewards program, group sales force, as well as customer recognition of the Marriott brand name. The invested capital with respect to these properties is primarily used for the improvement of common areas, as well as upgrading soft and hard goods (i.e., carpets, drapes, paint, furniture and additional amenities). The conversion process typically causes periods of disruption to these properties as selected rooms and common areas are temporarily taken out of service. Historically, the conversion properties have shown improvements as the benefits of Marriott International's marketing and reservation programs, group sales force and customer service initiatives take hold. In addition, these properties have generally been integrated into Marriott International's systems covering purchasing and distribution, insurance, telecommunications and payroll processing. 20 The chart below sets forth performance information for our comparable hotels:
1998 1997 ------- ------- Comparable Full-Service Hotels(1) Number of properties.......................................... 78 78 Number of rooms............................................... 38,589 38,589 Average daily rate............................................ $142.67 $133.45 Occupancy percentage.......................................... 78.8% 78.5% REVPAR........................................................ $112.39 $104.79 REVPAR % change............................................... 7.3% --
- -------- (1) Consists of the 78 properties owned directly or indirectly by us for the entire 1998 and 1997 fiscal years, respectively. These properties, for the respective periods, represent the "comparable properties". Properties held for less than all of the periods discussed above, respectively, are not considered comparable. The chart below sets forth certain performance information for our hotels:
1998 1997 1996 ------- ------- ------- Number of properties............................... 126(1) 95 79 Number of rooms.................................... 58,445(1) 45,718 37,210 Average daily rate................................. $140.35 $133.74 $119.94 Occupancy percentage............................... 77.7% 78.4% 77.3% REVPAR............................................. $109.06 $104.84 $ 92.71
- -------- (1) Number of properties and rooms as of December 31, 1998 and includes 25 properties (9,965 rooms) acquired in the public partnerships merger and the Blackstone Acquisition. The following table presents full service hotel information by geographic region for 1998:
Number Average Number Average Average Geographic Region of Hotels of Guest Rooms Occupancy(1) Daily Rate(1) REVPAR(1) - ----------------- --------- -------------- ------------ ------------- --------- Atlanta................. 11 486 72.3% $139.25 $100.67 Florida................. 13 513 78.9% 141.22 111.45 Mid-Atlantic............ 17 364 76.5% 122.56 93.75 Midwest................. 17 369 74.5% 114.71 85.41 New York................ 12 631 85.2% 183.21 156.18 Northeast............... 11 379 78.9% 107.93 85.13 South Central........... 18 497 77.0% 123.94 95.46 Western................. 27 491 78.1% 150.80 117.76 Average--All regions.... 126 463 78.0% 140.38 109.44
- -------- (1) The operating results of the 25 properties acquired through the Blackstone Acquisition and the merger of the public partnerships are not included. During 1995 and 1996, we divested virtually all of our limited-service hotel properties through the sale and leaseback of 53 Courtyard properties and 18 Residence Inn properties. During 1998, limited-service properties represented less than 2% of our EBITDA from hotel properties and we expect this percentage to continue to decrease as we continue to acquire full service properties. These 71 properties that we lease continue to be reflected in our revenues. The Courtyard and Residence Inn properties are subleased to subsidiaries of Crestline under sublease agreements and are managed by Marriott International under long-term management agreements. The owners of the 71 limited-services properties that we lease have not yet consented to the subleases but have agreed to waive any defaults under the related leases until April 23, 1999, to provide us with additional time to obtain such consents (which could require modifications in the terms of the sublease and structural or other changes related thereto). If such consents are not obtained, we may be required to terminate the subleases and 21 contribute to a non-controlled subsidiary our equity interests in the subsidiaries leasing the properties. This change would have the effect of reducing our revenues by $297 million and $282 million for 1998 and 1997, respectively, and increasing our net income by approximately $5 million and $4 million for 1998 and 1997, respectively. The following table sets forth as of March 1, 1999, the location and number of rooms relating to each of our 125 hotels. All of the properties are leased to a subsidiary of Crestline and operated under Marriott brands by Marriott International, unless otherwise indicated.
Location Rooms - -------- ------ Alabama Grand Hotel Resort and Golf Club.......................................................... 306 Arizona Mountain Shadows Resort........................................ 337 Scottsdale Suites.............................................. 251 The Ritz-Carlton, Phoenix...................................... 281 California Coronado Island Resort(1)(2)................................... 300 Costa Mesa Suites.............................................. 253 Desert Springs Resort and Spa.................................. 884 Fullerton(2)................................................... 224 Hyatt Regency, Burlingame(3)................................... 793 Manhattan Beach(1)(2)(4)....................................... 380 Marina Beach(1)(2)............................................. 368 Newport Beach.................................................. 570 Newport Beach Suites........................................... 250 Ontario Airport(4)............................................. 299 Sacramento Airport(2)(3)(7).................................... 85 San Diego Marriott Hotel and Marina(2)(6).................................................. 1,355 San Diego Mission Valley(4)(7)................................. 350 San Francisco Airport.......................................... 684 San Francisco Fisherman's Wharf(4)...................................................... 285 San Francisco Moscone Center(2)................................ 1,498 San Ramon(2)................................................... 368 Santa Clara(2)................................................. 754 The Ritz-Carlton, Marina del Rey(2)........................................................ 306 The Ritz-Carlton, San Francisco................................ 336 Torrance....................................................... 487 Colorado Denver Southeast(2)............................................ 595 Denver Tech Center(1).......................................... 625 Denver West(2)................................................. 307 Marriott's Mountain Resort at Vail(1)....................................................... 349 Connecticut Hartford/Farmington............................................ 380 Hartford/Rocky Hill(2)......................................... 251 Florida Fort Lauderdale Marina(2)...................................... 580 Harbor Beach Resort(2)(5)(6)(7)................................ 624 Jacksonville(2)(4)............................................. 256 Miami Airport(2)............................................... 782 Miami Biscayne Bay(2).......................................... 605 Orlando World Center........................................... 1,503 Palm Beach Gardens(4).......................................... 279 Singer Island Holiday Inn(3)................................... 222 Tampa Airport(2)............................................... 295 Tampa Westshore(2)............................................. 309 The Ritz-Carlton, Amelia Island................................ 449 The Ritz-Carlton, Naples....................................... 463 Georgia Atlanta Marriott Marquis(6).................................... 1,671 Atlanta Midtown Suites(2)...................................... 254 Georgia (Continued) Atlanta Norcross............................................... 222 Atlanta Northwest.............................................. 400 Atlanta Perimeter(2)........................................... 400 Four Seasons, Atlanta(3)....................................... 246 Grand Hyatt, Atlanta(3)........................................ 439 JW Marriott Hotel at Lenox(2).................................. 371 Swissotel, Atlanta(3).......................................... 348 The Ritz-Carlton, Atlanta(2)................................... 447 The Ritz-Carlton, Buckhead..................................... 553 Illinois Chicago/Deerfield Suites....................................... 248 Chicago/Downers Grove Suites................................... 254 Chicago/Downtown Courtyard..................................... 334 Chicago O'Hare(2).............................................. 681 Chicago O'Hare Suites(2)....................................... 256 Swissotel, Chicago(3).......................................... 630 Indiana South Bend(2).................................................. 300 Louisiana New Orleans.................................................... 1,290 Maryland Bethesda(2).................................................... 407 Gaithersburg/Washingtonian Center........................................................ 284 Massachusetts Boston/Newton.................................................. 430 Hyatt Regency, Cambridge(3).................................... 469 Swissotel, Boston(3)........................................... 498 The Ritz-Carlton, Boston....................................... 275 Michigan The Ritz-Carlton, Dearborn..................................... 308 Detroit Livonia................................................ 224 Detroit Romulus................................................ 245 Detroit Southfield............................................. 226 Minnesota Minneapolis City Center(2)..................................... 583 Minneapolis Southwest(4)(7).................................... 320 Missouri Kansas City Airport(2)......................................... 382 New Hampshire Nashua......................................................... 251 New Jersey Hanover........................................................ 353 Newark Airport(2).............................................. 590 Park Ridge(2).................................................. 289 Saddle Brook................................................... 221 New Mexico Albuquerque(2)................................................. 411 New York Albany(4)(7)................................................... 359 New York Marriott Financial Center........................................................ 504 New York Marriott Marquis(2)(6)................................ 1,919 Marriott World Trade Center(1)(2).................................................. 820 Swissotel, The Drake(3)........................................ 494
22
Location Rooms - -------- ----- North Carolina Charlotte Executive Park(4).......................................... 298 Greensboro/Highpoint(2).............................................. 299 Raleigh Crabtree Valley.............................................. 375 Research Triangle Park............................................... 224 Ohio Dayton............................................................... 399 Oklahoma Oklahoma City........................................................ 354 Oklahoma City Waterford(1)(4)........................................ 197 Oregon Portland............................................................. 503 Pennsylvania Four Seasons, Philadelphia(3)........................................ 365 Philadelphia Convention Center(2)........................................................... 1,200 Philadelphia Airport(2).............................................. 419 Pittsburgh City Center(1)(2)(4)...................................... 400 Tennessee Memphis(1)(2)........................................................ 404 Texas Dallas/Fort Worth Airport............................................ 492 Dallas Quorum(2)..................................................... 547 El Paso(2)........................................................... 296 Houston Airport(2)................................................... 566 Houston Medical Center(2)............................................ 386 JW Marriott Houston.................................................. 503 Plaza San Antonio(1)(2)(4)........................................... 252 San Antonio Rivercenter(2)........................................... 999 San Antonio Riverwalk(2)............................................. 500 Utah Salt Lake City(2).................................................... 510 Virginia Dulles Airport(2).................................................... 370 Fairview Park(2)..................................................... 395 Hyatt Regency, Reston(3)............................................. 514 Key Bridge(2)........................................................ 588 Norfolk Waterside(2)(4).............................................. 404 Pentagon City Residence Inn.......................................... 300 The Ritz-Carlton, Tysons Corner(2)........................................................... 397 Washington Dulles Suites............................................. 254 Westfields(1)........................................................ 335 Williamsburg(1)...................................................... 295 Washington Seattle SeaTac Airport............................................... 459 Washington, DC Washington Metro Center(1)........................................... 456 Canada Calgary(1)........................................................... 380 Toronto Airport...................................................... 423 Toronto Eaton Center(2).............................................. 459 Toronto Delta Meadowvale(3).......................................... 374 ------ TOTAL................................................................. 57,975 ======
- -------- (1) This property was converted to the Marriott brand after acquisition. (2) The land on which this hotel is built is leased under one or more long- term lease agreements. (3) This property is not operated under the Marriott brand and is not managed by Marriott International. (4) This property is operated as a Marriott franchised property. (5) This property is leased to Marriott International. (6) This property is not wholly owned by the operating partnership. (7) This property is not leased to Crestline. Investments in Affiliated Partnerships The operating partnership and certain of its subsidiaries also manage our partnership investments and conduct the partnership services business. As previously discussed, in connection with the REIT conversion, the non- controlled subsidiaries were formed to hold various assets. The direct ownership of those assets by us or the operating partnership could jeopardize our status as a REIT or the operating partnership's treatment as a partnership for federal income tax purposes. Substantially all our general and limited partner interests in partnerships owning 220 limited-service hotels were held by the non-controlled subsidiaries at year end. Additionally, of the 20 full- service hotels in which we had general and limited partner interests 13 were acquired by the operating partnership, two were sold, four were transferred to the non-controlled subsidiary and one was retained. The managing general partner of the partnership retained is responsible for the day-to-day management of the partnership operations, which generally includes payment of partnership obligations from partnership funds, preparation of financial reports and tax returns and communications with lenders, limited partners and regulatory bodies. As the general partner, we are reimbursed for the cost of providing these services subject to limitations in certain cases. The partnership hotel is currently operated under a management agreement with Marriott International or its subsidiaries. As the general partner, we oversee and monitor Marriott International and its subsidiaries' performance pursuant to these agreements. 23 Cash distributions provided from these partnerships including distributions related to partnerships sold, transferred or acquired in 1998 are tied to the overall performance of the underlying properties and the overall level of debt. Distributions from these partnerships to us were $2 million in 1998 and $5 million in each of 1997 and 1996. All debt of these partnerships is nonrecourse to us and our subsidiaries, except that we are contingently liable under various guarantees of debt obligations of certain of the limited-service partnerships. Marketing As of March 1, 1999, 99 of our 125 hotel properties were managed by Marriott International as Marriott or Ritz-Carlton brand hotels. Thirteen of the 26 remaining hotels are operated as Marriott brand hotels under franchise agreements with Marriott International. We believe that these Marriott-managed and franchised properties will continue to enjoy competitive advantages arising from their participation in the Marriott International hotel system. Marriott International's nationwide marketing programs and reservation systems as well as the advantage of the strong customer preference for Marriott brands should also help these properties to maintain or increase their premium over competitors in both occupancy and room rates. Repeat guest business in the Marriott hotel system is enhanced by the Marriott Rewards program, which expanded the previous Marriott Honored Guest Awards program. Marriott Rewards membership includes more than 7.5 million members. The Marriott reservation system provides Marriott reservation agents complete descriptions of the rooms available for sale and up-to-date rate information from the properties. The reservation system also features connectivity to airline reservation systems, providing travel agents with access to available rooms inventory for all Marriott and Ritz-Carlton lodging properties. In addition, software at Marriott's centralized reservations centers enables agents to immediately identify the nearest Marriott or Ritz- Carlton brand property with available rooms when a caller's first choice is fully occupied. Our website (www.hostmarriott.com) currently permits users to connect to the Marriott reservation system to reserve rooms in its hotels. Competition Our hotels compete with several other major lodging brands in each segment in which they operate. Competition in the industry is based primarily on the level of service, quality of accommodations, convenience of locations and room rates. Although the competitive position of each of our hotel properties differs from market to market, we believe that our properties compare favorably to their competitive set in the markets in which they operate on the basis of these factors. The following table presents key participants in segments of the lodging industry in which we compete:
Segment Representative Participants ------- --------------------------- Luxury Full-Service Ritz-Carlton; Four Seasons Upscale Full-Service Crown Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels, Resort and Suites; Radisson; Red Lion; Sheraton; Swissotel; Westin; Wyndham
Other Real Estate Investments We have lease and sublease activity relating primarily to Host Marriott's former restaurant operations. Additionally, as part of the Blackstone Acquisition, we acquired 165,000 square feet of office space in two buildings in Atlanta. Prior to the REIT conversion, we owned 12 undeveloped parcels of vacant land, totaling approximately 83 acres, originally purchased primarily for the development of hotels or senior living communities, which are now owned by one of the non-controlled subsidiaries. Employees We are managed by our Board of Directors and we have no employees who are not employees of the operating partnership. 24 Currently, the operating partnership has approximately 175 management employees, and approximately 16 other employees which are covered by a collective bargaining agreement that are subject to review and renewal on a regular basis. We believe that we and our managers have good relations with labor unions and have not experienced any material business interruptions as a result of labor disputes. Environmental and Regulatory Matters Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws may impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, certain environmental laws and common law principles could be used to impose liability for release of asbestos-containing materials, and third parties may seek recovery from owners or operators of real properties for personal injury associated with exposure to released asbestos-containing materials. Environmental laws also may impose restrictions on the manner in which property may be used or business may be operated, and these restrictions may require expenditures. In connection with our current or prior ownership or operation of hotels, we may be potentially liable for any such costs or liabilities. Although we are currently not aware of any material environmental claims pending or threatened against us, no assurance can be given that a material environmental claim will not be asserted against us. The Leases In order for us to qualify as a REIT and for the operating partnership to be treated as a partnership for federal income tax purposes, neither we nor the operating partnership may operate our hotels or related properties. Accordingly, we lease the hotels to the lessees, which are primarily wholly owned, indirect subsidiaries of Crestline. Lessees. There generally is a separate lessee for each hotel or group of hotels that is owned by a separate subsidiary of the operating partnership. Each lessee is generally a Delaware limited liability company, whose purpose is limited to acting as lessee under the applicable lease(s). For those hotels where it is the manager, Marriott International or a subsidiary has a non-economic membership interest in the lessee entitling it to certain voting rights but no economic rights. The operating agreements for such lessees provide that the Crestline member of the lessee has full control over the management of the business of the lessee, except with respect to certain decisions for which the consent of the members or partners and the manager are required. These decisions are: . dissolving, liquidating, consolidating, merging, selling or leasing all or substantially all of the assets of the lessee; . engaging in any other business or acquiring any assets or incurring any liabilities not reasonably related to the conduct of the lessee's business; . instituting voluntary bankruptcy or similar proceedings or consenting to involuntary bankruptcy or similar proceedings; . terminating the management agreement relating to the lessee's hotel, other than by reason of a breach by the manager or upon exercise of express termination rights in the management agreement; . challenging the status or rights of the manager or the enforceability of the manager's consent rights; or . incurring debt in excess of certain limits. Upon any termination of the applicable management agreement, these special voting rights of Marriott International (or its subsidiary) will cease. 25 Lease terms. Each lease has a fixed term ranging generally from seven to ten years, depending upon the lease, subject to earlier termination upon the occurrence of certain contingencies described in the lease, including, particularly, the provisions described below under "--Damage or Destruction," "--Termination of the Leases upon Disposition of Full-Service Hotels" and "-- Termination of the Leases upon Changes in Tax Laws". Minimum rent; percentage rent; additional charges. Each lease requires the lessee to pay (1) minimum rent in a fixed dollar amount per annum plus (2) to the extent it exceeds minimum rent, percentage rent based upon specified percentages of aggregate sales from the applicable hotel, including room sales, food and beverage sales and other income ("Gross Revenues"), in excess of specified thresholds. Minimum rent is a fixed dollar amount specified in each lease less the FF&E adjustment (which is described under "--Personal Property Limitation" below). Any amounts other than minimum rent and percentage rent due to the lessor under the leases are referred to as "additional charges". The amount of minimum rent and the percentage rent thresholds are to be adjusted each year. The annual adjustment with respect to minimum rent equals a percentage of any increase in the Consumer Price Index, or CPI, during the previous twelve months. The annual adjustment with respect to percentage rent thresholds is a specified percentage equal to the weighted average of a percentage of any increase in CPI plus a specified percentage of any increase in a regional labor cost index agreed upon by the lessor and the lessee during the previous twelve months. Neither minimum rent nor percentage rent thresholds will be decreased because of the annual adjustment. Rental payments will be made on a fiscal year basis. The "fiscal year" means the fiscal year used by the manager. Payments of rent are to be made within two business days after the required payment date under the management agreement for each accounting period. "Accounting period" means, for those hotels where Marriott International is the manager, any of the thirteen four- week accounting periods which are used in the manager's accounting system. Rent payable for each accounting period will be the sum of (1) the excess (if any) of (x) the greater of cumulative minimum rent year-to-date or cumulative percentage rent year-to-date over (y) the total amount of minimum rent and percentage rent paid year-to-date plus (2) any additional charges due. If the total amount of minimum rent and percentage rent paid year-to-date, as of any rent payment date, is greater than both cumulative minimum rent year-to-date and cumulative percentage rent year-to-date, then the lessor must remit the difference to the lessee. The leases generally provide for a rent adjustment in the event of damage, destruction, partial taking, certain capital expenditures or an FF&E adjustment. Lessee expenses. Each lessee is responsible for paying all of the expenses of operating the applicable hotel(s), including all personnel costs, utility costs and general repair and maintenance of the hotel(s). The lessee also is responsible for all fees payable to the applicable manager, including base and incentive management fees, chain services payments and franchise or system fees, with respect to periods covered by the term of the lease. The lessee is not obligated to bear the cost of any capital improvements or capital repairs to the hotels or the other expenses to be borne by the lessor, as described below. Lessor expenses. The lessor (typically, the operating partnership or its subsidiary) is responsible for the following expenses: real estate taxes, personal property taxes (to the extent the lessor owns the personal property), casualty insurance on the structures, ground lease rent payments, required expenditures for FF&E (including maintaining the FF&E reserve, to the extent such is required by the applicable management agreement) and capital expenditures. The consent of the lessor is required for any capital expenditures (except in an emergency or where the owner's consent is not required under the management agreement) or a change in the amount of the FF&E reserve payment. 26 Crestline guarantee. Crestline and certain of its subsidiaries have entered into a limited guarantee of the lease and management agreement obligations of each lessee. For each of four identified "pools" of hotels, the cumulative limit of the guarantee at any time is 10% of the aggregate rents under all leases in such pool paid with respect to the preceding thirteen full accounting periods (with an annualized amount based upon the minimum rent for those leases that have not been in effect for thirteen full accounting periods). In the event of a payment default under any lease or failure of Crestline to maintain certain minimum net worth or debt service coverage ratios, the obligations under the guarantees of leases in each pool are secured by excess cash flow of each lessee in such pool. Such excess cash flow will be collected, held in a cash collateral account, and disbursed in accordance with agreed cash management procedures. Security. The obligations of the lessee are secured by a pledge of all personal property (tangible and intangible) of the lessee related to or used in connection with the operation of the hotels (including any cash and receivables from the manager or others held by the lessee as part of working capital). Working capital. Each lessor sold the existing working capital, including inventory and fixed asset supplies (as defined in the Uniform System of Accounts for Hotels) and receivables due from the manager, net of accounts payable and accrued expenses to the applicable lessee upon the commencement of the lease at a price equal to the fair market value of such assets. The purchase price is represented by a note evidencing a loan that bears interest at a rate per annum equal to the long-term applicable federal rate in effect on the commencement of the lease. Interest owed on the working capital loan is due simultaneously with each periodic rent payment and the amount of each payment of interest will be credited against such rent payment. The principal amount of the working capital loan will be payable upon termination of the lease. At the termination or expiration of the lease, the lessee will sell to the lessor the then existing working capital at a price equal to the value of such assets at that time. The lessor will pay the purchase price of the working capital by offsetting the purchase price against the outstanding principal balance of the working capital loan. To the extent that the value of the working capital delivered to the lessor exceeds the value of the working capital delivered by the lessor to the lessee at the commencement of the lease, the lessor will pay to the lessee an amount equal to the difference in cash. To the extent that the value of the working capital delivered to the lessor is less than the value of the working capital delivered by the lessor to the lessee at the commencement of the lease, the lessee will pay to the lessor an amount equal to the difference in cash. Termination of leases upon disposition of full-service hotels. In the event the applicable lessor enters into an agreement to sell or otherwise transfer any full-service hotel free and clear of the applicable lease, the lessor must pay the lessee a termination fee equal to the fair market value of the lessee's leasehold interest for the remaining term of the lease. For purposes of determining the fair market value, a discount rate of 12% will be used, and the annual income for each remaining year of the lease will be assumed to be the average annual income generated by the lessee during the three fiscal years preceding the termination date or if the hotel has not been in operation for at least three fiscal years, then the average during the preceding fiscal years that have elapsed, and if the hotel has not been in operation for at least twelve months, then the assumed annual income shall be determined on a pro forma basis. Alternatively, the lessor would be entitled to (1) substitute a comparable hotel or hotels (in terms of economics and quality for the lessor and the lessee as agreed to by the lessee) for any hotel that is sold or (2) sell the hotel subject to the lease (subject to the lessee's reasonable approval if the sale is to an entity that does not have sufficient financial resources and liquidity to fulfill the "owner's" obligations under the management agreement and the lessor's obligations under the lease, or does not satisfy specified character standards) without being required to pay a termination fee. In addition, the lessors collectively and the lessees collectively each have the right to terminate up to twelve leases without being required to pay any fee or other compensation as a result of such termination, but the lessors are permitted to exercise such right only in connection with sales of hotels to an unrelated third party or the transfer of a hotel to a joint venture in which the operating partnership does not have a two-thirds or greater interest. Termination of the leases upon changes in tax laws. In the event that changes in the federal income tax laws allow the lessors, or subsidiaries or affiliates of the lessors, to directly operate the hotels without jeopardizing our status as a REIT, the lessors have the right to terminate all, but not less than all, of the leases 27 (excluding leases of hotels that must still be leased following the tax law change) in return for paying the lessees the fair market value of the remaining terms of the leases, valued in the same manner as provided above under "--Termination of Leases upon Disposition of Hotels". The payments are payable in cash or, subject to certain conditions, shares of our common stock, at the election of the lessor and us. Damage or Destruction. If a hotel is partially or totally destroyed and is no longer suitable for use as a hotel (as reasonably determined by the lessor), the lease of such hotel will automatically terminate and the insurance proceeds will be retained by the lessor, except for any proceeds attributable to personal property owned by the lessee or business interruption insurance. In this event, no termination fee will be owed to the lessee. If a hotel is partially destroyed but is still suitable for use as a hotel (as reasonably determined by the lessor), the lessee, subject to the lessor agreeing to release the insurance proceeds to fund the cost of repair and restoration, must apply the insurance proceeds to restore the hotel to its preexisting condition. The lessor must fund any shortfall in insurance proceeds less than or equal to five percent of the estimated cost of repair. The lessor may fund such deficiency, in its sole discretion, in the event the sum of (a) the insurance proceeds and (b) that portion of the insurance deductible, if any, which is greater than 5% of the cost of repair, is less than 95% of the cost of the repair, provided that if the lessor elects not to fund such shortfall, the lessee may terminate the lease and the lessor must pay to the lessee a termination fee equal to the lessee's operating profit for the immediately preceding fiscal year. The term "lessee's operating profit" shall mean for any fiscal year an amount equal to revenues due to the lessee from the leased property after the payment of all expenses relating to the operation or leasing of the leased property less rent paid to the lessor. If and to the extent any damage or destruction results in a reduction of gross revenues which would otherwise be realizable from the operation of the hotel, the lessor will receive all loss of income insurance and the lessee will have no obligation to pay rent, for any accounting period until the effects of the damage are restored, in excess of the greater of (1) one-thirteenth of the total rent paid in the fiscal year prior to the casualty or (2) percentage rent calculated for the current accounting period. Events of default. Except as otherwise provided below, and subject to the notice and, in some cases, cure periods in the lease, the lease may be terminated without penalty by the applicable lessor if any of the following events of default (among others) occur: . Failure to pay rent within ten days after the due date; . Failure to comply with, or observe any of, the terms of the lease (other than the failure to pay rent) for 30 days after notice from the lessor, including failure to properly maintain the hotel (other than by reason of the failure of the lessor to perform its obligations under the lease), such period to be extended for up to an additional 90 days if such default cannot be cured with due diligence within 30 days; . Acceleration of maturity of certain indebtedness of the lessee with a principal amount in excess of $1,000,000; . Failure of Crestline to maintain minimum net worth or debt service coverage ratio requirements; . Filing of any petition for relief, bankruptcy or liquidation by or against the lessee; . The lessee voluntarily ceases to operate the hotel for 30 consecutive days, except as a result of a casualty, condemnation or emergency situation; . A change in control of Crestline, the lessee or any subsidiary of Crestline that is a direct or indirect parent of the lessee. Unless the change in control involves an adverse party which would include a competitor in the hotel business, a party without adequate financial resources, a party that has been convicted of a felony (or controlled by such a person), or a party who would jeopardize our qualification as a REIT, the lessor must pay a termination fee equal to the lessee's operating profit from the hotel for the immediately preceding fiscal year; or . The lessee, the lessee's direct parent or Crestline defaults under the assignment of management agreement, the guarantees described above, the non-competition agreement described below or certain other related agreements between the parties or their affiliates. 28 Assignment of lease. A lessee is permitted to sublet all or part of the hotel or assign its interest under its lease, without the consent of the lessor, to any wholly owned and controlled single purpose subsidiary of Crestline, provided that Crestline continues to meet the minimum net worth test and all other requirements of the lease. Transfers to other parties are permitted if approved by the lessor. Subordination to qualifying mortgage debt. The rights of each lessee are expressly subordinate to qualifying mortgage debt and any refinancing thereof. A default under the loan documents may result in the termination of the lease by the lender. The lender is not required to provide a non-disturbance agreement to the lessee. The lessor is obligated to compensate the lessee, on a basis equal to the lease termination provision described in "--Termination of Leases upon Disposition of Hotels" above, if the lease is terminated because of a non- monetary default under the terms of a loan that occurs because of an action or omission by the lessor (or its affiliates) or a monetary default where there is not an uncured monetary event of default of the lessee. In addition, if any loan is not refinanced in a timely manner, and the loan amortization schedule is converted to a cash flow sweep structure, the lessee has the right to terminate the lease after a twelve-month cure period and the lessor would owe a termination fee as provided above. During any period of time that a cash flow sweep structure is in effect, the lessor must compensate the lessee for any lost revenue resulting from such cash flow sweep. The operating partnership has guaranteed these obligations. Personal property limitation. If a lessor reasonably anticipates that the average tax basis of the items of the lessor's FF&E and other personal property that are leased to the applicable lessee will exceed 15% of the aggregate average tax basis of the real and personal property subject to the applicable lease, the following procedures would apply, subject to obtaining lender consent where required: . The lessor would acquire any replacement FF&E that would cause the applicable limits to be exceeded, and immediately thereafter the lessee would be obligated either to acquire such excess FF&E from the lessor or to cause a third party to purchase such FF&E. . The lessee would agree to give a right of first opportunity to a non- controlled subsidiary of the operating partnership to acquire the excess FF&E and to lease the excess FF&E to the lessee at an annual rental equal to the market leasing factor times the cost of the excess FF&E. If such non-controlled subsidiary does not agree to acquire the excess FF&E and to enter into such lease, then the Lessee may either acquire the excess FF&E itself or arrange for another third party to acquire such excess FF&E and to lease the same to the lessee. . The annual rent under the applicable lease would be reduced in accordance with a formula based on market leasing rates for the excess FF&E. Certain actions under the leases. The leases prohibit the lessee from taking the following actions with respect to the management agreement without notice to the lessor and, if the action would have a material adverse effect on the lessor, the consent of the lessor: . terminate the management agreement prior to the expiration of the term thereof; . amend, modify or assign the management agreement; . waive (or fail to enforce) any right of the "owner" under the management agreement; . waive any breach or default by the manager under the management agreement (or fail to enforce any right of the "owner" in connection therewith); . agree to any change in the manager or consent to any assignment by the manager; or . take any other action which reasonably would be expected to materially adversely affect the lessor's rights or obligations under the management agreement for periods following the termination of the lease (whether upon the expiration of its term or upon earlier termination as provided for therein). 29 Change in manager. A lessee is permitted to change the manager or the brand affiliation of a hotel only with the approval of the applicable lessor, which approval may not be unreasonably withheld. Any replacement manager must be a nationally recognized manager with substantial experience in managing hotels of comparable quality. No such replacement can extend beyond the term of the lease without the consent of the lessor, which consent may be withheld in the lessor's sole discretion. The Management Agreements General The lessees lease the hotels from the operating partnership or its subsidiaries. Upon leasing the hotels, the lessees assumed substantially all of the obligations of such subsidiaries under the management agreements between those entities and the subsidiaries of Marriott International and other companies that currently manage the hotels. As a result of their assumptions of obligations under the management agreements, the lessees have substantially all of the rights and obligations of the "owners" of the hotels under the management agreements for the period during which the leases are in effect (including the obligation to pay the management and other certain fees thereunder) and hold the operating partnership harmless with respect thereto. The subsidiaries of the operating partnership remain liable for all obligations under the management agreements. See "--Management Services Provided by Marriott International and Affiliates," "--Assignment of Management Agreements". Management services provided by Marriott International and affiliates General. Under each management agreement related to a Marriott International-managed hotel, the manager provides complete management services to the applicable lessees in connection with its management of such lessee's hotels. Operational services. The managers have sole responsibility and exclusive authority for all activities necessary for the day-to-day operation of the hotels, including establishment of all room rates, the processing of reservations, procurement of inventories, supplies and services, periodic inspection and consultation visits to the hotels by the managers' technical and operational experts and promotion and publicity of the hotels. The manager receives compensation from the lessee in the form of a base management fee and an incentive management fee, which are normally calculated as percentages of gross revenues and operating profits, respectively. Executive supervision and management services. The managers provide all managerial and other employees for the hotels; review the operation and maintenance of the hotels; prepare reports, budgets and projections; provide other administrative and accounting support services, such as planning and policy services, financial planning, divisional financial services, risk planning services, product planning and development, employee planning, corporate executive management, legislative and governmental representation and certain in-house legal services; and protect the "Marriott" trademark and other tradenames and service marks. The manager also provides a national reservations system. Chain services. The management agreements require the manager to furnish chain services that are furnished generally on a central or regional basis to hotels in the Marriott hotel system. Such services include: (1) the development and operation of computer systems and reservation services, (2) regional management and administrative services, regional marketing and sales services, regional training services, manpower development and relocation costs of regional personnel and (3) such additional central or regional services as may from time to time be more efficiently performed on a regional or group level. Costs and expenses incurred in providing such services are allocated among all hotels in the Marriott hotel system managed by the manager or its affiliates and each applicable lessee is required to reimburse the manager for its allocable share of such costs and expenses. Working capital and fixed asset supplies. The lessee is required to maintain working capital for each hotel and fund the cost of fixed asset supplies, which principally consist of linen and similar items. The applicable lessee also is responsible for providing funds to meet the cash needs for the operations of the hotels if at any time the funds available from operations are insufficient to meet the financial requirements of the hotels. 30 Use of affiliates. The manager employs the services of its affiliates to provide certain services under the management agreements. Certain of the management agreements provide that the terms of any such employment must be no less favorable to the applicable lessee, in the reasonable judgment of the manager, than those that would be available from the manager. FF&E replacements. The management agreements generally provide that once each year the manager will prepare a list of FF&E to be acquired and certain routine repairs that are normally capitalized to be performed in the next year and an estimate of the funds necessary therefor. Under the terms of the leases, the lessor is required to provide to the applicable lessee all necessary FF&E for the operation of the hotels (including funding any required FF&E replacements). For purposes of funding the FF&E replacements, a specified percentage (generally 5%) of the gross revenues of the hotel is deposited by the manager into a book entry account. These amounts are treated under the leases as paid by the lessees to the lessor and will be credited against their rental obligations. If the manager determines that more than 5% of the gross revenues of the hotel is required to fund repairs for a certain period, the manager may increase the percentage of gross revenues to be deposited into the FF&E reserve account for such periods. In such event, the lessor may elect to fund such increases through annual increases in the amount deposited by the manager in the FF&E reserve account or to make a lump-sum contribution to the FF&E reserve account of the additional amounts required. If the lessor adopts the first election, the deductions are credited against the rental obligations of the lessee. If the lessor fails to elect either option within thirty days of the request for additional funds or fails to pay the lump-sum within 60 days of its election to do so, the manager may terminate the management agreement. Under certain circumstances, the manager may make repairs in addition to those set forth on its list, but in no event may it expend more than the amount in the FF&E reserve account without the consent of the operating partnership and the lessee. Under certain of the management agreements, the lessor must approve the FF&E replacements, including any FF&E replacements proposed by the manager that are not contained on the annual list which was approved by the lessor and the lessee. If the manager and the lessor agree, the lessor would acquire or otherwise provide the FF&E replacements set forth on the approved list. If the lessor and the manager are unable to agree on the list within 60 days of its submission, the lessor would be required to make only those FF&E replacements specified on such list that are no more extensive than the system standards for FF&E replacements that the manager requires for Marriott hotels. For purposes of funding the FF&E replacements required to be paid for by the operating partnership, each management agreement and the lessor's loan agreements require the lessor to deposit a designated amount into the FF&E reserve account periodically. The lessees have no obligation to fund the FF&E reserve accounts (and any amounts deposited therein by the manager from funds otherwise due the lessee under the management agreement will be credited against the lessee's rental obligation). Under each lease, the lessor is responsible for the costs of FF&E replacements and for decisions with respect thereto (subject to its obligations to the lessee under the lease). Building alterations, improvements and renewals. The management agreements require the manager to prepare an annual estimate of the expenditures necessary for major repairs, alterations, improvements, renewals and replacements to the structural, mechanical, electrical, heating, ventilating, air conditioning, plumbing and vertical transportation elements of each hotel. Such estimate must be submitted to the lessor and the lessee for their approval. In addition to the foregoing, the management agreements generally provide that the manager may propose such changes, alterations and improvements to the hotel as are required, in the manager's reasonable judgment, to keep the hotel in a competitive, efficient and economical operating condition or in accordance with Marriott standards. The cost of the foregoing is paid from the FF&E reserve account; to the extent that there are insufficient funds in such account, the operating partnership is required to pay any shortfall. Under the management agreements (and the leases), neither the lessor nor the lessee may unreasonably withhold consent to repairs and other changes which are required under applicable law or any of the manager's "life-safety" standards and, if the lessor and the lessee fail to approve any of the other proposed repairs or other changes within 75 days of the request therefor, the manager may terminate the management agreement. Under certain of the other management agreements, if the lessor and the manager are unable to agree on the estimate within 60 days of its submission, the lessor is required to make only those expenditures that are no more extensive than the 31 manager requires for Marriott hotels generally, as the case may be. Under the terms of the leases, the lessor is responsible for the costs of the foregoing items and for decisions with respect thereto (subject to its obligations to the lessees under the leases). Service marks. During the term of the management agreements, the service mark "Marriott" and other symbols, logos and service marks currently used by the manager and its affiliates may be used in the operation of the hotels. Marriott International (or its applicable affiliates) intends to retain its legal ownership of these marks. Any right to use the service marks, logo and symbols and related trademarks at a hotel will terminate with respect to that hotel upon termination of the management agreement with respect to such hotel. Termination fee. Certain of the management agreements provide that if the management agreement is terminated prior to its full term due to casualty, condemnation or the sale of the hotel, the manager would receive a termination fee as specified in the specific management agreement. Under the leases, the responsibility for the payment of any such termination fee as between the lessee and the lessor depends upon the cause for such termination. Termination for failure to perform. Most of the management agreements may be terminated based upon a failure to meet certain financial performance criteria, subject to the manager's right to prevent such termination by making certain payments to the lessee based upon the shortfall in such criteria. Events of default. Events of default under the management agreements include, among others, the following: . the failure of either party to make payments pursuant to the management agreement within ten days after written notice of such nonpayment has been made; . the failure of either party to perform, keep or fulfill any of the covenants, undertakings, obligations or conditions set forth in the management agreement and the continuance of such default for a period of 30 days after notice of said failure or, if such default is not susceptible of being cured within 30 days, the failure to commence said cure within 30 days or the failure thereafter diligently to pursue such efforts to completion; . if either party files a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law or admits that it is unable to pay its debts as they become due; . if either party consents to an involuntary petition in bankruptcy or fails to vacate, within 90 days from the date of entry thereof, any order approving an involuntary petition by such party; or . if an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating either party as bankrupt or insolvent or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of such party's assets is entered, and such order, judgment or decree continues unstayed and in effect for any period of 90 days. As described above, all fees payable under the management agreements are obligations of the lessees, to be paid by the lessees for so long as the leases remain in effect. The lessees' obligations to pay these fees, however, could adversely affect the ability of one or more lessees to pay base rent or percentage rent payable under the leases, even though such amounts otherwise are due and owing to the lessor. Moreover, the operating partnership remains obligated to the manager to the extent the lessee fails to pay these fees. Assignment of management agreements. The management agreements applicable to each hotel have been assigned to the applicable lessee for the term of the lease of such hotel. The lessee is obligated to perform all of the obligations of the lessor under the management agreement during the term of its lease, other than certain retained obligations including, without limitation, payment of real property taxes, property casualty insurance and ground rent, and maintaining a reserve fund for FF&E replacements and capital expenditures, for which the lessor retains responsibility. Although the lessee has assumed obligations of the lessor under the management agreement, the lessor is not released from its obligations and, if the lessee fails to perform any obligations, the 32 manager will be entitled to seek performance by or damages from the lessor. If the lease is terminated for any reason, any new or successor lessee must meet certain requirements for an "approved lessee" or otherwise be acceptable to Marriott International. The requirements for an "approved lessee" include that the entity: . has sufficient financial resources and liquidity to fill the obligations under the management agreement; . is not in control of or controlled by persons who have been convicted of felonies; . is not engaged, or affiliated with any person or entity engaged in the business of operating a branded hotel chain having 5,000 or more guest rooms in competition with Marriott International; and . must be a single purpose entity in which Marriott International has a non-economic membership interest with the same rights as it has in the current lessee. Any new lease must be in substantially the same form as the current lease or otherwise be acceptable to Marriott International. Non-competition agreements Pursuant to a non-competition agreement entered into in connection with the leases, Crestline has agreed, among other things, that until the earlier of December 31, 2008 and the date on which it is no longer a lessee for more than 25% of the number of the hotels owned by us on December 29, 1998, it will not (1) own, operate or otherwise control (as owner or franchisor) any full- service hotel brand or franchise, or purchase, finance or otherwise invest in full-service hotels, or act as an agent or consultant with respect to any of the foregoing activities, or lease or manage full-service hotels (other than hotels owned by the operating partnership) if its economic return therefrom would be more similar to returns derived from ownership interests in such hotels except for acquisitions of property used in hotels as to which a subsidiary of Crestline is the lessee, investments in full-service hotels which represent an immaterial portion of a merger or similar transaction or a minimal portfolio investment in another entity, limited investments (whether debt or equity) in full-service hotels as to which a subsidiary of Crestline is the lessee or activities undertaken with respect to its business of providing asset management services to hotel owners, or (2) without our consent, manage any of the hotels owned by the operating partnership, other than to provide asset management services. We have agreed with Crestline, among other things, that, (1) until December 31, 2003, we will not purchase, finance or otherwise invest in senior living communities, or act as an agent or consultant with respect to any of the foregoing activities (except for acquisitions of communities which represent an immaterial portion of a merger or similar transaction or for minimal portfolio investments in other entities) and (2) until the earlier of December 31, 2008 and the date on which subsidiaries of Crestline are no longer lessees for more than 25% of the number of the hotels owned by Host Marriott on December 29, 1998, we will not lease, as tenant or subtenant, limited- or full-service hotel properties from any "real estate investment trust" within the meaning of Sections 856 through 859 of the Internal Revenue Code where it will not be the operator or manager of the hotel (other than through a contractual arrangement with a non-affiliated party) and where its rental payments qualify as "rents from real property" within the meaning of Section 856(d) of the Internal Revenue Code, or purchase, finance or otherwise invest in persons or entities which engage in any of the foregoing activities, or act as an agent or consultant with respect to any of the foregoing activities (except for acquisitions of entities which engage in any of the foregoing activities where the prohibited activities represent an immaterial portion of a merger or similar transaction, or minimal portfolio investments in other entities which engage in any of the foregoing activities, or certain leasing arrangements existing on December 29, 1998 or entered into in the future between us and certain other related parties, or by our management of any hotels in which it has an equity interest). In addition, both Crestline and we have agreed not to hire or attempt to hire any of the other company's senior employees at any time prior to December 31, 2000. We entered into a noncompetition agreement with Marriott International that defines our rights and obligations with respect to certain businesses operated by each of us. Crestline became an additional party to this agreement at the time its shares were distributed to our stockholders. At that time, we also entered into an 33 agreement with Crestline under which we agreed with Crestline about the allocation between us of the rights to engage in certain activities permitted under the agreement with Marriott International. In general, until October 8, 2000, we and our subsidiaries are prohibited from entering into or acquiring any business that competes with the hotel management business (i.e., managing, operating or franchising full-service or limited-service hotels) as conducted by Marriott International. Pursuant to this agreement, we cannot (1) operate any hotel under a common name with any other hotel we operate or with any hotel operated by Crestline, (2) have a manager (other than Marriott International or one of its affiliates) manage any limited-service hotel for us under a common name with any other limited-service hotel managed by such manager for use or for Crestline, (3) have a manager (other than Marriott International or one of its affiliates) manage more than the greater of (a) 10 full-service hotels under a common name which is a brand other than "Delta," "Four Seasons," "Holiday Inn," "Hyatt" and "Swissotel" (the "Existing Brands") or (b) 25% of any system operated by such manager under a common name which is not an Existing Brand, (4) have a manager (other than Marriott International or one of its affiliates) manage more than the greater of (a) 5 full-service hotels under a common name which is an Existing Brand or (b) 12.5% of any system operated by such manager under a common name which is an Existing Brand, (5) franchise as franchisor any limited-service hotel under a common name with any other limited-service hotel for which we or Crestline is a franchisor or (6) franchise as franchisor more than 10 full-service hotels under a common name. Item 3. Legal Proceedings In connection with the REIT Conversion, the operating partnership assumed all liability arising under legal proceedings filed against us and will indemnify us as to all such matters. We believe all of the lawsuits in which we are a defendant, including the following lawsuits, are without merit and we intend to defend vigorously against such claims; however, no assurance can be given as to the outcome of any of the lawsuits. Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in several limited partnerships sponsored by us filed a lawsuit, Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial District Court of Bexar County, Texas, alleging that the defendants conspired to sell hotels to the partnerships for inflated prices and that they charged the partnerships excessive management fees to operate the partnerships' hotels. The plaintiffs further allege that the defendants committed fraud, breached fiduciary duties and violated the provisions of various contracts. The plaintiffs are seeking unspecified damages. On March 18, 1999, two limited partners in Courtyard by Marriott Limited Partnership filed a class action petition in intervention seeking to convert the lawsuit into a class action. The court has not yet ruled on this petition. Atlanta Marquis. Certain limited partners of Atlanta Marriott Marquis Limited Partnership ("AMMLP") filed a putative class action lawsuit, Hiram and Ruth Sturm v. Marriott Marquis Corporation, et al., Case No. 97-CV-3706, in the U.S. District Court for the Northern District of Georgia, on December 12, 1997 against AMMLP's general partner, its directors and us, regarding the merger of AMMLP into a new partnership as part of the refinancing of AMMLP's debt. The plaintiffs allege that the defendants misled the limited partners in order to induce them to approve the AMMLP merger, violated securities regulations and federal roll-up regulations and breached their fiduciary duties to the partners. The plaintiffs sought to enjoin, or in the alternative, rescind the AMMLP merger and damages. The partnership agreement includes provisions which require AMMLP to indemnify the general partners against losses, expenses and fees. On November 13, 1998, the court dismissed all of the federal securities law claims and retained jurisdiction over the state law claims for breach of fiduciary duty and breach of contract. Another limited partner of AMMLP sought similar relief and filed a separate lawsuit, styled Poorvu v. Marriott Marquis Corporation, et al., Civil Action No. 16095-NC, on December 19, 1997, in Delaware State Chancery Court. The defendants have filed an answer to the complaint. Courtyard II. A group of partners in Courtyard by Marriott II Limited Partnership ("CBM II") filed a lawsuit, Whitey Ford, et al. v. Host Marriott Corporation, et al., Case No. 96-CI-08327, on June 7, 1996, in the 34 285th Judicial District Court of Bexar County, Texas, against us, Marriott International and others alleging breach of fiduciary duty, breach of contract, fraud, negligent misrepresentation, tortious interference, violation of the Texas Free Enterprise and Antitrust Act of 1983 and conspiracy in connection with the formation, operation and management of CBM II and its hotels. The plaintiffs are seeking unspecified damages. On January 29, 1998, two other limited partners filed a petition in intervention seeking to convert the lawsuit into a class action. The defendants have filed an answer, the class has been certified, class counsel has been appointed, and discovery is underway. On March 11, 1999, Palm Investors, L.L.C., the assignee of a number of limited partnership units acquired through various tender offers, filed a plea in intervention to bring additional claims relating to the 1993 split of Marriott Corporation and to the 1995 refinancing of CBM II's indebtedness. This plea also seeks the addition of Ernst & Young, L.L.P. and E&Y Kenneth Leventhal Real Estate Services Co. as additional defendants for their appraisal role in the 1995 refinancing. The original plaintiffs subsequently filed a second amended complaint on March 19, 1999. MHP II. Limited partners of Marriott Hotel Properties II Limited Partnership ("MHP II") are asserting putative class claims in lawsuits filed in Palm Beach County Circuit Court on May 10, 1996, Leonard Rosenblum, as Trustee of the Sylvia Bernice Rosenblum Trust, et al. v. Marriott MHP Two Corporation, et al., Case No. CL-96-4087-AD, and, in Delaware State Chancery Court on April 24, 1996, Cary W. Salter, Jr., et al. v. MHP II Acquisition Corp., et al., respectively, against us and certain of our affiliates alleging that the defendants violated their fiduciary duties and engaged in fraud and coercion in connection with the tender offer for MHP II units. The defendants removed the Florida action to the United States District Court for the Southern District of Florida and, after hearings on various procedural motions, the District Court remanded the case to state court on July 25, 1998. The defendants then filed motions to dismiss Rosenblum's fifth amended complaint or, in the alternative, to deny class certification in the state court case. The state court held a hearing on these motions on October 27, 1998 but did not issue a ruling at that time. Thereafter, and prior to any ruling on the defendants' motions, Rosenblum filed a motion seeking leave to file a sixth amended complaint adding allegations relating to the partnership merger of MHP II and adding additional plaintiffs. On February 2, 1999, the court granted Rosenblum's motion to file an amended complaint and denied as moot the defendants' motion to dismiss the earlier complaint. On June 12, 1996, the Delaware Chancery Court entered an order denying the Delaware plaintiffs' application to enjoin the tender offer for MHP II units. The Delaware plaintiffs subsequently moved to voluntarily dismiss the Delaware action. The Chancery Court granted this motion, but with the proviso that the plaintiffs could only refile in the Florida federal action. After the District Court's remand of the Rosenblum case to Florida state court, two of the three original Delaware plaintiffs asked the Chancery Court to reconsider its order granting their voluntary dismissal. The Chancery Court refused to allow the plaintiffs to join the Rosenblum action in Florida and, instead, reinstated the Delaware case, now styled In Re Marriott Hotel Properties II Limited Partnership Unitholders Litigation, Consolidated Civil Action No. 14961. On January 29, 1999, Cary W. Slater alone filed an Amended Consolidated Class Action Complaint in the Delaware action, adding allegations relating to the partnership merger of MHP II. As a result of these recent developments in the Delaware case, the defendants filed a motion to stay the Florida action. The Florida court denied this motion, and the defendants have appealed to the Fourth District Court of Appeal of Florida. Potomac Hotel Limited Partnership. On July 15, 1998, one limited partner in Potomac Hotel Limited Partnership, or PHLP, filed a class action lawsuit styled Michael C. deBerardinis v. Host Marriott Corporation, Civil Action No WMN 98-2263, in the United States District Court for the District of Maryland. The plaintiff alleged that we misled PHLP's limited partners in order to induce them into approving the sale of one of PHLP's hotels, violated the securities regulations by issuing a false and misleading consent solicitation and breached fiduciary duties and the partnership agreement. The complaint sought unspecified damages. On February 16, 1999, the District Court dismissed the federal securities claims with prejudice and the state law claims without prejudice. On March 9, 1999, the plaintiff filed a class action complaint in Montgomery County, Maryland 35 Circuit Court in a case styled Michael C. deBerardinis v. Host Marriott Corporation, Civil No. 197694-V, to further pursue the state law claims. Item 4. Submission of matters to a vote of security holders On December 15, 1998, a special meeting of the stockholders of our predecessor, Host Marriott Corporation (a Delaware corporation) was held. At this meeting, the stockholders approved an agreement and plan of merger which included, among other things, the re-incorporation from Delaware to Maryland by means of a merger of Host Marriott Corporation with and into us. The stockholders present, either in person or by proxy, voted as follows: 168,147,578 for the agreement and plan of merger; 587,073 against the agreement and plan of merger; and 952,151 abstained. 36 PART II Item 5. Market for our common stock and related stockholder matters Our common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange and is traded under the symbol "HMT." The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share of the common stock as reported on the New York Stock Exchange Composite Tape. We did not declare any cash dividends on the common stock during the two fiscal years ended January 2, 1998. Host Marriott declared a special stock and cash dividend on December 18, 1998, in conjunction with the REIT conversion, and payable in February 1999 to stockholders of record on December 28, 1998. (See Note 2 to the consolidated financial statements for further discussion). The common stock prices listed below have not been adjusted for the special stock dividend as the effect is immaterial. On December 29, 1998, we spun off to our shareholders one share of Crestline for every ten shares of our common stock held. Crestline primarily represented the assets and liabilities of our senior living communities. (See Note 2) As a result of the REIT conversion, we are required to use available funds to pay dividends to the extent of 95% of taxable income in order to maintain our REIT qualification. We have indicated an intent to pay dividends equal to 100% of taxable income for each year. Payment of these dividends is expected to be funded by distributions from the operating partnership. To the extent that the operating partnership's cash flow is not sufficient to make distributions to holders of OP Units in an amount sufficient so that we can pay such dividends, the operating partnership may be required to borrow money to pay such dividends. As of March 19, 1999, there were approximately 53,000 holders of record of common stock and approximately 2,900 holders of record of OP Units (each of which is convertible into common stock on a one-for-one basis or the cash equivalent thereof, at our option, beginning at various times in the future, but no later than January 2000).
High Low --------- -------- 1997 1st Quarter............................................. $18 3/4 $15 3/4 2nd Quarter............................................. 18 1/8 15 1/4 3rd Quarter............................................. 20 13/16 17 1/2 4th Quarter............................................. 23 3/4 18 1/16 1998 1st Quarter............................................. $20 9/16 $17 1/2 2nd Quarter............................................. 22 1/8 17 3rd Quarter............................................. 19 12 9/16 4th Quarter............................................. 15 7/16 10
For several technical reasons relating to the federal income tax law, our ability to qualify as a REIT under the Internal Revenue Code is facilitated by limiting the number of shares of our stock that a person may own. Primarily because the Board of Directors believes it is desirable for us to qualify as a REIT, our Articles of Incorporation provide that, subject to certain limited exceptions, no person or persons acting as a group may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code, more than . 9.8% of the lesser of the number or value of shares of common stock outstanding; or . 9.8% of the lesser of the number or value of the issued and outstanding preferred or other shares of any class or series of our stock. The Board of Directors has the authority to increase the ownership limit from time to time, but does not have the authority to do so to the extent that after giving effect to such increase, five beneficial owners of capital stock could beneficially own in the aggregate more than 49.5% of the outstanding capital stock. These limitations on the ownership of our stock could have the effect of delaying, deferring or preventing a takeover or other transaction in which holders of some, or a majority, of the common stock might receive a premium for their common stock over the then prevailing market price or which such holders might believe to be otherwise in their best interest. 37 Item 6. Selected Financial Data The following table presents certain selected historical financial data which has been derived from our audited consolidated financial statements for the five most recent fiscal years ended December 31, 1998. The 1998 and 1997 financial information reflects the discontinued operations related to the spin-off of Crestline in conjunction with the REIT conversion.
Fiscal Year ----------------------------------------- 1998(3) 1997(3) 1996(1) 1995(2) 1994(3) ------- ------- ------- ------- ------- (in millions, except per share data) Income Statement Data: Revenues............................. $3,513 $2,823 $1,957 $1,362 $1,011 Operating profit before minority interest, corporate expenses and interest............................ 661 432 233 114 152 Income (loss) from continuing operations.......................... 194 47 (13) (62) (13) Income (loss) before extraordinary items............................... 195 47 (13) (123) (19) Net income (loss)(4)................. 47 50 (13) (143) (25) Basic earnings (loss) per common share:(5) Income (loss) from continuing operations........................ .90 .22 (.06) (.36) (.08) Income (loss) before extraordinary items............................. .91 .22 (.06) (.72) (.12) Net income (loss)(4)............... .22 .23 (.06) (.84) (.15) Diluted earnings (loss) per common share:(5) Income (loss) from continuing operations........................ .84 .22 (.06) (.36) (.08) Income (loss) before extraordinary items............................. .85 .22 (.06) (.72) (.12) Net income (loss)(4)............... .27 .23 (.06) (.84) (.15) Cash dividends declared per common share............................... 1.00 -- -- -- -- Balance Sheet Data: Total assets(6)...................... $8,268 $6,141 $5,152 $3,557 $3,366 Debt................................. 5,131 3,466 2,647 2,178 1,871
- -------- (1) Fiscal year 1996 includes 53 weeks. (2) Operating results for 1995 include a $10 million pre-tax charge to write down the carrying value of five limited service properties to their net realizable value and a $60 million pre-tax charge to write down an undeveloped land parcel to its estimated sales value. In 1995, we recognized a $20 million extraordinary loss, net of taxes, on the extinguishment of debt. (3) In 1998, we recognized a $148 million extraordinary loss, net of taxes, on the extinguishment of debt. In 1997, we recognized a $3 million extraordinary gain, net of taxes, on the extinguishment of certain debt. In 1994, we recognized a $6 million extraordinary loss, net of taxes, on the required redemption of senior notes. (4) We recorded income from discontinued operations, net of taxes, of $6 million in 1998, as a result of the Distribution. We also recorded a loss from discontinued operations, net of taxes, of $61 million in 1995 and $6 million in 1994, as a result of the spin-off of Host Marriott Services Corporation. The 1995 loss from discontinued operations includes a pre-tax charge of $47 million for the adoption of SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," a pre-tax $15 million restructuring charge and an extraordinary loss of $10 million, net of taxes, on the extinguishment of debt. (5) Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus other dilutive securities. Diluted earnings (loss) per share has not been adjusted for the impact of the Convertible Preferred Securities for 1997 and 1996 and for the comprehensive stock plan and warrants for 1994 through 1996, as they are anti-dilutive. (6) Total assets includes $236 million related to Net Investment in Discontinued Operations for 1997. 38 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Lack of Comparability Following the REIT Conversion Because substantially all of our hotels are leased due to the REIT conversion, we do not believe that the historical results of operations are comparable to what our results of operations following the REIT conversion. Therefore, in addition to the historical presentation, we have presented a discussion of the results of operation on a pro forma basis as if the REIT conversion had occurred on the first day of each respective year. Results of Operations Our historic revenues primarily represent gross property-level sales from our hotels, net gains (losses) on property transactions and equity in the earnings of affiliates. On November 20, 1997, the Emerging Issues Task Force (or 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. We considered the impact of EITF 97-2 on our financial statements and determined that EITF 97-2 required us to include property-level sales and operating expenses of our hotels in the statements of operations. We have given retroactive effect to the adoption of EITF 97-2 in the accompanying consolidated statements of operations. Application of EITF 97-2 to the consolidated financial statements for the fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997 increased both revenues and operating expenses by approximately $2.1 billion, $1.7 billion and $1.2 billion, respectively, and had no impact on operating profit, net income or earnings per share. Our hotel operating costs and expenses have been, to a great extent, fixed. Therefore, we have derived substantial operating leverage from increases in revenue. This operating leverage was somewhat diluted, however, by the impact of base management fees which were calculated as a percentage of sales, variable ground lease payments and incentive management fees tied to operating performance above certain established levels. Successful hotel performance resulted in certain of our properties reaching levels which allowed the manager to share in the growth of profits in the form of higher management fees. For the periods discussed below, our hotel properties experienced substantial increases in REVPAR. 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 occupancy achieved. REVPAR does not include food and beverage or other ancillary revenues generated by the property. The REVPAR increase primarily reflects strong percentage increases in room rates, while occupancy increases have been more moderate. Increases in average room rates have generally been achieved by the managers through shifting occupancies away from discounted group business to higher-rated group and transient business and by selectively increasing room rates. This has been made possible by increased travel due to improved economic conditions and by the favorable supply/demand characteristics existing in the upscale and luxury full-service segments of the lodging industry. 1998 Compared to 1997 (Historical) Revenues. Revenues increased $0.7 billion, or 24%, to $3.5 billion for 1998 from $2.8 billion for 1997. Our revenue and operating profit were impacted by improved results for comparable full-service hotel properties, the addition of 18 full-service hotel properties during 1997 and 36 full-service hotel properties during 1998 and the gain on the sale of two hotel properties in 1998. Hotel sales, which are gross hotel sales, including room sales, food and beverage sales, and other ancillary sales such as telephone sales, increased $0.6 billion, or 23%, to over $3.4 billion in 1998, reflecting the REVPAR 39 increases for comparable units and the addition of full-service hotels in 1997 and 1998. Improved results for our full-service hotels were driven by strong increases in REVPAR for our 78 comparable units of 7.3% to $112.39 for 1998. Results were further enhanced by approximately one percentage point increase in the house profit margin for comparable full-service properties. Average room rates increased nearly 6.9% for our comparable full-service hotels. As discussed in Note 2 to the financial statements, we spun off our senior living communities. We have accounted for these revenues and expenses as discontinued operations and has shown the amount, net of taxes, below income from continuing operations. Revenues generated from our 31 senior living communities totaled $241 million for 1998 compared to $111 million for 1997, as the assets were purchased in the third quarter of 1997. Revenues were also impacted by the gains on the sales of two hotels. The New York East Side Marriott was sold for $191 million resulting in a pre-tax gain of approximately $40 million. The Napa Valley Marriott was sold for $21 million resulting in a pre-tax gain of approximately $10 million. Operating Costs and Expenses. Operating costs and expenses principally consisted of property-level operating costs, depreciation, management fees, real and personal property taxes, ground, building and equipment rent, insurance and certain other costs. Operating costs and expenses increased $0.5 billion to $2.9 billion, primarily representing increased hotel operating costs. Hotel operating costs increased $0.5 billion to $2.8 billion for 1998, primarily due to the addition of 54 full-service hotel properties during 1997 and 1998 and increased management fees and rentals tied to improved property results. As a percentage of hotel revenues, hotel operating costs and expenses decreased slightly to 82% for 1998 from 84% of revenues for 1997, due to the significant increases in REVPAR discussed above, offset by increases in management fees and property-level operating costs, including higher labor costs in certain markets. Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, our operating profit increased $0.2 billion, or 53%, to $0.7 billion for 1998. For 1998, property-level operating profit increased $0.2 billion, or 39%, to $0.6 billion, or 18% of hotel revenues, for 1998 compared to $0.4 billion, or 16% of hotel revenues, for 1997. Specifically, hotels in New York City, San Francisco, Toronto and Mexico City reported significant improvements for 1998 over 1997. Properties in Florida reported some temporary declines in operating results due to exceptionally poor weather in 1998. Minority Interest. Minority interest expense increased $21 million to $52 million for 1998, primarily reflecting the impact of the consolidation of affiliated partnerships and the acquisition of controlling interests in newly- formed partnerships during 1997 and 1998. Corporate Expenses. Corporate expenses increased $5 million to $50 million for 1998. As a percentage of revenues, corporate expenses decreased to 1.4% of revenues for 1998 from 1.6% in 1997, reflecting our efforts to control corporate expenses in spite of the substantial growth in revenues. REIT Conversion Expenses. REIT conversion expenses reflect the professional fees, consent fees, and other expenses associated with our conversion to a REIT and totaled $64 million for 1998. There were no REIT conversion expenses prior to 1998. Interest Expense. Interest expense increased 16% to $335 million in 1998, primarily due to additional debt assumed in connection with the 1997 and 1998 full-service hotel additions as well as the issuance of the senior notes and establishment of a new credit facility in 1998. 40 Dividends on Convertible Preferred Securities of Subsidiary Trust. The dividends on the convertible preferred securities reflect the dividends on the $550 million in 6.75% Convertible Preferred Securities issued by a subsidiary trust of Host Marriott in December 1996. Interest Income. Interest income decreased $1 million to $51 million for 1998, primarily reflecting the lower level of cash and marketable securities held in 1998 compared to 1997. Discontinued Operations. Income from discontinued operations of $6 million for 1998 represents the senior living communities' business results of operations for the entire year. The provision for loss on disposal of $5 million for 1998 includes organizational and formation costs related to Crestline Capital Corporation. Income before Extraordinary Item. Income before extraordinary item for 1998 was $195 million, compared to $47 million for 1997. Extraordinary Gain (Loss). In connection with the purchase in August 1998 of our old senior notes, we recognized an extraordinary loss of $148 million, which represents the bond premium and consent payments totaling approximately $175 million and the write-off of deferred financing fees of approximately $52 million related to the old senior notes, net of taxes. In March 1997, we purchased 100% of the outstanding bonds secured by a first mortgage on the San Francisco Marriott Hotel. We purchased the bonds for $219 million, which was an $11 million discount to the face value of $230 million. In connection with the redemption and defeasance of the bonds, we recognized an extraordinary gain of $5 million, which represents the $11 million discount and the write- off of deferred financing fees, net of taxes. In December 1997, we refinanced the mortgage debt secured by Marriott's Orlando World Center. In connection with the refinancing, we recognized an extraordinary loss of $2 million, which represents payment of a prepayment penalty and the write-off of unamortized deferred financing fees, net of taxes. Net Income (Loss). Net income for 1998 was $47 million compared to net income of $50 million for 1997. Basic earnings (loss) per common share was $.22 and $.23 for 1998 and 1997, respectively. Diluted earnings (loss) per common share was $.27 and $.23 for 1998 and 1997, respectively. 1997 Compared to 1996 (Historical) Revenues. Revenues increased $866 million, or 44%, to $2,823 million for 1997. Our revenues and operating profit were impacted by: --improved lodging results for comparable full-service hotels; --the addition of 23 full-service hotels during 1996 and 18 full-service hotels during 1997; --the 1996 sale and leaseback of 16 Courtyard properties and 18 Residence Inns; and --the 1997 results including 52 weeks versus 53 weeks in 1996. Hotel sales increased $864 million, or 44%, to over $2,806 million in 1997, reflecting the REVPAR increases for comparable units and the addition of full- service properties during 1996 and 1997. Improved results for our full-service hotels were driven by strong increases in REVPAR for comparable units of 12.6% in 1997. Results were further enhanced by a more than two percentage point increase in the house profit margin for comparable full-service properties. On a comparable basis for our full-service properties, average room rates increased almost 11%, while average occupancy increased over one percentage point. Operating Costs and Expenses. Operating costs and expenses increased $667 million to $2,391 million for 1997, primarily representing increased hotel operating costs, including depreciation and management fees. Hotel operating costs increased $676 million to $2,362 million, primarily due to the addition of 41 full-service properties during 1996 and 1997, and increased management fees and rentals tied to improved property results. As a percentage of hotel revenues, hotel operating costs and expenses decreased to 84% of revenues for 1997, from 87% of revenues for 1996, reflecting the impact of increased 1997 revenues spread over relatively fixed operating costs and expenses. Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, our operating profit increased $199 million, or 85%, to $432 million in 1997. Hotel operating profit increased 41 $188 million, or 73%, to $444 million, or 16% of hotel revenues, for 1997 compared to $256 million, or 13% of hotel revenues, for 1996. In nearly all markets, our hotels recorded improvements in comparable operating results. In particular, our hotels in the Northeast, Mid-Atlantic and Pacific coast regions benefited from the upscale and luxury full-service room supply and demand imbalance. Hotels in New York City, Philadelphia, San Francisco/Silicon Valley and Southern California performed particularly well. In 1997, our suburban Atlanta properties (three properties totaling 1,022 rooms) generally reported decreased results due to higher activity in 1996 related to the Summer Olympics and the impact of the additional supply added to the suburban areas. However, the majority of our hotel rooms in Atlanta are in the core business districts in downtown and Buckhead where they realized strong year- over-year results and were only marginally impacted by the additional supply. Minority Interest. Minority interest expense increased $25 million to $31 million for 1997, primarily reflecting the impact of the consolidation of affiliated partnerships and the acquisition of controlling interests in newly- formed partnerships during 1996 and 1997. Corporate Expenses. Corporate expenses increased $2 million to $45 million in 1997. As a percentage of revenues, corporate expenses decreased to 1.6% of hotel sales in 1997 from 2.2% of hotel sales in 1996. This reflects our efforts to control corporate expenses in spite of the substantial growth in revenues. Interest Expense. Interest expense increased $51 million to $288 million in 1997, primarily due to the additional mortgage debt of approximately $1.1 billion assumed in connection with the 1996 and 1997 full-service hotel additions, approximately $315 million in debt incurred in conjunction with the acquisition of senior living communities, as well as the issuance of $600 million of 8 7/8% senior notes in July 1997. Dividends on Convertible Preferred Securities of Subsidiary Trust. The dividends on the convertible preferred securities reflect the dividends on the $550 million in 6.75% Convertible Preferred Securities issued by a subsidiary trust of Host Marriott in December 1996. Interest Income. Interest income increased $4 million to $52 million for 1997, primarily reflecting the interest income on the available proceeds generated by the December 1996 offering of convertible preferred securities and the proceeds generated by the issuance of our 8 7/8% senior notes in July 1997. Discontinued Operations. Income from discontinued operations was breakeven in 1997. There were no discontinued operations in 1996. Income (Loss) Before Extraordinary Items. Income before extraordinary items for 1997 was $47 million, compared to a $13 million loss before extraordinary items for 1996, as a result of the items discussed above. Extraordinary Gain (Loss). In March 1997, we purchased 100% of the outstanding bonds secured by a first mortgage on the San Francisco Marriott Hotel. We purchased the bonds for $219 million, which was an $11 million discount to the face value of $230 million. In connection with the redemption and defeasance of the bonds, we recognized an extraordinary gain of $5 million, which represents the $11 million discount less the write-off of unamortized deferred financing fees, net of taxes. In December 1997, we refinanced the mortgage debt secured by Marriott's Orlando World Center. In connection with the refinancing, we recognized an extraordinary loss of $2 million, which represents payment of a prepayment penalty and the write-off of unamortized deferred financing fees, net of taxes. Net Income (Loss). Our net income in 1997 was $50 million, compared to a net loss of $13 million in 1996. Basic and diluted earnings per common share was $.23 for 1997, compared to a basic and diluted loss per common share of $.06 in 1996. 42 1998 Compared to 1997 (Pro Forma)
Pro Forma -------------- 1998 1997 ------ ------ (in millions, except per share amounts) Revenues Hotels...................................................... $1,264 $1,167 Other....................................................... 15 6 ------ ------ Total revenues............................................ 1,279 1,173 ------ ------ Operating costs and expenses Hotels...................................................... 599 626 Other....................................................... 26 23 ------ ------ Total operating costs and expenses........................ 625 649 ------ ------ Operating profit.............................................. 654 524 Minority interest............................................. (23) (12) Corporate expenses............................................ (50) (44) Interest expense.............................................. (449) (446) Dividends on Convertible Preferred Securities of subsidiary trust........................................................ (37) (37) Interest income............................................... 27 12 ------ ------ Income (loss) from continuing operations before income taxes.. 122 (3) Provision for income taxes.................................... (6) -- ------ ------ Income (loss) from continuing operations...................... $ 116 $ (3) ====== ====== Basic earnings (loss) per common share from continuing operations................................................... $ .51 $ (.01) ====== ====== Weighted average shares outstanding........................... 225.6 225.6
Revenues. Revenues primarily represent lease revenues and net gains (losses) on property transactions. Revenues increased $106 million, or 9%, to $1.3 billion for 1998 from $1.2 billion for 1997. Improved results for our hotels were driven by strong increases in REVPAR of 7.4% to $110.93 for 1998, while average occupancy remained unchanged year over year. Operating Costs and Expenses. Operating costs and expenses principally consist of depreciation, property taxes, ground rent, insurance and certain other costs. Operating costs and expenses decreased $24 million to $625 million in 1998. As a percentage of rental revenues, hotel operating costs and expenses decreased to 47% of rental revenues in 1998 from 54% of rental revenues in 1997 due to the increase in minimum rent under our leases. Operating Profit. As a result of the changes in rental revenues and operating costs and expenses discussed above, our operating profit increased $130 million, or 25%, to $654 million for 1998. Hotel operating profit increased $124 million to $665 million, or 53% of rental revenues, for 1998 from $541 million, or 46% of rental revenues, for 1997. Our hotels recorded significant improvements in comparable operating results. Specifically, hotels in New York City, Boston, Toronto and Mexico reported significant improvements for 1998. Properties in Florida reported some temporary declines in operating results due to exceptionally poor weather in 1998. Minority Interest. Minority interest expense increased $11 million to $23 million for 1998, primarily reflecting improved hotel operations. Corporate Expenses. Corporate expenses increased $6 million to $50 million for 1998 due to increased staffing levels and the impact of inflation. 43 Interest Expense. Interest expense increased $3 million to $449 million in 1998, primarily due to amortization related to certain leases. Dividends on Convertible Preferred Securities of Subsidiary Trust. The dividends on convertible preferred securities reflect the dividends accrued on the $550 million in 6.75% Convertible Preferred Securities issued by a subsidiary trust in December 1996. Interest Income. Interest income increased $15 million to $27 million for 1998, primarily due to interest income from excess cash and marketable securities. Income (Loss) from Continuing Operations. The income from continuing operations for 1998 was $116 million, compared to a loss of $(3 million) for 1997. Liquidity and Capital Resources We fund our capital requirements with a combination of operating cash flow, debt and equity financing and proceeds from sales of selected properties and other assets. We utilize these sources of capital to acquire new properties, fund capital additions and improvements and make principal payments on debt. As a result of the REIT conversion, we are required to use available funds to pay dividends to the extent of 95% of taxable income in order to maintain our REIT qualification, and we have indicated an intent to pay dividends equivalent to 100% of taxable income for each year. Payment of these dividends is expected to be funded by the operating partnership. To the extent that the operating partnership's cash flow is not sufficient for this purpose, it may be required to borrow money to pay such dividends. Capital Transactions. We substantially changed our debt financing through the following series of transactions which were intended to facilitate the consummation of the REIT conversion. On April 20, 1998, we and certain of our subsidiaries filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission for $2.5 billion in securities, including debt, equity or any combination thereof. HMH Properties, Inc., then our wholly-owned subsidiary utilized $2.2 billion of the capacity under this shelf registration to issue the new senior notes described further below. On August 5, 1998, HMH Properties, which was merged into the operating partnership as part of the REIT conversion, purchased substantially all of its (i) $600 million of 9 1/2% senior notes due 2005, (ii) $350 million of 9% senior notes due 2007 and (iii) $600 million of 8 7/8% senior notes due 2007. Concurrently with each offer to purchase, HMH Properties solicited consents from registered holders of these old senior notes to certain amendments to eliminate or modify substantially all of the restrictive covenants and certain other provisions contained in the indentures pursuant to which the old senior notes were issued. HMH Properties simultaneously utilized the shelf registration to issue an aggregate of $1.7 billion in new senior notes, in two series: $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion of 7 7/8% Series B notes due in 2008. The August 1998 consent solicitations facilitated the merger of HMC Capital Resources Holdings Corporation, then our wholly-owned subsidiary, with and into HMH Properties. HMC Capital Resources, the owner of eight of our hotel properties, was the obligor under our old $500 million revolving credit facility. In August 1998, HMH Properties entered into a new $1.25 billion credit facility with a group of commercial banks, which replaced the old credit facility. The credit facility provides (i) a $350 million term loan facility, subject to certain increases, and (ii) a $900 million revolving credit facility. The new credit facility has an initial three-year term with two one-year extension options. Borrowings under the new credit facility generally bear interest at the Eurodollar rate plus 1.75% (7.5% at December 31, 1998) and the interest rate and commitment fee on the unused portion of the facility fluctuate based on certain financial ratios. As of December 31, 1998, $350 million was outstanding under the credit facility. The net proceeds from the offering of the $1.7 billion senior notes and borrowings under the credit facility were used to purchase substantially all of HMH Properties' old senior notes, to repay amounts outstanding under the old credit facility and to make bond premium and consent payments totaling $175 million. These costs, along with the write-off of deferred financing fees of approximately $52 million related to the old senior notes and the old credit facility, were recorded as a pre-tax extraordinary loss on the extinguishment of debt in 1998. 44 In December 1998, HMH Properties issued $500 million of 8.45% Series C senior notes due in 2008 under the same indenture and with the same covenants as the Series A and Series B senior notes previously issued. The proceeds were used to pay down other debt and pay expenses of the REIT conversion. HMH Properties had a total of $2.2 billion in senior notes outstanding as of its merger with the operating partnership on December 16, 1998. These senior notes, and obligations under the new credit facility, became obligations of the operating partnership at that time. In February 1999, the operating partnership issued $300 million of 8 3/8% Series D senior notes due in 2006 under the same indenture and with the same covenants as the new senior notes and Series C senior notes. The debt was used to refinance, or purchase, approximately $299 million of debt acquired in the partnership mergers, including approximately $40 million of other mortgage debt. In July 1997, HMH Properties and HMC Acquisition Properties, Inc. each of which is our wholly-owned subsidiary, completed consent solicitations with holders of their senior notes to amend certain provisions of their senior notes indentures. The 1997 consent solicitations facilitated the merger of Acquisitions with and into HMH Properties. Concurrent with the 1997 consent solicitations and the HMH Properties and Acquisitions merger, HMH Properties issued an aggregate of $600 million of 8 7/8% senior notes at par with a maturity of July 2007. HMH Properties received net proceeds of approximately $570 million, net of the costs of the 1997 consent solicitations and the offering. HMH Properties paid dividends to Host Marriott of $54 million and $29 million in 1997 and 1996, respectively, as permitted under the indentures. No dividends were paid in 1998. In addition to the capital resources provided by its debt financings, in December 1996 Host Marriott Financial Trust, one of our wholly-owned subsidiary trusts, issued 11 million shares of 6 3/4% Convertible Quarterly Income Preferred Securities, with a liquidation preference of $50 per share for a total liquidation amount of $550 million. The convertible preferred securities represent an undivided beneficial interest in the assets of the trust and, pursuant to various agreements entered into in connection with the transaction, are fully, irrevocably and unconditionally guaranteed by us. Proceeds from the issuance of the convertible preferred securities were invested in 6 3/4% Convertible Subordinated Debentures due December 2, 2026 issued by us, which are the trust's sole assets. Each of the convertible preferred securities is convertible at the option of the holder into shares of our common stock at the rate of 3.2537 shares per convertible preferred security equivalent to a conversion price of $15.367 per share of our common stock. This conversion ratio includes adjustments to reflect distributions made to our common stockholders in connection with the REIT conversion. During 1998, 1997 and 1996, no shares were converted into common stock. Holders of the convertible preferred securities are entitled to receive preferential cumulative cash distributions at an annual rate of 6 3/4% accruing from the original issue date, commencing March 1, 1997, and payable quarterly in arrears thereafter. The distribution rate and the distribution and other payment dates for the convertible preferred securities correspond to the interest rate and interest and other payment dates on the convertible subordinated debentures. We may defer interest payments on the convertible subordinated debentures for a period not to exceed 20 consecutive quarters. If interest payments on the convertible subordinated debentures are deferred, so too are payments on the convertible preferred securities. Under this circumstance, we would not be permitted to declare or pay any cash distributions with respect to our capital stock or debt securities that rank equal in right of payment with or junior to the convertible subordinated debentures. Subject to certain restrictions, the convertible preferred securities are redeemable at our option upon any redemption of the convertible subordinated debentures after December 2, 1999. Upon repayment at maturity or as a result of the acceleration of the convertible subordinated debentures upon the occurrence of a default, the convertible preferred securities are subject to mandatory redemption. We may, from time to time, make market repurchases of these securities as conditions permit. In connection with consummation of the REIT conversion, the operating partnership assumed primary liability for repayment of the convertible subordinated debentures, although we also retain liability. Upon conversion by a convertible preferred securities holder, we will issue shares of our common stock, which will be delivered to such holder. Upon the issuance of such shares by Host Marriott, the operating partnership will issue to us a number of OP Units equal to the number of shares of our common stock issued in exchange for the debentures. 45 In March 1996, we completed the issuance of 31.6 million shares of common stock for net proceeds of nearly $400 million. Capital Acquisitions, Additions and Improvements. We seek to grow primarily through opportunistic acquisitions of full-service hotels. We believe that the upscale and luxury full-service hotel segments of the market offer opportunities to acquire assets at attractive multiples of cash flow and at discounts to replacement value, including under-performing hotels which may be improved by conversion to the Marriott or Ritz-Carlton brands. In the first quarter of 1998, we acquired a controlling interest in the partnership that owns the 1,671-room Atlanta Marriott Marquis Hotel for $239 million, including the assumption of $164 million of mortgage debt. We also acquired a controlling interest in the partnership that owns the 359-room Albany Marriott, the 350-room San Diego Marriott Mission Valley and the 320-room Minneapolis Marriott Southwest for approximately $50 million. In the second quarter of 1998, we acquired the 289-room Park Ridge Marriott for $24 million and acquired the 281-room Ritz-Carlton, Phoenix for $75 million. In addition, we acquired the 397-room Ritz-Carlton, Tysons Corner, Virginia for $96 million and the 487-room Torrance Marriott near Los Angeles, California, for $52 million. In the third quarter of 1998, we acquired the 308-room Ritz-Carlton, Dearborn for approximately $65 million, the 336-room Ritz-Carlton, San Francisco for approximately $161 million and the 404-room Memphis Crowne Plaza (which was converted to the Marriott brand upon acquisition) for approximately $16 million. We are regularly engaged in discussions with respect to other potential acquisition properties. In December 1998, we completed the acquisition of, or controlling interests in, twelve world-class luxury hotels and certain other assets, including a mortgage note on a thirteenth hotel property from affiliates of the Blackstone Group. The operating partnership paid approximately $920 million in cash and assumed debt and issued approximately 43.9 million OP Units, along with other consideration for a total value of approximately $1.55 billion. The number of OP Units issued in the Blackstone acquisition will fluctuate based upon certain closing adjustments to be determined on March 31, 1999. Based on current stock prices, the operating partnership will be required to issue the Blackstone Entities approximately 3.7 million additional OP Units pursuant to such adjustments in April 1999. In December 1998, subsidiaries of the operating partnership merged with eight public partnerships and acquired limited partnership interests in four private partnerships, which collectively own or control 28 properties 15 of which were controlled by us and consolidated on our financial statements prior to December 1998. The operating partnership issued approximately 25 million OP Units, 8.5 million of which were subsequently converted to our common stock, for interests in these partnerships valued at approximately $333 million. As a result of these transactions, the operating partnership increased its ownership of most of the 28 properties to 100% while consolidating 13 additional hotels (4,445 rooms). In connection with our conversion to a REIT, we formed two non-controlled subsidiaries, which own approximately $264 million in assets. The ownership of most of these assets by us and the operating partnership could jeopardize our status as a REIT and the operating partnership's status as a partnership for federal income tax purposes. These assets primarily consist of partnership or other interests in hotels which are not leased and certain furniture, fixtures and equipment used in the hotels. In exchange for the operating partnership's contribution of these assets to the non-controlled subsidiaries, the operating partnership received only nonvoting common stock representing 95% of the total economic interests of the non-controlled subsidiaries. The Host Marriott Statutory Employee/Charitable Trust, the beneficiaries of which are 1) a trust formed for the benefit of certain employees of the operating partnership and 2) the J. Willard Marriott Foundation, acquired all of the voting common stock representing the remaining 5% of the total economic interests, and reflecting 100% of the control of each non-controlled subsidiary. As a result, as of December 31, 1998, we did not control the non-controlled subsidiaries. During 1997, we acquired eight full-service hotels (3,600 rooms) and controlling interests in nine additional full-service hotels (5,024 rooms) for an aggregate purchase price of approximately $766 million (including the assumption of approximately $418 million of debt). We also completed the acquisition of the 504-room New 46 York Marriott Financial Center, after acquiring the mortgage on the hotel for $101 million in late 1996. During 1996, we acquired six full-service hotels (1,964 rooms) for an aggregate purchase price of $189 million and controlling interests in 17 additional full-service properties (8,917 rooms) for an aggregate purchase price of approximately $1.1 billion (including the assumption of $696 million of debt). In November 1997, we announced a committment to develop and construct the 717-room Tampa Convention Center Marriott for a cost estimated at approximately $88 million, net of an approximate $16 million subsidy provided by the City of Tampa. We may also expand existing hotel properties where strong performance and market demand exists. Expansions to existing properties create a lower risk to us as the success of the market is generally known and development time is significantly shorter than new construction. We recently committed to add approximately 500 rooms and an additional 15,000 square feet of meeting space to the 1,503-room Marriott's Orlando World Center. In July 1998, we announced the purchase of a 13-acre parcel of land for the development of a 295-room Ritz-Carlton that will serve as an extension of the 463-room Ritz-Carlton Naples, which was purchased in September 1996. The existing hotel just completed a restaurant and public space refurbishment and is in the process of adding a world-class spa. In addition, a subsidiary of one of the non- controlled subsidiaries entered into a joint venture through which a non- controlled subsidiary owns 49% of the surrounding 27-hole world-class Greg Norman designed golf course development. The golf course joint venture was transferred to a non-controlled subsidiary in connection with the REIT conversion. The total investment by us in expansion and investments in the Ritz-Carlton, Naples property is expected to be approximately $97 million. In 1997, we acquired the outstanding common stock of the Forum Group from Marriott Senior Living Services, Inc., a subsidiary of Marriott International. We purchased the Forum Group portfolio of 29 senior living communities for approximately $460 million, including approximately $270 million in debt. Additionally, during 1997 and 1998, we completed certain expansions and acquired two additional senior living properties for $100 million, including $48 million of debt. The properties, which continued to be operated by Marriott International were owned by a subsidiary of Crestline and distributed to our shareholders in connection with the REIT conversion and are reflected as discontinued operations in our financial statements. In December 1998, we discontinued the senior living business as a result of the distribution of the Crestline common stock to our shareholders. Asset Dispositions. We historically have disposed of, and may from time to time in the future consider opportunities to sell or exchange, real estate properties at attractive valuations when the proceeds could be redeployed into investments with more favorable returns. During the second quarter of 1998, we disposed of the 662-room New York Marriott East Side for proceeds of $191 million and recorded a pre-tax gain of approximately $40 million and the Napa Valley Marriott for proceeds of $21 million and recorded a pre-tax gain of approximately $10 million. During 1997, we disposed of the 255-room Sheraton Elk Grove Suites for proceeds of approximately $16 million. We also sold 90% of an 174-acre parcel of undeveloped land in Germantown, Maryland for approximately $11 million, which approximated its carrying value. During the first and second quarters of 1996, 16 of our Courtyard properties and 18 of our Residence Inn properties were sold, subject to a leaseback, to Hospitality Properties Trust for approximately $314 million, with approximately $35 million to be received upon expiration of the leases. A gain on the transactions of approximately $45 million was deferred and is being amortized over the initial term of the leases. In February 1999, we disposed of the Minneapolis/Bloomington Marriott for $35 million and recorded a pre-tax gain on sale of approximately $13 million. In cases where we have made a decision to dispose of particular properties, we assess impairment of each individual property to be sold on the basis of expected sales price less estimated costs of disposal. Otherwise, we assess impairment of our real estate properties based on whether it is probable that undiscounted future cash flows from such properties will be less than their net book value. If a property is impaired, its basis is adjusted to its fair market value. 47 Cash Flows. Our cash flow from continuing operations in 1998, 1997 and 1996 totaled $312 million, $432 million and $205 million, respectively. Cash flow from (used in) discontinued operations totaled $29 million, $32 million and ($4 million) in 1998, 1997 and 1996, respectively. Our cash used in investing activities from continuing operations in 1998, 1997 and 1996 totaled $655 million, $807 million and $504 million, respectively. Cash from investing activities primarily consists of net proceeds from the sales of assets, offset by the acquisition of hotels and other capital expenditures previously discussed, as well as the purchases and sales of short-term marketable securities. Cash used in investing activities from continuing operations was significantly impacted by the purchase of $354 million of short-term marketable securities in 1997 and the net sale of $354 million of short-term marketable securities in 1998. Cash flow from investing activities from discontinued operations totaled $50 million and $239 million in 1998 and 1997, respectively. There was no cash flow from (used in) investing activities from discontinued operations in 1996. Our cash from financing activities from continuing operations was $265 million for 1998, $392 million for 1997 and $806 million for 1996. Our cash from financing activities from continuing operations primarily consists of the proceeds from debt and equity offerings, mortgage financing on certain acquired hotels and borrowings under our credit facilities offset by redemptions and payments on senior notes, prepayments on hotel mortgages and other scheduled principal payments. Cash flow from (used in) financing activities from discontinued operations totaled $24 million and ($3 million) in 1998 and 1997, respectively. There was no cash flow from (used in) financing activities from discontinued operations in 1996. EBITDA. Our consolidated earnings before interest, taxes, depreciation, amortization and other non-cash items, which is referred to as EBITDA, increased $180 million, or 25%, to $888 million in 1998 from $708 million in 1997. Hotel EBITDA increased $180 million, or 26%, to $870 million in 1998 from $690 million in 1997, reflecting comparable full-service hotel EBITDA growth, as well as incremental EBITDA from 1997 and 1998 acquisitions. Full-service hotel EBITDA from comparable hotel properties increased 9.6% on a REVPAR increase of 7.3%. Our senior living communities contributed $61 million of EBITDA in 1998. The following is a reconciliation of EBITDA to our income before extraordinary items (in millions):
Fifty-two Fifty-two Weeks Ended Weeks Ended December 31, 1998 January 2, 1998 ----------------- --------------- EBITDA................................... $ 888 $ 708 REIT conversion expense.................. (64) -- Interest expense......................... (335) (302) Dividends on convertible preferred securities.............................. (37) (37) Depreciation and amortization............ (243) (240) Minority interest expense................ (52) (32) Income taxes............................. 20 (36) Gain (loss) on disposition of assets and other non-cash charges, net............. 18 (14) ----- ----- Income before extraordinary items...... $ 195 $ 47 ===== =====
The ratio of earnings to fixed charges was 1.5 to 1.0, 1.3 to 1.0 and 1.0 to 1.0 in 1998, 1997 and 1996, respectively. Comparative FFO. Management believes that Comparative Funds From Operations or "Comparative FFO," which represents Funds From Operations, as defined by NAREIT, plus deferred tax expense, is a meaningful disclosure that will help the investment community to better understand our financial performance. FFO is meaningful due to the significance of our long-lived assets and because such data is considered useful by 48 the investment community to better understand our results, and can be used to measure our ability to service debt, fund capital expenditures and expand its business. FFO is defined by NAREIT as net income computed in accordance with GAAP, excluding gains or losses from debt restructurings and sales of properties, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income, operating profit, cash flows from operations or any other operating or liquidity performance measure prescribed by GAAP. FFO is also not an indicator of funds available for our cash needs, including distributions. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, is not comparable to such other REITs. Comparative FFO from total operations increased $107 million, or 36%, to $402 million in 1998. Comparative FFO from total operations increased $131 million, or 80%, to $295 million in 1997. The following is a reconciliation of our income before extraordinary items to Comparative FFO (in millions):
Fiscal Year ---------- 1998 1997 ---- ---- Income before extraordinary items................................ $195 $ 47 Depreciation and amortization.................................... 265 240 Other real estate activities..................................... (53) 6 Partnership adjustments.......................................... (11) (13) Deferred taxes................................................... 46 15 Other non-recurring adjustments: REIT conversion expenses....................................... (37) -- Change in reporting period(a).................................. (3) -- ---- ---- Comparative FFO from total operations........................ 402 295 Discontinued operations.......................................... (28) (10) ---- ---- Comparative FFO from continuing operations....................... $374 $285 ==== ====
- -------- (a) We changed our method of recording operations for certain non-Marriott owned properties in 1998, resulting in the recognition of 13 months of operations in 1998. This amount represents the incremental operations recognized. Cash expenditures for various long-term assets and income taxes have been, and will be, incurred which are not reflected in the Comparative FFO presentation. We consider EBITDA and Comparative FFO to be indicative measures of our operating performance due to the significance of our long-lived assets and because such data is considered useful by the investment community to better understand our results, and can be used to measure our ability to service debt, fund capital expenditures and expand its business, however, such information should not be considered as an alternative to net income, operating profit, cash from operations, or any other operating or liquidity performance measure prescribed by generally accepted accounting principles. Cash expenditures for various long-term assets, interest expense (for EBITDA purposes only) and income taxes have been, and will be, incurred which are not reflected in the EBITDA and Comparative FFO presentation. Partnership Activities. Prior to the REIT conversion, we had general and limited partner interests in numerous limited partnerships which owned 240 hotels including 20 full-service hotels, managed by Marriott International. Debt of the hotel limited partnerships was typically secured by first mortgages on the properties and was generally nonrecourse to the limited partnerships and their partners. However, we committed to advance amounts to certain affiliated limited partnerships, if necessary, to cover certain future debt service requirements; these commitments now have been assumed by the operating partnership. These commitments are limited, in the aggregate, to $22 million. Amounts repaid to us under these guarantees totaled $14 million and $2 million in 1998 and 1997, respectively. Fundings by us under these guarantees amounted to $10 million in 1997. There were no fundings in 1998 or 1996. As a result of the REIT conversion, our interests in the 220 limited- service hotels were transferred to the non-controlled subsidiaries. Additionally, as part of the REIT conversion, 13 of the 20 full-service hotels were acquired by the operating partnership, two were sold, four were transferred to one of the non-controlled subsidiaries and one was retained by us. Leases. We lease certain property and equipment under noncancelable operating leases, including the long-term ground leases for certain hotels, generally with multiple renewal options. The leases related to the 53 Courtyard properties and 18 Residence Inn properties sold during 1995 and 1996, are nonrecourse to us and contain provisions for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts. We remain contingently liable on certain leases related to divested non-lodging properties. Such 49 contingent liabilities aggregated $93 million at December 31, 1998. However, management considers the likelihood of any substantial funding related to these divested properties' leases to be remote. Inflation. Our hotel lodging properties have been impacted by inflation through its effect on increasing costs and on the managers' ability to increase room rates. Unlike other real estate, hotels have the ability to change room rates on a daily basis, so the impact of higher inflation generally can be passed on to customers. Our exposure to inflation is less now that substantially all of our hotels are leased to others. A substantial portion of our debt bears interest at fixed rates. This debt structure largely mitigates the impact of changes in the rate of inflation on future interest costs. However, we are currently exposed to some variable interest rate debt, whose market risk is hedged through interest rate exchange agreements with financial institutions with an aggregate notional amount of $365 million. Under the agreements, we collect interest based on one-month LIBOR (rate of 5.06% at December 31, 1998) and pay interest at fixed rates ranging from 5.72% to 6.60%. The agreements expire between August 2000 and August 2002. Accordingly, the amount of our interest expense under the interest rate exchange agreements and the floating rate debt for a particular year will be affected by changes in short-term interest rates. Year 2000 Issue Year 2000 issues have arisen because many existing computer programs and chip-based embedded technology systems use only the last two digits to refer to a year, and therefore do not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results. The following disclosure provides information regarding the current status of our Year 2000 compliance program. We have adopted the compliance program because we recognize the importance of minimizing the number and seriousness of any disruptions that may occur as a result of the Year 2000 issue. Our compliance program includes an assessment of our hardware and software computer systems and embedded systems, as well as an assessment of the Year 2000 issues relating to third parties with which we have a material relationship or whose systems are material to the operations of our hotel properties. Our efforts to ensure that our computer systems are Year 2000 compliant have been segregated into two separate phases: in-house systems and third-party systems. Following the REIT conversion, Crestline, as the lessee of most of our hotels, will deal directly with Year 2000 matters material to the operation of the hotels, and Crestline has agreed to adopt and implement the program outlined below with respect to third-party systems for all hotels for which it is the lessee. In-House Systems. Since the distribution of Marriott International on October 8, 1993, we have invested in the implementation and maintenance of accounting and reporting systems and equipment that are intended to enable us to provide adequately for our information and reporting needs and which are also Year 2000 compliant. Substantially all of our in-house systems have already been certified as Year 2000 compliant through testing and other mechanisms and we have not delayed any systems projects due to the Year 2000 issue. We are in the process of engaging a third party to review our Year 2000 in-house compliance. Management believes that future costs associated with Year 2000 issues for our in-house systems will be insignificant and therefore not impact our business, financial condition and results of operations. We have not developed, and do not plan to develop, a separate contingency plan for our in-house systems due to their current Year 2000 compliance. Third-Party Systems. We rely upon operational and accounting systems provided by third parties, primarily the managers and operators of our hotel properties, to provide the appropriate property-specific operating systems, including reservation, phone, elevator, security, HVAC and other systems, and to provide us with financial information. Based on discussion with the third parties that are critical to our business, including the managers and operators of our hotels, we believe that these parties are in the process of studying their systems and the systems of their respective vendors and service providers and, in many cases, have begun to implement changes, to ensure that they are Year 2000 compliant. However, we have not received any oral or written assurances that these third parties will be Year 2000 compliant on time. To the extent these changes impact 50 property-level systems, we may be required to fund capital expenditures for upgraded equipment and software. We do not expect these charges to be material, but we are committed to making these investments as required. To the extent that these changes relate to a third party manager's centralized systems, including reservations, accounting, purchasing, inventory, personnel and other systems, management agreements generally provide for these costs to be charged to our properties subject to annual limitations, which costs will be borne by Crestline under the leases. We expect that the third party managers will incur Year 2000 costs in lieu of costs for their centralized systems related to systems projects that otherwise would have been pursued and, therefore, the overall level of centralized systems charges allocated to the properties will not materially increase as a result of the Year 2000 compliance effort. We believe that this deferral of certain systems projects will not have a material impact on our future results of operations, although it may delay certain productivity enhancements at our properties. We and Crestline will continue to monitor the efforts of these third parties to become Year 2000 compliant and will take appropriate steps to address any non- compliance issues. We believe that, in the event of material Year 2000 non- compliance, we will have the right to seek recourse against the manager under our third party management agreements. The management agreements, however, generally do not specifically address the Year 2000 compliance issue. Therefore, the amount of any recovery in the event of Year 2000 non-compliance at a property, if any, is not determinable at this time, and only a portion of such recovery would accrue to us through increased lease rental payments from Crestline. We and Crestline will work with the third parties to ensure that appropriate contingency plans will be developed to address the most reasonably likely worst case Year 2000 scenarios, which may not have been identified fully. In particular, we and Crestline have had extensive discussions regarding the Year 2000 problem with Marriott International, the manager of a substantial majority of our hotel properties. Due to the significance of Marriott International to our business, a detailed description of Marriott International's state of readiness follows. Marriott International has adopted an eight-step process toward Year 2000 readiness, consisting of the following: (1) Awareness: fostering understanding of, and commitment to, the problem and its potential risks; (2) Inventory: identifying and locating systems and technology components that may be affected; (3) Assessment: reviewing these components for Year 2000 compliance, and assessing the scope of Year 2000 issues; (4) Planning: defining the technical solutions and labor and work plans necessary for each affected system; (5) Remediation/Replacement: completing the programming to renovate or replace the problem software or hardware; (6) Testing and Compliance Validation: conducting testing, followed by independent validation by a separate internal verification team; (7) Implementation: placing the corrected systems and technology back into the business environment; and (8) Quality Assurance: utilizing an internal audit team to review significant projects for adherence to quality standards and program methodology. Marriott International has grouped its systems and technology into three categories for purposes of Year 2000 compliance: (i) information resource applications and technology (IT Applications)--enterprise-wide systems supported by Marriott International's centralized information technology organization ("IR"); (ii) Business-initiated Systems ("BIS")--systems that have been initiated by an individual business unit, and that are not supported by Marriott International's IR organization; and (iii) Building Systems--non- IT equipment at properties that use embedded computer chips, such as elevators, automated room key systems and HVAC equipment. Marriott International is prioritizing its efforts based on how severe an effect noncompliance would have on customer service, core business processes or revenues, and whether there are viable, non-automated fallback procedures (System Criticality). Marriott International measures the completion of each phase based on documented and quantified results, weighted for System Criticality. As of January 1, 1999, the Awareness and Inventory phases were complete for IT Applications and substantially complete for BIS and Building Systems. For IT Applications, the Assessment, Planning Remediation/Replacement and Testing phases were each over 95 percent complete, and Compliance Validation had been completed for nearly half of key systems, with most of the remaining work in its final stage. BIS and Building Systems, Assessment and Planning are nearly complete. Remediation/Replacement and Testing is 20 percent complete for BIS, and Marriott International is on track for completion of initial Testing of Building 51 Systems by the end of the first quarter of 1999. Compliance Validation is in progress for both BIS and Building Systems. Marriott International remains on target for substantial completion of Remediation/Replacement and Testing for System Critical BIS and Building Systems by June 1999 and September 1999, respectively. Quality Assurance is in progress for IT Applications, BIS and Building Systems. Year 2000 compliance communications with Marriott International's significant third party suppliers, vendors and business partners, including its franchisees are ongoing. Marriott International's efforts are focused on the connections most critical to customer service, core business processes and revenues, including those third parties that support the most critical enterprise-wide IT Applications, franchisees generating the most revenues, suppliers of the most widely used Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT products, and financial institutions providing the most critical payment processing functions. Responses have been received from a majority of the firms in this group. A majority of these respondents have either given assurances of timely Year 2000 compliance or have identified the necessary actions to be taken by them or Marriott International to achieve timely Year 2000 compliance for their products. Marriott International has established a common approach for testing and addressing Year 2000 compliance issues for its managed and franchised properties. This includes a guidance protocol for operated properties, and a Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance information. Marriott International is also utilizing a Year 2000 best- practices sharing system. Risks. There can be no assurances that Year 2000 remediation by us or third parties will be properly and timely completed, and failure to do so could have a material adverse effect on us, our business and our financial condition. We cannot predict the actual effects to us of the Year 2000 problem, which depend on numerous uncertainties such as: whether significant third parties properly and timely address the Year 2000 issue and whether broad-based or systemic economic failures occur. Moreover, we are reliant upon Crestline to interface with third parties in addressing the Year 2000 issue at the hotels leased by Crestline. We are also unable to predict the severity and duration of any such failures, which could include disruptions in passenger transportation or transportation systems generally, loss of utility and/or telecommunications services, the loss or disruption of hotel reservations made on centralized reservation systems and errors or failures in financial transactions or payment processing systems such as credit cards. Due to the general uncertainty inherent in the Year 2000 problem and our dependence on third parties, including Crestline, we are unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on us. Our Year 2000 compliance program, and Crestline's adoption thereof, are expected to significantly reduce the level of uncertainty about the Year 2000 problem and management believes that the possibility of significant interruptions of normal operations should be reduced. Accounting Standards. In the fourth quarter of 1996, we adopted SFAS No. 123, "Accounting for Stock Based Compensation." The adoption of SFAS No. 123 did not have a material effect on our financial statements. During 1997, we adopted SFAS No. 128, "Earnings Per Share," SFAS No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The adoption of these statements did not have a material effect on our consolidated financial statements and the appropriate disclosures required by these statements have been incorporated herein. As of January 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income" which establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on our right to receive Host Marriott Services Corporation stock and foreign currency translation adjustments, to be included in other comprehensive income. For 1998 and 1997, our other comprehensive income (loss) was ($16 million) and $7 million, respectively. As of December 31, 1998 and January 2, 1998, our accumulated other comprehensive income (loss) was approximately ($4 million) and $12 million, respectively. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring 52 that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. We have not determined the impact of SFAS No. 133, but we do not believe it will be material. On November 20, 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus of 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. As discussed in Note 1 to the financial statements, we have adopted EITF 97- 2 in the fourth quarter of 1998 with retroactive effect in prior periods to conform to the new presentation. Application of EITF 97-2 to the consolidated financial statements for the fiscal years 1998, 1997 and 1996 increased both revenues and operating expenses by approximately $2.1 billion, $1.7 billion and $1.2 billion, respectively, and had no impact on operating profit, net income or earnings per share. 53 Item 7.a Quantitative and Qualitative Disclosures About Market Risk The table below provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and weighted average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward rates in the yield curve at the reporting date. As of December 31, 1998, the change in current yields between one-year and five-year U.S. Treasury bonds is three basis points, thus, minimal fluctuations in the average interest rates are anticipated over the maturity periods.
Expected Maturity Date --------------------------------------------- Fair 1999 2000 2001 2002 2003 Thereafter Total Value ----- ----- ----- ----- ----- ---------- ----- ----- ($ in millions) Liabilities Long-term Debt-- variable(5): Potomac Hotel Limited Partnership(1)........ $ 163 $ -- $ -- $ -- $ -- $ -- $ 163 $163 Marriott Diversified American Hotels, LP(1)................. 96 -- -- -- -- -- 96 96 New York Marriott Marquis............... 145 -- -- -- -- -- 145 145 San Diego Marriott..... 5 5 6 6 7 167 196 190 Grand Hyatt, Atlanta(2)............ -- -- -- 40 -- -- 40 40 Hyatt Regency, Cambridge............. -- 45 -- -- -- -- 45 45 Hyatt Regency, Reston.. -- -- 49 -- -- -- 49 49 Hyatt Regency, Burlingame............ -- 54 -- -- -- -- 54 54 The Ritz-Carlton, Amelia Island......... -- -- -- -- 90 -- 90 90 Swissotel.............. -- -- -- 200 -- -- 200 200 Credit Facility........ -- -- 350 -- -- -- 350 350 Average Interest Rate(3)............... 7.42% 6.71% 7.47% 7.63% 7.73% 7.73% 7.32% Other: Convertible preferred securities at 6 3/4%.. -- -- -- -- -- -- 550 449
Expected Expiration Date ------------------------------------------- Notional 1999 2000 2001 2002 2003 Thereafter Amount ----- ----- ----- ----- ---- ---------- -------- ($ in millions) Interest Rate Derivatives(6) Receivables: Grand Hyatt, Atlanta(2)............ $ -- $ -- $ -- $ 37 $-- $-- $ 37 Hyatt Regency, Cambridge............. -- 20 -- -- -- -- 20 Hyatt Regency, Cambridge............. -- 20 -- -- -- -- 20 Hyatt Regency, Reston.. -- -- 24 -- -- -- 24 Hyatt Regency, Reston.. -- -- 24 -- -- -- 24 Hyatt Regency, Burlingame............ -- 42 -- -- -- -- 42 Hyatt Regency, Burlingame............ -- 10 -- -- -- -- 10 Swissotel.............. -- -- -- 188 -- -- 188 Payables: Grand Hyatt, Atlanta(2)............ -- -- -- 37 -- -- 37 Hyatt Regency, Cambridge............. -- 20 -- -- -- -- 20 Hyatt Regency, Cambridge............. -- 20 -- -- -- -- 20 Hyatt Regency, Reston.. -- -- 24 -- -- -- 24 Hyatt Regency, Reston.. -- -- 24 -- -- -- 24 Hyatt Regency, Burlingame............ -- 42 -- -- -- -- 42 Hyatt Regency, Burlingame............ -- 10 -- -- -- -- 10 Swissotel.............. -- -- -- 188 -- -- 188 Average Interest Rate Receivables(3)......... 5.55% 5.55% 5.55% 5.55% -- -- 5.55% Payables(4)............ 6.16% 6.15% 6.17% 6.17% -- -- 6.20%
- -------- (1)Subsequent to year-end, the long-term debt amounts were refinanced with fixed interest rate obligations. (2) Subsequent to year-end, the long-term debt amounts were refinanced with fixed interest rate obligations and the related interest rate derivative was terminated. (3) Interest rates are based on one-month LIBOR plus certain basis points which range from zero to 275 basis points. The one-month LIBOR rate at December 31, 1998 was 5.06%. As noted above, the current yield curve is flat over the expected maturity dates and, therefore, we have calculated the average interest rates using the one-month LIBOR rate at December 31, 1998. (4)Interest rates are at fixed rates ranging from 5.72% to 6.60%. (5) Our fixed rate debt of $3.7 billion has a fair value which exceeds its carrying value by $20 million. Substantially all of our fixed rate debt matures in years subsequent to 2003. (6) The fair value of the interest rate swaps is $14 million as of December 31, 1998. See Note 5 to the consolidated financial statement. 54 Item 8. Financial Statements and Supplementary Data The following financial information is included on the pages indicated:
Page ---- Report of Independent Public Accountants................................. 45 Consolidated Balance Sheets as of December 31, 1998 and January 2, 1998.. 46 Consolidated Statements of Operations for the Fiscal Years Ended December 31, 1998 January 2, 1998 and January 3, 1997............................ 47 Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 31, 1998, January 2, 1998 and January 3, 1997............ 48 Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 1998, January 2, 1998 and January 3, 1997........................... 49 Notes to Consolidated Financial Statements............................... 50
55 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Host Marriott Corporation: We have audited the accompanying consolidated balance sheets of Host Marriott Corporation and subsidiaries as of December 31, 1998 and January 2, 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the three fiscal years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Host Marriott Corporation and subsidiaries as of December 31, 1998 and January 2, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company has given retroactive effect to the change to include property-level sales and operating expenses of its hotels in the consolidated statements of operations. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index at Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Washington, D.C. March 5, 1999 56 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and January 2, 1998
1998 1997 ------ ------ (in millions) ASSETS Property and equipment, net..................................... $7,201 $4,634 Notes and other receivables, net (including amounts due from affiliates of $134 million and $23 million, respectively)...... 203 52 Due from managers............................................... 19 87 Investments in affiliates....................................... 33 13 Other assets.................................................... 376 272 Short-term marketable securities................................ -- 354 Cash and cash equivalents....................................... 436 493 Net investment in discontinued operations....................... -- 236 ------ ------ $8,268 $6,141 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Debt Senior notes issued by the Company or its subsidiaries........ $2,246 $1,585 Mortgage debt................................................. 2,438 1,784 Other......................................................... 447 97 ------ ------ 5,131 3,466 Accounts payable and accrued expenses........................... 204 84 Deferred income taxes........................................... 97 487 Other liabilities............................................... 460 296 ------ ------ Total liabilities........................................... 5,892 4,333 ------ ------ Minority interest............................................... 515 58 Company-obligated mandatorily redeemable convertible preferred securities of a subsidiary trust whose sole assets are the convertible subordinated debentures due 2026 ("Convertible Preferred Securities")......................................... 550 550 ------ ------ Shareholders' equity Common Stock, 750 million shares authorized; 225.6 million shares in 1998 and 203.8 million shares in 1997 issued and outstanding.................................................. 2 204 Additional paid-in capital.................................... 1,867 935 Accumulated other comprehensive income........................ (4) 12 Retained (deficit) earnings................................... (554) 49 ------ ------ Total shareholders' equity.................................. 1,311 1,200 ------ ------ $8,268 $6,141 ====== ======
See Notes to Consolidated Financial Statements. 57 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997 (in millions, except per common share amounts)
1998 1997 1996 ------ ------ ------ REVENUES Rooms................................................. $2,220 $1,850 $1,302 Food and beverage..................................... 984 776 515 Other................................................. 238 180 125 ------ ------ ------ Total hotel revenues.................................. 3,442 2,806 1,942 Net gains (losses) on property transactions........... 57 (11) 1 Other................................................. 14 28 14 ------ ------ ------ Total revenues........................................ 3,513 2,823 1,957 ------ ------ ------ OPERATING COSTS AND EXPENSES Hotel property-level costs and expenses Rooms................................................. 524 428 313 Food and beverage..................................... 731 592 406 Other department costs and deductions................. 843 693 506 Management fees and other (including Marriott International management fees of $196 million, $162 million and $101 million, respectively)......... 726 649 461 Other................................................. 28 29 38 ------ ------ ------ Total operating costs and expenses.................... 2,852 2,391 1,724 ------ ------ ------ OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE EXPENSES AND INTEREST................................. 661 432 233 Minority interest...................................... (52) (31) (6) Corporate expenses..................................... (50) (45) (43) REIT conversion expenses............................... (64) -- -- Interest expense....................................... (335) (288) (237) Dividends on Convertible Preferred Securities of subsidiary trust...................................... (37) (37) (3) Interest income........................................ 51 52 48 ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................................................. 174 83 (8) Provision for income taxes............................. (86) (36) (5) Benefit from change in tax status...................... 106 -- -- ------ ------ ------ INCOME (LOSS) FROM CONTINUING OPERATIONS............... 194 47 (13) DISCONTINUED OPERATIONS Income from discontinued operations (net of income tax expense of $4 million in 1998)........................ 6 -- -- Provision for loss on disposal (net of income tax benefit of $3 million in 1998)........................ (5) -- -- ------ ------ ------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............... 195 47 (13) Extraordinary items--gain (loss) on early extinguishment of debt (net of income tax (benefit) expense of ($80) million and $1 million in 1998 and 1997, respectively)......................................... (148) 3 -- ------ ------ ------ NET INCOME (LOSS)...................................... $ 47 $ 50 $ (13) ====== ====== ====== BASIC EARNINGS (LOSS) PER COMMON SHARE: CONTINUING OPERATIONS.................................. $ .90 $ .22 $ (.06) Discontinued operations (net of income taxes).......... .01 -- -- Extraordinary items--gain (loss) on early extinguishment of debt (net of income taxes).......... (.69) .01 -- ------ ------ ------ BASIC EARNINGS (LOSS) PER COMMON SHARE................. $ .22 $ .23 $ (.06) ====== ====== ====== DILUTED EARNINGS (LOSS) PER COMMON SHARE: CONTINUING OPERATIONS.................................. $ .84 $ .22 $ (.06) Discontinued operations (net of income taxes).......... .01 -- -- Extraordinary items--gain (loss) on early extinguishment of debt (net of income taxes).......... (.58) .01 -- ------ ------ ------ DILUTED EARNINGS (LOSS) PER COMMON SHARE............... $ .27 $ .23 $ (.06) ====== ====== ======
See Notes to Consolidated Financial Statements. 58 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME OF HOST MARRIOTT CORPORATION (predecessor to Host Marriott, L.P.) Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997
Accumulated Common Additional Other Shares Common Paid-in Retained Comprehensive Comprehensive Outstanding Stock Capital Earnings Income (Loss) Income (Loss) ----------- ------ ---------- -------- ------------- ------------- (in millions) (in millions) Balance, December 29, 159.7 1995.................... $ 160 $ 499 $ 16 $ -- $ -- -- Net loss................ -- -- (13) -- (13) Other comprehensive -- income: Unrealized gain on HM Services common stock... -- -- -- 5 5 ---- -- Comprehensive loss...... $ (8) ==== Adjustment to Host Marriott -- Services dividend....... -- -- (4) -- 3.9 Common stock issued for the comprehensive stock and employee stock purchase plans.......... 3 12 -- -- 6.8 Common stock issued for warrants exercised...... 7 42 -- -- Common stock issued in 31.6 stock offering.......... 32 368 -- -- - ------------------------------------------------------------------------------------------------- Balance, January 3, 202.0 1997.................... 202 921 (1) 5 -- -- Net income.............. -- -- 50 -- 50 Other comprehensive -- income: Unrealized gain on HM Services common stock... -- -- -- 7 7 ---- -- Comprehensive income.... $ 57 ==== 1.8 Common stock issued for the comprehensive stock and employee stock purchase plans.......... 2 14 -- -- - ------------------------------------------------------------------------------------------------- Balance, January 2, 203.8 1998.................... 204 935 49 12 -- -- Net income.............. -- -- 47 -- 47 Other comprehensive -- income (loss): Unrealized loss on HM Services common stock... -- -- -- (5) (5) Foreign currency translation adjustment.. -- -- -- (9) (9) Reclassification of gain realized on HM Services common stock--net income.................. -- -- -- (2) (2) ---- -- Comprehensive income.... $ 31 ==== 1.4 Common stock issued for the comprehensive stock and employee stock purchase plans.......... -- 8 -- -- -- Adjustment of stock par value from $1 to $.01 per share............... (202) 202 -- -- 11.9 Common stock issued for Special Dividend........ -- 143 (143) -- 8.5 Common stock issued for the REIT roll-up of partnerships (Note 12).. -- 113 -- -- -- Increase in Operating Partnership equity due to issuance of OP Units for limited partner interests (net of $368 million minority interest of the Operating Partnership) ........................ -- 466 -- -- -- Distribution of stock of Crestline Capital Corporation............. -- -- (438) -- -- Cash portion of Special Dividend................ -- -- (69) -- - ------------------------------------------------------------------------------------------------- Balance, December 31, 225.6 1998.................... $ 2 $1,867 $(554) $ (4) - -------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 59 HOST MARRIOTT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997
1998 1997 1996 ------ ------ ---- (in millions) OPERATING ACTIVITIES Income (loss) from continuing operations................ $ 194 $ 47 $(13) Adjustments to reconcile to cash from operations: Depreciation and amortization.......................... 243 231 168 Income taxes........................................... (103) (20) (35) Amortization of deferred income........................ (4) (4) (6) Net (gains) losses on property transactions............ (50) 19 4 Equity in earnings of affiliates....................... (1) (4) (3) Other.................................................. 39 62 49 Changes in operating accounts: Other assets........................................... (56) 57 9 Other liabilities...................................... 50 44 32 ------ ------ ---- Cash from continuing operations........................ 312 432 205 Cash from (used in) discontinued operations............ 29 32 (4) ------ ------ ---- Cash from operations................................... 341 464 201 ------ ------ ---- INVESTING ACTIVITIES Proceeds from sales of assets........................... 227 51 373 Less non-cash proceeds................................. -- -- (35) ------ ------ ---- Cash received from sales of assets...................... 227 51 338 Acquisitions............................................ (988) (359) (702) Capital expenditures: Capital expenditures for renewals and replacements..... (165) (129) (87) New investment capital expenditures.................... (87) (29) (72) Purchases of short-term marketable securities........... (134) (354) -- Sales of short-term marketable securities............... 488 -- -- Notes receivable collections............................ 4 6 13 Affiliate notes receivable issuances and collections, net.................................................... (13) (6) 21 Other................................................... 13 13 (15) ------ ------ ---- Cash used in investing activities from continuing operations............................................ (655) (807) (504) Cash used in investing activities from discontinued operations............................................ (50) (239) -- ------ ------ ---- Cash used in investing activities...................... (705) (1,046) (504) ------ ------ ---- FINANCING ACTIVITIES Issuances of debt....................................... 2,496 857 46 Debt prepayments........................................ (1,898) (403) (173) Cash contributed to Crestline at inception.............. (52) -- -- Cash contributed to Non-Controlled Subsidiary........... (30) -- -- Cost of extinguishment of debt.......................... (175) -- -- Scheduled principal repayments.......................... (51) (90) (82) Issuances of common stock............................... 1 6 454 Issuances of Convertible Preferred Securities, net...... -- -- 533 Other................................................... (26) 22 28 ------ ------ ---- Cash from financing activities from continuing operations............................................ 265 392 806 Cash from (used in) financing activities from discontinued operations............................... 24 (3) -- ------ ------ ---- Cash from financing activities......................... 289 389 806 ------ ------ ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (75) (193) 503 CASH AND CASH EQUIVALENTS, beginning of year............ 511 704 201 ------ ------ ---- CASH AND CASH EQUIVALENTS, end of year.................. $ 436 $ 511 $704 ====== ====== ==== Non-cash financing activities: Assumption of mortgage debt for the acquisition of, or purchase of controlling interests in, certain hotel properties and discontinued senior living communities... $1,215 $ 733 $696 ====== ====== ==== Distribution of net assets in connection with the discontinued operations................................ $ 438 ====== Contribution of net assets to Non-Controlled Subsidiaries........................................... $ 12 ======
See Notes to Consolidated Financial Statements. 60 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Description of Business Host Marriott Corporation a Maryland corporation formerly named HMC Merger Corporation ("Host REIT"), operating through an umbrella partnership structure, is the owner of full-service hotel properties. Host REIT operates as a self-managed and self-administered real estate investment trust ("REIT") and its operations are conducted solely through an operating partnership and its subsidiaries. As REITs are not permitted to derive revenues directly from the operations of hotels, Host REIT leases substantially all of the hotels to subsidiaries of Crestline Capital Corporation ("Crestline" or the "Lessee") and certain other lessees as further discussed at Note 9. As of December 31, 1998, Host REIT owned, or had controlling interests in, 126 upscale and luxury, full-service hotel lodging properties generally located throughout the United States and operated primarily under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names. Most of these properties are managed by Marriott International, Inc. ("Marriott International"). Host REIT also has certain economic, non-voting interests in certain Non-Controlled Subsidiaries, whose hotels are also managed by Marriott International (see Note 4). Basis of Presentation On April 16, 1998, the Board of Directors of Host Marriott Corporation, ("Host Marriott"), a Delaware corporation and the predecessor to Host REIT, approved a plan to reorganize Host Marriott's business operations through the spin-off of Host Marriott's senior living business as part of Crestline and the contribution of Host Marriott's hotels and certain other assets and liabilities to a newly formed Delaware limited partnership, Host Marriott, L.P. (the "Operating Partnership"). Host Marriott merged into HMC Merger Corporation (the "Merger"), a newly formed Maryland corporation (renamed Host Marriott Corporation) which intends to qualify, effective January 1, 1999, as a real estate investment trust ("REIT") and is the sole general partner of the Operating Partnership. Host Marriott's and its subsidiaries' contribution of its hotels and certain assets and liabilities to the Operating Partnership and its subsidiaries (the "Contribution") in exchange for units of partnership interest in the Operating Partnership was accounted for at Host Marriott's historical basis. As of December 31, 1998, Host REIT owned approximately 78% of the Operating Partnership. In these consolidated financial statements, the "Company" or "Host Marriott" refers to Host Marriott Corporation, both before and after the Merger and its conversion to a REIT (the "REIT Conversion"). On December 29, 1998, the Company completed the previously announced spin- off of Crestline (see Note 2), through a taxable stock dividend to its shareholders. Each Host Marriott shareholder of record on December 28, 1998 received one share of Crestline for every ten shares of Host Marriott common stock owned (the "Distribution"). As a result of the Distribution, the Company's financial statements have been restated to present the senior living communities' business results of operations and cash flows as discontinued operations. See Note 2 for further discussion of the Distribution. All historical financial statements presented have been restated to conform to this presentation, with the historical assets and liabilities of that segment presented on the balance sheet as Net Investment in Discontinued Operations. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries and controlled affiliates. Investments in affiliates over which the Company has the ability to exercise significant 61 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) influence, but does not control, are accounted for using the equity method. All material intercompany transactions and balances have been eliminated. Fiscal Year End Change The U.S. Internal Revenue Code of 1986, as amended, requires REITs to file their U.S. income tax return on a calendar year basis. Accordingly in 1998, the Company changed its fiscal year-end to December 31 for both financial and tax reporting requirements. Previously, the Company's fiscal year ended on the Friday nearest to December 31. Fiscal year 1998 and 1997 included 52 weeks compared to 53 weeks for fiscal year 1996. Revenues and Expenses Revenues primarily represent the gross sales generated by the Company's hotel properties and net gains (losses) on property transactions. As discussed below, the Company previously recorded only the house profit generated by the Company's hotels as revenue. House profit is total hotel sales less certain hotel property-level costs and expenses, which reflects the net revenues flowing to the Company as the property owner. 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 considered the impact of EITF 97-2 on its financial statements and determined that EITF 97-2 requires the Company to include property-level sales and operating expenses of its hotels in its statements of operations. The Company has given retroactive effect to the adoption of EITF 97-2 in the accompanying consolidated statements of operations. Application of EITF 97-2 to the consolidated financial statements for the fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997 increased both revenues and operating expenses by approximately $2.1 billion, $1.7 billion and $1.2 billion, respectively, and had no impact on operating profit, net income (loss) or earnings per share. In prior years operations for certain of the Company's hotels were recorded from the beginning of December of the prior year to November of the current year due to a one-month delay in receiving results from those hotel properties. Upon conversion to a REIT, all operations are required to be reported on a calendar year basis in accordance with Federal income tax regulations. As a result, the Company has recorded one additional period of operations in fiscal year 1998 for these properties. The effect on revenues and net income was to increase revenues by $44 million and net income by $6 million and diluted earnings per share by $.02. Earnings (Loss) Per Common Share Basic earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding plus other dilutive securities. Diluted earnings per common share has not been adjusted for the impact of the Convertible Preferred Securities for 1997 and 1996 and for the comprehensive stock plan and warrants for 1996 as they were anti-dilutive. In December 1998, the Company declared the Special Dividend (Note 2) and, in February 1999, the Company distributed 11.9 million shares to existing shareholders in conjunction with the Special Dividend. The weighted average number of common shares outstanding and the basic and diluted earnings per share computations have been restated to reflect these shares as outstanding for all periods presented. 62 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In February 1999, the Company issued 8.5 million shares in exchange for 8.5 million OP Units issued to certain limited partners in connection with the Partnership Mergers (see Note 12) which are deemed outstanding at December 31, 1998. A reconciliation of the number of shares utilized for the calculation of diluted earnings per common share follows:
1998 1997 1996 ----- ----- ----- Weighted average number of common shares outstanding...... 216.3 215.0 200.6 Assuming distribution of common shares granted under comprehensive stock plan, less shares assumed purchased at average market price.................................. 4.0 4.8 -- Assuming conversion of Convertible Preferred Securities... 35.8 -- -- Other..................................................... 0.3 0.3 -- ----- ----- ----- Shares utilized for the calculation of diluted earnings per share................................................ 256.4 220.1 200.6 ===== ===== =====
A reconciliation of net income (loss) to earnings (loss) used for the calculation of diluted earnings per common share follows:
1998 1997 1996 ---- ---- ---- Net income (loss).......................................... $47 $ 50 $(13) Dividends, net of tax benefit, assuming conversion of Convertible Preferred Securities.......................... 22 -- -- --- ---- ---- Earnings used for the calculation of diluted earnings per share..................................................... $69 $ 50 $(13) === ==== ====
International Operations The consolidated statements of operations include the following amounts related to non-U.S. subsidiaries and affiliates: revenues of $121 million, $105 million and $49 million and income (loss) before income taxes of $7 million, ($9 million) and ($2 million) in 1998, 1997 and 1996, respectively. Minority Interest The 22% of the Operating Partnership equity owned by outside third parties is presented as minority interest ($368 million as of December 31, 1998). Minority interest also includes minority interests in consolidated investments of the Operating Partnership of $147 million. Property and Equipment Property and equipment is recorded at cost. For newly developed properties, cost includes interest, ground rent and real estate taxes incurred during development and construction. Replacements and improvements are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 years for buildings and three to ten years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Gains on sales of properties are recognized at the time of sale or deferred to the extent required by generally accepted accounting principles. Deferred gains are recognized as income in subsequent periods as conditions requiring deferral are satisfied or expire without further cost to the Company. 63 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In cases where management is holding for sale particular hotel properties, the Company assesses impairment based on whether the estimated sales price less costs of disposal of each individual property to be sold is less than the net book value. A property is considered to be held for sale when the Company has made the decision to dispose of the property. Otherwise, the Company assesses impairment of its real estate properties based on whether it is probable that undiscounted future cash flows from each individual property will be less than its net book value. If a property is impaired, its basis is adjusted to its fair market value. Deferred Charges Financing costs related to long-term debt are deferred and amortized over the remaining life of the debt. Cash, Cash Equivalents and Short-term Marketable Securities The Company considers all highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents includes approximately $22 million and $115 million at December 31, 1998 and January 2, 1998, respectively, of cash related to certain consolidated partnerships, the use of which is restricted generally for partnership purposes to the extent it is not distributed to the partners. Short-term marketable securities include investments with a maturity of 91 days to one year at the date of purchase. The Company's short-term marketable securities represent investments in U.S. government agency notes and high quality commercial paper. The short-term marketable securities are categorized as available for sale and, as a result, are stated at fair market value. Unrealized holding gains and losses are included as a separate component of shareholders' equity until realized. Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and short-term marketable securities. The Company maintains cash and cash equivalents and short-term marketable securities with various high credit- quality financial institutions. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution. The Company is also subject to credit risk as a party to interest rate swap agreements. The Company monitors the creditworthiness of its contracting parties by evaluating credit exposure and referring to the ratings of widely accepted credit rating services. The Standard and Poors' long-term debt ratings for the contracting parties are AA-, AA- and BBB+. The Company is exposed to credit loss in the event of non-performance by the contracting party to the interest rate swap agreements; however, the Company does not anticipate non-performance by any of the contracting parties. In addition, on January 1, 1999, subsidiaries of Crestline became the lessees of virtually all the hotels and, as such, their rent payments are the primary source of the Company's future revenues. Rent payments are provided from pools of hotels which are guaranteed by Crestline. For discussion of the guarantee, see Note 9. However, management believes that due to Crestline's substantial assets, net worth and ability to operate as a separate publicly traded company, Crestline will have the financial stability and access to capital necessary to meet the substantial obligations as lessee under the leases. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 64 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) REIT Conversion Expenses The Company has incurred certain costs related to the REIT Conversion. These costs consist of professional fees, printing and filing costs, consent fees and certain other related fees and are classified as REIT conversion expenses on the consolidated statement of operations. As of December 31, 1998, $48 million of REIT Conversion expenses were accrued and included in accounts payable and accrued expenses. Interest Rate Swap Agreements The Company has entered into a limited number of interest rate swap agreements for non-trading purposes. The Company uses such agreements to fix certain of its variable rate debt to a fixed rate basis. The interest rate differential to be paid or received on interest rate swap agreements is recognized as an adjustment to interest expense. Other Comprehensive Income As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's right to receive HM Services stock (see Note 10) and foreign currency translation adjustments, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. The components of total accumulated other comprehensive income in the balance sheet are as follows (in millions):
1998 1997 ---- ---- Net unrealized gains ............................................. 5 12 Foreign currency translation adjustment........................... (9) -- --- --- Total accumulated other comprehensive income (loss)............... $(4) $12 === ===
Application of New Accounting Standards During 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." In 1997, the Company adopted SFAS No. 128, "Earnings Per Share;" SFAS No. 129, "Disclosure of Information About Capital Structure" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The adoption of these statements did not have a material effect on the Company's consolidated financial statements and comprehensive income. As discussed above, the Company has retroactively adopted EITF 97-2. 65 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that derivative instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not determined the impact of SFAS No. 133, but management does not believe it will be material. The EITF reached a consensus in May 1998 on Issue 98-9, "Accounting for Contingent Rents in Interim Financial Periods," which required a lessor to defer recognition of contingent rental income in interim periods until the specified target that triggers the contingent rental income is achieved. In November 1998, EITF 98-9 was rescinded; however, the impact of the accounting principles outlined in EITF 98-9 must continue to be disclosed in quarterly financial statements. The Company's accounting policy is to recognize rental income based on an estimate of full-year rental income and disclose in the footnotes to the financial statements the portion of rental income that is contingent. 2. Distribution and Special Dividend In December 1998, the Company distributed to its shareholders through a taxable distribution the outstanding shares of common stock of Crestline (the "Distribution"), formerly a wholly owned subsidiary of the Company, which, as of the date of the Distribution, owned and operated the Company's senior living communities, owned certain other assets and held leasehold interests in substantially all of the Company's hotels. The Distribution provided Company shareholders with one share of Crestline common stock for every ten shares of Company common stock held by such shareholders on the record date of December 28, 1998. As a result of the Distribution, the Company's financial statements have been restated to present the senior living communities' business results of operations and cash flows as discontinued operations. Revenues for the Company's discontinued operations totaled $241 million and $111 million in 1998 and 1997, respectively. The provision for loss on disposal includes organizational and formation costs related to Crestline. For purposes of governing certain of the ongoing relationships between the Company and Crestline after the Distribution and to provide for an orderly transition, the Company and Crestline entered into various agreements, including a Distribution Agreement, an Employee Benefits Allocation Agreement and a Tax Sharing Agreement. Effective as of December 29, 1998, these agreements provide, among other things, for the division between the Company and Crestline of certain assets and liabilities. On December 18, 1998, the Board of Directors declared a special dividend which entitled shareholders of record on December 28, 1998 to elect to receive either $1.00 in cash or .087 of a share of common stock of the Company for each outstanding share of the Company's common stock owned by such shareholder on the record date (the "Special Dividend"). Cash totaling $69 million and 11.9 million shares of common stock that were elected in the Special Dividend were paid and/or issued on February 10, 1999. 66 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Property and Equipment Property and equipment consists of the following:
1998 1997 ------ ------ (in millions) Land and land improvements................................ $ 740 $ 418 Buildings and leasehold improvements...................... 6,613 4,329 Furniture and equipment................................... 740 686 Construction in progress.................................. 78 36 ------ ------ 8,171 5,469 Less accumulated depreciation and amortization............ (970) (835) ------ ------ $7,201 $4,634 ====== ======
The detail of property and equipment above excludes net book value of the discontinued senior living business of $583 million at January 2, 1998. Interest cost capitalized in connection with the Company's development and construction activities totaled $4 million in 1998, $1 million in 1997 and $3 million in 1996. In 1997, the Company, through an agreement with the ground lessor of one of its properties terminated its ground lease and recorded a $15 million loss on the write-off of its investment, including certain transaction costs, which has been included in net gains (losses) on property transactions in the accompanying consolidated financial statements. In 1996, the Company recorded a $4 million charge to write down an undeveloped land parcel to its net realizable value based on its expected sales value. 4. Investments in and Receivables from Affiliates Investments in and receivables from affiliates consist of the following:
Ownership Interests 1998 1997 --------- ------ ------ (in millions) Equity investments Rockledge Hotel Properties, Inc................... 95% $ 31 $ -- Fernwood Hotel Assets, Inc........................ 95% 2 -- Hotel partnerships(1)............................. 1%-50% -- 13 Notes and other receivables from affiliates, net.... -- 134 23 ------ ------ $ 167 $ 36 ====== ======
- -------- (1) During 1998, all or substantially all of the interests in the previously unconsolidated hotel partnerships were consolidated or contributed to the Non-Controlled Subsidiaries (defined herein) as a result of the REIT Conversion and the Partnership Mergers. In connection with the REIT Conversion, Rockledge Hotel Properties, Inc. and Fernwood Hotel Assets, Inc. (together, the "Non-Controlled Subsidiaries") were formed to own various assets of approximately $264 million contributed by the Company to the Operating Partnership, the direct ownership of which by the Company or the Operating Partnership could jeopardize the Company's status as a REIT. These assets primarily consist of 67 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) partnership or other interests in hotels which are not leased and certain furniture, fixtures and equipment ("FF&E") used in the hotels. In exchange for the contribution of these assets to the Non-Controlled Subsidiaries, the Operating Partnership received only non-voting common stock of the Non- Controlled Subsidiaries, representing 95% of the total economic interests therein. The Host Marriott Statutory Employee/Charitable Trust, the beneficiaries of which are certain employees of the Company and the J.W. Marriott Foundation concurrently acquired all of the voting common stock representing the remaining 5% of the total economic interest. As a result, as of December 31, 1998, the Company did not control the Non-Controlled Subsidiaries. The Non-Controlled Subsidiaries own three full-service hotels and interests in partnerships that own an additional two full-service hotels and 220 limited-service hotels. In connection with the REIT Conversion, the Company completed the Partnership Mergers and, as a result, investments in affiliates in prior years include earnings and assets, which are now consolidated. (See Note 12 for discussion.) In 1997, the Company acquired all of the outstanding interests in Chesapeake Hotel Limited Partnership ("CHLP") that owns six hotels and acquired controlling interests in four affiliated partnerships for approximately $550 million, including the assumption of approximately $410 million of debt. In early 1998, the Company obtained a controlling interest in the partnership that owns the 1,671-room Atlanta Marriott Marquis for approximately $239 million, including the assumption of $164 million of mortgage debt. Receivables from affiliates are reported net of reserves of $7 million at December 31, 1998 and $144 million at January 2, 1998. Net amounts funded by the Company totaled $10 million in 1997, and repayments were $14 million in 1998 and $2 million in 1997. There were no fundings in 1998 and 1996. The Company's pre-tax income from affiliates includes the following:
1998 1997 1996 ------ ------ ---- (in millions) Interest income......................................... $ 1 $ 11 $17 Equity in net income.................................... 1 5 3 ------ ------ --- $ 2 $ 16 $20 ====== ====== === Combined summarized balance sheet information for the Company's affiliates follows: 1998 1997 ------ ------ (in millions) Property and equipment, net............................. $1,656 $1,979 Other assets............................................ 258 283 ------ ------ Total assets.......................................... $1,914 $2,262 ====== ====== Debt, principally mortgages............................. $1,622 $2,179 Other liabilities....................................... 300 412 Partners' deficit....................................... (8) (329) ------ ------ Total liabilities and partners' deficit............... $1,914 $2,262 ====== ======
68 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Combined summarized operating results for the Company's affiliates follow:
1998 1997 1996 ------ ------ ------ (in millions) Revenues............................................. $1,123 $1,393 $1,740 Operating expenses: Cash charges (including interest).................. (930) (1,166) (1,469) Depreciation and other non-cash charges............ (151) (190) (229) ------ ------ ------ Income before extraordinary items.................... 42 37 42 Extraordinary items--forgiveness of debt............. 4 40 12 ------ ------ ------ Net income......................................... $ 46 $ 77 $ 54 ====== ====== ======
5. Debt Debt consists of the following:
1998 1997 ------ ------ (in millions) Series A senior notes, with a rate of 7 7/8% due August 2005........................................................ $ 500 $ -- Series B senior notes, with a rate of 7 7/8% due August 2008........................................................ 1,192 -- Series C senior notes, with a rate of 8.45% due December 2008........................................................ 498 -- Senior secured notes, with a rate of 9 1/2% due May 2005..... 21 600 Senior secured notes, with a rate of 8 7/8% due July 2007.... -- 600 Senior secured notes, with a rate of 9% due December 2007.... -- 350 Senior notes, with an average rate of 9 3/4% at December 31, 1998, maturing through 2012....................................... 35 35 ------ ------ Total senior notes......................................... 2,246 1,585 ------ ------ Mortgage debt (non-recourse) secured by $3.3 billion of real estate assets, with an average rate of 7.77% at December 31, 1998, maturing through February 2023............................................... 2,438 1,762 Line of credit, terminated in August 1998.................... -- 22 ------ ------ Total mortgage debt........................................ 2,438 1,784 ------ ------ Line of credit, with a variable rate of Eurodollar plus 1.75% (7.5% at December 31, 1998).......................................... 350 -- Other notes, with an average rate of 7.39% at December 31, 1998, maturing through December 2017........................ 90 89 Capital lease obligations.................................... 7 8 ------ ------ Total other................................................ 447 97 ------ ------ $5,131 $3,466 ====== ======
The detail above excludes $317 million of debt relating to the discontinued senior living business in 1997. On July 10, 1997, HMH Properties, Inc. ("Properties," an indirect wholly owned subsidiary of Host Marriott) and HMC Acquisitions Properties, Inc. ("Acquisitions", an indirect, wholly owned subsidiary of Host Marriott) completed consent solicitations (the "1997 Consent Solicitations") with holders of their senior notes ($600 million of 9 1/2% senior notes due 2005 and $350 million of 9% senior notes due 2007) to amend 69 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) certain provisions of their senior indentures. The 1997 Consent Solicitations facilitated the merger of Acquisitions with and into Properties. The amendments to the indentures also increased the ability of Properties 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 required to permit Properties to make distributions to affiliates. Concurrent with the 1997 Consent Solicitations and the Properties and Acquisitions merger, Properties issued an aggregate of $600 million of 8 7/8% senior notes at par with a maturity of July 2007. Properties received net proceeds of approximately $570 million, net of the costs of the 1997 Consent Solicitations and the offering. In conjunction with the REIT Conversion, Properties was merged with the Operating Partnership and all of the debt of Host Marriott and Properties was assumed by the Operating Partnership. During 1997, the Company, through its wholly owned subsidiary, HMC Capital Resources Corporation ("Resources"), entered into a credit facility (the "Old Credit Facility") with a group of commercial banks under which it could borrow up to $500 million for the acquisition of lodging real estate and for the Company's working capital purposes. During August 1998, the Old Credit Facility was terminated. The Company also purchased 100% of the outstanding bonds secured by a first mortgage on the San Francisco Marriott in 1997. The Company purchased the bonds for $219 million, an $11 million discount to the face value of $230 million. In connection with the redemption and defeasance of the bonds, the Company recognized an extraordinary gain of $5 million, which represents the $11 million discount less the write-off of unamortized deferred financing fees, net of taxes. In 1997, the Company also incurred approximately $418 million of mortgage debt in conjunction with the acquisition of 11 hotels. In connection with the acquisition of the outstanding common stock of Forum Group, Inc. (the "Forum Group") in June 1997, the Company assumed debt of approximately $270 million. In 1997, an additional $33 million of debt financing was provided by Marriott International. The Company also assumed approximately $15 million of debt in conjunction with the acquisition of the Leisure Park retirement community in 1997. As a result of the Distribution, the debt related to the Forum Group and Leisure Park retirement community is included in net investments of discontinued operations for 1997 (Note 2). The Company continues to provide a guarantee on the Leisure Park debt. In the fourth quarter of 1996, the Company repaid the $109 million mortgage on the Philadelphia Marriott. In the first quarter of 1997, the Company obtained $90 million in first mortgage financing from two insurance companies secured by the Philadelphia Marriott. The mortgage bears interest at a fixed rate of 8.49% and matures in April 2009. In December 1997, the Company successfully completed the refinancing of the MHP (defined herein) mortgage debt for approximately $152 million. The new mortgage bears interest at 7.48% and matures in January 2008. In connection with the refinancing, the Company recognized an extraordinary loss of $2 million which represents payment of a prepayment penalty and the write-off of unamortized deferred financing fees, net of taxes. On April 20, 1998, the Company and certain of its subsidiaries filed a shelf registration on Form S-3 (the "Shelf Registration") with the Securities and Exchange Commission for the issuance of up to $2.5 billion in securities. 70 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On August 5, 1998, the Company (through Properties) utilized the Shelf Registration to issue an aggregate of $1.7 billion in new senior notes (the "New Senior Notes"). The New Senior Notes were issued in two series, $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion of 7 7/8% Series B notes due in 2008. The Company utilized the proceeds from the New Senior Notes to purchase substantially all of its (i) $600 million in 9 1/2% senior notes due 2005; (ii) $350 million in 9% senior notes due 2007; and (iii) $600 million in 8 7/8% senior notes due 2007 (collectively, the "Old Senior Notes"). Approximately $21 million of the Old Senior Notes remain outstanding. In connection with the purchase of substantially all of the Old Senior Notes, the Company recorded a charge of approximately $148 million (net of income tax benefit of $80 million) as an extraordinary item representing the amount paid for bond premiums and consent fees, as well as the write-off of deferred financing fees on the Old Senior Notes. Concurrently with each offer to purchase, Properties successfully solicited consents (the "1998 Consent Solicitations") from registered holders of the Old Senior Notes to certain amendments to eliminate or modify substantially all of the restrictive covenants and certain other provisions contained in the indentures pursuant to which the Old Senior Notes were issued. In conjunction with the issuance of the New Senior Notes, Properties entered into a $1.25 billion credit facility (the "New Credit Facility") with a group of commercial banks. The New Credit Facility has an initial three-year term with two one-year extension options. Borrowings under the New Credit Facility bear interest currently at the Eurodollar rate plus 1.75% (7.5% at December 31, 1998). The interest rate and commitment fee on the unused portion of the New Credit Facility fluctuate based on certain financial ratios. The New Senior Notes and the New Credit Facility were assumed by the Operating Partnership in connection with the REIT Conversion. As of December 31, 1998, $350 million was outstanding under the New Credit Facility. The New Credit Facility and the indenture under which the New Senior Notes were issued contain covenants restricting the ability of Properties and certain of its subsidiaries to incur indebtedness, grant liens on their assets, acquire or sell assets or make investments in other entities, and make certain distributions to equityholders of Properties, the Company, and the Operating Partnership. The New Credit Facility also contains certain financial covenants relating to, among other things, maintaining certain levels of tangible net worth and certain ratios of EBITDA to interest and fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt, and secured debt to total debt. In connection with the REIT Conversion, Properties was merged with, and into, the Operating Partnership in December 1998. In December 1998, the Operating Partnership issued $500 million of 8.45% Series C notes due in 2008 under the same indenture and with the same covenants as the New Senior Notes. In February 1999, the Company issued $300 million of 8 3/8% Series D notes due in 2006. The debt was used to refinance, or purchase, approximately $299 million of debt acquired in the Partnership Mergers, and approximately $40 million of other mortgage debt. In December 1998, the Company became party to eight interest rate swap agreements in connection with the Blackstone Acquisition discussed in Note 12. The notional amount of the agreements is approximately $365 million, with expiration dates between August 2000 and August 2002. The Company receives interest based on one month LIBOR (5.06% at December 31, 1998) and pays interest at fixed rates ranging from 5.72% to 6.60%. The interest rate swap agreements allow the Company to effectively eliminate the variability of the interest rates on certain secured debt. The Company was party to an interest rate swap agreement with a financial institution with an aggregate notional amount of $100 million which expired in December 1998. In 1997, the Company was party to two additional interest rate swap agreements with an aggregate notional amount of $400 million which expired in May 1997. The Company realized a net reduction of interest expense of $1 million in 1997 and $6 million in 1996 related to interest rate swap agreements. The reduction in interest expense in 1998 was not material as the Company did not assume the agreements until December 30. 71 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's debt balance at December 31, 1998, includes $87 million of debt that is recourse to the parent company. Aggregate debt maturities at December 31, 1998 are (in millions): 1999.............................................................. $ 405 2000.............................................................. 206 2001.............................................................. 435 2002.............................................................. 430 2003.............................................................. 121 Thereafter........................................................ 3,523 ------ 5,120 Discount on senior notes.......................................... (10) Interest rate swap agreements..................................... 14 Capital lease obligation.......................................... 7 ------ $5,131 ======
Cash paid for interest for continuing operations, net of amounts capitalized, was $325 million in 1998, $278 million in 1997 and $220 million in 1996. Deferred financing costs, which are included in other assets, amounted to $98 million and $96 million, net of accumulated amortization, as of December 31, 1998 and January 2, 1998, respectively. Amortization of deferred financing costs totaled $10 million, $7 million and $5 million in 1998, 1997 and 1996, respectively. 6. Company-obligated Mandatorily Redeemable Convertible Preferred Securities of a Subsidiary Trust Whose Sole Assets are the Convertible Subordinated Debentures Due 2026 In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly- owned subsidiary trust of the Company, issued 11 million shares of 6 3/4% convertible quarterly income preferred securities (the "Convertible Preferred Securities"), with a liquidation preference of $50 per share (for a total liquidation amount of $550 million). The Convertible Preferred Securities represent an undivided beneficial interest in the assets of the Issuer. The payment of distributions out of moneys held by the Issuer and payments on liquidation of the Issuer or the redemption of the Convertible Preferred Securities are guaranteed by the Company to the extent the Issuer has funds available therefor. This guarantee, when taken together with the Company's obligations under the indenture pursuant to which the Debentures (defined below) were issued, the Debentures, the Company's obligations under the Trust Agreement and its obligations under the indenture to pay costs, expenses, debts and liabilities of the Issuer (other than with respect to the Convertible Preferred Securities) provides a full and unconditional guarantee of amounts due on the Convertible Preferred Securities. Proceeds from the issuance of the Convertible Preferred Securities were invested in 6 3/4% Convertible Subordinated Debentures (the "Debentures") due December 2, 2026 issued by the Company. The Issuer exists solely to issue the Convertible Preferred Securities and its own common securities (the "Common Securities") and invest the proceeds therefrom in the Debentures, which is its sole asset. Separate financial statements of the Issuer are not presented because of the Company's guarantee described above; the Company's management has concluded that such financial statements are not material to investors as the Issuer is wholly-owned and essentially has no independent operations. Each of the Convertible Preferred Securities is convertible at the option of the holder into shares of Company common stock at the rate of 3.2537 shares per Convertible Preferred Security (equivalent to a conversion price of $15.367 per share of Company common stock). The Debentures are convertible at the option of the holders into shares of Host Marriott common stock at a conversion rate of 3.2537 shares for each $50 in 72 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) principal amount of Debentures. The Issuer will only convert Debentures pursuant to a notice of conversion by a holder of Convertible Preferred Securities. During 1998, 1997 and 1996, no shares were converted into common stock. The conversion ratio and price were adjusted to reflect the impact of the Distribution and the Special Dividend. Holders of the Convertible Preferred Securities are entitled to receive preferential cumulative cash distributions at an annual rate of 6 3/4% accruing from the original issue date, commencing March 1, 1997, and payable quarterly in arrears thereafter. The distribution rate and the distribution and other payment dates for the Convertible Preferred Securities will correspond to the interest rate and interest and other payment dates on the Debentures. The Company may defer interest payments on the Debentures for a period not to exceed 20 consecutive quarters. If interest payments on the Debentures are deferred, so too are payments on the Convertible Preferred Securities. Under this circumstance, the Company will not be permitted to declare or pay any cash distributions with respect to its capital stock or debt securities that rank pari passu with or junior to the Debentures. Subject to certain restrictions, the Convertible Preferred Securities are redeemable at the Issuer's option upon any redemption by the Company of the Debentures after December 2, 1999. Upon repayment at maturity or as a result of the acceleration of the Debentures upon the occurrence of a default, the Convertible Preferred Securities are subject to mandatory redemption. In connection with consummation of the REIT Conversion, the Operating Partnership assumed primary liability for repayment of the Debentures of the Company underlying the Convertible Preferred Securities. Upon conversion by a Convertible Preferred Securities holder, the Company will issue shares of Company common stock, which will be delivered to such holder. Upon the issuance of such shares by the Company, the Operating Partnership will issue to the Company a number of OP Units equal to the number of shares of Company common stock issued in exchange for the Debentures. 7. Shareholders' Equity Seven hundered fifty million shares of common stock, with a par value of $0.01 per share, are authorized, of which 225.6 million and 203.8 million were outstanding as of December 31, 1998 and January 2, 1998, respectively. Fifty million shares of no par value preferred stock are authorized with none outstanding. In conjunction with the Merger, the Blackstone Acquisition and the Partnership Mergers (Note 12), the Operating Partnership issued approximately 64.5 million OP Units which are convertible into cash (or at Host Marriott's option shares of Host Marriott common stock). These OP Units are restricted from converting until July 1999, October 1999 and January 2000 when 23.9 million, 11.9 million and 28.8 million units, respectively, are eligible for conversion. The Company issued 11.9 million shares of common stock as part of the Special Dividend (Note 2) and 8.5 million shares of common stock in exchange for 8.5 million OP Units issued to certain limited partners in connection with the Partnership Mergers (Note 12). Also, as part of the REIT Conversion, the Company changed its par value from $1 to $0.01 per share. The change in par value did not affect the number of shares outstanding. On March 27, 1996, the Company completed the issuance of 31.6 million shares of common stock for net proceeds of nearly $400 million. In connection with a class action settlement, the Company issued warrants to purchase up to 7.7 million shares of the Company's common stock at $8.00 per share through October 8, 1996 and $10.00 per share thereafter. During 1996, 6.8 million warrants were exercised at $8.00 per share and an equivalent number of 73 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) shares of Company common stock were issued. During 1997 and 1998, 60,000 and 98,000 warrants were exercised at $10.00 per share. On October 8, 1998, the remaining warrants expired. In November 1998, the Board of Directors adopted a shareholder rights plan (as amended December 24, 1998) under which a dividend of one preferred stock purchase right was distributed for each outstanding share of the Company's common stock. Each right when exercisable entitles the holder to buy 1/1,000th of a share of a series A junior participating preferred stock of the Company at an exercise price of $55 per share, subject to adjustment. The rights were exercisable 10 days after a person or group acquired beneficial ownership of at least 20%, or began a tender or exchange offer for at least 20%, of the Company's common stock. Shares owned by a person or group on November 3, 1998 and held continuously thereafter were exempt for purposes of determining beneficial ownership under the rights plan. The rights are non-voting and expire on November 22, 2008, unless exercised or previously redeemed by the Company for $.005 each. If the Company was involved in a merger or certain other business combinations not approved by the Board of Directors, each right entitles its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquiror having a value of twice the exercise price of the right. 8. Income Taxes In December 1998, the Company restructured itself to enable the Company to qualify for treatment as a REIT, pursuant to the US Internal Revenue Code of 1986, as amended, effective January 1, 1999. In general, a corporation that elects REIT status and distributes at least 95% of its taxable income to its shareholders and complies with certain other requirements (relating primarily to the nature of its assets and the sources of its revenues) is not subject to Federal income taxation to the extent it distributes its taxable income. Management believes that the Company was organized and will operate so as to qualify as a REIT as of January 1, 1999 (including distribution of at least 95% of its REIT taxable income to shareholders in 1999 and subsequent years). Management expects that the Company will pay taxes on "built-in gains" on only certain of its assets. Based on these considerations, management does not believe that the Company will be liable for income taxes at the federal level or in most of the states in which it operates in future years, and the Company eliminated $106 million of its net existing deferred tax liabilities as of December 31, 1998. The Company does not expect to provide for any material deferred income taxes in future periods except in certain states and foreign countries. In connection with the Distribution and formation of the Non- Controlled Subsidiaries, the Company reduced deferred income tax liabilities by $102 million. In order to qualify as a REIT for federal income tax purposes, among other things, the Company must have distributed all of the accumulated earnings and profits ("E&P") of Host Marriott Corporation to its stockholders in one or more taxable dividends prior to the end of the first full taxable year for which the REIT election of the Company is effective, which currently is expected to be the taxable year commencing January 1, 1999. 74 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In an effort to help accomplish the requisite distributions of the accumulated E&P, Host Marriott made an initial E&P distribution consisting of approximately 20.4 million shares of Crestline valued at $297 million, $69 million in cash, and approximately 11.9 million shares of Host Marriott stock valued at $143 million. The actual amount of the initial E&P distribution was based, in part, upon the estimated amount of accumulated E&P of Host Marriott as of the last day of its taxable year. To the extent that the initial E&P distribution was not sufficient to eliminate Host Marriott's accumulated E&P, Host Marriott will make one or more additional taxable distributions to its stockholders (in the form of cash or securities) prior to the last day of Host Marriott's first full taxable year as a REIT. Where required, deferred income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes are recognized for temporary differences between the financial reporting bases of assets and liabilities and their respective tax bases and for operating loss and tax credit carryforwards based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including tax planning strategies and other factors. Total deferred tax assets and liabilities at December 31, 1998 and January 2, 1998 were as follows:
1998 1997 ------- ------ (in millions) Deferred tax assets..................................... $ 32 $ 159 Deferred tax liabilities................................ (129) (646) ------- ------ Net deferred income tax liability..................... $ (97) $ (487) ======= ====== The tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax assets and liabilities as of December 31, 1998 and January 2, 1998 follows: 1998 1997 ------- ------ (in millions) Investments in affiliates............................... $ -- $ (310) Property and equipment.................................. -- (179) Safe harbor lease investments........................... (24) (65) Deferred tax gain....................................... (105) (92) Reserves................................................ -- 103 Alternative minimum tax credit carryforwards............ 32 41 Other, net.............................................. -- 15 ------- ------ Net deferred income tax liability..................... $ (97) $ (487) ======= ======
75 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The provision (benefit) for income taxes consists of:
1998 1997 1996 ---- ---- ---- (in millions) Current--Federal............................................ $116 $19 $(2) --State.............................................. 27 4 3 --Foreign............................................ 4 3 3 ---- --- --- 147 26 4 ---- --- --- Deferred--Federal........................................... (49) 8 2 --State............................................. (12) 2 (1) ---- --- --- (61) 10 1 ---- --- --- $ 86 $36 $ 5 ==== === ===
At December 31, 1998, the Company had approximately $32 million of alternative minimum tax credit carryforwards available which do not expire. Through 1997, the Company settled with the Internal Revenue Service ("IRS") substantially all issues for tax years through 1993. The Company expects to resolve any remaining issues with no material impact on the consolidated financial statements. The Company made net payments to the IRS of approximately $27 million, $10 million and $45 million in 1998, 1997 and 1996, respectively, related to these settlements. Certain adjustments totaling approximately $2 million in 1996 were made to the tax provision related to those settlements. A reconciliation of the statutory Federal tax rate to the Company's effective income tax rate follows (excluding the impact of the change in tax status):
1998 1997 1996 ---- ---- ----- Statutory Federal tax rate.............................. 35.0% 35.0 % (35.0)% State income taxes, net of Federal tax benefit.......... 5.8 4.9 21.7 Tax credits............................................. (1.7) (2.7) -- Additional tax on foreign source income................. 4.2 6.0 40.8 Tax contingencies....................................... -- -- 25.0 Permanent non-deductible REIT Conversion expenses....... 4.6 -- -- Other permanent items................................... 1.2 .1 9.0 Other, net.............................................. 0.3 .1 1.0 ---- ---- ----- Effective income tax rate............................. 49.4% 43.4 % 62.5 % ==== ==== =====
Crestline and the Company entered into a tax sharing agreement (the "Tax Sharing Agreement") which defines each party's rights and obligations with respect to deficiencies and refunds of federal, state and other income or franchise taxes relating to Crestline's business for taxable years prior to the Distribution and with respect to certain tax attributes of Crestline after the Distribution. The Company is responsible for filing consolidated returns and paying taxes for periods through the date of the Distribution, and Crestline is responsible for filing its returns and paying taxes for subsequent periods. Cash paid for income taxes, including IRS settlements, net of refunds received, was $83 million in 1998, $56 million in 1997 and $40 million in 1996. 76 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Leases As of January 1, 1999, the Company leases substantially all of its hotels to subsidiaries of Crestline. Additionally, the Company also leases certain property and equipment under non-cancellable operating and capital leases. Hotel Leases. Due to current federal income tax law restrictions on a REIT's ability to derive revenues directly from the operation of a hotel, the Company leases its hotels (the "Leases") to one or more lessees (the "Lessees"). There generally is a separate Lessee for each hotel or group of hotels that is owned by a separate subsidiary of the Company. The operating agreements for such Lessees provide that the Crestline member of the Lessee has full control over the management of the business of the Lessee, subject to blocking rights by Marriott International, where it is the manager, over certain decisions by virtue of its non-economic, limited voting interest in the lessee subsidiaries. Each full-service hotel Lease has a fixed term generally ranging from seven to ten years, subject to earlier termination upon the occurrence of certain contingencies as defined in the Leases. Each Lease requires the Lessee to pay 1) minimum rent in a fixed dollar amount per annum plus 2) to the extent it exceeds minimum rent, percentage rent based upon specified percentages of aggregate sales from the applicable hotel, including room sales, food and beverage sales, and other income in excess of specified thresholds. The amount of minimum rent and the percentage rent thresholds will be adjusted each year based upon any increases in the Consumer Price Index and the Employment Cost Index during the previous 10 months, as well as for certain capital expenditures and casualty occurrences. If the Company anticipates that the average tax basis of the Company's FF&E and other personal property that are leased by any individual lessor entity will exceed 15% of the aggregate average tax basis of the fixed assets in that entity, then the Lessee would be obligated either to acquire such excess FF&E from the Company or to cause a third party to purchase such FF&E. The Lessee has agreed to give a right of first opportunity to a Non-Controlled Subsidiary to acquire the excess FF&E and to lease the excess FF&E to the Lessee. Each Lessee is responsible for paying all of the expenses of operating the applicable hotel(s), including all personnel costs, utility costs and general repair and maintenance of the hotel(s). The Lessee also is responsible for all fees payable to the applicable manager, including base and incentive management fees, chain services payments and franchise or system fees, with respect to periods covered by the term of the Lease. Host Marriott also remains liable under each management agreement. The Company is responsible for paying real estate taxes, personal property taxes (to the extent the Company owns the personal property), casualty insurance on the structures, ground lease rent payments, required expenditures for FF&E (including maintaining the FF&E reserve, to the extent such is required by the applicable management agreement) and other capital expenditures. Crestline Guarantees Crestline and certain of its subsidiaries entered into limited guarantees of the Lease obligations of each Lessee. For each of four identified "pools" of hotels (determined on the basis of the term of the particular Lease with all leases having generally the same lease term placed in the same "pool"), the cumulative limit of Crestline's guaranty obligation is the greater of 10% of the aggregate rent payable for the immediately preceding fiscal year under all Leases in the pool or 10% of the aggregate rent payable under all Leases in the pool. For each pool, the subsidiary of Crestline that is the parent of the Lessees in the pool (a "Pool Parent") also is a party to the guaranty of the Lease obligations for that pool. 77 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The obligations of the Pool Parent under each guaranty is secured by all funds received by the applicable Pool Parent from the hotels in the pool, and the hotels in the pool are required to distribute their excess cash flow to the Pool Parent for each accounting period, under certain conditions as described by the guaranty. In the event that Crestline's obligation under a guaranty is reduced to zero, the applicable Pool Parent can elect to terminate its guaranty and the pooling agreement for that pool by giving notice to the Operating Partnership. In that event, subject to certain conditions, the Pool Parent's guaranty will terminate six months after the effective date of such notice, subject to reinstatement in certain limited circumstances. The Operating Partnership sold the existing working capital to the applicable Lessee upon the commencement of the Lease at a price equal to the fair market value of such assets. The purchase price is represented by a note evidencing a loan that bears interest at a rate of 5.12%. Interest accrued on the working capital loan is due simultaneously with each periodic rent payment, and the amount of each payment of interest is credited against such rent payment. The principal amount of the working capital loan is payable upon termination of the Lease. The Lessee can return the working capital in satisfaction of the note. As of December 31, 1998, the note receivable from Crestline for working capital was $95 million. In the event the Company enters into an agreement to sell or otherwise transfer any full-service hotel free and clear of the applicable Lease, the Lessor must pay the Lessee a termination fee equal to the fair market value of the Lessee's leasehold interest in the remaining term of the Lease using a discount rate of 12%. Alternatively, the Lessor will be entitled to (i) substitute a comparable hotel or hotels for any hotel that is sold or (ii) sell the hotel subject to the Lease and certain conditions without being required to pay a termination fee. In the event that changes in the Federal income tax laws allow the Company, or subsidiaries or affiliates of the Company, to directly operate the hotels without jeopardizing the Company's status as a REIT, the Company will have the right to terminate all, but not less than all, of the full-service and HPT hotel Leases in return for paying the Lessees the fair market value of the remaining terms of the full-service hotel Leases, valued in the same manner as discussed above. The payment is payable in cash or, subject to certain conditions, shares of the Company's common stock, at the election of the Company. The rights of each Lessee will be expressly subordinated to qualifying mortgage debt and any refinancing thereof. The Company sold and leased back 37 of its Courtyard properties in 1995 and an additional 16 Courtyard properties in 1996 to Hospitality Properties Trust ("HPT"). Additionally, in 1996, the Company sold and leased back 18 of its Residence Inns to HPT. These leases, which are accounted for as operating leases and are included in the table below, have initial terms expiring through 2012 for the Courtyard properties and 2010 for the Residence Inn properties, and are renewable at the option of the Company. Minimum rent payments are $51 million annually for the Courtyard properties and $17 million annually for the Residence Inn properties, and additional rent based upon sales levels are payable to the owner under the terms of the leases. In connection with the REIT Conversion, the Operating Partnership sublet the HPT hotels (the "Subleases") to separate indirect sublessee subsidiaries of Crestline ("Sublessee"), subject to the terms of the applicable HPT Lease. The term of each Sublease expires simultaneously with the expiration of the initial term of the HPT lease to which it relates and automatically renews for the corresponding renewal term under the HPT lease, unless either the HPT lessee (the "Sublessor") elects not to renew the HPT lease, or the Sublessee elects not to renew the Sublease at the expiration of the initial term provided, however, that neither party can elect to terminate fewer than all of the Subleases in a particular pool of HPT hotels (one for Courtyard by Marriott hotels and one for Residence Inn hotels). Rent under the Sublease consists of the Minimum Rent payable under the HPT lease and an additional percentage rent payable to the Sublessor. The percentage rent is sufficient to cover the additional 78 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) rent due under the HPT lease, with any excess being retained by the Sublessor. The rent payable under the Subleases is guaranteed by Crestline, up to a maximum amount of $30 million which amount is allocated between the two pools of HPT hotels. A number of the Company's leased hotel properties also include long-term ground leases for certain hotels, generally with multiple renewal options. Certain leases contain provision for the payment of contingent rentals based on a percentage of sales in excess of stipulated amounts. Future minimum annual rental commitments for all non-cancelable leases for which the Company is the lessee are as follows:
Capital Operating Leases Leases ------- --------- (in millions) 1999....................................................... $ 2 $ 119 2000....................................................... 1 116 2001....................................................... 1 111 2002....................................................... 1 106 2003....................................................... 1 102 Thereafter................................................. 4 1,292 --- ------ Total minimum lease payments............................... 10 $1,846 ====== Less amount representing interest.......................... (3) --- Present value of minimum lease payments.................. $ 7 ===
Certain of the lease payments included in the table above relate to facilities used in the Company's former restaurant business. Most leases contain one or more renewal options, generally for five or 10-year periods. Future rentals on leases have not been reduced by aggregate minimum sublease rentals from restaurants and HPT subleases of $103 million and $915 million, respectively, payable to the Company under non-cancellable subleases. The aggregate minimum rental payments to be received by the Operating Partnership under the hotel leases are $774 million in 1999 and will be adjusted in future periods based on changes in the Consumer Price Index and Employment Cost Index. In conjunction with the refinancing of the mortgage of the New York Marriott Marquis, the Company also renegotiated the terms of the ground lease. The renegotiated ground lease provides for the payment of a percentage of the hotel sales (3% in 1998, 4% in 1999 and 5% thereafter) through 2017, which is to be used to amortize the existing deferred ground rent obligation of $116 million. The Company has the right to purchase the land under certain circumstances. The Company remains contingently liable at December 31, 1998 on certain leases relating to divested non-lodging properties. Such contingent liabilities aggregated $93 million at December 31, 1998. However, management considers the likelihood of any substantial funding related to these leases to be remote. Rent expense consists of:
1998 1997 1996 ---- ---- ---- (in millions) Minimum rentals on operating leases........................... $104 $ 98 $83 Additional rentals based on sales............................. 26 20 16 ---- ---- --- $130 $118 $99 ==== ==== ===
79 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Employee Stock Plans At December 31, 1998, the Company maintained two stock-based compensation plans, including the comprehensive stock plan (the "Comprehensive Plan"), whereby the Company may award to participating employees (i) options to purchase the Company's common stock, (ii) deferred shares of the Company's common stock and (iii) restricted shares of the Company's common stock and the employee stock purchase plan (the "Employee Stock Purchase Plan"). Total shares of common stock reserved and available for issuance under the Comprehensive Plan at December 31, 1998 was 26.6 million. Employee stock options may be granted to officers and key employees with an exercise price not less than the fair market value of the common stock on the date of grant. Non-qualified options generally expire up to 15 years after the date of grant. Most options vest ratably over each of the first four years following the date of the grant. In connection with the Marriott International Distribution in 1993, the Company issued an equivalent number of Marriott International options and adjusted the exercise prices of its options then outstanding based on the relative trading prices of shares of the common stock of the two companies. In connection with the Host Marriott Services ("HM Services") spin-off in 1995, outstanding options held by current and former employees of the Company were redenominated in both Company and HM Services stock and the exercise prices of the options were adjusted based on the relative trading prices of shares of the common stock of the two companies. Pursuant to the distribution agreement between the Company and HM Services, the Company has the right to receive up to 1.4 million shares of HM Services' common stock or an equivalent cash value subsequent to exercise of the options held by certain former and current employees of Marriott International. As of December 31, 1998, the Company valued this right at approximately $9 million, which is included in other assets. Effective December 29, 1998, the Company adjusted the number of outstanding stock options and the related exercise prices to maintain the intrinsic value of the options to account for the Special Dividend and the Distribution. The vesting provisions and option period of the original grant was retained. No compensation expense was recorded by the Company as a result of these adjustments. Employee optionholders that remained with the Company received options only in the Company's stock and those employee optionholders that became Crestline employees received Crestline options in exchange for the Company's options. The Company continues to account for expense under its plans according to the provisions of Accounting Principle Board Opinion 25 and related interpretations as permitted under SFAS No. 123. Consequently, no compensation cost has been recognized for its fixed stock options under the Comprehensive Plan and its Employee Stock Purchase Plan. For purposes of the following disclosures required by SFAS No. 123, the fair value of each option granted has been estimated on the date of grant using an option-pricing model with the following weighted average assumptions used for grants in 1997 and 1996, respectively: risk-free interest rate of 6.2% and 6.6%, respectively, volatility of 35% and 36%, respectively, expected lives of 12 years and no dividend yield. The weighted average fair value per option granted during the year was $13.13 in 1997 and $8.68 in 1996. No options were granted in 1998. Pro forma compensation cost for 1998, 1997 and 1996 would have reduced (increased) net income (loss) by approximately $524,000, $330,000 and ($150,000), respectively. Basic and diluted earnings per share on a pro forma basis were not impacted by the pro forma compensation cost in 1998, 1997 and 1996. The effects of the implementation of SFAS No. 123 are not representative of the effects on reported net income in future years because only the effects of stock option awards granted in 1996 and 1997 have been considered. 80 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the status of the Company's stock option plan for 1998, 1997 and 1996 follows:
1998 1997 1996 ---------------------------- ---------------------------- ---------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (in millions) Exercise Price (in millions) Exercise Price (in millions) Exercise Price ------------- -------------- ------------- -------------- ------------- -------------- Balance, at beginning of year................... 6.8 $ 4 8.3 $ 4 10.0 $ 4 Granted................. -- -- .1 20 .2 13 Exercised............... (1.3) 5 (1.6) 4 (1.9) 4 Forfeited/Expired....... (0.6) 4 -- -- -- -- Adjustment for Distribution and Special Dividend....... 0.7 3 -- -- -- -- ---- ---- ---- Balance, at end of year................... 5.6 3 6.8 4 8.3 4 ==== ==== ==== Options exercisable at year-end............... 5.5 6.4 7.6 ==== ==== ====
The following table summarizes information about stock options at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------- ---------------------- Weighted Average Weighted Weighted Remaining Average Average Shares Contractual Exercise Shares Exercise Range of Exercise Prices (in millions) Life Price (in millions) Price ------------------------ ------------- ----------- -------- ------------- -------- $ 1 - 3 4.1 8 $ 2 4.1 $ 2 4 - 6 0.8 6 5 0.8 5 7 - 9 0.4 11 8 0.4 8 10 - 12 0.1 12 10 0.1 10 13 - 15 0.1 13 13 0.1 13 19 - 22 0.1 14 18 -- -- --- --- 5.6 5.5 === ===
Deferred stock incentive plan shares granted to officers and key employees after 1990 generally vest over 10 years in annual installments commencing one year after the date of grant. Certain employees may elect to defer payments until termination or retirement. The Company accrues compensation expense for the fair market value of the shares on the date of grant, less estimated forfeitures. In 1998, 1997 and 1996, 12,000, 14,000 and 13,000 shares were granted, respectively, under this plan. The compensation cost that has been charged against income for deferred stock was not material in 1998, 1997 and 1996. The weighted average fair value per share granted during each year was $19.21 in 1998, $15.81 in 1997 and $11.81 in 1996. The Company from time to time awards restricted stock plan shares under the Comprehensive Plan to officers and key executives to be distributed over the next three to 10 years in annual installments based on continued employment and the attainment of certain performance criteria. The Company recognizes compensation expense over the restriction period equal to the fair market value of the shares on the date of issuance adjusted for forfeitures, and where appropriate, the level of attainment of performance criteria and fluctuations in the fair market value of the Company's common stock. In 1998, 1997 and 1996, 2,900, 198,000 and 2,511,000 shares of additional restricted stock plan shares were granted to certain key employees under these terms and conditions. Approximately 16,842 and 161,000 shares were forfeited in 1998 and 1996, respectively. There were no shares forfeited in 1997. The Company recorded compensation expense of $11 million, $13 million and $11 million in 1998, 1997 and 1996, respectively, related to these awards. The weighted average fair value per share granted during each year was $18.13 in 1998, $16.88 in 1997 and $14.01 in 1996. Under these awards 925,000 shares were outstanding at December 31, 1998. The Board has voted to approve 3,199,000 shares for award in 1999 under similar terms. 81 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In 1998, 568,408 stock appreciation rights ("SARs") were issued under the Comprehensive Plan to certain directors of the Company as a replacement for previously issued options that were cancelled during the year. The conversion to SARs was completed in order to comply with ownership limits applicable to the Company upon conversion to a REIT. The SARs are fully vested and the grant prices range from $1.20 to $5.13. In 1998, the Company recognized compensation expense of $4.8 million related to this grant. Additionally, in future periods, the Company will recognize compensation expense for outstanding SARs as a result of fluctuations in the market price of the Company's common stock. Under the terms of the Employee Stock Purchase Plan, eligible employees may purchase common stock through payroll deductions at 90% of the lower of market value at the beginning or market value at the end of the plan year. 11. Profit Sharing and Postemployment Benefit Plans The Company contributes to profit sharing and other defined contribution plans for the benefit of employees meeting certain eligibility requirements and electing participation in the plans. The amount to be matched by the Company is determined annually by the Board of Directors. The Company provides medical benefits to a limited number of retired employees meeting restrictive eligibility requirements. Amounts for these items were not material in 1996 through 1998. 12. Acquisitions and Dispositions The Company acquired or gained controlling interest in 36 hotels with 15,166 rooms in 1998, 18 hotels with 9,128 rooms in 1997 and 24 hotels with 11,385 rooms in 1996. The Company has also disposed of a number of hotels, including two hotels since 1997 and one subsequent to year-end 1998. Twenty-five of the 1998 acquisitions, consisting of the Blackstone Acquisition and the Partnership Mergers, were completed on December 30, 1998 in conjunction with the REIT Conversion. Additionally, three full-service properties were contributed to one of the Non-Controlled Subsidiaries (Note 4). Each of these transactions is discussed separately below. 1998 Acquisitions. In January 1998, the Company acquired an additional interest in Atlanta Marriott Marquis II Limited Partnership, which owns an interest in the 1,671-room Atlanta Marriott Marquis Hotel, for $239 million, including the assumption of $164 million of mortgage debt. The Company previously owned a 1.3% general and limited partnership interest. In March 1998, the Company acquired a controlling interest in a partnership that owns three hotels: the 359-room Albany Marriott, the 350-room San Diego Marriott Mission Valley and the 320-room Minneapolis Marriott Southwest for approximately $50 million. In the second quarter of 1998, the Company acquired the partnership that owns the 289-room Park Ridge Marriott in Park Ridge, New Jersey for $24 million. The Company previously owned a 1% managing general partner interest and a note receivable interest in such partnership. In addition, the Company acquired the 281-room Ritz-Carlton, Phoenix for $75 million, the 397-room Ritz-Carlton in Tysons Corner, Virginia for $96 million and the 487-room Torrance Marriott near Los Angeles, California for $52 million. In the third quarter of 1998, the Company acquired the 308-room Ritz- Carlton, Dearborn for $65 million, the 336-room Ritz-Carlton, San Francisco for $161 million and the 404-room Memphis Crowne Plaza (which was converted to the Marriott brand upon acquisition) for $16 million. Blackstone Acquisition. In December 1998, the Company completed the acquisition of, or controlling interests in, twelve hotels and one mortgage loan secured by an additional hotel (the "Blackstone Acquisition") from the Blackstone Group, a Delaware limited partnership, and a series of funds controlled by affiliates of Blackstone Real Estate Partners (together, the "Blackstone Entities"). In addition, the Company acquired a 25% interest in Swissotel Management (USA) L.L.C., which operates five Swissotel hotels in the United States, from 82 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the Blackstone Entities, which the Company transferred to Crestline in connection with the Distribution. The Operating Partnership issued approximately 43.9 million OP Units, which OP Units are redeemable for cash (or at Host Marriott's option, shares of common stock of Host Marriott) assumed debt and made cash payments totaling approximately $920 million and distributed 1.4 million of the shares of Crestline common stock to the Blackstone Entities. The actual number of OP Units to be issued to the Blackstone Entities will fluctuate based upon certain adjustments to be determined on March 31, 1999. Based on current stock prices, the Operating Partnership will be required to issue to the Blackstone Entities approximately 3.7 million additional units in April 1999. The consideration received by the Blackstone Entities was determined through negotiations between the Company and Blackstone and was not based upon appraisals of the assets. Each OP Unit is exchangeable for one share of the Company's common stock (or its cash equivalent, at the Company's election). After all adjustments, the Blackstone Entities will own approximately 16.4% of the outstanding OP Units of the Operating Partnership. At the closing of the Blackstone Acquisition, the hotels were leased to subsidiaries of Crestline but will continue to be managed on behalf of the Lessees under their existing management agreements. Partnership Mergers. In December 1998, the Company announced the completion of the Partnership Mergers which was the roll-up of eight public partnerships and four private partnerships which own or control 28 properties, 13 of which were already consolidated (the "Partnership Mergers"). The Operating Partnership issued approximately 25 million OP Units to partners for their interests valued at approximately $333 million. The eight public partnerships that merged are: the Atlanta Marriott Marquis II, Limited Partnership ("Atlanta Marquis"); Desert Springs Marriott Limited Partnership ("Desert Springs"); Hanover Marriott Limited Partnership ("Hanover"); Marriott Diversified American Hotels, Limited Partnership ("MDAH"); Marriott Hotel Properties, Limited Partnership ("MHP"); Marriott Hotel Properties II, Limited Partnership ("MHP2"); Mutual Benefit Chicago Marriott Suite Hotel Partners, Limited Partnership ("Chicago Suites") and Potomac Hotel Limited Partnership ("PHLP") (collectively, the "Public Partnerships"). The four private partnerships in which all or controlling interests also were acquired include privately-held ownership interests in the Atlanta Marriott Marquis; The Ritz- Carlton, Naples; The Ritz-Carlton, Buckhead; the New York Marriott Marquis and the Hartford Marriott (collectively, the "Private Partnerships"). The Company had previously not consolidated three of the 12 partnerships. Those three partnerships are: 1) MDAH, the owner of six full-service Marriott hotels; 2) PHLP, the owner of eight Marriott hotels (two of which were previously consolidated) and 3) Chicago Suites, the owner of the 256-room Marriott O'Hare Suites. As a result of these transactions, the Company has increased its ownership of most of the 28 properties to 100% while consolidating 13 additional hotels (4,445 rooms). 1998 Dispositions. In 1998, the Company sold the 662-room New York Marriott East Side for approximately $191 million and recorded a pre-tax gain of approximately $40 million. The Company also sold the 191-room Napa Valley Marriott for approximately $21 million and recorded a pre-tax gain of approximately $10 million. 1999 Dispositions. In February 1999, the Company sold the 479-room Minneapolis/Bloomington Marriott for approximately $35 million and recorded a pre-tax gain of approximately $13 million. 1997 Acquisitions. In 1997, the Company acquired eight full-service hotels totaling 3,600 rooms for approximately $145 million. In addition, the Company acquired controlling interests in nine full-service hotels totaling 5,024 rooms for approximately $621 million, including the assumption of approximately $418 million of debt. The Company also completed the acquisition of the 504-room New York Marriott Financial Center, after acquiring the mortgage on the hotel for $101 million in late 1996. 83 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Also in 1997, the Company acquired the outstanding common stock of the Forum Group from Marriott Senior Living Services. The Company purchased the Forum Group portfolio of 29 senior living communities for approximately $460 million, including approximately $270 million in debt. The Company also acquired 49% of the remaining 50% interest in the partnership which owned the 418-unit Leisure Park retirement community for approximately $23 million, including the assumption of approximately $15 million of debt. The Company contributed these assets in conjunction with the Distribution of Crestline. 1996 Acquisitions. In 1996, the Company acquired six full-service hotels totaling 1,964 rooms for an aggregate purchase price of approximately $189 million. In addition, the Company acquired controlling interests in 17 full- service hotels totaling 8,917 rooms for an aggregate purchase price of approximately $1.1 billion, including the assumption of approximately $696 million of debt. The Company also purchased the first mortgage of the 504-room New York Marriott Financial Center for approximately $101 million. In the first and second quarters of 1996, the Company completed the sale and leaseback of 16 of its Courtyard properties and 18 of its Residence Inn properties for $349 million. The Company received net proceeds of approximately $314 million and will receive approximately $35 million upon expiration of the leases. A deferred gain of $45 million on the sale/leaseback transactions is being amortized over the initial term of the leases. The Company's summarized, unaudited consolidated pro forma results of operations, assuming the above transactions occurred on January 3, 1997, are as follows (in millions, except per share amounts):
1998 1997 ------ ------ Revenues................................................... $4,220 $3,919 Income before extraordinary items.......................... 189 71 Net income (loss).......................................... 41 74 Basic earnings (loss) per common share: Income before extraordinary items........................ .88 .33 Basic earnings (loss) per common share................... .19 .34 Diluted earnings (loss) per common share: Income before extraordinary items........................ .83 .32 Diluted earnings (loss) per common share................. .25 .33
13. Fair Value of Financial Instruments The fair values of certain financial assets and liabilities and other financial instruments are shown below:
1998 1997 --------------- --------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------ -------- ------ (in millions) Financial assets Short-term marketable securities.......... $ -- $ -- $ 354 $ 354 Receivables from affiliates............... 134 141 23 26 Notes receivable.......................... 69 69 29 46 Other..................................... 9 9 20 20 Financial liabilities Debt, net of capital leases............... 5,110 5,125 3,458 3,493 Other financial instruments Convertible Preferred Securities.......... 550 449 550 638
84 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Short-term marketable securities and receivable Convertible Preferred Securities are valued based on quoted market prices. Receivables from affiliates, notes and other financial assets are valued based on the expected future cash flows discounted at risk-adjusted rates. Valuations for secured debt are determined based on the expected future payments discounted at risk- adjusted rates. The fair values of the New Credit Facility and other notes are estimated to be equal to their carrying value. Senior notes are valued based on quoted market prices. The fair value of the liability related to the interest rate swap agreements assumed in the Blackstone Acquisition was $14 million. The fair value is based on the estimated amount the Company would pay or receive to terminate the swap agreements. The aggregate notional amount of the agreements was $365 million at December 31, 1998 and $100 million at January 2, 1998. 14. Marriott International Distribution and Relationship with Marriott International The Company and Marriott International (formerly a wholly owned subsidiary, the common stock of which was distributed to the Company's shareholders on October 8, 1993) have entered into various agreements in connection with the Marriott International Distribution and thereafter which provide, among other things, that (i) the majority of the Company's hotel lodging properties are managed by Marriott International under agreements with initial terms of 15 to 20 years and which are subject to renewal at the option of Marriott International for up to an additional 16 to 30 years (see Note 15); (ii) 13 of the Company's full-service properties are operated under franchise agreements with Marriott International with terms of 15 to 30 years; (iii) Marriott International provided the Company with $92 million of financing at an average rate of 9% in 1997 related to the Company's discontinued senior living operations; (iv) the Company acquired 49% of Marriott International's 50% interest in the Leisure Park retirement community in 1997 for $23 million, including approximately $15 million of assumed debt; (v) Marriott International guarantees the Company's performance in connection with certain loans and other obligations ($70 million at December 31, 1998); (vi) the Company borrowed and repaid $109 million of first mortgage financing for construction of the Philadelphia Marriott (see Note 5); (vii) Marriott International and the Company formed a joint venture and Marriott International provided the Company with $29 million in debt financing at an average interest rate of 12.7% and $28 million in preferred equity in 1996 for the acquisition of two full-service properties in Mexico City, Mexico; and (viii) Marriott International provides certain limited administrative services. In 1998, 1997 and 1996, the Company paid to Marriott International $196 million, $162 million and $101 million, respectively, in hotel management fees; $4 million, $13 million and $18 million, respectively, in interest and commitment fees under the debt financing and line of credit provided by Marriott International, and $3 million, $3 million and $4 million, respectively, for limited administrative services. The Company also paid Marriott International $9 million, $4 million and $2 million, respectively, of franchise fees in 1998, 1997 and 1996. In connection with the discontinued senior living communities' business, the Company paid Marriott International $13 million and $6 million in management fees during 1998 and 1997, respectively. Additionally, Marriott International has the right to purchase up to 20% of the voting stock of the Company if certain events involving a change in control of the Company occur. 15. Hotel Management Agreements Most of the Company's hotels are subject to management agreements (the "Agreements") under which Marriott International manages the Company's hotels, generally for an initial term of 15 to 20 years with renewal terms at the option of Marriott International of up to an additional 16 to 30 years. The Agreements generally provide for payment of base management fees equal to one to four percent of sales and incentive management 85 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) fees generally equal to 20% to 50% of Operating Profit (as defined in the Agreements) over a priority return (as defined) to the Company, with total incentive management fees not to exceed 20% of cumulative Operating Profit, or 20% of current year Operating Profit. In the event of early termination of the Agreements, Marriott International will receive additional fees based on the unexpired term and expected future base and incentive management fees. The Company has the option to terminate certain management agreements if specified performance thresholds are not satisfied. No agreement with respect to a single lodging facility is cross-collateralized or cross-defaulted to any other agreement and a single agreement may be canceled under certain conditions, although such cancellation will not trigger the cancellation of any other agreement. As a result of the REIT Conversion, all fees payable under the Agreements for subsequent periods are the primary obligations of the Lessees. The obligations of the Lessees are guaranteed to a limited extent by Crestline. The Company remains obligated to the managers in case the Lessee fails to pay these fees (but it would be entitled to reimbursement from the Lessee under the terms of the Leases). Pursuant to the terms of the Agreements, Marriott International is required to furnish the hotels with certain services ("Chain Services") which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. In addition, the Company's hotels also participate in the Marriott Rewards program. The cost of this program is charged to all hotels in the Marriott hotel system. Crestline, as the Company's Lessee, is obligated to provide the manager with sufficient funds to cover the cost of (a) certain non-routine repairs and maintenance to the hotels which are normally capitalized; and (b) replacements and renewals to the hotels' property and improvements. Under certain circumstances, Crestline will be required to establish escrow accounts for such purposes under terms outlined in the Agreements. Crestline assumed franchise agreements with Marriott International for 10 hotels. Pursuant to these franchise agreements, Crestline generally pays a franchise fee based on a percentage of room sales and food and beverage sales as well as certain other fees for advertising and reservations. Franchise fees for room sales vary from four to six percent of sales, while fees for food and beverage sales vary from two to three percent of sales. The terms of the franchise agreements are from 15 to 30 years. Crestline assumed management agreements with The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International, to manage ten of the Company's hotels. These agreements have an initial term of 15 to 25 years with renewal terms at the option of Ritz-Carlton of up to an additional 10 to 40 years. Base management fees vary from two to five percent of sales and incentive management fees are generally equal to 20% of available cash flow or operating profit, as defined in the agreements. Crestline also assumed management agreements with hotel management companies other than Marriott International and Ritz-Carlton for 23 of the Company's hotels (10 of which are franchised under the Marriott brand). These agreements generally provide for an initial term of 10 to 20 years with renewal terms at the option of either party or, in some cases, the hotel management company of up to an additional one to 15 years. The agreements generally provide for payment of base management fees equal to one to four percent of sales. Seventeen of the 23 agreements also provide for incentive management fees generally equal to 10 to 25 percent of available cash flow, operating profit, or net operating income, as defined in the agreements. 86 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Relationship with Crestline Capital Corporation The Company and Crestline have entered into various agreements in connection with the Distribution as discussed in Note 2 and further outlined below. Distribution Agreement Crestline and the Company entered into a distribution agreement (the "Distribution Agreement"), which provided for, among other things, (i) the distribution of shares of Crestline in connection with the Distribution; (ii) the division between Crestline and the Company of certain assets and liabilities; (iii) the transfer to Crestline of the 25% interest in the Swissotel management company acquired in the Blackstone Acquisition and (iv) certain other agreements governing the relationship between Crestline and the Company following the Distribution. Crestline also granted the Company a contingent right to purchase Crestline's interest in Swissotel Management (USA) L.L.C. at fair market value in the event the tax laws are changed so that the Company could own such interest without jeopardizing its status as a REIT. Subject to certain exceptions, the Distribution Agreement provides for, among other things, assumptions of liabilities and cross-indemnities designed to allocate to Crestline, effective as of the date of the Distribution, financial responsibilities for liabilities arising out of, or in connection with, the business of the senior living communities. Asset Management Agreement The Company and the Non-Controlled Subsidiaries entered into asset management agreements (the "Asset Management Agreements") with Crestline whereby Crestline agrees to provide advice on the operation of the hotels and review financial results, projections, loan documents and hotel management agreements. Crestline also agrees to consult on market conditions and competition, as well as monitor and negotiate with governmental agencies, insurance companies and contractors. Crestline will be paid a fee not to exceed $4.5 million for each calendar year for its consulting services under the Asset Management Agreements, which includes $0.25 million related to the Non-Controlled Subsidiaries. The Asset Management Agreements each have terms of two years with an automatic one year renewal, unless earlier terminated by either party in accordance with the terms thereof. Non-Competition Agreement Crestline and the Company entered into a non-competition agreement that limits the respective parties' future business opportunities. Pursuant to this non-competition agreement, Crestline agrees, among other things, that until the earlier of December 31, 2008, or the date on which it is no longer a Lessee of more than 25% of the number of hotels owned by the Company at the time of the Distribution, it will not own any full service hotel, manage any limited service or full service hotel owned by the Company, or own or operate a full service hotel franchise system operating under a common name brand, subject to certain exceptions. In addition, the Company agrees not to participate in the business of leasing, operating or franchising limited service or full service properties, subject to certain exceptions. 1998 Employee Benefits and Other Employment Matters Allocation Agreement As part of the REIT Conversion, the Company, the Operating Partnership and Crestline entered into the 1998 Employee Benefits Allocation Agreement relating to various compensation, benefits and labor matters. Under the agreement, the Operating Partnership and Crestline each assumed certain liabilities related to covered benefits and labor matters arising prior to the effective date of the Distribution and relating to employees of 87 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) each organization, respectively, after the Distribution. The agreements also govern the treatment of awards under the Comprehensive Plan and requires the adoption of such a plan by Crestline and the Operating Partnership. 17. Litigation The Company is and from time-to-time will be the subject of, or involved in, judicial proceedings. Management believes that any liability or loss resulting from such matters will not have a material adverse effect on the financial position or results of operations of the Company. In the fourth quarter of 1997, the Company reached a settlement in a lawsuit against Trinity Industries and others for claims related to construction of the New York Marriott Marquis. In settlement of the lawsuit, the Company and its affiliate received a cash settlement of approximately $70 million, the majority of which was considered a recovery of construction costs and $10 million of which has been recorded as other revenues in the accompanying consolidated financial statements. 18. Geographic and Business Segment Information The Company operates one business segment, hotel ownership. The Company's hotels are primarily operated under the Marriott or Ritz-Carlton brands, contain an average of nearly 465 rooms, as well as supply other amenities such as meeting space and banquet facilities; a variety of restaurants and lounges; gift shops and swimming pools. They are typically located in downtown, airport, suburban and resort areas throughout the United States. The Company evaluates the performance of its segment based primarily on operating profit before depreciation, corporate expenses, and interest expense. The Company's income taxes are included in the consolidated Federal income tax return of the Company and its affiliates and is allocated based upon the relative contribution to the Company's consolidated taxable income/loss and changes in temporary differences. The allocation of taxes is not evaluated at the segment level and, therefore, the Company does not believe the information is material to the consolidated financial statements. 88 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents revenues and other financial information excluding amounts related to the Company's discontinued senior living business (in millions):
1998 ----------------------------- Corporate Hotels & Other Consolidated ------ --------- ------------ Revenues.......................................... $3,492 $ 21 $3,513 Operating profit ................................. 618 43 661 Interest expense.................................. 328 7 335 Interest income................................... 37 14 51 Depreciation and amortization..................... 238 5 243 Capital expenditures.............................. 247 5 252 Total assets...................................... 7,908 360 8,268 1997 ----------------------------- Corporate Hotels & Other Consolidated ------ --------- ------------ Revenues.......................................... $2,806 $ 17 $2,823 Operating profit (loss)........................... 444 (12) 432 Interest expense.................................. 281 7 288 Interest income................................... 40 12 52 Depreciation and amortization..................... 226 5 231 Capital expenditures.............................. 154 4 158 Total assets...................................... 5,789 116 5,905 1996 ----------------------------- Corporate Hotels & Other Consolidated ------ --------- ------------ Revenues.......................................... $1,942 $ 15 $1,957 Operating profit (loss)........................... 256 (23) 233 Interest expense.................................. 228 9 237 Interest income................................... 31 17 48 Depreciation and amortization..................... 165 3 168 Capital expenditures.............................. 156 3 159 Total assets...................................... 4,770 382 5,152
During most of 1998, the Company's foreign operations consisted of six full- service hotel properties located in Mexico and Canada. As of December 31, 1998, the Company's foreign operations had decreased to four Canadian hotel properties, as the hotels in Mexico were contributed to Rockledge Hotel Properties, Inc. There were no intercompany sales between the properties and the Company. The following table presents revenues and long-lived assets for each of the geographical areas in which the Company operates (in millions):
1998 1997 1996 ------------------- ------------------- ------------------- Long-lived Long-lived Long-lived Revenues Assets Revenues Assets Revenues Assets -------- ---------- -------- ---------- -------- ---------- United States...... $3,392 $7,112 $2,718 $4,412 $1,908 $3,587 International...... 121 89 105 222 49 218 ------ ------ ------ ------ ------ ------ Total............. $3,513 $7,201 $2,823 $4,634 $1,957 $3,805 ====== ====== ====== ====== ====== ======
The long-lived assets for 1997 exclude $583 million of assets related to the discontinued senior living business. 89 HOST MARRIOTT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 19. Quarterly Financial Data (unaudited)
1998 -------------------------------------------------------- First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year --------- --------- --------- ---------- ---------- (in millions, except per common share amounts) Revenues.................. $ 791 $ 839 $ 745 $ 1,138 $ 3,513 Operating profit before minority interest, corporate expenses and interest................. 147 208 111 195 661 Income from continuing operations............... 28 62 2 102 194 Income before extraordinary items...... 30 66 4 95 195 Net income (loss)......... 30 66 (144) 95 47 Basic earnings (loss) per common share: Income from continuing operations............. .13 .29 .01 .47 .90 Income before extraordinary items.... .14 .31 .02 .44 .91 Net income (loss)....... .14 .31 (.67) .44 .22 Diluted earnings (loss) per common share: Income from continuing operations............. .13 .26 .01 .43 .84 Income before extraordinary items.... .14 .28 .02 .40 .85 Net income (loss)....... .14 .28 (.65) .40 .27 1997 -------------------------------------------------------- First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year --------- --------- --------- ---------- ---------- (in millions, except per common share amounts) Revenues.................. $ 624 $ 643 $ 615 $ 941 $ 2,823 Operating profit before minority interest, corporate expenses and interest................. 91 124 82 135 432 Income from continuing operations............... 6 26 6 9 47 Income before extraordinary items...... 6 26 6 9 47 Net income................ 11 26 6 7 50 Basic earnings per common share: Income from continuing operations............. .03 .12 .03 .04 .22 Income before extraordinary items.... .03 .12 .03 .04 .22 Net income.............. .05 .12 .03 .03 .23 Diluted earnings per common share: Income from continuing operations............. .03 .12 .03 .04 .22 Income before extraordinary items.... .03 .12 .03 .04 .22 Net income.............. .05 .12 .03 .03 .23
The quarterly data in the table above has been restated to reflect the Company's senior living business as a discontinued operation and the impact of the 1998 stock portion of the Special Dividend on earnings per share. The first three quarters consist of 12 weeks each in both 1998 and 1997, and the fourth quarter includes 16 weeks. The sum of the basic and diluted earnings (loss) per common share for the four quarters in 1998 and 1997 differs from the annual earnings per common share due to the required method of computing the weighted average number of shares in the respective periods. 90 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III The information called for by Items 10-13 is incorporated by reference from our 1999 Annual Meeting of Shareholders Notice and Proxy Statement (to be filed pursuant to Regulation 14A not later than 120 days after the close of fiscal year). Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (i) FINANCIAL STATEMENTS All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K. (ii)FINANCIAL STATEMENT SCHEDULES The following financial information is filed herewith on the pages indicated. Financial Schedules:
Page ---------- III. Real Estate and Accumulated Depreciation.................. S-1 to S-2
All other schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (iii)EXHIBITS
Exhibit No. Description ------- ----------- 2.1 Agreement and Plan of Merger by and among Host Marriott Corporation, HMC Merger Corporation and Host Marriott L.P. (incorporated by reference to Host Marriott Corporation Registration Statement No. 333- 64793). 3.3 Bylaws of Host Marriott Corporation dated September 28, 1998 (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). 3.4 Articles of Amendment and Restatement of Articles of Incorporation of Host Marriott Corporation (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). 4.1 Form of Common Stock Certificate of Host Marriott Corporation (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-55807).
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Exhibit No. Description ------- ----------- 4.2 Guarantee Agreement, dated December 2, 1996, between Host Marriott Corporation and IBJ Schroeder Bank & Trust Company, as Guarantee Trustee (incorporated by reference to Exhibit 4.6 of Host Marriott Corporation Registration Statement No. 333-19923). 4.3(i) Rights Agreement between Host Marriott Corporation and The Bank of New York as Rights Agent dated as of November 23, 1998 (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated November 23, 1998). 4.3(ii) Amendment No. 1 to Rights Agreement between Host Marriott Corporation and The Bank of New York as Rights Agent dated as of December 18, 1998 (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated December 18, 1998). 4.4 Indenture by and among HMC Acquisition Properties, Inc., as Issuer, HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as Trustee (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-00768). 4.5 Indenture by and among HMH Properties, Inc., as Issuer, HMH Courtyard Properties, Inc., HMC Retirement Properties, Inc., Marriott Financial Services, Inc., Marriott SBM Two Corporation, HMH Pentagon Corporation and Host Airport Hotels, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as Trustee (incorporated by reference to Host Marriott Corporation Registration Statement 33-95058). 4.6 Indenture by and among HMH Properties, Inc., as Issuer, and the Subsidiary Guarantors named therein, and Marine Midland Bank, as Trustee (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated August 6, 1998). 4.7 Indenture for the 6 3/4% Convertible Debentures, dated December 2, 1996, between Host Marriott Corporation and IBJ Schroeder Bank & Trust Company, as Indenture Trustee (incorporated by reference to Exhibit 4.3 of Host Marriott Corporation Registration Statement No. 333-19923). 4.8 Amended and Restated Trust Agreement, dated December 2, 1996, among Host Marriott Corporation, IBJ Schroeder Bank & Trust Company, as Property Trustee, Delaware Trust Capital Management, Inc., as Delaware Trustee, and Robert E. Parsons, Jr., Bruce D. Wardinski and Christopher G. Townsend, as Administrative Trustees (incorporated by reference to Exhibit 4.2 of Host Marriott Corporation Registration Statement No. 333-19923). 4.9 Amended and Restated Trust Agreement, dated as of December 29, 1998, among HMC Merger Corporation, as Depositor, IBJ Schroder Bank & Trust Company, as Property Trustee, Delaware Trust Capital Management, Inc., as Delaware Trustee, and Robert E. Parsons, Jr., Ed Walter and Christopher G. Townsend, as Administrative Trustees. 10.1 Second Amended and Restated Agreement of Limited Partnership of Host Marriott, L.P. (incorporated by reference to Exhibit 3.1 of Host Marriott Corporation Registration Statement No. 333-55807). 10.2 Indenture between Host Marriott L.P., as Issuer, and Marine Midland Bank, as Indenture Trustee, and Form of 6.56% Callable Note due December 15, 2005 (incorporated by reference to Exhibit 4.1 of Host Marriott Corporation Registration Statement No. 333-55807). 10.3 Amended and Restated Credit Agreement dated as of June 19, 1997 and Amended and Restated as of August 5, 1998 among Host Marriott Corporation, Host Marriott Hospitality, Inc., HMH Properties, Inc., Host Marriott, L.P., HMC Capital Resources Corp., Various Banks, Wells Fargo Bank, National Association, The Bank of Nova Scotia and Credit Lyonnais New York Branch, as Co-Arrangers, and Bankers Trust Company as Arranger and Administrative Agent (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated September 11, 1998). 10.4* First Amendment and Waiver of Amended and Restated Credit Agreement dated as of June 19, 1997 and Amended and Restated as of August 5, 1998, among Host Marriott Corporation, Host Marriott Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P., HMC Capital Resources Corp., Various Banks, Wells Fargo Bank, National Association, The Bank of Nova Scotia and Credit Lyonnais New York Branch, as Co-Arrangers and Bankers Trust Company as Arranger and Administrative Agent dated as of November 25, 1998.
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Exhibit No. Description ------- ----------- 10.5* Second Amendment and Consent to Credit Agreement of Amended and Restated Credit Agreement dated as of June 19, 1997 and Amended and Restated as of August 5, 1998, among Host Marriott Corporation, Host Marriott Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P., HMC Capital Resources Corp., Various Banks, Wells Fargo Bank, National Association, The Bank of Nova Scotia and Credit Lyonnais New York Branch, as Co-Arrangers and Bankers Trust Company as Arranger and Administrative Agent dated as of December 17, 1998. 10.6* Third Amendment and Waiver to Credit Agreement Amended and Restated Credit Agreement dated as of June 19, 1997 and Amended and Restated as of August 5, 1998, among Host Marriott Corporation, Host Marriott Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P., HMC Capital Resources Corp., Various Banks, Wells Fargo Bank, National Association, The Bank of Nova Scotia and Credit Lyonnais New York Branch, as Co-Arrangers and Bankers Trust Company as Arranger and Administrative Agent dated as of March 15, 1999. 10.7* Host Marriott L.P. Executive Deferred Compensation Plan effective as of December 29, 1998 (formerly the Marriott Corporation Executive Deferred Compensation Plan). 10.8 Host Marriott Corporation 1997 Comprehensive Incentive Stock Plan (incorporated by reference to Host Marriott Corporation's Proxy Statement filed April 3, 1997). 10.9 Distribution Agreement dated as of September 15, 1993 between Marriott Corporation and Marriott International, Inc. (incorporated by reference from Host Marriott Corporation Current Report on Form 8-K dated October 23, 1993). 10.10 Amendment No. 1 to the Distribution Agreement dated December 29, 1995 by and among Host Marriott Corporation, Host Marriott Services Corporation and Marriott International, Inc. (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated January 16, 1996). 10.11 Amendment No. 2 to the Distribution Agreement dated June 21, 1997 by and among Host Marriott Corporation, Host Marriott Services Corporation and Marriott International, Inc. (incorporated by reference to Host Marriott Corporation Registration Statement No. 333- 64793). 10.12 Amendment No. 3 to the Distribution Agreement dated March 3, 1998 by and among Host Marriott Corporation, Host Marriott Services Corporation and Marriott International, Inc. (incorporated by reference to Host Marriott Corporation Registration Statement No. 333- 64793). 10.13 Amendment No. 4 to the Distribution Agreement by and among Host Marriott Corporation and Marriott International Inc. (incorporated by reference to Host Marriott Corporation Registration Statement No. 333- 64793). 10.14* Amendment No. 5 to the Distribution Agreement dated December 18, 1998 by and among Host Marriott Corporation, Host Marriott Services Corporation and Marriott International Inc. 10.15 Distribution Agreement dated December 22, 1995 by and between Host Marriott Corporation and Host Marriott Services Corporation (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated January 16, 1996). 10.16* Amendment to Distribution Agreement dated December 22, 1995 by and between Host Marriott Corporation and Host Marriott Services Corporation 10.17 Tax Sharing Agreement dated as of October 5, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated October 23, 1993).
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Exhibit No. Description ------- ----------- 10.18* License Agreement dated as of December 29, 1998 by and among Host Marriott Corporation, Host Marriott, L.P., Marriott International, Inc. and Marriott Worldwide Corporation. 10.19* Noncompetition Agreement between Host Marriott Corporation, Host Marriott, L.P. and Crestline Capital Corporation and other parties named therein. 10.20 Tax Administration Agreement dated as of October 8, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated October 23, 1993). 10.21 Restated Noncompetition Agreement dated March , 1998 by and among Host Marriott Corporation, Marriott International, Inc. and Sodexho Marriott Services, Inc. (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). 10.22 First Amendment to Restated Noncompetition Agreement by and among Host Marriott Corporation, Marriott International, Inc. and Sodexho Marriott Services, Inc. (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). 10.23 Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts and Hotels dated September 25, 1993 by and between Marriott Corporation and Marriott International, Inc. (incorporated by reference to Host Marriott Corporation Registration Statement No. 33- 51707). 10.24 Employee Benefits and Other Employment Matters Allocation Agreement dated as of December 29, 1995 by and between Host Marriott Corporation and Host Marriott Services Corporation (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated January 16, 1996). 10.25 Tax Sharing Agreement dated as of December 29, 1995 by and between Host Marriott Corporation and Host Marriott Services Corporation (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated January 16, 1996). 10.26* Host Marriott, L.P. Retirement and Savings Plan and Trust. 10.27 Contribution Agreement dated as of April 16, 1998 among Host Marriott Corporation, Host Marriott, L.P. and the contributors named therein, together with Exhibit B (incorporated by reference to Exhibit 10.18 of Host Marriott Corporation Registration Statement No. 333-55807). 10.28 Amendment No. 1 to Contribution Agreement dated May 8, 1998 among Marriott Corporation, Host Marriott, L.P. and the contributors named therein (incorporated by reference to Exhibit 10.19 of Host Marriott Corporation Registration Statement No. 333-55807). 10.29 Amendment No. 2 to Contribution Agreement dated May 18, 1998 among Host Marriott Corporation, Host Marriott, L.P. and the contributors named therein (incorporated by reference to Exhibit 10.20 of Host Marriott Corporation Registration Statement No. 333-55807). #10.30 Form of Lease Agreement (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). #10.31 Form of Management Agreement for Full-Service Hotels (incorporated by reference to Host Marriott Corporation Registration Statement No. 33- 51707). #10.32 Form of Owner's Agreement between Host Marriott Corporation, Marriott International and Crestline Capital Corporation (incorporated by reference to Crestline Capital Corporation Registration Statement No. 333-64657). 10.33 Employee Benefits and Other Employment Matters Allocation Agreement between Host Marriott Corporation, Host Marriott, L.P. and Crestline Capital Corporation (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793).
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Exhibit No. Description ------- ----------- 10.34* Amendment to the Employee Benefits and Other Employment Matters Allocation Agreement effective as of December 29, 1998 by and between Host Marriott Corporation, Marriott International, Sodexho Marriott Services, Inc., Crestline Capital Corporation and Host Marriott, L.P. 10.35 Pool Guarantee Agreement between Host Marriott Corporation, the lessees referred to therein and Crestline Capital Corporation (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). 10.36 Pooling and Security Agreement by and among Host Marriott Corporation and Crestline Capital Corporation (incorporated by reference to Host Marriott Corporation Registration Statement No. 333- 64793). 10.37 Amended and Restated Communities Noncompetition Agreement (incorporated by reference to Host Marriott Corporation Registration Statement No. 333-64793). 10.38 Asset Management Agreement between Host Marriott, L.P. and Crestline Capital Corporation (incorporated by reference to Crestline Capital Corporation Registration Statement No. 333-64657). 12.1* Computation of Ratios of Earnings to Fixed Charges. 21* List of Subsidiaries of Host Marriott Corporation. 23.1* Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule. (Incorporated by reference to Host Marriott Corporation 8-K/A filed on March 15, 1999)
- -------- # Agreement filed is illustrative of numerous other agreements to which the Company is a party. * Filed herewith. 95 (b) REPORTS ON FORM 8-K . November 25, 1998--Report of the announcement that Host Marriott mailed a Proxy Statement to its stockholders relating to a special meeting of its stockholders to be held on December 15, 1998. . December 10, 1998--Report that Host Marriott and The Bank of New York entered into an Amendment No. 3 to the Rights Agreement, dated November 23, 1998 which was originally entered into on February 3, 1989 and as amended by Amendment No. 1, dated October 8, 1993, and further amended by Amendment No. 2, dated November 3, 1998. . December 22, 1998--Report of the announcement that Host Marriott and certain of its subsidiaries executed an underwriting agreement and Host Marriott agreed to issue and sell $500,000,000 aggregate principal amount of 8.45% Series C Senior Notes due 2008 which was consummated on December 11, 1998. . December 22, 1998--Report of the announcement of Host Marriott's declaration of a special dividend payable in either cash or common stock of Host Marriott, at the election of each Host Marriott stockholder, a dividend of shares of Crestline Capital Corporation, a subsidiary of Host Marriott, and a receipt of the necessary partnership approvals to acquire eight public limited hotel partnerships. . December 29, 1998--Report of the announcement that HMC Merger Corporation, a Maryland corporation and formerly a wholly owned subsidiary of Host Marriott Corporation, a Delaware corporation, completed its merger with Host Marriott Corporation and, as the surviving corporation in the merger, HMC Merger Corporation changed its name from HMC Merger Corporation to Host Marriott Corporation. . December 31, 1998--Report of the announcement that Host Marriott successfully completed the final steps in its conversion to a real estate investment trust ("REIT") and that it is positioned to elect REIT status effective January 1, 1999. Also the announcement that Host Marriott acquired ownership of, or controlling interests in, 12 upscale and luxury full-service hotels and certain other assets from the Blackstone Group and a series of funds controlled by Blackstone Real Estate Partners. . January 14, 1999--Report that Host Marriott Corporation, through its subsidiary Host Marriott L.P., acquired ownership of, or controlling interests in, twelve upscale and luxury full-service hotels and certain other assets from the Blackstone Group and a series of funds controlled by Blackstone Real Estate Partners, and financial statements will be filed within 60 days of the filing of the report. . January 14, 1999--Report on the December 29, 1998 Host Marriott Corporation distribution of Crestline shares to shareholders of record and Host Marriott belief that the fair market value of the Crestline shares on December 29, 1998 was $15.30 per share (a distribution value of $1.53 per Host Marriott share) which is the value determined by the Host Marriott Board of Directors. . January 15, 1999--Report of the announcement that on December 30, 1998 Host Marriott Corporation had completed the final steps in its conversion to a real estate investment trust ("REIT") and had positioned itself to elect REIT status, effective January 1, 1999. . January 22, 1999--Report that, based upon its annual budget for 1999, Host Marriott Corporation estimates that on a standalone basis its 1999 Earnings Before Interest, Expense, Taxes, Depreciation and Amortization and other non-cash items will be in the range of approximately $1.0 billion to $1.05 billion while its 1999 Funds From Operations will be in the range of approximately $565 million to $595 million. . March 15, 1999--Report that on December 30, 1998, Host Marriott Corporation, through its subsidiary Host Marriott, L.P., acquired ownership of, or controlling interests in, 12 upscale and luxury full- service hotels and certain other assets from the Blackstone Group, and a series of funds controlled by affiliates Blackstone Real Estate Partners. In exchange for these assets, (1) Host Marriott, L.P. issued approximately 43.9 million of its limited partnership units, assumed debt and made cash payments totaling approximately $920 million and (2) Host Marriott distributed 1.4 million shares of Crestline Capital Corporation. The actual number of OP Units to be issued to the Blackstone Entities will fluctuate based upon certain adjustments to be determined on March 31, 1999. (d) OTHER INFORMATION 96 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda, State of Maryland, on March 24, 1999. Host Marriott Corporation /s/ Robert E. Parsons, Jr. By: _________________________________ Robert E. Parsons, Jr. Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ Terence C. Golden President, Chief Executive March 24, 1999 ______________________________________ Officer and Director Terence C. Golden (Principal Executive Officer) /s/ Robert E. Parsons, Jr. Executive Vice President March 24, 1999 ______________________________________ and Chief Financial Robert E. Parsons, Jr. Officer (Principal Financial Officer) /s/ Donald D. Olinger Senior Vice President and March 24, 1999 ______________________________________ Corporate Controller Donald D. Olinger (Principal Accounting Officer) /s/ Richard E. Marriott Chairman of the Board of March 24, 1999 ______________________________________ Directors Richard E. Marriott /s/ R. Theodore Ammon Director March 24, 1999 ______________________________________ R. Theodore Ammon /s/ Robert M. Baylis Director March 24, 1999 ______________________________________ Robert M. Baylis /s/ J.W. Marriott, Jr. Director March 24, 1999 ______________________________________ J.W. Marriott, Jr. /s/ Ann Dore McLaughlin Director March 24, 1999 ______________________________________ Ann Dore McLaughlin
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Signatures Title Date ---------- ----- ---- /s/ John G. Schreiber Director March 24, 1999 ______________________________________ John G. Schreiber /s/ Harry L. Vincent, Jr. Director March 24, 1999 ______________________________________ Harry L. Vincent, Jr.
98 SCHEDULE III Page 1 of 2 HOST MARRIOTT CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in millions)
Gross Amount at Initial Costs December 31, 1998 ----------------- Subsequent ------------------------ Date of Buildings & Costs Buildings & Accumulated Completion of Date Description Debt Land Improvements Capitalized Land Improvements Total Depreciation Construction Acquired ----------- ------ ---- ------------ ----------- ---- ------------ ------ ------------ ------------- -------- Full-service hotels: New York Marriott Marquis Hotel, New York, NY.......... $ 145 $-- $552 $24 $-- $576 $576 $(144) 1986 N/A Other full-service properties, each less than 5% of total............. $2,293 $724 $5,638 $376 $727 $6,032 $6,759 $(413) various various ------ ---- ------ ---- ---- ------ ------ ----- Total full- service......... 2,438 724 6,190 400 727 6,608 7,335 (557) Other properties, each less than 5% of total.......... -- 13 5 -- 13 5 18 (18) various N/A ------ ---- ------ ---- ---- ------ ------ ----- Total........... $2,438 $737 $6,195 $400 $740 $6,613 $7,353 $(575) ====== ==== ====== ==== ==== ====== ====== ===== Depreciation Description Life ----------- ------------ Full-service hotels: New York Marriott Marquis Hotel, New York, NY.......... 40 Other full-service properties, each less than 5% of total............. 40 Total full- service......... Other properties, each less than 5% of total.......... various Total...........
S-1 SCHEDULE III Page 2 of 2 HOST MARRIOTT CORPORATION AND SUBSIDIARIES REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in millions) Notes: (A) The change in total cost of properties for the fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997 is as follows: Balance at December 29, 1995......................................... $2,986 Additions: Acquisitions....................................................... 1,087 Capital expenditures............................................... 77 Transfers from construction-in-progress............................ 28 Deductions: Dispositions and other............................................. (322) ------ Balance at January 3, 1997......................................... 3,856 Additions: Acquisitions....................................................... 1.459 Capital expenditures............................................... 117 Transfers from construction-in-progress............................ 30 Deductions: Dispositions and other............................................. (145) ------ Balance at January 2, 1998........................................... 5,317 Additions: Acquisitions....................................................... 2,849 Capital Expenditures............................................... 46 Transfers from construction-in-progress............................ 14 Deductions: Dispositions and other............................................. (91) Transfers to Non-Controlled Subsidiary............................. (139) Transfers to Spin-Off (Crestline Capital Corporation).............. (643) ------ Balance at December 31, 1998......................................... $7,353 ======
(B) The change in accumulated depreciation and amortization of real estate assets for the fiscal years ended December 31, 1998, January 2, 1998 and January 3, 1997 is as follows: Balance at December 29, 1995........................................... $374 Depreciation and amortization.......................................... 96 Dispositions and other................................................. (59) Balance at January 3, 1997............................................. 411 Depreciation and amortization.......................................... 126 Dispositions and other................................................. (31) ---- Balance at January 2, 1998............................................. 506 Depreciation and amortization.......................................... 132 Dispositions and other................................................. (13) Transfers to Non-Controlled Subsidiary................................. (29) Transfers to Spin-Off (Crestline Capital Corporation).................. (21) ---- Balance at December 31, 1998........................................... $575 ====
(C) The aggregate cost of properties for Federal income tax purposes is approximately $5,786 million at December 31, 1998. (D) The total cost of properties excludes construction-in-progress properties. S-2

 
                                                                     Exhibit 4.9

                             AMENDED AND RESTATED

                                TRUST AGREEMENT

                                     AMONG

                            HMC MERGER CORPORATION
                                 AS DEPOSITOR,

                       IBJ SCHRODER BANK & TRUST COMPANY
                             AS PROPERTY TRUSTEE,

                    DELAWARE TRUST CAPITAL MANAGEMENT, INC.
                             AS DELAWARE TRUSTEE,

                                      AND

                    THE ADMINISTRATIVE TRUSTEES NAMED HEREIN

                         DATED AS OF DECEMBER 29, 1998


                         HOST MARRIOTT FINANCIAL TRUST

 
                               TABLE OF CONTENTS


                                   ARTICLE 1
                                 DEFINED TERMS

SECTION 1.1.  Definitions...................................................  2


                                   ARTICLE 2
                           ESTABLISHMENT OF THE TRUST

SECTION 2.1.    Name.......................................................  13
SECTION 2.2.    Office of the Delaware Trustee; Principal Place of 
                  Business.................................................  13
SECTION 2.3.    Organizational Expenses....................................  13
SECTION 2.4.    Issuance of the Preferred Securities.......................  13
SECTION 2.5.    Subscription and Purchase of Debentures;
                Issuance of the Common Securities..........................  14
SECTION 2.6.    Declaration of Trust.......................................  14
SECTION 2.7.    Authorization to Enter into Certain Transactions...........  15
SECTION 2.8.    Assets of Trust............................................  18
SECTION 2.9.    Title to Trust Property....................................  18
 

                                   ARTICLE 3
                                PAYMENT ACCOUNT

SECTION 3.1.    Payment Account............................................  19


                                   ARTICLE 4
                DISTRIBUTIONS; REDEMPTION; EXCHANGE; CONVERSION

SECTION 4.1.    Distributions..............................................  19
SECTION 4.2.    Redemption.................................................  20
SECTION 4.3.    Conversion.................................................  22
SECTION 4.4.    Special Event Exchange or Redemption.......................  25
SECTION 4.5.    Subordination of Common Securities.........................  27
SECTION 4.6.    Payment Procedures.........................................  27
SECTION 4.7.    Tax Returns and Reports....................................  27
SECTION 4.8.    Payment of Taxes, Duties, Etc. of  the Trust...............  27
SECTION 4.9.    Payments under Indenture...................................  28

                                       i

 
                                                                          PAGE

                                   ARTICLE 5
                         TRUST SECURITIES CERTIFICATES

SECTION 5.1      Initial Ownership........................................  28
SECTION 5.2      The Trust Securities Certificates........................  28
SECTION 5.3      Delivery of Trust Securities Certificates................  28
SECTION 5.4      Registration of Transfer and Exchange of Preferred 
                 Securities; Restrictions on Transfer.....................  29
SECTION 5.5.     Mutilated, Destroyed, Lost or Stolen Trust Securities 
                 Certificates.............................................  33
SECTION 5.6.     Persons Deemed Securityholders...........................  34
SECTION 5.7.     Access to List of Securityholders' Names and Addresses...  34
SECTION 5.8.     Maintenance of Office or Agency..........................  34
SECTION 5.9.     Appointment of Paying Agent..............................  35
SECTION 5.10     Ownership of Common Securities by Depositor..............  35
SECTION 5.11.    Global Securities; Non-Global Securities; Common 
                 Securities Certificate...................................  35
SECTION 5.12.    Notices to Clearing Agency...............................  37
SECTION 5.13.    Definitive Preferred Securities Certificates.............  37
SECTION 5.14.    Rights of Securityholders................................  37
SECTION 5.15.    Restrictive Legends......................................  37


                                   ARTICLE 6
                    ACT OF SECURITYHOLDERS; MEETINGS; VOTING

SECTION 6.1.     Limitations on Voting Rights.............................  38
SECTION 6.2.     Notice of Meetings.......................................  40
SECTION 6.3.     Meetings of Preferred Securityholders....................  40
SECTION 6.4.     Voting Rights............................................  41
SECTION 6.5.     Proxies, Etc.............................................  41
SECTION 6.6.     Securityholder Action by Written Consent.................  41
SECTION 6.7.     Record Date for Voting and Other Purposes................  41
SECTION 6.8.     Acts of Securityholders..................................  41
SECTION 6.9.     Inspection of Records....................................  43


                                   ARTICLE 7
                         REPRESENTATIONS AND WARRANTIES

SECTION 7.1.     Representations and Warranties of the Property Trustee 
                 and the Delaware Trustee.................................  43
SECTION 7.2.     Representations and Warranties of Depositor..............  44

                                      ii

 
                                                                            PAGE
                                   ARTICLE 8
                                  THE TRUSTEES

SECTION 8.1.     Certain Duties and Responsibilities......................  44
SECTION 8.2.     Notice of Defaults.......................................  46
SECTION 8.3.     Certain Rights of Property Trustee.......................  48
SECTION 8.4.     Not Responsible for Recitals or Issuance of Securities...  50
SECTION 8.5.     May Hold Securities......................................  50
SECTION 8.6.     Compensation; Indemnity; Fees............................  50
SECTION 8.7.     Property Trustee Required; Eligibility of Trustees.......  51
SECTION 8.8.     Conflicting Interests....................................  51
SECTION 8.9.     Resignation and Removal; Appointment of Successor........  51
SECTION 8.10     Acceptance of Appointment by Successor...................  53
SECTION 8.11.    Merger, Conversion, Consolidation or Succession to 
                 Business...................................................53
SECTION 8.12.    Preferential Collection of Claims Against Depositor 
                 or Trust.................................................  54
SECTION 8.13.    Reports by Property Trustee..............................  54
SECTION 8.14.    Reports to the Property Trustee..........................  54
SECTION 8.15.    Evidence of Compliance with Conditions Precedent.........  55
SECTION 8.16.    Number of Trustees.......................................  55
SECTION 8.17.    Delegation of Power......................................  55


                                   ARTICLE 9
                      TERMINATION, LIQUIDATION AND MERGER

SECTION 9.1.     Termination upon Expiration Date.........................  56
SECTION 9.2.     Early Termination........................................  56
SECTION 9.3.     Termination..............................................  56
SECTION 9.4.     Liquidation..............................................  56
SECTION 9.5.     Mergers, Consolidations, Amalgamations or Replacements of 
                 the Trust................................................  58


                                   ARTICLE 10
                            MISCELLANEOUS PROVISIONS
 
SECTION 10.1.    Limitation of Rights of Securityholders..................  59
SECTION 10.2.    Amendment................................................  59
SECTION 10.3.    Separability.............................................  60
SECTION 10.4.    GOVERNING LAW............................................  60
SECTION 10.5.    Payments Due on Non-Business Day.........................  60
SECTION 10.6.    Successors...............................................  60
SECTION 10.7.    Headings.................................................  61
SECTION 10.8.    Reports, Notices and Demands.............................  61
SECTION 10.9.    Agreement Not to Petition................................  61
SECTION 10.10.   Trust Indenture Act; Conflict with Trust Indenture Act...  62
SECTION 10.11.   Acceptance of Terms of Trust Agreement, 
                 Guarantee and Indenture..................................  62

                                      iii

 
                                                                            PAGE
                                   ARTICLE 11
                              REGISTRATION RIGHTS

SECTION 11.1.    Registration Rights......................................  62

EXHIBIT A        Certificate of Trust of Host Marriott Financial Trust
EXHIBIT B        Form of Certificate Depositary Agreement
EXHIBIT C        Form of Common Securities of Host Marriott Financial Trust
EXHIBIT D        Form of Preferred Securities of  Host Marriott Financial Trust
EXHIBIT E        Form of Regulation S Certificate
EXHIBIT F        Form of Restricted Securities Certificate
EXHIBIT G        Form of Unrestricted Securities Certificate
EXHIBIT H        Notice of Conversion

                                      iv

 
                              HOST FINANCIAL TRUST*
                    Certain Sections of this Trust Agreement
                      relating to Sections 310 through 318
                       of the Trust Indenture Act of 1939:


  TRUST INDENTURE                                       TRUST AGREEMENT
     SECTION                                                SECTION

Section  310  (a)(1)..........................................8.7
              (a)(2)..........................................8.7
              (a)(4)..........................................2.7(a)(ii)
              (b).............................................8.8
Section  311  (a).............................................8.12
              (b).............................................8.12
Section  312  (a).............................................5.7
              (b).............................................5.7
              (c).............................................5.7
Section  313  (a).............................................8.13(a)
              (c).............................................10.8
              (d).............................................8.13(c)
              (a)(4)..........................................8.13(b)
              (b).............................................8.13(b)
Section  314  (a).............................................8.14
              (b).............................................Not Applicable
              (c)(1)..........................................8.15
              (c)(2)..........................................8.15
              (c)(3)..........................................Not Applicable
              (d).............................................Not Applicable
              (e).............................................1.1, 8.15
Section  315  (a).............................................8.1(a), 8.3(a)
              (b).............................................8.2, 10.8
              (c).............................................8.1(a)
              (d).............................................8.1, 8.3
              (e).............................................Not Applicable
 Section 316  (a).............................................Not Applicable
              (a)(1)(A).......................................Not Applicable
              (a)(1)(B).......................................Not Applicable
              (a)(2)..........................................Not Applicable
              (b).............................................Not Applicable
              (c).............................................6.7
Section  317  (a)(1)..........................................Not Applicable
              (b).............................................5.9
Section  318  (a).............................................10.10

                                       v

 
* Note: This reconciliation and tie sheet shall not, for any purpose, be deemed 
to be a part of the Trust Agreement.


                                      vi


 
     AMENDED AND RESTATED TRUST AGREEMENT, dated as of December 29, 1998
among (i) HMC Merger Corporation, a Maryland corporation (including any
successors or assigns, "the Depositor"), (ii) IBJ Schroder Bank & Trust Company,
a New York banking corporation, as property trustee (in such capacity, the
"Property Trustee" and, in its personal capacity and not in its capacity as
Property Trustee, the "Bank"), (iii) Delaware Trust Capital Management, Inc., a
corporation duly organized and existing under the laws of the State of Delaware,
as Delaware trustee (in such capacity, the "Delaware Trustee"), (iv) Robert E.
Parsons, Jr., an individual, Ed Walter, an individual, and Christopher G.
Townsend, an individual, each of whose address is c/o Host Marriott Corporation,
10400 Fernwood Road, Bethesda, Maryland 20817, (each, an "Administrative
Trustee" and, collectively, the "Administrative Trustees" and, collectively with
the Property Trustee and Delaware Trustee, the "Trustees") and (v) the several
Holders as hereinafter defined.

                              W I T N E S S E T H:

     WHEREAS, the Depositor and the Trustees have heretofore duly declared and
established a business trust pursuant to the Delaware Business Trust Act by the
entering into of that certain Trust Agreement, dated as of December 28, 1998
(the "Original Trust Agreement"), and by the execution and filing by the
Trustees with the Secretary of State of the State of Delaware of the Certificate
of Trust, filed on December 29, 1998, attached as Exhibit A, for the purposes of
(i) merging Host Financial Trust, a Delaware business trust originally formed on
November 25, 1996 (the "Old Trust") with and into the Trust (the "Merger"), (ii)
in connection with the Merger, having the Trust assume all of the obligations
and liabilities of the Old Trust, including under the Common Securities and the
Preferred Securities, which originally represented undivided beneficial
interests in the assets of the Old Trust, and pursuant to the Merger and this
Trust Agreement, hereafter represent undivided beneficial interests in the
assets of the Trust, and (iii) in connection with the Merger, acquiring all of
the Old Trust's assets and rights, including those accruing under the Debentures
(as defined herein) originally acquired by the Old Trust with the proceeds from
the sale of the Common Securities and the Preferred Securities pursuant to the
Purchase Agreement;

     WHEREAS, other than the Common Securities and the Preferred Securities, no
interests in the Trust have been issued; and

     NOW THEREFORE, in consideration of the agreements and obligations set forth
herein and for other good and valuable consideration, the sufficiency of which
is hereby acknowledged, each party, for the benefit of the other party and for
the benefit of the Holders of the Preferred Securities, hereby amends and
restates the Original Trust Agreement in its entirety and agrees as follows:

                                   ARTICLE 1
                                 DEFINED TERMS

SECTION 1.1.  Definitions.  For all purposes of this Trust Agreement, except as
otherwise expressly provided or unless the context otherwise requires:

     (a) the terms defined in this Article have the meanings assigned to them in
this Article and include the plural as well as the singular;

                                       1

 
     (b) all other terms used herein that are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;

     (c) unless the context otherwise requires, any reference to an "Article" or
a "Section" refers to an Article or a Section, as the case may be, of this Trust
Agreement; and

     (d) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Trust Agreement as a whole and not to any particular
Article, Section or other subdivision.

     "Act" has the meaning specified in Section 6.8.

     "Additional Amount" means, with respect to the Trust Securities, the amount
of Additional Interest (as defined in the Indenture) paid by the Depositor on
the Debentures.

     "Additional Sums" means, with respect to the Trust Securities, the amount
of Additional Sums (as defined in the Indenture) paid by the Depositor on the
Debentures.

     "Administrative Trustee" means each of Robert E.  Parsons, Jr., Ed Walter
and Christopher G. Townsend, each solely in his capacity as Administrative
Trustee of the Trust formed and continued hereunder and not in his individual
capacity, or such Administrative Trustee's successor in interest in such
capacity, or any successor in interest in such capacity, or any successor
administrative trustee appointed as herein provided.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person, provided, however that an Affiliate of the
Depositor shall not be deemed to include the Trust.  For the purposes of this
definition, "control" when used with respect to any specified Person means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

     "Applicable Procedures" means, with respect to any transfer or transaction
involving a Global Certificate or beneficial interest therein, the rules and
procedures of Euroclear and Cedel, and of the Clearing Agency for such security,
in each case to the extent applicable to such transaction and as in effect from
time to time.

     "Bank" has the meaning specified in the preamble to this Trust Agreement.

     "Bankruptcy Event" means, with respect to any Person:

          (a) the entry of a decree or order by a court having jurisdiction in
     the premises judging such Person as bankrupt or insolvent, or approving as
     properly filed a petition seeking reorganization, arrangement, adjudication
     or composition of or in respect of such Person under any applicable Federal
     or State bankruptcy, insolvency, reorganization or other similar law, or
     appointing a receiver, liquidator, assignee, trustee, sequestrator (or
     other 

                                       2

 
     similar official) of such Person or of any substantial part of its property
     or ordering the winding-up or liquidation of its affairs, and the
     continuance of any such decree or order unstayed and in effect for a period
     of 60 consecutive days; or

          (b) the institution by such Person of proceedings to be adjudicated as
     bankrupt or insolvent, or the consent by it to the institution of
     bankruptcy or insolvency proceedings against it, or the filing by it of a
     petition or answer or consent seeking reorganization or relief under any
     applicable Federal or State bankruptcy, insolvency, reorganization or other
     similar law, or the consent by it to the filing of any such petition or to
     the appointment of a receiver, liquidator, assignee, trustee,  sequestrator
     (or similar official) of such Person or of any substantial part of its
     property, or the making by it of an assignment for the benefit of
     creditors, or the admission by it in writing of its inability to pay its
     debts generally as they become due and its willingness to be adjudicated a
     bankrupt, or the taking of corporate action by such Person in furtherance
     of any such action.

     "Bankruptcy Laws" has the meaning specified in Section 10.9.

     "Board of Directors" means either the board of directors of the Depositor
or any committee of that board duly authorized to act hereunder.

     "Book-Entry Preferred Securities Certificates" means a beneficial interest
in the Preferred Securities Certificates, ownership and transfers of which shall
be made through book entries by a Clearing Agency as described in Section 5.11.

     "Business Day" means any day other than a Saturday or Sunday or a day on
which banking institutions in The City of New York are authorized or required by
law or executive order to remain closed or a day on which the Corporate Trust
Office of the Property Trustee or the corporate trust office of the Debenture
Trustee, is closed for business.

     "Certificate Depository Agreement" means the agreement among the Old Trust,
the predecessor to the Depositor and The Depository Trust Company, as the
initial Clearing Agency, dated as of the Closing Date and assumed by the Trust
by operation of law pursuant to the Merger, relating to the Trust Securities
Certificates substantially in the form attached as Exhibit B, as the same may be
amended and supplemented from time to time.

     "Certificated Preferred Security" has the meaning specified in Section 5.2.

     "Clearing Agency" means an organization registered as a "clearing agency"
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The
Depository Trust Company will be the initial Clearing Agency.

     "Clearing Agency Participant" means a broker, dealer, bank, other financial
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of securities deposited with the Clearing
Agency.

                                       3

 
     "Closing Date" means the first Time of Delivery (as defined in the Purchase
Agreement), which date is the date of execution and delivery of  the Restated
and Amended Trust Agreement of the Old Trust.

     "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this instrument such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.

     "Common Securities Certificate" means a certificate evidencing ownership of
Common Securities, substantially in the form attached as Exhibit C, but
including any certificate evidencing ownership of Common Securities in the form
issued by the Old Trust.

     "Common Security" means an undivided beneficial interest in the assets of
the Old Trust, which by operation of law pursuant to the Merger represents an
undivided beneficial interest in the assets of the Trust, having a Liquidation
Amount with respect to the assets of the Trust of $50 and having the rights
provided therefor in this Trust Agreement, including the right to receive
Distributions and a Liquidation Distribution as provided herein.

     "Common Stock" means common stock, $0.01 par value per share, of the
Depositor.

     "Conversion Agent" has the meaning specified in Section 4.3.

     "Conversion Date" has the meaning specified in Section 4.3.

     "Conversion Expiration Date" means the date selected by the Depositor not
less than 30 days nor more than 60 days after the date on which the Depositor
issues a press release announcing its intention to terminate the conversion
rights of the Holders.

     "Conversion Price" has the meaning specified in Section 4.3.

     "Corporate Trust Office" means the principal corporate trust office of the
Property Trustee at which at any particular time its corporate trust business
shall be administered, which office at the date hereof is located at One State
Street, 11th Floor, New York, New York 10004, Attention: Corporate Trust &
Agency Department.

     "Current Market Price", with respect to Common Stock, means for any day the
last reported sale price, regular way, on such day, or, if no sale takes place
on such day, the average of the reported closing bid and asked prices on such
day, regular way, in either case as reported on the New York Stock Exchange
Composite Transactions Tape, or, if Common Stock is not listed or admitted to
trading on the New York Stock Exchange on such day, on the principal national
securities exchange on which Common Stock is listed or admitted to trading, if
Common Stock is listed on a national securities exchange, or the Nasdaq National
Market, or, if Common Stock is not quoted or admitted to trading on such
quotation system, on the principal quotation system on which Common Stock may be
listed or admitted to trading or quoted, or, if not listed or admitted to
trading or quoted on any national securities exchange or quotation system, the
average of the closing bid 

                                       4

 
and asked prices of Common Stock in the over-the-counter market on the day in
question as reported by the National Quotation Bureau Incorporated, or a similar
generally accepted reporting service, or, if not so available in such manner, as
furnished by any New York Stock Exchange member firm selected from time to time
by the Board of Directors for that purpose or, if not so available in such
manner, as otherwise determined in good faith by the Board of Directors.

     "Debenture Event of Default" means an "Event of Default" as defined in the
Indenture.

     "Debenture Redemption Date" means, with respect to any Debentures to be
redeemed under the Indenture, the date fixed for redemption thereof under the
Indenture.

     "Debenture Trustee" means IBJ Schroder Bank & Trust Company, a New York
banking corporation, as trustee under the Indenture.

     "Debentures" means $567,050,000 aggregate principal amount of the
Depositor's predecessor's 6 3/4% convertible subordinated debentures issued
pursuant to the Indenture, the obligations under which have been assumed by the
Depositor.

     "Definitive Preferred Securities Certificates" means either or both (as the
context requires) of (a) Preferred Securities Certificates issued in
certificated, fully registered form as provided in Section 5.11(a) and (b)
Preferred Securities Certificates issued in certificated, fully registered form
as provided in Section 5.13.

     "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Del. C. (S)(S) 3801, et. seq., as it may be amended from time to
time.

     "Delaware Trustee" means the Person identified as the "Delaware Trustee" in
the preamble to this Trust Agreement solely in its capacity as Delaware Trustee
of the Trust formed and continued hereunder and not in its individual capacity,
or its successor in interest in such capacity, or any successor Delaware trustee
appointed as herein provided.

     "Depositor" has the meaning specified in the preamble to this Trust
Agreement.

     "Direct Action" has the meaning specified in Section 6.8.

     "Distribution Date" has the meaning specified in Section 4.1(a).

     "Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 4.1.

     "Early Termination Event" has the meaning specified in Section 9.2.

     "Event of Default" means the occurrence of a Debenture Event of Default,
whatever the reason for such Debenture Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body.

                                       5

 
     "Exchange Notice" has the meaning specified in Section 4.4(b).

     "Expiration Date" has the meaning specified in Section 9.1.

     "Global Certificate" means a Preferred Security that is registered in the
Securities Register in the name of a Clearing Agency or a nominee thereof.

     "Guarantee" means the Guarantee Agreement executed and delivered by the
Depositor's predecessor and IBJ Schroder Bank & Trust Company, a New York
banking corporation, as guarantee trustee, on the Closing Date, for the benefit
of the Holders of the Preferred Securities, as amended from time to time.

     "Holder" means a Person in whose name a Trust Securities Certificate
representing a Trust Security is registered, such Person being a beneficial
owner within the meaning of the Delaware Business Trust Act.

     "Indenture" means the Convertible Subordinated Indenture, dated as of
December 2, 1996 between the Depositor's predecessor  and the Debenture Trustee,
as amended or supplemented from time to time.

     "Investment Company Event" means the receipt by the Property Trustee, on
behalf of the Trust, of an Opinion of Counsel, rendered by a law firm having a
national tax and securities practice (which Opinion of Counsel shall not have
been rescinded by such law firm), to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law") that there is more
than an insubstantial risk that the Trust is or will be considered an
"investment company" that is required to be registered under the 1940 Act, which
Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Preferred Securities under this Trust Agreement.

     "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of
trust, adverse ownership interest, hypothecation, assignment, security interest
or preference, priority or other security agreement or preferential arrangement
of any kind or nature whatsoever.

     "Liquidated Damages" has the meaning specified under the Indenture.

     "Liquidation Amount" means an amount with respect to the assets of the
Trust equal to $50 per Trust Security.

     "Liquidation Date" means each date on which Debentures or cash are to be
distributed to Holders of Trust Securities in connection with a termination and
liquidation of the Trust pursuant to Section 9.4(a).

     "Liquidation Distribution" has the meaning specified in Section 9.4(d).

                                       6

 
     "1940 Act" means the Investment Company Act of 1940, as amended.

     "Notice of Conversion" means the notice given by a holder of Preferred
Securities to the Conversion Agent directing the Conversion Agent to exchange
such Preferred Security for Debentures and to convert such Debentures into
Common Stock on behalf of such holder.  Such notice is substantially in the form
set forth in Exhibit H.

     "Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board, a Vice Chairman, the President or a Vice President, and by (ii) the
Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant
Secretary, of the Depositor, and delivered to the Trustee.  One of the officers
signing an Officers' Certificate given pursuant to Section 8.15 shall be the
principal executive, financial or accounting officer of the Depositor. Any
Officers' Certificate delivered with respect to compliance with a condition or
covenant provided for in this Trust Agreement shall include:

          (a) a statement that each officer signing the Officers' Certificate
          has read the covenant of condition and the definitions relating
          thereto;

          (b) a brief statement of the nature and scope of the examination or
          investigation undertaken by each officer in rendering the Officers'
          Certificate;

          (c) a statement that each officer has made such examination or
          investigation as, in such officer's opinion, is necessary to enable
          such officer to express an informed opinion as to whether or not such
          covenant or condition has been complied with; and

          (d) a statement as to whether, in the opinion of each such officer,
          such condition or covenant has been complied with.

     "Opinion of Counsel" means a written opinion of counsel, who may be counsel
for the Trust, the Property Trustee or the Depositor, and who may be an employee
of any thereof, and who shall be acceptable to the Property Trustee. Any Opinion
of Counsel delivered with respect to compliance with a condition or covenant
provided for in this Trust Agreement shall include:

          (a) a statement that each individual signing the Opinion of Counsel
          has read the covenant or condition and the definitions relating
          thereto;

          (b) a brief statement of the nature and scope of the examination or
          investigation undertaken by each individual in rendering the Opinion
          of Counsel;

          (c) a statement that each individual has made such examination or
          investigation as is necessary to enable such individual to express an
          informed opinion as to whether or not such covenant or condition has
          been complied with; and

          (d) a statement as to whether, in the opinion of each such individual,
          such condition or covenant has been complied with.

                                       7

 
     "Optional Redemption Price" means, except as set forth below, with respect
to the Preferred Securities, the following percentages of the Liquidation
Amounts thereof, and accumulated and unpaid Distributions, if any, to the date
fixed for redemption if redeemed during the twelve-month period commencing
December 2 in each of the following years indicated:

 
Year       Redemption Price        Year       Redemption Price
 
1999           104.725%            2003           102.025%
 
2000           104.050%            2004           101.350%
 
2001           103.375%            2005           100.675%
 
2002           102.700%            2006 and       100%
                                   thereafter


In the event of a redemption of Trust Securities upon the occurrence of a Tax
Event, Trust Securities shall be redeemed at the redemption price of $50 per
Trust Security and all accumulated and unpaid Distributions, if any to the date
fixed for redemption.

In the event of a redemption of Trust Securities pursuant to Section 4.2(a)(ii),
Trust Securities shall be redeemed as the redemption price specified therein.

     "Original Trust Agreement" has the meaning specified in the recitals to
this Trust Agreement.

     "Outstanding", when used with respect to Trust Securities, means, as of the
date of determination, all Trust Securities theretofore executed and delivered
under this Trust Agreement, except:

          (a) Trust Securities theretofore cancelled by the Securities Registrar
          or delivered to the Securities Registrar for cancellation or tendered
          for conversion;

          (b) Trust Securities for whose payment or redemption money in the
          necessary amount has been theretofore deposited with the Property
          Trustee or any Paying Agent for the Holders of such Trust Securities;
          provided that, if such Trust Securities are to be redeemed, notice of
          such redemption has been duly given pursuant to this Trust Agreement;
          and

          (c) Trust Securities which have been paid or in exchange for or in
          lieu of which other Trust Securities have been executed and delivered
          pursuant to Section 5.5: provided, however, that in determining
          whether the Holders of the requisite Liquidation Amount of the
          Outstanding Trust Securities have given any request, demand,
          authorization, direction, notice, consent or waiver hereunder, Trust
          Securities owned by the Depositor, any Trustee or any  affiliate of
          the Depositor or any Trustee shall be disregarded and deemed not to be
          Outstanding, except that (a) in 

                                       8

 
          determining whether any Trustee shall be protected in relying upon any
          such request, demand, authorization, direction, notice, consent or
          waiver, only Trust Securities that such Trustee knows to be so owned
          shall be so disregarded and (b) the foregoing shall not apply at any
          time when all of the Outstanding Trust Securities are owned by the
          Depositor, one or more of the Trustees and/or any such Affiliate.
          Trust Securities so owned which have been pledged in good faith may be
          regarded as Outstanding if the pledgee establishes to the satisfaction
          of the Securities Registrar the pledgee's right so to act with respect
          to such Trust Securities and that the pledgee is not the Depositor or
          any Affiliate of the Depositor.

     "Owner" means each Person who is the beneficial owner of a Book-Entry
Preferred Securities Certificate as reflected in the records of the Clearing
Agency or, if a Clearing Agency Participant is not the Owner, then as reflected
in the records of a Person maintaining an account with such Clearing Agency
(directly or indirectly, in accordance with the rules of such Clearing Agency).

     "Paying Agent" means any paying agent or co-paying agent appointed pursuant
to Section 5.9.

     "Payment Account" means a segregated non-interest bearing corporate trust
account maintained by the Property Trustee with the Bank in its trust department
for the benefit of the Securityholders in which all amounts paid in respect of
the Debentures will be held and from which the Property Trustee shall make
payments to the Securityholders in accordance with Section 4.1.

     "Person" means any individual, corporation, partnership, joint venture,
trust, limited liability company or corporation, unincorporated organization or
government or any agency or political subdivision thereof.

     "Preferred Securities Certificate" means a certificate evidencing ownership
of Preferred Securities, substantially in the form attached as Exhibit D, but
including any certificate evidencing ownership of Preferred Securities in the
form issued by the Old Trust.

     "Preferred Security" means an undivided beneficial interest in the assets
of the Old Trust, which by operation of law pursuant to the Merger represents an
undivided beneficial interest in the assets of the Trust, having a Liquidation
Amount with respect to the assets of the Trust of $50 and having the rights
provided therefor in this Trust Agreement, including the right to receive
Distributions and a Liquidation Distribution as provided herein.

     "Property Trustee" means the commercial bank or trust company identified as
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust heretofore formed and continued
hereunder and not in its individual capacity, or its successor in interest in
such capacity, or any successor property trustee appointed as herein provided.

     "Purchase Agreement" means the Purchase Agreement, dated as of November 25,
1996 among the Old Trust, the Depositor's predecessor and the Purchasers named
therein.

                                       9

 
     "Redemption Date" means, with respect to any Trust Security to be redeemed,
each Debenture Redemption Date.

     "Redemption Price" means, with respect to any Trust Security, $50 per Trust
Security, plus accumulated and unpaid Distributions (including any Additional
Sums) to the date of redemption.

     "Registration Rights Agreement" means the Registration Rights Agreement,
dated December 2, 1996, among the Depositor's predecessor, the Old Trust, and
the Purchasers named in the Purchase Agreement.

     "Regulation S Certificate" means a certificate substantially in the form
set forth in Exhibit E.

     "Regulation S Global Certificate" has the meaning specified in Section 5.2.

     "Regulation S Legend" has the meaning specified in Section 5.15(b).

     "Regulation S Preferred Security" means all Preferred Securities required
pursuant to Section 5.4(c) to bear a Regulation S Legend.  Such term includes
the Regulation S Global Certificate.

     "Relevant Trustee" has the meaning specified in Section 8.9.

     "Restricted Global Certificate" has the meaning specified in Section 5.2.

     "Restricted Period" means, with respect to the Preferred Securities, the
one-year period, and with respect to the Debentures or the Common Stock Isabel
on conversion of the Preferred Securities, the 40-day period, in either case
following the last original issue date of the Preferred Securities (including
any Preferred Securities issued to cover over-allotments).

     "Restricted Securities" means all Preferred Securities required pursuant to
Section 5.4 to bear any Restricted Securities Legend. Such term includes the
Restricted Global Certificate.

     "Restricted Securities Certificate" means a certificate substantially in
the form set forth in Exhibit F.

     "Restricted Securities Legend" has the meaning specified in Section
5.15(a).

     "Rights" has the meaning specified in Section 4.3.

     "Rule 144A Preferred Securities" has the meaning specified in Section 5.2.

     "Securities Act Legend" means a Restricted Securities Legend or a
Regulation S Legend.

     "Securities Register" and "Securities Registrar" have the respective
meanings specified in Section 5.4.

                                       10

 
     "Securityholder" or "Holder" means a Person in whose name a Trust Security
or Securities is registered in the Securities Register; any such Person shall be
deemed to be a beneficial owner within the meaning of the Delaware Business
Trust Act.

     "Special Event" means a Tax Event or an Investment Company Event.

     "Successor Delaware Trustee" has the meaning specified in Section 8.9.

     "Successor Property Trustee" has the meaning specified in Section 8.9.

     "Successor Securities" has the meaning specified in Section 9.5.

     "Tax Event" means the receipt by the Property Trustee, on behalf of the
Trust, of an Opinion of Counsel, rendered by a law firm having a national tax
and securities practice (which Opinion of Counsel shall not have been rescinded
by such law firm), to the effect that, as a result of any amendment to, or
change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the date of issuance of
the Preferred Securities under this Trust Agreement, there is more than an
insubstantial risk in each case after the date thereof that (i) the Trust is, or
will be within 90 days after the date thereof, subject to United States Federal
income tax with respect to income received or accrued on the Debentures, (ii)
interest payable by the Depositor on the Debentures is not, or will not be,
within 90 days after the date hereof, deductible, in whole or in part, for
United States Federal income tax purposes or (iii) the Trust is, or will be
within 90 days after the date thereof, subject to more than de minimis amount of
other taxes, duties, assessments or other governmental charges.

     "Trust" means the Delaware business trust continued hereby and identified
on the cover page of this Trust Agreement.

     "Trust Agreement" means this Amended and Restated Trust Agreement, as the
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.

     "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

     "Trust Property" means the property acquired by the Trust by operation of
law pursuant to the Merger, including (a) the Debentures, (b) any cash on
deposit in, or owing to, the Payment 

                                       11

 
Account and (c) all proceeds and rights in respect of the foregoing to be held
by the Property Trustee pursuant to the terms of this Trust Agreement for the
benefit of the Securityholders.

     "Trust Securities Certificate" means any one of the Common Securities
Certificates, the Global Certificates or the Certificated Preferred Securities,
including, without limitation, any certificate evidencing any Trust Securities
in the form issued by the Old Trust.

     "Trust Security" means any one of the Common Securities or the Preferred
Securities.

     "Trustees" means, collectively, the Property Trustee, the Delaware Trustee
and the Administrative Trustees.

     "Unrestricted Securities Certificate" means a certificate substantially in
the form set forth in Exhibit G.


                                   ARTICLE 2
                           ESTABLISHMENT OF THE TRUST

     SECTION 2.1.  Name.  The Trust continued hereby shall be known as "Host
Marriott Financial Trust", as such name may be modified from time to time by the
Administrative Trustees following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.  Contemporaneously with the execution
and delivery of this Trust Agreement, the Administrative Trustees are authorized
and directed to execute and file a Certificate of Amendment to the Trust's
Certificate of Trust, to change the Trust's name from Host Marriott REIT
Financial Trust to Host Marriott Financial Trust, the name of the Old Trust.

     SECTION 2.2.  Office of the Delaware Trustee; Principal Place of Business.
The address of the Delaware Trustee in the State of Delaware is 300 Delaware
Avenue, Wilmington, Delaware 19801, Attention: Corporate Trust Administration,
or such other address in the State of Delaware as the Delaware Trustee may
designate by written notice to the Securityholders and the Depositor.  The
principal executive office of the Trust is 10400 Fernwood Road, Bethesda,
Maryland, 20817.

     SECTION 2.3.  Organizational Expenses.  The Depositor shall pay
organizational expenses of the Trust as they arise or shall, upon request of any
Trustee, promptly reimburse such Trustee for any such expenses paid by such
Trustee. The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.
 
     SECTION 2.4.  Issuance of the Preferred Securities.  On November 25, 1996
the Depositor's predecessor and an administrative trustee on behalf of the Old
Trust executed and delivered the Purchase Agreement. On the Closing Date, an
administrative trustee, on behalf of the Old Trust, executed in accordance with
section 5.2 of the Amended and Restated Trust Agreement of the Old Trust and
delivered to the Purchasers named in the Purchase Agreement Preferred Securities
Certificates, in an aggregate amount of 11,000,000 Preferred Securities having
an aggregate Liquidation Amount of $550,000,000, against receipt of the
aggregate purchase price of such 

                                       12

 
Preferred Securities of $550,000,000, which amount the administrative trustees
of the Old Trust thereafter promptly delivered to the property trustee of the
Old Trust. All such Preferred Securities, with no further action required on the
part of the holders thereof, the Old Trust, the Trust, or the Trustees (other
than the consummation of the Merger, which has been accomplished), shall be and
constitute Preferred Securities of the Trust as if originally issued under this
Trust Agreement on their respective dates of issuance.

     SECTION 2.5.  Subscription and Purchase of Debentures; Issuance of the
Common Securities.  On the Closing Date, the administrative trustees, on behalf
of the Old Trust, subscribed to and purchased from the Depositor's predecessor
Debentures, registered in the name of the property trustee of the Old Trust (in
its capacity as such) and having an aggregate principal amount equal to
$567,050,000, and, in satisfaction of the purchase price for such Debentures,
the property trustee of the Old Trust, on behalf of the Old Trust, delivered to
the Depositor's predecessor the sum of $567,050,000.  Contemporaneously
therewith, an administrative trustee, on behalf of the Old Trust, executed in
accordance with Section 5.2 of the Restated and Amended Trust Agreement of the
Old Trust and delivered to the Depositor's predecessor Common Securities
Certificates registered in the name of the Depositor's predecessor, in an
aggregate amount of 341,000 Common Securities having an aggregate Liquidation
Amount of $17,050,000 against receipt of the aggregate purchase price of such
Common Securities from the Depositor of the sum of $17,050,000.  All such Common
Securities, with no further action required on the part of the holder thereof,
the Old Trust, the Trust, or the Trustees (other than the consummation of the
Merger, which has been accomplished), shall be and constitute Common Securities
of the Trust as if originally issued under this Trust Agreement on their
respective dates of issuance.

     SECTION 2.6.  Declaration of Trust.  The exclusive purposes and functions
of the Trust are (a) merging the Old Trust with and into the Trust pursuant to
the Merger, which as of the execution hereof has been accomplished, (b) in
connection with the Merger, having the Trust assume all of the obligations and
liabilities of the Old Trust, including under the Common Securities and the
Preferred Securities, which originally represented undivided beneficial
interests in the assets of the Old Trust, and pursuant to the Merger and this
Trust Agreement, hereafter represent undivided beneficial interests in the
assets of the Trust, (c) in connection with the Merger, acquiring all of the Old
Trust's assets and rights, including those accruing under the Debentures
originally acquired by the Old Trust with the proceeds from the sale of the
Common Securities and the Preferred Securities pursuant to the Purchase
Agreement, and (d) engaging in only those other activities necessary or
incidental thereto.  The Trust shall not borrow money, issue debt or reinvest
proceeds derived from investments, pledge any of its assets or otherwise
undertake (or permit to be undertaken) any activity that would cause the Trust
not to be classified for United States Federal income tax purposes as a grantor
trust.  The Depositor hereby appoints the Trustees as trustees of the Trust, to
have all the rights, powers and duties to the extent set forth herein, and the
Trustees hereby accept such appointment.  The Property Trustee hereby declares
that it will hold the Trust Property in trust upon and subject to the conditions
set forth herein for the benefit of the Trust and the Securityholders.  The
Administrative Trustees shall have all rights, powers and duties set forth
herein and in accordance with applicable law with respect to accomplishing the
purposes of the Trust.  The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities, of the Property Trustee or the Administrative Trustees set
forth herein.  The Delaware Trustee shall be one of the Trustees of the Trust
for the 

                                       13

 
sole and limited purpose of fulfilling the requirements of Section 3807 of the
Delaware Business Trust Act.

     SECTION 2.7.  Authorization to Enter into Certain Transactions.

     (a) The Trustees shall conduct the affairs of the Trust in accordance with
the terms of this Trust Agreement.  Subject to the limitations set forth in
Section 2.6 and paragraph (b) of this Section, and in accordance with the
following provisions (i) and (ii), the Trustees shall have the exclusive power,
duty and the authority to cause the Trust to engage in the following activities:

     (i) As among the Trustees, each Administrative Trustee shall have the power
and authority to act on behalf of the Trust with respect to the following
matters:

         (A) to issue and sell the Trust Securities, including all matters
     relating to the prior issuance and sale of the Trust Securities by the Old
     Trust; provided, however, that the Trust may issue no more than one series
     of Preferred Securities and no more than one series of Common Securities,
     and, provided, further, that there shall be no interests in the Trust other
     than the Trust Securities, and the issuance of Trust Securities shall be
     limited to simultaneous issuance of both Preferred Securities and Common
     Securities that previously occurred on the Closing Date and any other date
     Preferred Securities and Common Securities may have been sold pursuant to
     the over-allotment option granted to the initial purchasers in the Purchase
     Agreement, subject to the issuance of Trust Securities pursuant to Section
     5.5 and Successor Securities pursuant to Section 9.5;

         (B) to perform on behalf of the Trust, the Registration Rights
     Agreement, the Purchase Agreement and the Certificate Depository Agreement,
     each of which the Trust assumed from the Old Trust by operation of law
     pursuant to the Merger,  and to cause the  Trust to enter into, execute,
     and perform on behalf of the Trust such other agreements as may be
     necessary or incidental to the purposes and function of the Trust;

         (C) to assist in ongoing registration matters relating to the
     Preferred Securities under the Securities Act of 1933, as amended, and
     under state securities or blue sky laws, and the qualification of this
     Trust Agreement as a trust indenture under the Trust Indenture Act;

         (D) to assist in the listing of the Preferred Securities upon such
     securities exchange or exchanges as shall be determined by the Depositor,
     and the registration of the Preferred Securities under the Securities
     Exchange Act of 1934, as amended, and the preparation and filing of all
     periodic and other reports and other documents pursuant to the foregoing
     (only to the extent that such listing or registration is requested by the
     Depositor);

         (E) to appoint a Paying Agent, a Securities Registrar and an
     authenticating agent in accordance with this Trust Agreement, all of which
     shall be the same as their respective counterparts under the Amended and
     Restated Trust Agreement of the Old Trust;

                                       14

 
         (F) to the extent provided in this Trust Agreement, to wind up the
     affairs of and liquidate the Trust and prepare, execute and file the
     certificate of cancellation with the Secretary of State of the State of
     Delaware;

         (G) unless otherwise determined by the Depositor, the Property Trustee
     or the Administrative Trustees, or as otherwise required by the Delaware
     Business Trust Act or the Trust Indenture Act, to execute on behalf of the
     Trust (either acting alone or together with any other Administrative
     Trustees) any documents that the Administrative Trustees have the power to
     execute pursuant to this Trust Agreement; and

         (H) to take any action incidental to the foregoing as the Trustees may
     from time to time determine is necessary or advisable to give effect to the
     terms of this Trust Agreement including, but not limited to:

             (i)    causing the Trust not to be deemed to be an Investment
          Company required to be registered under the 1940 Act;

             (ii)   causing the Trust to be classified for United States Federal
          income tax purposes as a grantor trust; and

             (iii)  cooperating with the Depositor to ensure that the Debentures
          will be treated as indebtedness of the Depositor for United States
          Federal income tax purposes;

     provided that such action does not adversely affect in any material respect
     the interests of Securityholders except as otherwise provided in Section
     10.2(a).

     (ii) As among the Trustees, the Property Trustee shall have the power, duty
and authority to act on behalf of the Trust with respect to the following
matters:

          (A) the handling and responsibility for the payment account of the Old
     Trust acquired by the Trust by operation of law pursuant to the Merger;

          (B) the receipt of, and by operation of law pursuant to the Merger
     taking title to, the Debentures;

          (C) the collection of interest, principal and any other payments made
     in respect of the Debentures in the Payment Account;

          (D) the distribution from the Trust Property of amounts owed to the
     Securityholders in respect of the Trust Securities;

          (E) the exercise of all of the rights, powers and privileges of a
     holder of the Debentures;

                                       15

 
          (F) the sending of notices of default, other notices and other
     information regarding the Trust Securities and the Debentures to the
     Securityholders in accordance with this Trust Agreement;

          (G) the distribution of the Trust Property in accordance with the
     terms of this Trust Agreement;

          (H) to the extent provided in this Trust Agreement, the winding up of
     the affairs of and liquidation of the Trust and the preparation, execution
     and filing of the certificate of cancellation with the Secretary of State
     of the State of Delaware;

          (I) after an Event of Default, the taking of any action incidental to
     the foregoing as the Property Trustee may from time to time determine is
     necessary or advisable to give effect to the terms of this Trust Agreement
     and protect and conserve the Trust Property for the benefit of the
     Securityholders (without consideration of the effect of any such action on
     any particular Securityholder);

          (J) subject to this Section 2.7(a)(ii), the Property Trustee shall
     have none of the duties, liabilities, powers or the authority of the
     Administrative Trustees set forth in Section 2.7(a)(i); and

          (K) to act as Paying Agent and/or Securities Registrar to the extent
     appointed as such hereunder.

     (b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby.  In particular, the Trust shall not, and the Trustees shall not and
shall cause the Trust not to (i) invest any proceeds received by the Trust from
holding the Debentures (rather, the Trustees shall distribute all such proceeds
to the Securityholders pursuant to the terms of this Trust Agreement and the
Trust Securities), acquire any investments or engage in any activities not
authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange,
mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or
interests therein, including to Securityholders, except as expressly provided
herein, (iii) take any action that would cause the Trust to fail or cease to
qualify as a "grantor trust" for United States Federal income tax purposes, (iv)
make any loans or incur any indebtedness for borrowed money  or issue any other
debt, (v) take or consent to any action that would result in the placement of a
Lien on any of the Trust Property, (vi) possess any power or otherwise act in
such a way as to vary the Trust assets or the terms of the Trust Securities in
any way whatsoever except as permitted by the terms of this Trust Agreement, or
(vii) issue any securities or other evidences of beneficial ownership of, or
beneficial interest in, the Trust other than the Trust Securities.  The
Administrative Trustees shall defend all claims and demands of all Persons at
any time claiming any Lien on any of the Trust Property adverse to the interest
of the Trust or the Securityholders in their capacity as Securityholders.

     (c) In connection with the original issuance and sale of the Preferred
Securities, the Depositor's predecessor had the right and responsibility to
assist the Old Trust with respect to, or effect on behalf of the Old Trust, the
following actions.  Pursuant to this Trust Agreement, the 

                                       16

 
Depositor shall have the right and responsibility, as applicable, to assist the
Trust with respect to, or effect on behalf of the Trust, the following actions
(and any actions taken by the Depositor's predecessor or the Depositor in
furtherance of the following prior to the date of this Trust Agreement are
hereby ratified and confirmed in all respects):

          (i)   to file by the Trust with the Commission and to execute on
     behalf of the Trust a registration statement on the appropriate form in
     relation to the Preferred Securities, including any amendments thereto;

          (ii)  to determine the States and foreign jurisdictions in which to
     take appropriate action to qualify or register for sale all or part of the
     Preferred Securities and to do any and all such acts, other than actions
     which must be taken by or on behalf of the Trust, and advise the Trustees
     of actions they must take on behalf of the Trust, and prepare for execution
     and filing any documents to be executed and filed by the Trust or on behalf
     of the Trust, as the Depositor deems necessary or advisable in order to
     comply with the applicable laws of any such States and foreign
     jurisdictions;

          (iii) to the extent necessary, to prepare for filing by the Trust
     with the Commission and to execute on behalf of the Trust a registration
     statement on Form 8-A relating to the registration of the Preferred
     Securities under Section 12(b) or 12(g) of the Securities Exchange Act of
     1934, as amended, including any amendments thereto (it being understood
     that neither the Trust nor the Depositor has any obligation under the
     Indenture, the Purchase Agreement or the Trust Agreement to register any
     Trust Securities under the Securities Exchange Act of 1934, as amended or
     to list any Trust Securities on any securities exchange);

          (iv)  any other actions necessary or incidental to carry out any of
     the foregoing activities.

     (d)  Notwithstanding anything herein to the contrary, the Administrative
Trustees are authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that the Trust will not be deemed to be an "investment
company" required to be registered under the 1940 Act, or taxed as a corporation
for United States Federal income tax purposes and so that the Debentures will be
treated as indebtedness of the Depositor for United States Federal income tax
purposes.  In this connection, the Depositor and the Administrative Trustees are
authorized to take any action, not inconsistent with applicable law, the
Certificate of Trust or this Trust Agreement, that each of the Depositor and the
Administrative Trustees determines in their discretion to be necessary or
desirable for such purposes, so long as such action does not adversely affect in
any material respect the interests of the Holders of the Preferred Securities
except as otherwise provided in Section 10.2(a).

     SECTION 2.8.  Assets of Trust.  The assets of the Trust shall consist of
only the Trust Property.

     SECTION 2.9.  Title to Trust Property.  Legal title to all Trust Property
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the 

                                       17

 
Property Trustee for the benefit of the Trust and the Securityholders in
accordance with this Trust Agreement. The Securityholder shall not have legal
title to any part of the assets of the Trust, but shall have an undivided
beneficial interest in the assets of the Trust.

                                   ARTICLE 3
                                PAYMENT ACCOUNT
                                        
     SECTION 3.1.  Payment Account.

     (a) On or prior to the Closing Date, the property trustee of the Old Trust
established the Payment Account under the Amended and Restated Trust Agreement
of the Old Trust.  Pursuant to the Merger and by operation of law, the Property
Trustee acquired title to the Payment Account and shall maintain the same in
accordance with this Trust Agreement.  The Property Trustee and any agent of the
Property Trustee shall have exclusive control and sole right of withdrawal with
respect to the Payment Account for the purpose of making deposits in and
withdrawals from the Payment Account in accordance with this Trust Agreement.
All monies and other property deposited or held from time to time in the Payment
Account shall be held by the Property Trustee in the Payment Account for the
exclusive benefit of the Securityholders and for distribution as herein provided
including (and subject to) any priority of payments provided for herein.

     (b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on, and any other
payments or proceeds with respect to, the Debentures.  Amounts held in the
Payment Account shall not be invested by the Property Trustee pending
distribution thereof.

                                   ARTICLE 4
                DISTRIBUTIONS; REDEMPTION; EXCHANGE; CONVERSION
                                        
     SECTION 4.1.  Distributions.

     (a) Distributions on the Trust Securities shall be cumulative, and shall
accrue from the date of original issuance under the Amended and Restated Trust
Agreement of the Old Trust, or the most recent Distribution Date (as defined
herein) and, except in the event that the Depositor exercises its right to defer
the payment of interest on the Debentures pursuant to the Indenture, have been
paid quarterly in arrears on March 1, June 1, September 1 and December 1 of each
year, commencing on March 1, 1997, and shall continue to be payable quarterly in
arrears on March 1, June 1, September 1 and December 1 of each year, commencing
on March 1, 1999 (which dates correspond to the interest payment dates on the
Debentures), when, as and if available for payment by the Property Trustee, as
further described in paragraph (c) of this Section 4.1.  If any date on which
Distributions are otherwise payable on the Trust Securities is not a Business
Day, then the payment of such Distributions shall be made on the next succeeding
day which is a Business Day (and no interest shall accrue for the period from
and after such date until the next succeeding Business Day) with the same force
and effect as if made on such date (each date on which Distributions are payable
in accordance with this Section 4.1(a), a "Distribution Date").

                                       18

 
     (b) The Trust Securities represent undivided beneficial interests in the
Trust Property, and the Distributions on the Trust Securities shall be payable
at a rate of 6 3/4% per annum of the Liquidation Amount of the Trust Securities,
such rate being the rate of interest payable on the Debentures to be held by the
Property Trustee.  The amount of Distributions payable for any period shall be
computed on the basis of a 360-day year of twelve 30-day months.  For periods
less than a full month, distributions shall reflect interest on Debentures
computed on the basis of the actual number of elapsed days based on a 360-day
year.  The amount of Distributions payable for any period shall include the
Additional Amounts, if any.

     (c) Distributions on the Trust Securities shall be made by the Property
Trustee from the Payment Account and shall be payable on each Distribution Date
only to the extent that the Trust has funds then on hand and  available in the
Payment Account for the payment of such Distributions.

     (d) Distributions on the Trust Securities with respect to a Distribution
Date shall be payable to the Holders thereof as they appear on the Securities
Register for the Trust Securities on the relevant record date, which shall be
the date which is the fifteenth day (whether or not a Business Day)  next
preceding such Distribution Date.

     SECTION 4.2.  Redemption.  (a)

          (i)  Upon an optional redemption (as set forth in the Indenture) of
     Debentures, the proceeds from such redemption shall be applied to redeem
     Trust Securities having an aggregate Liquidation Amount equal to the
     aggregate principal amount of the Debentures so redeemed by the Depositor,
     including pursuant to Section 4.4, at the Optional Redemption Price, and
     upon a mandatory redemption (as set forth in the Indenture) of Debentures,
     the proceeds from such redemption shall be applied to redeem Trust
     Securities, having an aggregate Liquidation Amount equal to the aggregate
     principal amount of the Debentures so redeemed by the Depositor, at the
     Redemption Price.

          (ii) If at any time following the Conversion Expiration Date, less
     than five percent (5%) in principal amount of the Debentures originally
     issued by the Depositor remain outstanding, such Debentures are redeemable,
     at the option of the Depositor, in whole but not in part, at a redemption
     price equal to the aggregate principal amount thereof, and all accrued and
     unpaid interest; in such event, the proceeds from such redemption shall be
     applied to redeem the Outstanding Trust Securities.

     (b)  Notice of redemption (which notice will be irrevocable) shall be given
by  the Property Trustee by first-class mail, postage prepaid, mailed not less
than 30 nor more than 60 days prior to the Redemption Date to the Depositor and
each Holder of Trust Securities to be redeemed, at such Holder's address as it
appears in the Securities Register.  All notices of  redemption shall state:

               (i)  the Redemption Date;

                                       19

 
               (ii) the Redemption Price or the Optional Redemption Price, as
          the case may be;

               (iii)  the CUSIP number;

               (iv) if less than all of the Outstanding Trust Securities are to
          be redeemed,  the identification and the aggregate Liquidation Amount
          of the particular  Trust Securities to be redeemed;

               (v) If the Preferred Securities are convertible, (A) that a
          Holder of Preferred Securities who desires to convert such Preferred
          Securities called for redemption must satisfy the requirements for
          conversion  contained in Section 4.3 below, (B) the Conversion Price
          and (C), if  previously determined, the Conversion Expiration Date;

               (vi) that on the Redemption Date the Redemption Price or the
          Optional Redemption Price, as the case may be, will become due and
          payable upon each such Trust Security to be redeemed and that
          Distributions thereon will cease to accrue on and after said date; and

               (vii)  the place or places where such Trust Securities are to be
          surrendered for payment of the Redemption Price or the Optional
          Redemption Price, as the case may be.

     (c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price or the Optional Redemption Price, as the case may be,
with the proceeds from the contemporaneous redemption of Debentures. Redemptions
of the Trust Securities shall be made and the Redemption Price or the Optional
Redemption Price, as the case may be, shall be payable on each Redemption Date
only to the extent that the Trust has funds then on hand and available in the
Payment Account for the payment of such Redemption Price or the Optional
Redemption Price, as the case may be.

     (d) If the Property Trustee gives a notice of redemption in respect of any
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, subject to Section 4.2(c), the Property Trustee will, so  long as and to
the extent the Preferred Securities are in book-entry-only form, irrevocably
deposit with the Clearing Agency for the Preferred Securities funds sufficient
to pay the applicable Redemption Price.  If the Preferred Securities are no
longer in book-entry only form, the Property Trustee, subject to Section 4.2(c),
will irrevocably deposit with the Paying Agent funds sufficient to pay the
applicable Redemption Price or Optional Redemption Price, as the case may be, on
such Preferred Securities held in certificated form and will give the Paying
Agent irrevocable instructions and authority to pay the Redemption Price or the
Optional Redemption Price, as the case may be, to the Holders thereof upon
surrender of their Preferred Securities Certificates.  Notwithstanding the
foregoing, Distributions payable on or prior to the Redemption Date for any
Trust Securities called for redemption shall be payable to the Holders of such
Trust Securities as they appear on the Securities Register for the Trust
Securities on the relevant record dates for the related Distribution Dates.  If
notice of redemption shall have been

                                       20

 
given and funds deposited as required, then, upon the date of such deposit, all
rights of Securityholders holding Trust Securities so called for redemption will
cease, except the right of such Securityholders to receive the Redemption Price
or the Optional Redemption Price, as the case may be, but without interest, and
such Trust Securities will cease to be Outstanding. In the event that any date
on which any Redemption Price or the Optional Redemption Price, as the case may
be, is payable is not a Business Day, then payment of the Redemption Price or
the Optional Redemption Price, as the case may be, payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), with the same force and
effect as if made on such date.

          (e) If less than all the Outstanding Trust Securities are to be
redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust
Securities to be redeemed shall be allocated on a pro rata basis (based on
Liquidation Amounts) among the Common Securities and the Preferred Securities
that are to be redeemed.  The particular Preferred Securities to be redeemed
shall be selected not more than 60 days prior to the Redemption Date by the
Property Trustee from the Outstanding Preferred  Securities not previously
called for redemption, by lot or by such other method as  the Property Trustee
shall deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to $50 or an integral multiple of $50 in excess
thereof) of the liquidation amount of the Preferred Securities.  The Property
Trustee shall promptly notify the Securities Registrar and the Conversion Agent
in writing of the Preferred Securities selected for redemption and, in the case
of any Preferred Securities selected for partial redemption, the Liquidation
Amount thereof to be redeemed; it being understood that, in the case of
Preferred Securities registered in the name of and held of record by the
Clearing Agency (or any successor) or any nominee, the distribution of the
proceeds of such redemption will be made in accordance with the procedures of
the Clearing Agency or its nominee. For all purposes of this Trust Agreement,
unless the context otherwise requires, all provisions relating to the redemption
of Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the Liquidation
Amount of Preferred Securities which has been or is to be redeemed. In the event
of any redemption in part, the Trust shall not be required to (i) issue,
register the transfer of or exchange of any Preferred Security during a period
beginning at the opening of business 15 days before any selection for redemption
of Preferred Securities and ending at the close of business on the earliest date
in which the relevant notice of redemption is deemed to have been given to all
holders of Preferred Securities to be so redeemed or (ii) register the transfer
of or exchange of any Preferred Securities so selected for redemption, in whole
or in part, except for the unredeemed portion of any Preferred Securities being
redeemed in part.

     SECTION 4.3.  Conversion.  The Holders of Trust Securities, subject to the
limitations set forth in this Section, shall have the right at any time prior to
the Conversion Expiration Date, at their option, to cause the Conversion Agent
to convert Trust Securities, on behalf of the converting Holders, into shares of
Common Stock in the manner described herein on and subject to the following
terms and conditions:

     (i) The Trust Securities will be convertible into fully paid and
nonassessable shares of Common Stock pursuant to the Holder's direction to the
Conversion Agent to exchange such Trust Securities for a portion of the
Debentures, and immediately convert such amount of Debentures into fully paid
and nonassessable shares of Common Stock at an initial rate of 2.6876 shares of
Common

                                       21

 
Stock for each Trust Security (which is equivalent to a conversion price of
$18.604 per $50 principal amount of Debentures), subject to certain adjustments
set forth in the Indenture (as so adjusted, "Conversion Price").

     (ii) In order to convert Trust Securities into Common Stock, the Holder of
such Trust Securities shall submit to the Conversion Agent an irrevocable Notice
of Conversion to convert Trust Securities on behalf of such Holder, together, if
the Trust Securities are in certificated form, with  such certificates.  The
Notice of Conversion shall (i) set forth the number of Trust Securities to be
converted and the name or names, if other than the Holder, in which the shares
of Common Stock should be issued and (ii) direct the Conversion Agent (a) to
exchange such Trust Securities for a portion of the Debentures held by the
Property Trustee (at the rate of exchange specified in the preceding paragraph)
and (b) to immediately convert such Debentures, on behalf of such Holder, into
Common Stock (at the conversion rate specified in the preceding paragraph).  The
Conversion Agent shall notify the Property Trustee of the Holder's election to
exchange Trust Securities for a portion of the Debentures held by the Property
Trustee and the Property Trustee shall, upon receipt of such notice, deliver to
the Conversion Agent the appropriate principal amount of Debentures for exchange
in accordance with this Section.  The Conversion Agent shall thereupon notify
the Depositor of the Holder's election to convert such Debentures into shares
of Common Stock.  Holders of Trust Securities at the close of business on a
Distribution payment record date will be entitled to receive the Distribution
paid on such Trust Securities on the corresponding Distribution Date
notwithstanding the conversion of such Trust Securities following such record
date but prior to such Distribution Date.  Except as provided above, neither the
Trust nor the Depositor will make, or be required to make, any payment,
allowance or adjustment upon any conversion on account of any accumulated and
unpaid Distributions whether or not in arrears accrued on the Trust Securities
surrendered for conversion, or on account of any accumulated and unpaid
dividends on the shares of Common Stock issued upon such conversion. Trust
Securities shall be deemed to have been converted immediately prior to the close
of business on the day on which an irrevocable Notice of  Conversion relating to
such Trust Securities is received by the Conversion Agent in accordance with the
foregoing provision (the "Conversion Date"). The Person or Persons entitled to
receive the Common Stock issuable upon conversion of the Debentures shall be
treated for all purposes as the record holder or holders of such Common Stock on
the date of conversion. As promptly as practicable on or after the Conversion
Date, the Depositor shall issue and deliver at the office of the Conversion
Agent a certificate or certificates for the number of full shares of Common
Stock issuable upon such conversion, together with the cash payment, if any, in
lieu of any fraction of any share to the Person or Persons entitled to receive
the same, unless otherwise directed by the Holder in the notice of conversion
and the Conversion Agent shall distribute such certificate or certificates to
such Person or Persons.

     (iii)  On and after December 2, 1999, the Depositor may, at its option,
cause the conversion rights of holders of the Debentures (and the corresponding
conversion rights of Holders of Trust Securities) to expire; provided, however,
that the Depositor may exercise this option only if for 20 trading days within
any period of 30 consecutive trading days, including the last trading day of
such period, the Current Market Price of Common Stock exceeds 120% of the
Conversion Price.  In order to exercise its option to terminate the conversion
rights of the Debentures, the Depositor must issue a press release for
publication on the Dow Jones News Service announcing the Conversion Expiration
Date prior to the opening of business on the second trading day after any

                                       22

 
period in which the condition in the preceding sentence has been met, but in no
event prior to December 2, 1999. The press release shall announce the Conversion
Expiration Date (which may not occur sooner than 30 nor more than 60 days after
the Depositor issues the press release announcing its intention to terminate the
conversion rights of the Debentures) and provide the current Conversion Price
and Current Market Price of Common Stock, in each case as of the close of
business on the trading day next preceding the date of the press release.
Conversion rights will terminate at the close of business on the Conversion
Expiration Date. The Depositor, or at the request of the Depositor, the Property
Trustee shall send notice of the expiration of conversion rights by first-class
mail to the Holders of the Trust Securities and the holders of the Debentures
not more than four Business Days after the Depositor issues the press release
or, if the Property Trustee is requested to send such notice, which shall be on
the date of such press release, after the Depositor delivers written
instructions to the Property Trustee containing the information required by the
next sentence to be in the notice. Such mailed notice of the expiration of the
conversion rights of the Holders shall state: (A) the Conversion Expiration
Date; (B) the Conversion Price of the Trust Securities and the Current Market
Price of the Common Stock, in each case as of the close of business on the
Business Day next preceding the date of the notice of expiration of the
conversion rights of the Holders; (C) the place or places at which Trust
Securities may be surrendered prior to the Conversion Expiration Date for
certificates representing shares of Common Stock; and (D) such other information
or instructions as the Depositor deems necessary or advisable to enable a Holder
to exercise its conversion right hereunder. No defect in the notice of
expiration of the conversion rights of the Holders or in the mailing thereof
with respect to any Trust Security shall affect the validity of such notice with
respect to any other Trust Security. As of the close of business on the
Conversion Expiration Date, the Debentures (and correspondingly, the Trust
Securities) shall no longer be convertible into Common Stock. In the event that
the Depositor does not exercise its option to terminate the conversion rights of
the Debentures, the Conversion expiration Date with respect to the Trust
Securities will be the close of business two Business Days preceding the date
set for redemption of the Trust Securities upon the mandatory or optional
redemption of the Debentures.

     (iv) Each Holder of a Trust Security by its acceptance thereof initially,
pursuant to the Amended and Restated Trust Agreement of the Old Trust, appointed
IBJ Schroder Bank & Trust Company not in its individual capacity but solely as
conversion agent (the "Conversion Agent") for the purpose of effecting the
conversion of Trust Securities in accordance with this Section.  IBJ Schroder
Bank & Trust Company, not in its individual capacity but solely as Conversion
Agent shall remain the Conversion Agent under this Trust Agreement.  In
effecting the conversion and transactions described in this Section, the
Conversion Agent shall be acting as agent of the Holders of Trust Securities
directing it to effect such conversion transactions.  The Conversion Agent is
hereby authorized (i) to exchange Trust  Securities from time to time for
Debentures held by the Trust in connection with the conversion of such Trust
Securities in accordance with this Section and (ii) to convert all or a portion
of the Debentures into Common Stock and thereupon to deliver such shares of
Common Stock in  accordance with the provisions of this Section and to deliver
to the Property Trustee any new Debenture or Debentures for any resulting
unconverted principal amount delivered to the Conversion Agent by the Debenture
Trustee.

     (v) No fractional shares of Common Stock will be issued as a result of
conversion, but, in lieu thereof, such fractional interest will be paid in cash
by the Depositor to the Conversion

                                       23

 
Agent in an amount equal to the Current Market Price of the fractional share of
the Common Stock, and the Conversion Agent will in turn make such payment to the
Holder or Holders of Trust Securities so converted.

     (vi) Nothing in this Section 4.3 shall limit the requirement of the Trust
to  withhold taxes pursuant to the terms of the Trust Securities or as set forth
in this Agreement or otherwise required of the Property Trustee or the Trust to
pay any amounts on account of such withholdings.


     SECTION 4.4.  Special Event Exchange or Redemption.

     (a) If a Special Event shall occur and be continuing, the Property Trustee
shall direct the Conversion Agent to exchange all Outstanding Trust Securities
for Debentures having a principal amount equal to the aggregate Liquidation
Amount of the Trust Securities to be exchanged and with accrued interest in an
amount equal to any unpaid Distribution (including any Additional Amounts) on
the Trust Securities; provided, however, that, in the case of a Tax Event, the
Depositor shall have the right to (i) direct that less than all, or none, as
appropriate, of the Trust Securities be so exchanged if and for so long as the
Depositor shall have elected to pay any Additional Sums (as defined in the
Indenture) such that the amount received by Holders of Trust Securities not so
exchanged in respect of Distributions and other distributions are not reduced as
a result of such Tax Event, and shall not have revoked any such election or
failed to make such payments or (ii) cause the Trust Securities to be redeemed
in the manner set forth below. If a Tax Event shall occur or be continuing, the
Depositor shall have the right, upon not less than 30 nor more than 60 days'
notice, to redeem the Debentures, in whole or in part, for cash upon the later
of (i) 90 days following the occurrence of such Tax Event or (ii) December 2,
1999. Promptly following such redemption, Trust Securities with an aggregate
liquidation amount equal to the aggregate principal amount of the Debentures so
redeemed will be redeemed by the Trust at the Optional Redemption Price on a pro
rata basis.

     (b) Notice of any exchange pursuant to this Section 4.4 (an "Exchange
Notice") of the Trust Securities, which Exchange Notice shall be irrevocable,
will be given by the Property Trustee by first-class mail to the Depositor and
to each record Holder of Trust Securities to be exchanged not fewer than 30 nor
more than 60 days prior to the date fixed for exchange thereof.  For purposes of
the calculation of the date of exchange and the dates on which notices are given
pursuant to this paragraph (b), an Exchange Notice shall be deemed to be given
on the day such notice is first mailed by first-class mail, postage prepaid, to
each Holder.  Each Exchange Notice shall be addressed to each Holder of Trust
Securities at the address of such Holder appearing in the books and records of
the Trust.  Each Exchange Notice shall state: (A) the exchange date; (B) the
aggregate  Liquidation Amount and any unpaid Distributions (including any
Additional Amounts) on the Trust Securities to be exchanged and the aggregate
principal amount and any accrued interest on the Debentures to be exchanged
therefor; (C) that on the exchange date the Trust Securities to be so
exchanged shall be exchanged for Debentures and that Distributions on the Trust
Securities so exchanged will cease to accumulate on and after said date; and (D)
the identity of the Conversion Agent, if any, and the  place or places where
each Trust Certificate to be exchanged is to be surrendered in exchange for
Debentures.  No defect in the Exchange Notice or in the mailing

                                       24

 
thereof with respect to any Trust Security shall affect the validity of the
exchange proceedings for any other Trust Security.

     (c) In the event that fewer than all the Outstanding Preferred Securities
are to be exchanged, then, on the exchange date, (i) if all of the Outstanding
Preferred Securities are represented by Definitive Preferred Securities
Certificates, the particular Preferred Securities to be exchanged will be
selected by the Property Trustee from the Outstanding Preferred Securities not
previously called for redemption or exchange on a pro rata basis, (ii) if all of
the Outstanding Preferred Securities are represented by Book-Entry Preferred
Securities Certificates, the Property Trustee shall provide for the selection
for exchange of a portion of the Global Certificate representing the Book-Entry
Preferred Securities Certificates on a pro rata basis and (iii) if Outstanding
Trust Securities are represented by both Definitive Preferred Securities
Certificates and Book-Entry Preferred Securities Certificates, the Property
Trustee shall select the portion of the Global Certificate representing the
Book-Entry Preferred Securities Certificates and the particular Outstanding
Preferred Securities represented by Definitive Preferred Securities Certificates
to be exchanged on a pro rata basis.  In the case of clause (ii) or (iii) above,
the particular Book-Entry Preferred Securities Certificates to be exchanged
shall be selected in accordance with the applicable rules and procedures for the
Clearing Agency in whose name, or whose nominee's name, such global certificate
is then held.  Any Preferred Securities Certificate that is to be exchanged only
in part shall be surrendered with due endorsement or by a written instrument of
transfer fully executed by the Holder thereof (or its attorney duly authorized
in writing) and the Trust shall prepare and deliver to such Holder, without
service charge, a new Preferred Securities Certificate or Certificates in
aggregate stated  Liquidation Amount equal to, and in exchange for, the
unredeemed portion of the Preferred Securities Certificate so surrendered.  The
Common Securities shall be exchanged in a similar manner.

     (d) In the event of an exchange pursuant to this Section 4.4, on the date
fixed for any such exchange, (i) if the Preferred Securities are represented by
Book-Entry Preferred Securities Certificates, the Clearing Agency of its
nominee, as the record Holder of the Preferred Securities, will exchange through
the Conversion Agent the Global Certificate representing the Preferred
Securities to be exchanged for a registered Global Certificate or certificates
representing the Debentures to be delivered upon such exchange, (ii) if the
Preferred Securities are represented by Definitive Preferred Securities
Certificates, the certificates representing the Preferred Securities to be so
exchanged will be deemed to represent Debentures having a principal amount equal
to the aggregate stated Liquidation Amount of such Preferred Securities until
such certificates are presented to the Conversion Agent for exchange for
definitive certificates representing Debentures and (iii) all rights of the
Holders of the Preferred Securities so exchanged will cease, except for the
right of such Holders to receive Debentures. The Common Securities shall be
exchanged in a similar manner.

          (e) Each Holder, by becoming a party to the Amended and Restated Trust
Agreement of the Old Trust and remaining a Holder pursuant to the Merger and by
operation of law, will be deemed, in accordance with Section 10.11 of this Trust
Agreement, to have agreed to be bound by these exchange provisions in regard to
the exchange of Trust Securities for Debentures pursuant to the terms described
above.

                                       25

 
     (f) Nothing in this Section 4.4 shall limit the requirement of the Trust to
withhold taxes pursuant to the terms of the Trust Securities or as set forth in
this Agreement or otherwise require the Property Trustee or the Trust to pay any
amounts on account of such withholdings.

     SECTION 4.5.  Subordination of Common Securities.  Payment of Distributions
(including Additional Amounts, if applicable) on, and the Redemption Price of,
the Trust Securities, as applicable, shall be made pro rata based on the
Liquidation Amount of the Trust Securities; provided, however, that if on any
Distribution Date or Redemption Date an Event of Default shall have occurred and
be continuing, no payment of any Distribution (including Additional Amounts, if
applicable) on, or the Redemption Price of, any Common Security, and no other
payment on account of the redemption, liquidation or other acquisition of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions (including Additional Amounts, if applicable) on all
Outstanding Preferred Securities for all Distribution periods terminating on or
prior thereto, or in the case of payment of the Redemption Price the full
amount of such Redemption Price on all Outstanding Preferred Securities, shall
have been made or provided for, and all funds immediately available to the
Property Trustee shall first be applied to the payment in full in cash of all
Distributions (including Additional Amounts, if applicable) on, or the
Redemption Price of, Preferred Securities then due and payable.

     SECTION 4.6.  Payment Procedures.  Payments in respect of the Preferred
Securities shall be made by check mailed to the address of the Person entitled
thereto as such address shall appear on the Securities Register or, if the
Preferred Securities are held by a Clearing Agency, such Distributions shall be
made to the Clearing Agency in immediately available funds, in accordance
with the Certificate Depositary Agreement on the applicable Distribution Dates.
Payments in respect of the Common Securities shall be made in such manner as
shall be mutually agreed between the Property Trustee and the Holder of the
Common Securities.

     SECTION 4.7.  Tax Returns and Reports.  The Administrative Trustees shall
prepare (or cause to be prepared), at the Depositor's expense, and file all
United States Federal, State and local tax and information returns and reports
required to be filed by or in respect of the Trust.  In this regard, the
Administrative Trustees shall (a) prepare and file (or cause to be prepared or
filed) Form 1041 or the appropriate Internal Revenue Service form required to be
filed in respect of the Trust in each taxable year of the Trust and (b) prepare
and furnish (or cause to be prepared and furnished) to each Securityholder a
Form 1099 or the appropriate Internal Revenue Service form required to be
furnished to such Securityholder or the information required to be provided on
such form.  The Administrative Trustees shall provide the Depositor and the
Property Trustee with a copy of all such returns, reports and schedules promptly
after such filing or furnishing.  The Trustees shall comply with United States
Federal withholding and backup withholding tax laws and information reporting
requirements with respect to any payments to Securityholders under the Trust
Securities.

     SECTION 4.8.  Payment of Taxes, Duties, Etc.  of the Trust.  Upon receipt
under the Debentures of Additional Sums, the Property Trustee, upon receipt of
written notice from the Depositor or the Administrative Trustees, shall promptly
pay from such Additional Sums any taxes, duties or governmental charges of
whatsoever nature (other than withholding taxes) imposed on the Trust by the
United States or any other taxing authority.

                                       26

 
     SECTION 4.9.  Payments under Indenture.  Any amount payable hereunder to
any Holder of Preferred Securities (and any Owner with respect thereto) shall be
reduced by the amount of any corresponding payment such Holder (or Owner) has
directly received pursuant to Section 5.8 of the Indenture in accordance with
the terms of Section 6.8 hereof.

                                   ARTICLE 5
                         TRUST SECURITIES CERTIFICATES
                                        
     SECTION 5.1.  Initial Ownership.  Upon the formation of the Trust and until
the assumption by the Trust of all of the duties and obligations of the Old
Trust under the Trust Securities, no Trust Securities were Outstanding, and the
Depositor was the sole beneficial owner of the Trust.

     SECTION 5.2.  The Trust Securities Certificates.  The Preferred Securities
Certificates shall be issued in minimum denominations of $50 Liquidation Amount
and integral multiples of $50 in excess thereof, and the Common Securities
Certificates shall be issued in denominations of $50 Liquidation Amount and
integral multiples thereof.  The consideration received by the Trust for the
issuance of the Trust Securities shall constitute a contribution to the capital
of the Trust and shall not constitute a loan to the Trust. Preferred Securities
initially sold by the Old Trust to qualified institutional buyers in reliance on
Rule 144A under the Securities Act ("Rule 144A Preferred Securities") were
represented by one or more certificates in registered, global form
(collectively, the "Restricted Global Certificate"). Preferred Securities
initially sold by the Old Trust in off-shore transactions in reliance on
Regulation S ("Regulation S Preferred Securities") were represented by one or
more certificates in registered, global form (collectively, the "Regulation S
Global Certificate" and, together with the Restricted Global Certificate, the
"Global Certificates").  Preferred Securities initially transferred, in
accordance with Section 5.4, to institutional accredited investors in a manner
exempt from the registration requirements of the Securities Act will be
exchanged for Preferred Securities in registered, certificated form (the
"Certificated Preferred Securities").  Trust Securities Certificates issued by
the Old Trust shall represent Trust Securities of the Trust and need not be
reissued by the Trust.  Except as set forth in the preceding sentence, the Trust
Securities Certificates shall be executed on behalf of the Trust by manual or
facsimile signature of at least one Administrative Trustee and authenticated by
the Property Trustee. Trust Securities Certificates bearing the manual or
facsimile signatures of individuals who were, at the time when such signatures
shall have been affixed, authorized to sign on behalf of the Trust, or the Old
Trust, as the case may be, shall be validly issued and entitled to the benefit
of this Trust Agreement, notwithstanding that such individuals or any of them
shall have ceased to be so authorized prior to the delivery of such Trust
Securities Certificates or did not hold such offices at the date of delivery of
such Trust Securities Certificates.  A transferee of a Trust Securities
Certificate shall become a Securityholder, and shall be entitled to the rights
and subject to the obligations of a Securityholder hereunder, upon due
registration of such Trust Securities Certificate in such transferee's name
pursuant to Section 5.4.

     SECTION 5.3.  Delivery of Trust Securities Certificates.  On the Closing
Date, the administrative trustees of the Old Trust caused Trust Securities
Certificates, in an aggregate Liquidation Amount as provided in Sections 2.4 and
2.5, to be executed on behalf of the Trust and delivered to or upon the written
order of the Depositor's predecessor, signed by its Chairman of the

                                       27

 
Board, any Vice Chairman, its President, any Senior Vice President or any Vice
President, Treasurer or Assistant Treasurer or Controller without further
corporate action by the Depositor's predecessor, in authorized denominations. A
Trust Security Certificate shall not be valid until authenticated by the manual
signature of an authorized signatory of the Property Trustee. The signature
shall be conclusive evidence that the Trust Security Certificate has been
authenticated under this Trust Agreement. Upon a written order of the Trust
signed by one Administrative Trustee, the Property Trustee shall authenticate
the Trust Security Certificates for original issue. The Property Trustee may
appoint an authenticating agent acceptable to the Administrative Trustees to
authenticate Trust Security Certificates. An authenticating agent may
authenticate Trust Security Certificates whenever the Property Trustee may do
so. Each reference in this Trust Agreement to authentication by the Property
Trustee includes authentication by such agent. An authenticating agent has the
same rights as the Property Trustee to deal with the Depositor or an Affiliate
with respect to the authentication of Trust Securities. Notwithstanding the
foregoing, Trust Securities Certificates issued by the Old Trust shall represent
Trust Securities of the Trust and need not be reissued by the Trust.

     SECTION 5.4.  Registration of Transfer and Exchange of Preferred
Securities; Restrictions on Transfer.

     (a) The Securities Registrar shall keep or cause to be kept, at the office
or agency maintained pursuant to Section 5.8, a Securities Register in which,
subject to such reasonable regulations as it may prescribe, the Securities
Registrar shall provide for the registration of Preferred Securities
Certificates and Common Securities Certificates (subject to Section 5.10 in the
case of the Common Securities Certificates) and registration of transfers and
exchanges of Preferred Securities Certificates as herein provided.  The Property
Trustee shall be the initial Securities Registrar.  Subject to the other
provisions of this Trust Agreement regarding restrictions on transfer, upon
surrender for registration of transfer of any Preferred Security at an office or
agency of the Depositor designated pursuant to Section 5.8 for such purpose, the
Depositor shall execute, and the Property Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Preferred Securities of any authorized denominations and of a like aggregate
principal amount and bearing such restrictive legends as may be required by this
Trust Agreement. At the option of the Holder, and subject to the other
provisions of this Section 5.4, Preferred Securities may be exchanged for other
Preferred Securities of any authorized denomination and of a like Liquidation
Amount, upon surrender of the Preferred Securities to be exchanged at any such
office or agency. Whenever any Preferred Securities are so surrendered for
exchange, the Depositor shall execute, and the Property Trustee shall
authenticate and deliver, the Preferred Securities which the Holder making the
exchange is entitled to receive. All Preferred Securities issued upon any
registration of transfer or exchange of Preferred Securities shall be the valid
obligations of the Depositor, evidencing the same debt, and entitled to the same
benefits under this Trust Agreement, as the Securities surrendered upon such
registration of transfer or exchange. Every Preferred Security presented or
surrendered for registration of transfer or for exchange shall (if so requested
by the Depositor or the Securities Registrar) be duly endorsed, or be
accompanied by a written instrument of transfer in form satisfactory to the
Depositor and the Securities Registrar duly executed, by the Holder thereof or
his attorney duly authorized in writing. No service charge shall be made for any
registration of transfer or exchange of Preferred Securities Certificates, but

                                       28

 
the Securities Registrar may require payment of a sum sufficient to cover any
tax or governmental charge that may be imposed in connection with any transfer
or exchange of Preferred Securities Certificates.

     (b) Certain Transfers and Exchanges.  Notwithstanding any other provision
of  this Trust Agreement or the Preferred Securities, transfers and exchanges of
Preferred Securities and beneficial interests in a Global Certificate of the
kinds specified in this Section 5.4(b) shall be made only in accordance with
this Section 5.4(b).

          (i) Restricted Global Certificate to Regulation S Global Certificate.
     If the owner of a beneficial interest in the Restricted Global Certificate
     wishes at any time to transfer such interest to a Person who wishes to
     acquire the same in the form of a beneficial interest in the Regulation S
     Global Certificate, such transfer may be effected in accordance with the
     provisions of this Clause (b)(i) and Clause (b)(vii) below and subject to
     the Applicable Procedures.  Upon receipt by the Property Trustee, as
     Securities Registrar, of (A) an order given by the Clearing Agency or its
     authorized representative directing that a beneficial interest in the
     Regulation S Global Certificate in a specified principal amount be credited
     to a specified participant's account and that a beneficial interest in the
     Restricted Global Certificate in an equal principal amount be debited from
     another specified participant's account and (B) a Regulation S Certificate,
     satisfactory to the Property Trustee and duly executed by the owner of such
     beneficial interest in the Restricted Global Certificate or  his attorney
     duly authorized in writing, then the Property Trustee, as Securities
     Registrar but subject to Clause (b)(vii) below, shall reduce the share
     number of the Restricted Global Certificate and increase the share number
     of the Regulation S Global Certificate by such specified principal amount
     as provided in Section 5.11(b).

          (ii) Regulation S Global Certificate to Restricted Global Certificate.
     If the owner of a beneficial interest in the Regulation S Global
     Certificate  wishes at any time to transfer such interest to a Person who
     wishes to  acquire the same in the form of a beneficial interest in the
     Restricted Global Certificate, such transfer may be effected only in
     accordance with  this Clause (b)(ii) and subject to the Applicable
     Procedures.  Upon receipt by the Property Trustee, as Securities Registrar,
     of (A) an order given by the Clearing Agency or its authorized
     representative directing  that a beneficial interest in the Restricted
     Global Certificate in a specified principal amount be credited to a
     specified participant's account and that a beneficial interest in the
     Regulation S Global Certificate in an equal principal amount be debited
     from another specified participant's account and (B) if such transfer is to
     occur during the Restricted Period, a Restricted Securities Certificate,
     satisfactory to the Property Trustee and duly executed by the owner of such
     beneficial interest in the Regulation S Global Certificate or his attorney
     duly authorized in writing, then the Property Trustee, as Securities
     Registrar, shall reduce the principal amount of the Regulation S Global
     Certificate and increase the principal amount of the Restricted Global
     Certificate by such specified principal amount as provided in Section
     5.11(b).

          (iii)  Restricted Non-Global Certificate to Restricted Global
     Certificate or Regulation S Global Certificate.  If the Holder of a
     Restricted Security (other than a Global Certificate) wishes at any time to
     transfer all or any portion of such Restricted Security to a

                                       29

 
     Person who wishes to take delivery thereof in the form of a beneficial
     interest in the Restricted Global Certificate or the Regulation S Global
     Certificate, such transfer may be effected only in accordance with the
     provisions of this Clause (b)(iii) and Clause (b)(vii) below and subject to
     the Applicable Procedures. Upon receipt by the Property Trustee, as
     Securities Registrar, of (A) such Restricted Security as provided in
     Section 5.4(a) and instructions satisfactory to the Property Trustee
     directing that a beneficial interest in the Restricted Global Certificate
     or Regulation S Global Certificate in a specified principal amount not
     greater than the share amount of such Preferred Security be credited to a
     specified participant's account and (B) a Restricted Securities
     Certificate, if the specified account is to be credited with a beneficial
     interest in the Restricted Global Certificate, or a Regulation S
     Certificate, if the specified account is to be credited with a beneficial
     interest in the Regulation S Global Certificate, in either case
     satisfactory to the Property Trustee and duly executed by such Holder or
     his attorney duly authorized in writing, then the Property Trustee, as
     Securities Registrar but subject to Clause (b)(vii) below, shall cancel
     such Restricted Security (and issue a new Restricted Security in respect of
     any untransferred portion thereof) as provided in Section 5.4(a) and
     increase the principal amount of the Restricted Global Certificate or the
     Regulation S Global Certificate, as the case may be, by the specified
     principal amount as provided in Section 5.11(b).

          (iv)   Regulation S Non-Global Certificate to Restricted Global
     Certificate or Regulation S Global Certificate. If the Holder of a
     Regulation S Preferred Security (other than a Global Certificate) wishes at
     any time to transfer all or any portion of such Regulation S Security to a
     Person who wishes to acquire the same in the form of a beneficial interest
     in the Restricted Global Certificate or the Regulation S Global
     Certificate, such transfer may be effected only in accordance with this
     Clause (b)(iv) and Clause (b)(vii) below and subject to the Applicable
     Procedures. Upon receipt by the Property Trustee, as Securities Registrar,
     of (A) such Regulation S Security as provided in Section 5.4(a) and
     instructions satisfactory to the Property Trustee directing that a
     beneficial interest in the Restricted Global Certificate or Regulation S
     Global Certificate in a specified share amount not greater than the share
     amount of such Preferred Security be credited to a specified participant's
     account and (B) if the transfer is to occur during the Restricted Period
     and the specified account is to be credited with a beneficial interest in
     the Restricted Global Certificate, a Restricted Securities Certificate
     satisfactory to the Property Trustee and duly executed by such Holder or
     his attorney duly authorized in writing then the Property Trustee, as
     Securities Registrar but subject to Clause (b)(vii) below, shall cancel
     such Regulation S Security (and issue a new Regulation S Security in
     respect of any untransferred portion thereof) as provided in Section 5.4(a)
     and increase the principal amount of the Restricted Global Certificate or
     the Regulation S Global Certificate, as the case may be, by the specified
     principal amount as provided in Section 5.11(b).

          (v)    Non-Global Certificate to Non-Global Certificate. A Security
     that is not a Global Certificate may be transferred, in whole or in part,
     to a Person who takes delivery in the form of another Security that is not
     a Global Certificate as provided in Section 5.11, provided that, if the
     Security to be transferred in whole or in part is a Restricted Security, or
     is a Regulation S Preferred Security and the transfer is to occur during
     the Restricted Period, then the Property Trustee shall have received (A) a
     Restricted Securities Certificate,

                                      30

 
     satisfactory to the Property Trustee and duly executed by the transferor
     Holder or his attorney duly authorized in writing, in which case the
     transferee Holder shall take delivery in the form of a Restricted Security,
     or (B) a Regulation S Certificate, satisfactory to the Property Trustee and
     duly executed by the transferor Holder or his attorney duly authorized in
     writing, in which case the transferee Holder shall take delivery in the
     form of a Regulation S Preferred Security (subject in every case to Section
     5.4(c)).

          (vi)   Exchanges between Global Certificate and Non-Global
     Certificate. A beneficial interest in a Global Certificate may be exchanged
     for a Preferred Security that is not a Global Certificate as provided in
     Section 5.11 to an institution that is an accredited investor within the
     meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D of the
     Securities Act of 1933, as amended, provided that, if such interest is a
     beneficial interest in the Restricted Global Certificate, or if such
     interest is a beneficial interest in the Regulation S Global Certificate
     and such exchange is to occur during the Restricted Period, then such
     interest shall be exchanged for a Restricted Security (subject in each case
     to Section 5.4(c)). A Preferred Security that is not a Global Certificate
     may be exchanged for a beneficial interest in a Global Certificate only if
     (A) such exchange occurs in connection with a transfer effected in
     accordance with Clause (b)(iii) or (iv) above or (B) such Security is a
     Regulation S Preferred Security and such exchange occurs after the
     Restricted Period.

          (vii)  Regulation S Global Certificate to be Held Through Euroclear or
     Cedel during Restricted Period.  The Depositor shall use its best efforts
     to cause the Clearing Agency to ensure that, until the expiration of the
     Restricted Period, beneficial interests in the Regulation S Global
     Certificate may be held only in or through accounts maintained at the
     Clearing Agency by Euroclear or Cedel (or by participants acting for the
     account thereof), and no person shall be entitled to effect any transfer or
     exchange that would result in any such interest being held otherwise than
     in or through such an account; provided that this Clause (b)(vii) shall not
     prohibit any transfer or exchange of such an interest in accordance with
     Clause (b)(ii) or (vi) above.

     (c)  Securities Act Legends.  Rule 144A Securities, Certificated Preferred
Securities and their respective Successor Securities shall bear a  Restricted
Securities Legend as set forth in Section 5.15, and the Regulation S Preferred
Securities and their Successor Securities shall bear a Regulation S Legend,
subject to the following:

          (i)    subject to the following Clauses of this Section 5.4(c), a
     Preferred Security or any portion thereof which is exchanged, upon transfer
     or otherwise, for a Global Certificate or any portion thereof shall bear
     the Securities Act Legend borne by such Global Certificate while
     represented thereby;

          (ii)   subject to the following Clauses of this Section 5.4(c), a new
     Preferred Security which is not a Global Certificate and is issued in
     exchange for another Preferred Security (including, a Global Certificate)
     or any portion thereof, upon transfer or otherwise, shall bear the
     Securities Act Legend borne by such other Preferred Security, provided
     that, if such new Preferred Security is required pursuant to Section
     5.4(b)(v) or (vi) to be issued in the form of a Restricted Security, it
     shall bear a Restricted Securities Legend and, if such 

                                      31

 
     new Preferred Security is so required to be issued in the form of a
     Regulation S Preferred Security, it shall bear a Regulation S Legend;

          (iii)  Any Preferred Securities which are sold or otherwise disposed
     of pursuant to an effective registration statement under the Securities Act
     (including the Shelf Registration Statement), together with their Successor
     Securities shall not bear a Securities Act Legend; the Depositor shall
     inform the Property Trustee in writing of the effective date of any such
     registration statement registering the Preferred Securities under the
     Securities Act and shall notify the Property Trustee at any time when
     prospectuses may not be delivered with respect to Preferred Securities to
     be sold pursuant to such registration statement. The Property Trustee shall
     not be liable for any action taken or omitted to be taken by it in good
     faith in accordance with the aforementioned registration statement;

          (iv)   at any time after the Preferred Securities may be freely
     transferred without registration under the Securities Act or without being
     subject to transfer restrictions pursuant to the Securities Act, a new
     Preferred Security which does not bear a Securities Act Legend may be
     issued in exchange for or in lieu of a Preferred Security (other than a
     Global Certificate) or any portion thereof which bears such a legend if the
     Property Trustee has received an Unrestricted Securities Certificate,
     satisfactory to the Property Trustee and duly executed by the Holder of
     such legended Preferred Security or his attorney duly authorized in
     writing, and after such date and receipt of such certificate, the Property
     Trustee shall authenticate and deliver such a new Preferred Security in
     exchange for or in lieu of such other Preferred Security as provided in
     this Article 5;

          (v)    a new Preferred Security which does not bear a Securities Act
     Legend may be issued in exchange for or in lieu of a Preferred Security
     (other than a Global Certificate) or any portion thereof which bears such a
     legend if, in the Depositor's judgment, placing such a legend upon such new
     Preferred Security is not necessary to ensure compliance with the
     registration requirements of the Securities Act, and the Property Trustee,
     at the direction of the Depositor, shall authenticate and deliver such a
     new Preferred Security as provided in this Article 5; and

          (vi)   notwithstanding the foregoing provisions of this Section
     5.4(c), a Successor Security of a Preferred Securities that does not bear a
     particular form of Securities Act Legend shall not bear such form of legend
     unless the Depositor has reasonable cause to believe that such Successor
     Security is a "restricted security" within the meaning of Rule 144, in
     which case the Property Trustee, at the direction of the Depositor, shall
     authenticate and deliver a new Preferred Security bearing a Restricted
     Securities Legend in exchange for such Successor Security as provided in
     this Article 5.

     SECTION 5.5.  Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates.

     If (a) any mutilated Trust Securities Certificate shall be surrendered to
the Securities Registrar, or if the Securities Registrar shall receive evidence
to its satisfaction of the destruction, loss or theft of any Trust Securities
Certificate and (b) there shall be delivered to the Securities Registrar and the
Administrative Trustees such security or indemnity as may be required by them to


                                      32

 
save each of them harmless, then in the absence of notice that such Trust
Securities Certificate shall have been acquired by a bona fide purchaser, the
Administrative Trustees, or any one of them, on behalf of the Trust shall
execute and make available for authentication and delivery, in exchange for or
in lieu of any such mutilated, destroyed, lost or stolen Trust Securities
Certificate, a new Trust Securities Certificate of like denomination. In
connection with the issuance of any new Trust Securities Certificate under this
Section, the Securities Registrar may require the payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
therewith. Any duplicative Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.

     SECTION 5.6.  Persons Deemed Securityholders.  The Property Trustee and the
Securities Registrar shall treat the Person in whose name any Trust Securities
Certificate shall be registered in the Securities Register as the owner of such
Trust Securities Certificate for the purpose of receiving Distributions and for
all other purposes whatsoever, and neither the Property Trustee nor the
Securities Registrar shall be bound by any notice to the contrary.

     SECTION 5.7.  Access to List of Securityholders' Names and Addresses. The
Administrative Trustees or the Depositor shall furnish or cause to be furnished
(unless the Property Trustee is acting as Securities Registrar with respect to
the Trust Securities under the Trust Agreement) a list, in such form as the
Property Trustee may reasonably require, of the names and addresses of the
Securityholders as of the most recent record date (a) to the Property Trustee,
quarterly at least 5 Business Days before each Distribution Date, and (b) to the
Property Trustee, promptly after receipt by the Depositor of a request therefor
from the Property Trustee in order to enable the Property Trustee to discharge
its obligations under this Trust Agreement, in each case to the extent such
information is in the possession or control of the Administrative Trustees or
the Depositor and is not identical to a previously supplied list or has not
otherwise been received by the Property Trustee in its capacity as Securities
Registrar. The rights of Securityholders to communicate with other
Securityholders with respect to their rights under this Trust Agreement or under
the Trust Securities, and the corresponding rights of the Trustee shall be as
provided in the Trust Indenture Act, except to the extent Section 3819 of the
Delaware Business Trust Act would require greater access to such information, in
which case the latter shall apply. Each Holder, by receiving and holding a Trust
Securities Certificate, and each Owner shall be deemed to have agreed not to
hold the Depositor, the Property Trustee or the Administrative Trustees
accountable by reason of the disclosure of its name and address, regardless of
the source from which such information was derived.

     SECTION 5.8.   Maintenance of Office or Agency.  The Securities Registrar
shall maintain in The City of New York an office or offices or agency or
agencies where Preferred Securities Certificates may be surrendered for
registration of transfer, exchange or conversion and where notices and demands
to or upon the Trustees in respect of the Trust Securities Certificates may be
served.  The Securities Registrar initially designates One State Street, 11th
Floor, New York, New York 10004, Attention: Corporate Trust Department, as its
principal corporate trust office for such purposes.  The Securities Registrar
shall give prompt written notice to the Depositor and to the 

                                      33

 
Securityholders of any change in the location of the Securities Register or any
such office or agency.

     SECTION 5.9.  Appointment of Paying Agent.  In the event that the Preferred
Securities are not in book-entry form only, the Trust shall maintain in the
Borough of Manhattan, City of New York, an office or agency (the "Paying Agent")
where the Preferred Securities may be presented for payment. The Paying Agent
shall make Distributions to Securityholders from the Payment Account and shall
report the amounts of such Distributions to the Property Trustee and the
Administrative Trustees. Any Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making the
Distributions referred to above. The Administrative Trustees may revoke such
power and remove the Paying Agent if such Trustees determine in their sole
discretion that the Paying Agent shall have failed to perform its obligations
under this Trust Agreement in any material respect. The Paying Agent shall
initially be the Property Trustee, and any co-paying agent chosen by the
Property Trustee and acceptable to the Administrative Trustees and the
Depositor. Any Person acting as Paying Agent shall be permitted to resign as
Paying Agent upon 30 days' written notice to the Property Trustee and the
Depositor. In the event that the Property Trustee shall no longer be the Paying
Agent or a successor Paying Agent shall resign or its authority to act be
revoked, the Administrative Trustees shall appoint a successor that is
acceptable to the Property Trustee and the Depositor to act as Paying Agent
(which shall be a bank or trust company). Each successor Paying Agent or any
additional Paying Agent shall agree with the Trustees that, as Paying Agent,
such successor Paying Agent or additional Paying Agent will hold all sums, if
any, held by it for payment to the Securityholders in trust for the benefit of
the Securityholders entitled thereto until such sums shall be paid to each
Securityholder. The Paying Agent shall return all unclaimed funds to the
Property Trustee and upon removal of a Paying Agent such Paying Agent shall also
return all funds in its possession to the Property Trustee. The provisions of
Sections 8.1, 8.3 and 8.6 shall apply to the Property Trustee also in its role
as Paying Agent, for so long as the Property Trustee shall act as Paying Agent
and, to the extent applicable, to any other paying agent appointed hereunder.
Any reference in this Agreement to the Paying Agent shall include any co-paying
agent unless the context requires otherwise.

     SECTION 5.10.  Ownership of Common Securities by Depositor.  On the Closing
Date provided for in Section 2.5, the Depositor's predecessor acquired
beneficial and record ownership of the Common Securities.  On or around the date
hereof, the Depositor acquired such Common Securities by operation of law
pursuant to a merger of Depositor's predecessor with and into the Depositor.  To
the fullest extent permitted by law, any attempted transfer of the Common
Securities other than further to the aforementioned merger of Depositor's
predecessor with and into the Depositor, shall be void.  The administrative
trustees of the Old Trust shall cause each Common Securities Certificate issued
to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT
TRANSFERABLE".

     SECTION 5.11.  Global Securities; Non-Global Securities; Common Securities
                    Certificate.

     (a) Each Global Certificate authenticated under this Trust Agreement shall
be registered in the name of the Clearing Agency designated by the Depositor for
such Global Certificate or a nominee thereof and delivered to such Clearing
Agency or a nominee thereof or custodian therefor, 

                                      34

 
and each such Global Certificate shall constitute a Preferred Security for all
purposes of this Trust Agreement.

     (b) If a Global Certificate is to be exchanged for Certificated Preferred
Securities or canceled in whole, it shall be surrendered by or on behalf of the
Clearing Agency, its nominee or custodian to the Property Trustee, as Securities
Registrar, for exchange or cancellation as provided in this Article 5. If any
Global Certificate is to be exchanged for Certificated Preferred Securities or
cancelled in part, or if another Preferred Security is to be exchanged in whole
or in part for a beneficial interest in any Global Certificate, in each case, as
provided in Section 5.4, then either (i) such Global Certificate shall be so
surrendered for exchange or cancellation as provided in this Article 5 or (ii)
the principal amount thereof shall be reduced or increased by an amount equal to
the portion thereof to be so exchanged or cancelled, or equal to the principal
amount of such Certificated Preferred Security to be so exchanged for a
beneficial interest therein, as the case may be, by means of an appropriate
adjustment made on the records of the Property Trustee, as Securities Registrar,
whereupon the Property Trustee, in accordance with the Applicable Procedures,
shall instruct the Clearing Agency or its authorized representative to make a
corresponding adjustment to its records. Upon any such surrender or adjustment
of a Global Certificate, the Property Trustee shall, subject to Section 5.4 and
as otherwise provided in this Article 5, authenticate and deliver any Preferred
Securities issuable in exchange for such Global Certificate (or any portion
thereof) to or upon the order of, and registered in such names as may be
directed by, the Clearing Agency or its authorized representative. Upon the
request of the Property Trustee in connection with the occurrence of any of the
events specified in the preceding paragraph, the Depositor shall promptly make
available to the Property Trustee a reasonable supply of Preferred Securities
that are not in the form of Global Certificates. The Property Trustee shall be
entitled to rely upon any order, direction or request of the Clearing Agency or
its authorized representative which is given or made pursuant to this Article 5
if such order, direction or request is given or made in accordance with the
Applicable Procedures.

     (c) Every Preferred Security authenticated and delivered upon registration
of transfer of, or in exchange for or in lieu of, a Global Certificate or any
portion thereof, whether pursuant to this Article 5 or otherwise, shall be
authenticated and delivered in the form of, and shall be, a Global Certificate,
unless such Preferred Security is registered in the name of a Person other than
the Clearing Agency for such Global Certificate or a nominee thereof.

     (d) The Clearing Agency or its nominee, as registered owner of a Global
Certificate, shall be the holder of such Global Certificate for all purposes
under the Trust Agreement and the Preferred Securities, and owners of beneficial
interests in a Global Certificate shall hold such interests pursuant to the
Applicable Procedures. Accordingly, any such Owner's beneficial interest in a
Global Certificate will be shown only on, and the transfer of such interest
shall be effected only through, records maintained by the Clearing Agency or its
nominee or its participants and such owners of beneficial interests in a Global
Certificate will not be considered the owners or holders of such Global
Certificate for any purpose of this Trust Agreement or the Preferred Securities.

     (e) A single Common Securities Certificate representing the Common
Securities was issued to Depositor's predecessor and shall be retained by the
Depositor in the form of a definitive Common Securities Certificate.

                                      35

 
     SECTION 5.12.  Notices to Clearing Agency.  To the extent that a notice or
other communication to the Owners is required under this Trust Agreement, unless
and until Definitive Preferred Securities Certificates shall have been issued to
Owners pursuant to Section 5.13, the Trustees shall give all such notices and
communications specified herein to be given to Owners to the Clearing Agency,
and shall have no obligations to provide notices directly to the Owners.

     SECTION 5.13.  Definitive Preferred Securities Certificates.
Notwithstanding any other provision in this Trust Agreement other than as
provided for in Section 5.4(b)(vi), no Global Certificate may be exchanged in
whole or in part for Preferred Securities registered, and no transfer of a
Global Certificate in whole or in part may be registered, in the name of any
Person other than the Clearing Agency for such Global Certificate or a nominee
thereof unless (i) such Clearing Agency (A) has notified the Depositor that it
is unwilling or unable to continue as Clearing Agency for such Global
Certificate or (B) has ceased to be a clearing agency registered as such under
the Securities Exchange Act of 1934, as amended, and in either case the Trust
and the Depositor thereupon fails to appoint a successor Clearing Agency, (ii)
the Trust and the Depositor, at their option, notify the Property Trustee in
writing that it elects to cause the issuance of the Preferred Securities in
certificated form or (iii) there shall have occurred and be continuing an Event
of Default or any event which after notice or lapse of time or both would be an
Event of Default. In all cases, Certificated Preferred Securities delivered in
exchange for any Global Certificate or beneficial interests therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of the Clearing Agency (in accordance with its customary
procedures).

     SECTION 5.14.  Rights of Securityholders.  The legal title to the Trust
Property is vested exclusively in the Property Trustee (in its capacity as such)
in accordance with Section 2.9, and the Securityholders shall not have any right
or title therein other than the undivided beneficial interest in the assets of
the Trust conferred by their Trust Securities and they shall have no right to
call for any partition or division of property, profits or rights of the Trust
except as described below.  The Trust Securities shall be personal property
giving only the rights specifically set forth therein and in this Trust
Agreement.  The Trust Securities shall have no preemptive or similar rights and,
when issued and delivered to Securityholders against payment of the purchase
price therefor, will be fully paid and nonassessable by the Trust.  The Holders
of the Trust Securities, in their capacities as such, shall be entitled to the
same limitation of personal liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.

     SECTION 5.15. Restrictive Legends. (a) The Restricted Global Certificate
and the Certificated Preferred Securities shall bear the following legend (the
"Restricted Securities Legend") unless the Depositor determines otherwise in
accordance with applicable law:

"THE SECURITIES EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON THEIR
CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S.  SECURITIES ACT OF 1933 (THE
"SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) BY ANY INITIAL INVESTOR THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT, (1) TO A PERSON WHO
THE TRANSFEROR REASONABLY 

                                      36

 
BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER ACQUIRING FOR ITS OWN ACCOUNT OR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION COMPLYING WITH RULE
144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 904 OF REGULATION S
UNDER THE SECURITIES ACT, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE) OR (4)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR (B) BY ANY INITIAL INVESTOR
THAT IS A QUALIFIED INSTITUTIONAL BUYER OR BY ANY SUBSEQUENT INVESTOR, AS SET
FORTH IN CLAUSE (A) ABOVE OR TO AN INSTITUTION THAT IS AN ACCREDITED INVESTOR
WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7) IN A TRANSACTION EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND, IN EACH CASE (A)
AND (B), IN COMPLIANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE
UNITED STATES AND OTHER JURISDICTIONS. SECURITIES OWNED BY AN INITIAL INVESTOR
THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER MAY NOT BE HELD IN BOOK-ENTRY FORM
AND MAY NOT BE TRANSFERRED WITHOUT CERTIFICATION THAT THE TRANSFER COMPLIES WITH
THE FOREGOING RESTRICTIONS, AS PROVIDED IN THE TRUST AGREEMENT REFERRED TO
BELOW."

     (b) The Regulation S Preferred Securities shall bear the following legend
(the "Regulation S Legend") unless the Depositor determines otherwise in
accordance with the applicable law:

"THE SECURITIES EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON CONVERSION
THEREOF (COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT AND MAY NOT BE OFFERED, SOLD OR DELIVERED IN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY U.S. PERSON, UNLESS SUCH SECURITIES
ARE REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS THEREOF IS AVAILABLE."

                                   ARTICLE 6
                    ACT OF SECURITYHOLDERS; MEETINGS; VOTING
                                        
     SECTION 6.1.  Limitations on Voting Rights.

     (a) Except as provided in this Section, in Section 8.9 and 10.2 and in the
Indenture and as otherwise required by law, no Holder of Preferred Securities
shall have any right to vote or in any manner otherwise control the
administration, operation and management of the Trust or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the terms
of the Trust Securities Certificates, be construed so as to constitute the
Securityholders from time to time as partners or members of an association.

     (b) Subject to Section 8.2 hereof, if an Event of Default with respect to
the Preferred Securities has occurred and been subsequently cured, waived or
otherwise eliminated, the provisions of Section 6.1(b)(ii) hereof shall apply.
During (x) the period commencing on the date 

                                      37

 
of the occurrence of an Event of Default with respect to the Preferred
Securities and ending on the date when such Event of Default is cured, waived or
otherwise eliminated, or (y) any period not described in either the preceding
sentence or the preceding clause (x), the provisions of Section 6.1(b)(i) shall
apply.

          (i)  The holders of a majority in aggregate liquidation amount of the
     Preferred Securities will have the right to direct the time, method and
     place of conducting any proceeding for any remedy available to the Property
     Trustee or to exercise any trust or power conferred upon the Property
     Trustee under the Trust Agreement, including the right to direct the
     Property Trustee to exercise the remedies available to it as a holder of
     the Debentures but excluding the right to direct the Property Trustee to
     consent to an amendment, modification or termination of the Indenture
     (which shall be as provided below). So long as any Debentures are held by
     the Property Trustee, the Trustees shall not (A) direct the time, method
     and place of conducting any proceeding for any remedy available to the
     Debenture Trustee, or executing any trust or power conferred on the
     Debenture Trustee with respect to such Debentures, (B) waive any past
     default which is waivable under Section 5.13 of the Indenture, (C) exercise
     any right to rescind or annul a declaration that the principal of all the
     Debentures shall be due and payable or (D) consent to any amendment,
     modification or termination of the Indenture or the Debentures, where such
     consent shall be required, without, in each case, obtaining the prior
     approval of the Holders of a majority in aggregate Liquidation Amount of
     all Outstanding Preferred Securities (except in the case of clause (D),
     which consent, in the event that no Event of Default shall occur and be
     continuing, shall be of the Holders of all Trust Securities, voting
     together as a single class); provided, however, that where a consent under
     the Indenture would require the consent of each holder of Debentures
     affected thereby, no such consent shall be given by the Property Trustee
     without the prior written consent of each Holder of Preferred Securities.
     The Trustees shall not revoke any action previously authorized or approved
     by a vote of the Holders of the Preferred Securities, except by a
     subsequent vote of the Holders of the Preferred Securities. The Property
     Trustee shall notify all Holders of record of the Preferred Securities of
     any notice of default received from the Debenture Trustee with respect to
     the Debentures. In addition to obtaining the foregoing approvals of the
     Holders of the Preferred Securities, prior to taking any of the foregoing
     actions, the Trustees shall, at the expense of the Depositor, obtain an
     Opinion of Counsel experienced in such matters to the effect that the Trust
     will not be classified as an association taxable as a corporation or
     partnership for United States Federal income tax purposes on account of
     such action.

          (ii) Subject to Section 8.2 of this Trust Agreement and only after the
     Event of Default with respect to the Preferred Securities has been cured,
     waived, or otherwise eliminated the holders of a majority in aggregate
     liquidation amount of the Common Securities will have the right to direct
     the time, method and place of conducting any proceeding for any remedy
     available to the Property Trustee or to exercise any trust or power
     conferred upon the Property Trustee under the Trust Agreement, including
     the right to direct the Property Trustee to exercise the remedies available
     to it as a holder of the Debentures but excluding the right to direct the
     Property Trustee to consent to an amendment, modification or termination of
     the Indenture (which shall be as provided 

                                      38

 
     below). So long as any Debentures are held by the Property Trustee, the
     Trustees shall not (A) direct the time, method and place of conducting any
     proceeding for any remedy available to the Debenture Trustee, or executing
     any trust or power conferred on the Debenture Trustee with respect to such
     Debentures, (B) waive any past default which is waivable under Section 5.13
     of the Indenture, (C) exercise any right to rescind or annul a declaration
     that the principal of all the Debentures shall be due and payable or (D)
     consent to any amendment, modification or termination of the Indenture or
     the Debentures, where such consent shall be required, without, in each
     case, obtaining the prior approval of the Holders of a majority in
     aggregate Liquidation Amount of all Common Securities (except in the case
     of clause (D), which consent, in the event that no Event of Default shall
     occur and be continuing, shall be of the Holders of all Trust Securities,
     voting together as a single class); provided, however, that where a consent
     under the Indenture would require the consent of each holder of Debentures
     affected thereby, no such consent shall be given by the Property Trustee
     without the prior written consent of each Holder of Common Securities. The
     Trustees shall not revoke any action previously authorized or approved by a
     vote of the Holders of the Common Securities, except by a subsequent vote
     of the Holders of the Common Securities. The Property Trustee shall notify
     all Holders of record of the Common Securities of any notice of default
     received from the Debenture Trustee with respect to the Debentures. In
     addition to obtaining the foregoing approvals of the Holders of the Common
     Securities, prior to taking any of the foregoing actions, the Trustees
     shall, at the expense of the Depositor, obtain an Opinion of Counsel
     experienced in such matters to the effect that the Trust will not be
     classified as an association taxable as a corporation or partnership for
     United States Federal income tax purposes on account of such action.

          (c) If any proposed amendment to the Trust Agreement provides for, or
the Trustees otherwise propose to effect the dissolution, winding-up or
termination of the Trust, other than pursuant to the terms of this Trust
Agreement, then the Holders of Outstanding Preferred Securities as a class will
be entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of the Holders of a majority in
aggregate Liquidation Amount of the Outstanding Preferred Securities.

     SECTION 6.2. Notice of Meetings. Notice of all meetings of the Holders of
the Preferred Securities, stating the time, place and purpose of the meeting,
shall be given by the Property Trustee pursuant to Section 10.8 to each
Preferred Securityholder of record, at its registered address, at least 15 days
and not more than 90 days before the meeting. At any such meeting, any business
properly before the meeting may be so considered whether or not stated in the
notice of the meeting. Any adjourned meeting may be held as adjourned without
further notice.

     SECTION 6.3. Meetings of Preferred Security-holders. No annual meeting of
Securityholders is required to be held. The Administrative Trustees, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Preferred Securityholders of record of 25% of the Preferred
Securities (based upon their Liquidation Amount) and the Administrative Trustees
or the Property Trustee may, at any time in their discretion, call a meeting of
the Holders of Preferred Securities to vote on any matters as to which such
Holders are entitled to vote. Holders of record of 50% of the Preferred
Securities (based upon their Liquidation Amount), present in person or by proxy,
shall constitute a quorum at any meeting of Securityholders. If a


                                      39

 
a quorum is present at a meeting, an affirmative vote by the Holders of record
of Preferred Securities present, in person or by proxy, holding more than a
majority of the Preferred Securities (based upon their Liquidation Amount) held
by Holders of record of Preferred Securities present, either in person or by
proxy, at such meeting shall constitute the action of the Securityholders,
unless this Trust Agreement requires a greater number of affirmative votes.

     SECTION 6.4.  Voting Rights.  Securityholders shall be entitled to one vote
for each $50 of Liquidation Amount represented by their Trust Securities in
respect of any matter as to which such Securityholders are entitled to vote.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Depositor, the Trustees or any
affiliate of any Trustee shall, for purposes of such vote or consent, be treated
as if such Preferred Securities were not outstanding.

     SECTION 6.5.  Proxies, Etc.  At any meeting of Securityholders, any
Securityholders entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustees, or with such other officer or agent of the
Trust as the Administrative Trustees may direct, for verification prior to the
time at which such vote shall be taken.  Pursuant to a resolution of the
Property Trustee, proxies may be solicited in the name of the Property Trustee
or one or more officers of the Property Trustee.  Only Securityholders of record
shall be entitled to vote.  When Trust Securities are held jointly by several
Persons, any one of them may vote at any meeting in person or represented by
proxy in respect of such Trust Securities, but if more than one of them shall be
present at such meeting in person or by proxy, and such joint owners or their
proxies so present disagree as to any vote to be cast, such vote shall not be
received in respect of such Trust Securities.  A proxy purporting to be executed
by or on behalf of a Securityholder shall be deemed valid unless challenged at
or prior to its exercise, and the burden of proving invalidity shall rest on the
challenger.  No proxy shall be valid more than three years after its date of
execution.

     SECTION 6.6  Securityholder Action by Written Consent.  Any action which
may be taken by Securityholders at a meeting may be taken without a meeting if
Securityholders holding more than a majority of all Outstanding Trust Securities
(based upon their Liquidation Amount) entitled to vote in respect of such action
(or such larger proportion thereof as shall be required by any express provision
of this Trust Agreement) shall consent to the action in writing.

     SECTION 6.7.  Record Date for Voting and Other Purposes.  For the purposes
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or to participate in any Distribution on the
Trust Securities in respect of which a record date is not otherwise provided for
in this Trust Agreement, or for the purpose of any other action, the Property
Trustee may from time to time fix a date, not more than 90 days prior to the
date of any meeting of Securityholders or the payment of Distributions or other
action, as the case may be, as a record date for the determination of the
identity of the Securityholders of record for such purposes.

     SECTION 6.8.  Acts of Securityholders.  Any request, demand, authorization,
direction, notice, consent, waiver or other action provided or permitted by this
Trust Agreement to be given, made or taken by Securityholders or Owners may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Securityholders or Owners in person or by 

                                       40

 
an agent duly appointed in writing; and, except as otherwise expressly provided
herein, such action shall become effective when such instrument or instruments
are delivered to an Administrative Trustee. Such instrument or instruments (and
the action embodied therein and evidence thereby) are herein sometimes referred
to as the "Act" of the Securityholders or Owners signing such instrument or
instruments. Proof of execution of any such instrument or of a writing
appointing any such agent shall be sufficient for any purpose of this Trust
Agreement and (subject to Section 8.1) conclusive in favor of the Trustees, if
made in the manner provided in this Section. The fact and date of the execution
by any Person of any such instrument or writing may be proved by the affidavit
of a witness of such execution or by a certificate of a notary public or other
officer authorized by law to take acknowledgements of deeds, certifying that the
individual signing such instrument or writing acknowledged to him the execution
thereof. Where such execution is by a signer acting in a capacity other than his
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of his authority. The fact and date of the execution of any
such instrument or writing, or the authority of the Person executing the same,
may also be proved in any other manner which any Trustee receiving the same
deems sufficient. The ownership of Preferred Securities shall be proved by the
Securities Register. Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Securityholder of any Trust Security shall
bind every future Securityholder of the same Trust Security and the
Securityholder of every Trust Security issued upon the registration of transfer
thereof or in exchange therefor or in lieu thereof in respect of anything done,
omitted or suffered to be done by the Trustees or the Trust in reliance thereon,
whether or not notation of such action is made upon such Trust Security. Without
limiting the foregoing, a Securityholder entitled hereunder to take any action
hereunder with regard to any particular Trust Security may do so with regard to
all or any part of the Liquidation Amount of such Trust Security or by one or
more duly appointed agents each of which may do so pursuant to such appointment
with regard to all or any part of such Liquidation Amount. If any dispute shall
arise between the Securityholders and the Administrative Trustees or among such
Securityholders or Trustees with respect to the authenticity, validity or
binding nature of any request, demand, authorization, direction, consent, waiver
or other Act of such Securityholder or Trustee under this Article 6, then the
determination of such matter by the Property Trustee shall be conclusive with
respect to such matter. Upon the occurrence and continuation of an Event of
Default, the holders of Preferred Securities shall rely on the enforcement by
the Property Trustee of its rights as holder of the Debentures against the
Depositor. If the Property Trustee fails to enforce its rights as holder of the
Debentures after a request therefor by a holder of Preferred Securities, such
holder may proceed to enforce such rights directly against the Depositor.
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Depositor to pay
interest or principal on the Debentures on the date such interest or principal
is otherwise payable (or in the case of redemption, on the Redemption Date),
then a holder of Preferred Securities shall have the right to institute a
proceeding directly against the Depositor, for enforcement of payment to such
holder of the principal amount of or interest on Debentures having a principal
amount equal to the aggregate Liquidation Amount of the Preferred Securities of
such holder after the respective due date specified in the Debentures (a "Direct
Action"). In connection with any such Direct Action, the rights of the Depositor
will be subrogated to the rights of any holder of the Preferred Securities to
the extent of any payment made by the Depositor to such holder of Preferred
Securities as a result of such Direct Action. A Securityholder may institute a
legal proceeding directly against the Depositor under the Guarantee to enforce
its rights under the

                                       41

 
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee (as defined in the Guarantee), the Trust or any Person or entity.

     SECTION 6.9.  Inspection of Records.  Upon reasonable notice to the
Administrative Trustees and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.

                                   ARTICLE 7
                        REPRESENTATIONS AND WARRANTIES

     SECTION 7.1.  Representations and Warranties of the Property Trustee and
the Delaware Trustee.  The Property Trustee and the Delaware Trustee, each
severally on behalf of and as to itself, hereby represents and warrants for the
benefit of the Depositor and the Securityholders that (each such representation
and warranty made by the Property Trustee and the Delaware Trustee being made
only with respect to itself):

     (a) the Property Trustee is a banking corporation duly organized, validly
existing and in good standing under the laws of the State of New York;

     (b) the Delaware Trustee is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware;

     (c) each of the Property Trustee and the Delaware Trustee has full
corporate power, authority and legal right to execute, deliver and perform its
obligations under this Trust Agreement and has taken all necessary action to
authorize the execution, delivery and performance by it of this Trust Agreement;

     (d) this Trust Agreement has been duly authorized, executed and delivered
by each of the Property Trustee and the Delaware Trustee and constitutes the
valid and legally binding agreement of the Property Trustee and the Delaware
Trustee enforceable against it in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles; (e) the execution, delivery and performance by
each of the Property Trustee and the Delaware Trustee of this Trust Agreement
have been duly authorized by all necessary corporate or other action on the part
of the Property Trustee and the Delaware Trustee and does not require any
approval of stockholders of the Property Trustee or the Delaware Trustee and
such execution, delivery and performance will not (i) violate either of the
Property Trustee's or the Delaware Trustee's charter or by-laws, (ii) violate
any provision of, or constitute, with or without notice or lapse of time, a
default under, or result in the creation or imposition of any Lien on any
properties included in the Trust Property pursuant to the provisions of, any
indenture, mortgage, credit agreement, license or other agreement or instrument
to which the Property Trustee or the Delaware Trustee is a party or by which it
is bound, or (iii) violate any law, governmental rule or regulation of the
United States or the State of Delaware, as the case may be, governing the
banking, corporate, or 

                                       42

 
trust powers of the Property Trustee or the Delaware Trustee (as appropriate in
context) or any order, judgment or decree applicable to the Property Trustee or
the Delaware Trustee;

     (f) neither the authorization, execution or delivery by the Property
Trustee or the Delaware Trustee of this Trust Agreement nor the consummation of
any of the transactions by the Property Trustee or the Delaware Trustee (as
appropriate in context) contemplated herein or therein requires the consent or
approval of, the giving of notice to, the registration with or the taking of any
other action with respect to, any governmental authority or agency under any
existing Federal law governing the banking, corporate or trust powers of the
Property Trustee or the Delaware Trustee, as the case may be, under the laws of
the United States or the State of Delaware;

     (g) there are no proceedings pending or, to the best of each of the
Property Trustee's and the Delaware Trustee's knowledge, threatened against or
affecting the Property Trustee or the Delaware Trustee in any court or before
any governmental authority, agency or arbitration board or tribunal which,
individually or in the aggregate, would materially and adversely affect the
Trust or would question the right, power and authority of the Property Trustee
or the Delaware Trustee, as the case may be, to enter into or perform its
obligations as one of the Trustees under this Trust Agreement.

     SECTION 7.2.  Representations and Warranties of Depositor.  The Depositor
hereby represents and warrants for the benefit of the Securityholders that:

     (a) the Trust Securities Certificates issued on the Closing Date on behalf
of the Trust have been duly authorized and will have been duly and validly
executed, issued and delivered by the Trustees pursuant to the terms and
provisions of, and in accordance with the requirements of, this Trust Agreement
and the Securityholders will be, as of such date, entitled to the benefits of
this Trust Agreement; and

     (b) there are no taxes, fees or other governmental charges payable by the
Trust (or the Trustees on behalf of the Trust) under the laws of the State of
Delaware or any political subdivision thereof in connection with the execution,
delivery and performance by the Property Trustee or the Delaware Trustee, as the
case may be, of this Trust Agreement.

                                   ARTICLE 8
                                 THE TRUSTEES
                                        
     SECTION 8.1.  Certain Duties and Responsibilities.

     (a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, by the Trust
Indenture Act.  The Property Trustee, before the occurrence of any Event of
Default and after the curing or waiving of all Events of Default that may have
occurred, shall undertake to perform only such duties and obligations as are
specifically set forth in this Trust Agreement and the Trust Indenture Act and
no implied covenants shall be read into this Trust Agreement against the
Property Trustee.  In case an Event of Default has occurred (that has not been
cured or waived pursuant to Section 8.2) of which a 

                                       43

 
responsible officer of the Property Trustee has actual knowledge, the Property
Trustee shall exercise such rights and powers vested in it by this Trust
Agreement and the Trust Indenture Act, and use the same degree of care and skill
in its exercise, as a prudent individual would exercise or use under the
circumstances in the conduct of his or her own affairs. Notwithstanding the
foregoing, no provision of this Trust Agreement shall require the Trustees to
expend or risk their own funds or otherwise incur any financial liability in the
performance of any of their duties hereunder, or in the exercise of any of their
rights or powers, if they shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. Whether or not therein expressly so provided,
every provision of this Trust Agreement relating to the conduct or affecting the
liability of or affording protection to the Trustees shall be subject to the
provisions of this Section. Nothing in this Trust Agreement shall be construed
to release the Administrative Trustees from liability for their own grossly
negligent action, their own grossly negligent failure to act, or their own
willful misconduct. To the extent that, at law or in equity, an Administrative
Trustee has duties (including fiduciary duties) and liabilities relating thereto
to the Trust or to the Securityholders, such Administrative Trustee shall not be
liable to the Trust or to any Securityholder for such Administrative Trustee's
good faith reliance on the provisions of this Trust Agreement. The provisions of
this Trust Agreement, to the extent that they restrict the duties and
liabilities of the Administrative Trustees otherwise existing at law or in
equity, are agreed by the Depositor and the Securityholders to replace such
other duties and liabilities of the Administrative Trustees.

     (b) All payments made by the Property Trustee or a Paying Agent in respect
of the Trust Securities shall be made only from the revenue and proceeds from
the Trust Property and only to the extent that there shall be sufficient revenue
or proceeds from the Trust Property to enable the Property Trustee or a Paying
Agent to make payments in accordance with the terms hereof.  Each
Securityholder, by its acceptance of a Trust Security, agrees that it will look
solely to the revenue and proceeds from the Trust Property to the extent legally
available for distribution to it as herein provided and  that the Trustees are
not personally liable to it for any amount distributable in respect of any Trust
Security or for any other liability in respect of any Trust Security.  This
Section 8.1(b) does not limit the liability of the Trustees expressly set forth
elsewhere in this Trust Agreement or, in the case of the Property Trustee, in
the Trust Indenture Act.

     (c) No provision of this Trust Agreement shall be construed to relieve the
Property Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:

          (i) the Property Trustee shall not be liable for any error of judgment
     made in good faith by an authorized officer of the Property Trustee, unless
     it shall be proved that the Property Trustee was negligent in ascertaining
     the pertinent facts;

          (ii) the Property Trustee shall not be liable with respect to any
     action taken or omitted to be taken by it in good faith in accordance with
     the direction of the Holders of a majority Liquidation Amount of the Trust
     Securities relating to the time, method and place of conducting any
     proceeding for any remedy available to the Property Trustee, or exercising
     any trust or power conferred upon the Property Trustee under this Trust
     Agreement;

                                       44

 
          (iii)  the Property Trustee's sole duty with respect to the custody,
     safekeeping and physical preservation of the Debentures and the Payment
     Account shall be to deal with such property as fiduciary assets, subject to
     the protections and limitations on liability afforded to the Property
     Trustee under this Trust Agreement and the Trust Indenture Act;

          (iv) The Property Trustee shall not be liable for any interest on any
     money received by it except as it may otherwise agree with the Depositor
     and money held by the Property Trustee need not be segregated from other
     funds held by it except in relation to the Payment Account maintained by
     the Property Trustee pursuant to Section 3.1 and except to the extent
     otherwise required by law; and

          (v) the Property Trustee shall not be responsible for monitoring the
     compliance by the Administrative Trustees or the Depositor with their
     respective duties under this Trust Agreement, nor shall the Property
     Trustee be liable for the default or misconduct of the Administrative
     Trustees or the Depositor.

     SECTION 8.2.  Notice of Defaults.

     (a) Within ten days after the occurrence of any Event of Default actually
known to the Property Trustee, the Property Trustee shall transmit, in the
manner and to the extent provided in Section 10.8, notice of such Event of
Default to the holders of Preferred Securities, the Administrative Trustees and
the Depositor, unless such Event of Default shall have been cured or waived,
provided that, except for a default in the payment of principal of (or premium,
if any) or interest on any of the Debentures, the Property Trustee shall be
protected in withholding such notice if and so long as the Board of Directors,
the executive committee, or a trust committee of directors and/or responsible
officers of the Property Trustee in good faith determines that the withholding
of such notice is in the interests of the Holders of the Preferred Securities.

     (b) Within ten days after the receipt of notice of the Depositor's exercise
of its right to extend the interest payment period for the Debentures pursuant
to the Indenture, the Property Trustee shall transmit, in the manner and to the
extent provided in Section 10.8, notice of such exercise to the Securityholders,
unless such exercise shall have been revoked.

     (c) The Holders of a majority in liquidation amount of Preferred Securities
may, by vote, on behalf of the Holders of all of the Preferred Securities, waive
any past Event of Default in respect of the Preferred Securities and its
consequences, provided that, if the underlying Debenture Event of Default:

          (i) is not waivable under the Indenture, the Event of Default under
     the Trust Agreement shall also not be waivable; or

          (ii) requires the consent or vote of greater than a majority in
     principal amount of the holders of the Debentures (a "Super Majority") to
     be waived under the Indenture, the Event of Default under the Trust
     Agreement may only be waived by the vote of the Holders of the same
     proportion in liquidation amount of the Preferred Securities that the
     relevant 

                                       45

 
     Super Majority represents of the aggregate principal amount of the
     Debentures outstanding. The provisions of Section 6.1(b) and this Section
     8.2(c) shall be in lieu of (S) 316(a)(1)(B) of the Trust Indenture Act and
     such (S) 316(a)(1)(B) of the Trust Indenture Act is hereby expressly
     excluded from this Trust Agreement and the Preferred Securities, as
     permitted by the Trust Indenture Act. Upon such waiver, any such default
     shall cease to exist, and any Event of Default with respect to the
     Preferred Securities arising therefrom shall be deemed to have been cured,
     for every purpose of this Trust Agreement, but no such waiver shall extend
     to any subsequent or other default or an Event of Default with respect to
     the Preferred Securities or impair any right consequent thereon. Any waiver
     by the Holders of the Preferred Securities of an Event of Default with
     respect to the Preferred Securities shall also be deemed to constitute a
     waiver by the Holders of the Common Securities of any such Event of Default
     with respect to the Common Securities for all purposes of this Trust
     Agreement without any further act, vote, or consent of the Holders of the
     Common Securities.

     (d) The Holders of a majority in liquidation amount of the Common
Securities may, by vote, on behalf of the Holders of all of the Common
Securities,  waive any past Event of Default with respect to the Common
Securities and its consequences  provided that, if the underlying Debenture
Event of Default:

          (i) is not waivable under the Indenture, except where the Holders of
     the Common Securities are deemed to have waived such Event of Default under
     the Declaration as provided below in this Section 8.2(d), the Event of
     Default under the Trust Agreement shall also not be waivable; or

          (ii) requires the consent or vote of a Super Majority to be waived,
     except where the Holders of the Common Securities are deemed to have waived
     such Event of Default under the Trust Agreement as provided below in this
     Section 8.2(d), the Event of Default under the Trust Agreement may only be
     waived by the vote of the Holders of the same proportion in liquidation
     amount of the Common Securities that the relevant Super Majority represents
     of the aggregate principal amount of the Debentures outstanding; provided
     further, that each Holder of Common Securities will be deemed to have
     waived any such Event of Default and all Events of Default with respect to
     the Common Securities and its consequences until all Events of Default with
     respect to the Preferred Securities have been cured, waived or otherwise
     eliminated, and until such Events of Default have been so cured, waived or
     otherwise eliminated, the Property Trustee will be deemed to be acting
     solely on behalf of the Holders of the Preferred Securities and only the
     Holders of the Preferred Securities will have the right to direct the
     Property Trustee in accordance with the terms of the Securities.  The
     provisions of Section 6.1(b) and this Section 8.2(d) shall be in lieu of
     (S)316(a)(1)(B) of the Trust Indenture Act and such (S)316(a)(1)(B) of the
     Trust Indenture Act is hereby expressly excluded from this Trust Agreement
     and the Preferred Securities, as permitted by the Trust Indenture Act.
     Subject to the foregoing provisions of this Section 8.2(d), upon such
     waiver, any such default shall cease to exist and any Event of Default with
     respect to the Common Securities arising therefrom shall be deemed to have
     been cured for every purpose of this Trust Agreement, but no such waiver
     shall extend to any subsequent or 

                                       46

 
     other default or Event of Default with respect to the Common Securities or
     impair any right consequent thereon.

     (e) A waiver of an Event of Default under the Indenture by the Property
Trustee at the direction of the Holders of the Preferred Securities, constitutes
a waiver of the corresponding Event of Default under this Trust Agreement.  The
foregoing provisions of this Section 8.2(e) shall be in lieu of (S) 316(a)(1)(B)
of the Trust Indenture Act and such (S) 316(a)(1)(B) of the Trust Indenture Act
is hereby expressly excluded from this Trust Agreement and the Preferred
Securities, as permitted by the Trust Indenture Act.

     SECTION 8.3.  Certain Rights of Property Trustee.  Subject to the
provisions of Section 8.1:

     (a) The Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;

     (b) if no Event of Default has occurred and is continuing and, (i) in
performing its duties under this Trust Agreement the Property Trustee is
required to decide between alternative courses of action or (ii) in construing
any of the provisions in this Trust Agreement the Property Trustee finds the
same ambiguous or inconsistent with any other provisions contained herein or
(iii) the Property Trustee is unsure of the application of any provision of this
Trust Agreement, then, except as to any matter as to which the Holders of
Preferred Securities are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken and the Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own bad
faith, negligence or willful misconduct;

     (c) any direction or act of the Depositor or the Administrative Trustees
contemplated by this Trust Agreement shall be sufficiently evidenced by an
Officers' Certificate;

     (d) whenever in the administration of this Trust Agreement, the Property
Trustee shall deem it desirable that a matter be established before undertaking,
suffering or omitting any action hereunder, the Property Trustee (unless other
evidence is herein specifically prescribed) may, in the absence of bad faith on
its part, request and rely upon an Officers' Certificate and an Opinion of
Counsel which, upon receipt of such request, shall be promptly delivered by the
Depositor or the Administrative Trustees;

                                       47

 
     (e) the Property Trustee shall have no duty to accomplish any recording,
filing or registration of any instrument (including any financing or
continuation statement or any filing under tax or securities laws) or any
rerecording, refiling or reregistration thereof;

     (f) the Property Trustee may consult with counsel (which counsel may be
counsel to the Depositor or any of its Affiliates, and may include any of its
employees) and the advice of such counsel or any Opinion of Counsel shall be
full and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon and in
accordance with such advice; and the Property Trustee shall have the right at
any time to seek instructions concerning the administration of this Trust
Agreement from any court of competent jurisdiction;

     (g) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;

     (h) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolutions, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
debenture, note or other evidence of indebtedness or other paper or document,
unless requested in writing to do so by Holders of record of 25% or more of the
Preferred Securities (based upon their Liquidation Amount), but the Property
Trustee may make such further inquiry or investigation into such facts or
matters as it may see fit;

     (i) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys or an Affiliate, provided that the Property Trustee shall be
responsible for its own negligence or recklessness with respect to selection of
any agent or attorney appointed by it hereunder;

     (j) whenever in the administration of this Trust Agreement the Property
Trustee shall deem it desirable to receive instructions with respect to
enforcing any remedy or right or taking any other action hereunder, the Property
Trustee (i) may request instructions from the Holders of the Trust Securities,
which instructions may only be given by the Holders of the same proportion in
Liquidation Amount of the Trust Securities as would be entitled to direct the
Property Trustee under the terms of the Trust Securities in respect of such
remedy, right or action, (ii) may refrain from enforcing such remedy or right or
taking such other action until such instructions are received, and (iii) shall
be protected in acting in accordance with such instructions; and

     (k) except as otherwise expressly provided by this Trust Agreement, the
Property Trustee shall not be under any obligation to take any action that is
discretionary under the provisions of this Trust Agreement. No provision of this
Trust Agreement shall be deemed to impose any duty or obligation on the Property
Trustee to perform any act or acts or exercise any right, power, duty or
obligation conferred or imposed on it, in any jurisdiction in which it shall be
illegal, or in which the Property Trustee shall be unqualified or incompetent in
accordance with applicable law, to perform any such act or acts, or to exercise
any such right, power, duty or 

                                       48

 
obligation. No permissive power or authority available to the Property Trustee
shall be construed to be a duty.

     SECTION 8.4.  Not Responsible for Recitals or Issuance of Securities.  The
recitals contained herein and in the Trust Securities Certificates shall not be
taken as the statements of the Trustees, and the Trustees do not assume any
responsibility for their correctness.  The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.

     SECTION 8.5.  May Hold Securities.  Except as provided in the definition of
the term "Outstanding" in Article 1, any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Section 8.8 and 8.12, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.

     SECTION 8.6.  Compensation; Indemnity; Fees.

     The Depositor agrees:

          (a) to pay the Trustees from time to time reasonable compensation for
     all services rendered by them hereunder (which compensation shall not be
     limited by any provision of law in regard to the compensation of a trustee
     of an express trust);

          (b) except as otherwise expressly provided herein, to reimburse the
     Trustees upon request for all reasonable expenses, disbursements and
     advances incurred or made by the Trustees in accordance with any provision
     of this Trust Agreement (including the reasonable compensation and the
     expenses and disbursements of its agents and counsel), except any such
     expense, disbursement or advance as may be attributable to its negligence
     or bad faith;

          (c) to the fullest extent permitted by applicable law, to indemnify
     and hold harmless (i) each Trustee, (ii) any Affiliate of any Trustee,
     (iii) any officer, director, shareholder, employee, representative or agent
     of any Trustee, and (iv) any employee or agent of the Trust or its
     Affiliates (referred to herein as an "Indemnified Person") from and against
     any loss, damage, liability, tax, penalty, expense or claim of any kind or
     nature whatsoever incurred by such Indemnified Person by reason of the
     creation, operation or termination of the Trust or any act or omission
     performed or omitted by such Indemnified Person in good faith on behalf of
     the Trust and in a manner such Indemnified Person reasonably believed to be
     within the scope of authority conferred on such Indemnified Person by this
     Trust Agreement, except that no Indemnified Person shall be entitled to be
     indemnified in respect of any loss, damage or claim incurred by such
     Indemnified Person by reason of negligence or willful misconduct with
     respect to such acts or omissions; and

          (d) no Trustee may claim any lien or charge on any Trust Property as a
     result of any amount due pursuant to this Section 8.6.

                                       49

 
     SECTION 8.7.  Property Trustee Required; Eligibility of Trustees.

     (a) There shall at all times be a Property Trustee hereunder with respect
to the Trust Securities.  The Property Trustee shall be a Person that is
eligible pursuant to the Trust Indenture Act to act as such and has a combined
capital and surplus of at least $50,000,000.  If any such Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of its supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such person shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published.  If at any time the Property Trustee with respect to the
Trust Securities shall cease to be eligible in accordance with the provisions of
this Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.

     (b) There shall at all times be one or more Administrative Trustees
hereunder with respect to the Trust Securities.  Each Administrative Trustee
shall be either a natural person who is at least 21 years of age or a legal
entity that shall act through one or more persons authorized to bind that
entity.

     (c) There shall at all times be a Delaware Trustee with respect to the
Trust Securities.  The Delaware Trustee shall either be (i) a natural person who
is at least 21 years of age and a resident of the State of Delaware or (ii) a
legal entity with its principal place of business in the State of    Delaware
and that otherwise meets the requirements of applicable Delaware law that shall
act through one or more persons authorized to bind such entity.

     SECTION 8.8.  Conflicting Interests.  If the Property Trustee has or shall
acquire a conflicting interest within the meaning of the Trust Indenture Act,
the Property Trustee shall either eliminate such interest or resign, to the
extent and in the manner provided by, and subject to the provisions of, the
Trust Indenture Act and this Trust Agreement.

     SECTION 8.9.  Resignation and Removal; Appointment of Successor.

     (a) Subject to Sections 8.9(b) and 8.9(c), Trustees (the "Relevant
Trustee") may be appointed or removed without cause at any time: (i) until the
issuance of any Trust Securities, by written instrument executed by the
Depositor; and (ii) after the issuance of any Securities, by vote of the Holders
of a majority in liquidation amount of the Common Securities voting as a class.

     (b) The Trustee that acts as Property Trustee shall not be removed in
accordance with Section 8.9(a) until a successor possessing the qualifications
to act as a Property Trustee under Section 8.7 (a "Successor Property Trustee")
has been appointed and has accepted such  appointment by instrument executed by
such Successor Property Trustee and delivered to the Trust, the Depositor and
the removed Property Trustee.

     (c) The Trustee that acts as Delaware Trustee shall not be removed in
accordance with Section 8.9(a) until a successor possessing the qualifications
to act as Delaware Trustee under Section 8.7 (a "Successor Delaware Trustee")
has been appointed and has accepted such appointment by instrument executed by
such Successor Delaware Trustee and delivered to the Trust, the Depositor and
the removed Delaware Trustee.

                                       50

 
     (d) A Trustee appointed to office shall hold office until his, her or its
successor shall have been appointed or until his, her or its death, removal,
resignation, dissolution or liquidation.  Any Trustee may resign from office
(without need for prior or subsequent accounting) by an instrument in writing
signed by the Trustee and delivered to the Depositor and the Trust, which
resignation shall take effect upon such delivery or upon such later date as is
specified therein; provided, however, that:

          (i) No such resignation of the Trustee that acts as the Property
     Trustee shall be effective:

               (1) until a Successor Property Trustee has been appointed and has
          accepted such appointment by instrument executed by such Successor
          Property Trustee and delivered to the Trust, the Sponsor and the
          resigning Property Trustee; or

               (2) until the assets of the Trust have been completely liquidated
          and the proceeds thereof distributed to the holders of the Securities;
          and

          (ii) no such resignation of the Trustee that acts as the Delaware
     Trustee shall be effective until a Successor Delaware Trustee has been
     appointed and has accepted such appointment by instrument executed by such
     Successor Delaware Trustee and delivered to the Trust, the Depositor and
     the resigning Delaware Trustee.

     (e) The Holders of the Common Securities shall use their best efforts to
promptly appoint a Successor Property Trustee or Successor Delaware Trustee, as
the case may be, if the Property Trustee or the Delaware Trustee delivers an
instrument of resignation in accordance with Section
8.9(d).

     (f) If no Successor Property Trustee or Successor Delaware Trustee shall
have been appointed and accepted appointment as provided in this Section 8.9
within 60 days after delivery    pursuant to this Section 8.9 of an instrument
of resignation or removal, the Property Trustee or Delaware Trustee resigning or
being removed, as applicable, may petition any court of competent jurisdiction
for appointment of a Successor Property Trustee or Successor Delaware Trustee.
Such court may thereupon, after prescribing such notice, if any, as it may deem
proper and prescribe, appoint a Successor Property Trustee or Successor Delaware
Trustee, as the case may be.

     (g) No Property Trustee or Delaware Trustee shall be liable for the acts or
omissions to act of any Successor Property Trustee or Successor Delaware
Trustee, as the case may be.

     (h) The Property Trustee shall give notice of each resignation and each
removal of a Trustee and each appointment of a successor Trustee to all
Securityholders in the manner provided in Section 10.8 and shall give notice to
the Depositor.  Each notice shall include the name of the     successor Relevant
Trustee and the address of its Corporate Trust Office if it is the Property
Trustee.

                                       51

 
     (i) Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or a Delaware Trustee who is
a natural person dies or becomes, in the opinion of the Depositor, incompetent
or incapacitated, the vacancy created by such death, incompetence or incapacity
may be filled by (a) the unanimous act of the remaining Administrative Trustees
if there are at least two of them or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirement
for Administrative Trustees or the Delaware Trustee, as the case may be, set
forth in Section 8.7).

     (j) The indemnity provided to a Trustee under Section 8.6 shall survive any
Trustee's resignation or removal.

     SECTION 8.10.  Acceptance of Appointment by Successor.  In case of the
appointment hereunder of a successor Trustee, such successor Trustee so
appointed shall execute, acknowledge and deliver to the Trust and to the
retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee; but, on the request of the
Depositor or the successor Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on the
request of the Depositor or the successor Trustee, such retiring Trustee shall,
upon payment of its charges, execute and deliver an instrument transferring to
such successor Trustee all the rights, powers and trusts of the retiring Trustee
and if the Property Trustee is the resigning Trustee shall duly assign, transfer
and deliver to the successor Trustee all property and money held by such
retiring Property Trustee hereunder. In case of the appointment hereunder of a
successor Relevant Trustee, the retiring Relevant Trustee and each successor
Relevant Trustee shall execute and deliver an amendment hereto wherein each
successor Relevant Trustee shall accept such appointment and which (a) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Relevant Trustee all the rights,
powers, trusts and duties of the retiring Relevant Trustee and (b) shall add to
or change any of the provisions of this Trust Agreement as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more
than one Relevant Trustee, it being understood that nothing herein or in such
amendment shall constitute such Relevant Trustees co-trustees and upon the
execution and delivery of such amendment the resignation or removal of the
retiring Relevant Trustee shall become effective to the extent provided therein
and each such successor Relevant Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Relevant Trustee; but, on request of the Trust or any successor
Relevant Trustee, such retiring Relevant Trustee shall duly assign, transfer and
deliver to such successor Relevant Trustee all Trust Property, all proceeds
thereof and money held by such retiring Relevant Trustee hereunder.

     Upon request of any such successor Relevant Trustee, the Trust shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Relevant Trustee all such rights, powers and trusts
referred to in the first or second preceding paragraph, as the case may be. No
successor Relevant Trustee shall accept its appointment unless at the time of
such acceptance such successor Relevant Trustee shall be qualified and eligible
under this Article.

     SECTION 8.11.  Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee 

                                       52

 
that is not a natural person may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which such Relevant Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of such Relevant Trustee, shall be the successor of such Relevant Trustee
hereunder, provided such corporation shall be otherwise qualified and eligible
under this Article, without the execution or filing of any paper or any further
act on the part of any of the parties hereto.

     SECTION 8.12.  Preferential Collection of Claims Against Depositor or
Trust. If and when the Property Trustee shall be or become a creditor of the
Depositor or the Trust (or any other obligor upon the Debentures or the Trust
Securities), the Property Trustee shall be subject to and shall take all actions
necessary in order to comply with the provisions of the Trust Indenture Act
regarding the collection of claims against the Depositor or Trust (or any such
other obligor).

     SECTION 8.13.  Reports by Property Trustee.

     (a) To the extent required by the Trust Indenture Act, within 60 days after
December 31 of each year commencing with December 31, 1996 the Property Trustee
shall transmit to all Securityholders in accordance with Section 10.8 and to the
Depositor, a brief report dated as of such December 31 with respect to:

          (i) its eligibility under Section 8.7 or, in lieu thereof, if to the
     best of its knowledge it has continued to be eligible under said Section, a
     written statement to such effect;

          (ii) a statement that the Property Trustee has complied with all of
     its obligations under this Trust Agreement during the twelve-month period
     (or, in the case of the initial report, the period since the Closing Date)
     ending with such December 31 or, if the Property Trustee has not complied
     in any material respects with such obligations, a description of such
     noncompliance; and

          (iii)  any change in the property and funds in its possession as
     Property Trustee since the date of its last report and any action taken by
     the Property Trustee in the performance of its duties hereunder which it
     has  not previously reported and which in its opinion materially affects
     the Trust Securities.

     (b) In addition, the Property Trustee shall transmit to Securityholders
such reports concerning the Property Trustee and its actions under this Trust
Agreement as may be required pursuant to the Trust Indenture Act at the times
and in the manner provided pursuant thereto.

     (c) A copy of such report shall, at the time of such transmissions to
Holders, be filed by the Property Trustee with each national securities exchange
or self-regulatory organization upon which the Trust Securities are listed, with
the Commission and with the Depositor.

     SECTION 8.14.  Reports to the Property Trustee.  The Depositor and the
Administrative Trustees on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) 

                                       53

 
and the compliance certificate required by Section 314(a) of the Trust Indenture
Act in the form, in the manner and at the times required by Section 314 of the
Trust Indenture Act.

     SECTION 8.15.  Evidence of Compliance with Conditions Precedent.  Each of
the Depositor and the Administrative Trustees on behalf of the Trust shall
provide to the Property Trustee such evidence of compliance with any conditions
precedent, if any, provided for in this Trust Agreement that relate to any of
the matters set forth in Section 314(c) of the Trust Indenture Act.  Any
certificate or opinion required to be given by an officer pursuant to Section
314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers'
Certificate.

     SECTION 8.16.  Number of Trustees.

     (a) The number of Trustees shall be five, provided that the Holder of all
of the Common Securities by written instrument may increase or decrease the
number of Administrative Trustees.  The Property Trustee and the Delaware
Trustee may be the same Person.

     (b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 8.16(a), or if the
number of Trustees is increased pursuant to Section 8.16(a), a vacancy shall
occur.

     (c) The death, resignation, retirement, removal, bankruptcy, incompetence
or incapacity to perform the duties of a Trustee shall not operate to annul the
Trust.  Whenever a vacancy in the number of Administrative Trustees shall occur,
until such vacancy is filled by the appointment of an Administrative Trustee in
accordance with Section 8.9, the Administrative Trustees in office, regardless
of their number (and notwithstanding any other provision of this Agreement),
shall have all the powers granted to the Administrative Trustees and shall
discharge all the duties imposed     upon the Administrative Trustees by this
Trust Agreement.

     SECTION 8.17.  Delegation of Power.

     (a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any other natural person over the age of 21 his or
her power for the purpose of executing any documents contemplated in Section
2.7(a), including any registration statement or amendment thereof filed with the
Commission, or making any other governmental filing.

     (b) The Administrative Trustees shall have power to delegate from time to
time to such of their number or to the Depositor the doing of such things and
the execution of such instruments either in the name of the Trust or the names
of the Administrative Trustees or otherwise as the Administrative Trustees may
deem expedient, to the extent such delegation is not prohibited by applicable
law or contrary to the provisions of the Trust, as set forth herein.

                                       54

 
                                   ARTICLE 9
                      TERMINATION, LIQUIDATION AND MERGER

     SECTION 9.1.  Termination upon Expiration Date.  Unless earlier terminated,
the Trust shall automatically terminate on November 25, 2041 (the "Expiration
Date"), following the distribution of the Trust Property in accordance with
Section 9.4.

     SECTION 9.2.  Early Termination.  The first to occur of any of the
following events is an "Early Termination Event":

     (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of, the Depositor;

     (b) the occurrence of a Special Event except in the case of a Tax Event
following which the Depositor has elected (i) to pay any Additional Sums (in
accordance with Section 4.4) such that the net amount received by Holders of
Preferred Securities in respect of Distributions are not reduced as a result of
such Tax Event and the Depositor has not revoked any such election or failed to
make such payments or (ii) to redeem all or some of the Debentures pursuant to
Section 4.4(a);

     (c) the redemption, conversion or exchange of all of the Trust Securities;

     (d) an order for dissolution of the Trust shall have been entered by a
court of competent jurisdiction; and

     (e) receipt by the Property Trustee of written notice from the Depositor at
any time (which direction is optional and wholly within the discretion of the
Depositor) of its intention to terminate the Trust and distribute the
Debentures in exchange for the Preferred Securities.

     SECTION 9.3.  Termination.  The respective obligations and responsibilities
of the Trustees and the Trust created and continued hereby shall terminate upon
the latest to occur of the following: (a) the distribution by the Property
Trustee to Securityholders upon the liquidation of the Trust pursuant to Section
9.4, or upon the redemption of all of the Trust Securities pursuant to Section
4.2, of all amounts required to be distributed hereunder upon the final payment
of the Trust Securities; (b) the payment of all expenses owed by the Trust; and
(c) the discharge of all administrative duties of the Administrative Trustees,
including the performance of any tax reporting obligations with respect to the
Trust or the Securityholders.

     SECTION 9.4.  Liquidation.

     (a) If an Early Termination Event specified in clause (a), (b), (d) or (e)
of Section 9.2 occurs or upon the Expiration Date, the Trust shall be liquidated
by the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder an aggregate principal amount
of Debentures equal to the aggregate Liquidation Amount of Trust Securities held
by such Holder, subject to Section 9.4(d). Notice of liquidation shall be given
by the Property Trustee by first-class mail, postage prepaid, mailed not later
than 30 nor more than 60 days prior to the Liquidation Date 

                                       55

 
to each Holder of Trust Securities at such Holder's address as it appears in the
Securities Register. All notices of liquidation shall:

          (i)  state the Liquidation Date;

          (ii) state that, from and after the Liquidation Date, the Trust
     Securities will no longer be deemed to be Outstanding and any Trust
     Securities Certificates not surrendered for exchange will be deemed to
     represent an  aggregate principal amount of Debentures equal to the
     aggregate Liquidation Amount of Preferred Securities held by such Holder;
     and

          (iii)  provide such information with respect to the mechanics by which
     Holders may exchange Trust Securities Certificates for Debentures, or, if
     Section 9.4(d) applies, receive a Liquidation Distribution, as the
     Administrative Trustees or the Property Trustee shall deem appropriate.

     (b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect the
liquidation of the Trust and distribution of the Debentures to Securityholders,
the Property Trustee shall establish a record date for such distribution (which
shall be not more than 45 days prior to the Liquidation Date) and, either itself
acting as exchange agent or through the appointment of a separate exchange
agent, shall establish such procedures as it shall deem appropriate to effect
the distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.

     (c) Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation
Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii)
the Clearing Agency or its nominee, as the record holder of such Trust
Securities, will receive a registered global certificate or certificates
representing the Debentures to be delivered upon such distribution and (iii) any
Trust Securities Certificates not held by the Clearing Agency will be deemed to
represent an aggregate principal amount of Debentures equal to the aggregate
Liquidation Amount of Preferred Securities held by such Holders, and bearing
accrued and unpaid interest in an amount equal to the accrued and unpaid
Distributions on such Trust Securities until such certificates are presented to
the Property Trustee for transfer or reissuance.

     (d) In the event that, notwithstanding the other provisions of this Section
9.4, whether because of an order for dissolution entered by a court of competent
jurisdiction or otherwise, distribution of the Debentures in the manner provided
herein is determined by the Property Trustee not to be practicable, the Trust
Property shall be liquidated, and the Trust shall be dissolved, wound-up or
terminated, by the Property Trustee in such manner as the Property Trustee
determines.  In such event, on the date of  the dissolution, winding up or other
termination of the Trust, Securityholders will be entitled to receive out of the
assets of the Trust available for distribution to Securityholders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to the Liquidation Amount per Trust Security plus accrued
and unpaid Distributions thereon to the date of payment (such amount being the
"Liquidation Distribution").  If, upon any such dissolution, winding-up or
termination, the Liquidation Distribution can be paid only in part because the
Trust has insufficient assets available to pay in full the aggregate Liquidation
Distribution, then, subject to the next succeeding sentence, the amounts payable
by the Trust on the Trust Securities shall be paid on a pro rata basis (based
upon Liquidation Amounts).  The Holder of 

                                       56

 
the Common Securities will be entitled to receive Liquidation Distributions upon
any such dissolution, winding-up or termination pro rata (determined as
aforesaid) with Holders of Preferred Securities, except that, if a Debenture
Event of Default has occurred and is continuing, the Preferred Securities shall
have a priority over the Common Securities.

     SECTION 9.5.  Mergers, Consolidations, Amalgamations or Replacements of the
Trust.  The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other body, except pursuant
to this Section 9.5. At the request of the Depositor, with the consent of the
Administrative Trustees and without the consent of the Property Trustee, the
Delaware Trustee or the Holders of the Preferred Securities, the Trust may merge
with or into, consolidate, amalgamate, be replaced by or convey, transfer or
lease its properties and assets substantially as an entirety to a trust
organized as such under the laws of any State; provided, that (i) such successor
entity either (a) expressly assumes all of the obligations of the Trust with
respect to the Preferred Securities or (b) substitutes for the Preferred
Securities other securities having substantially the same terms as the Preferred
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Preferred Securities rank in priority with respect to
Distributions and payments upon liquidation, redemption and otherwise, (ii) the
Depositor expressly appoints a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Debentures,
(iii) the Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
other organization on which the Preferred Securities are then listed, if any,
(iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the Holders of the Preferred Securities (including any
Successor Securities) in any material respect, (vi) such successor entity has a
purpose identical to that of the Trust, (vii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease the
Depositor has received an Opinion of Counsel to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the Holders of the
Preferred Securities (including any Successor Securities) in any material
respect (other than with respect to any dilution of the Holder's interest in the
new entity), (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease neither the Trust nor such successor
entity will be required to register as an investment company under the 1940 Act,
and (c) following such merger, consolidation, amalgamation or replacement, the
Trust or such successor entity will be treated as a grantor trust for United
States Federal income tax purposes and (viii) the Depositor or any permitted
successor or assignee owns all of the Common Securities of such successor entity
and guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of Holders of 100% in
aggregate Liquidation Amount of the Preferred Securities, consolidate,
amalgamate, merge with or into, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to any other entity or permit
any other entity to consolidate, amalgamate, merge with or into, or replace it
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause the Trust or the 

                                       57

 
successor entity to be classified as other than a grantor trust for United
States Federal income tax purposes.

                                   ARTICLE 10
                            MISCELLANEOUS PROVISIONS

     SECTION 10.1.  Limitation of Rights of Securityholders.  The death or
incapacity of any person having an interest, beneficial or otherwise, in Trust
Securities shall not operate to terminate this Trust Agreement, nor entitle the
legal representatives or heirs of such person or any Securityholder for such
person to claim an accounting, take any action or bring any proceeding in any
court for a partition or winding-up of the arrangements contemplated hereby, nor
otherwise affect the rights, obligations and liabilities of the parties hereto
or any of them.

     SECTION 10.2.  Amendment.

     (a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, (i) to cure any
ambiguity, correct or supplement any provision herein which may be inconsistent
with any other provision herein, or to make any other provisions with respect to
matters or questions arising under this Trust Agreement, which shall not be
inconsistent with the other provisions of this Trust Agreement, (ii) to modify,
eliminate or add to any provisions of this Trust Agreement to such extent as
shall be necessary to ensure that the Trust will be classified for United States
Federal income tax purposes as a grantor trust at all times that any Trust
Securities are Outstanding or to ensure that the Trust will not be required to
register as an "investment company" under the 1940 Act, or be classified as
other than a grantor trust for United States Federal income tax purposes, or
(iii) to comply with the requirements of the Commission in order to effect or
maintain the qualification of this Trust Agreement under the Trust Indenture
Act; provided, however, that in the case of clause (i), such action shall not
adversely affect in any material respect the interests of any Securityholder,
and any amendments of this Trust Agreement shall become effective when notice
thereof is given to the Securityholders.

     (b) Except as provided in Section 10.2(c) hereof, any provision of this
Trust Agreement may be amended by the Trustees and the Depositor with (i) the
consent of Holders representing not less than a majority (based upon Liquidation
Amounts) of the Trust Securities then Outstanding, acting as a single class, and
(ii) receipt by the Trustees of an Opinion of Counsel to the effect that such
amendment or the exercise of any power granted to the Trustees in accordance
with such amendment will not affect the Trustee's status as a grantor trust for
United States Federal income tax purposes or the Trust's exemption from the
status of an "investment company" under the 1940 Act, provided, however, if any
amendment or proposal that would adversely affect the powers, preferences or
special rights of the Trust Securities, whether by way of amendment or
otherwise, would adversely affect only the Preferred Securities or only the
Common Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of a majority in liquidation amount of such class of
Trust Securities.

     (c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance 

                                       58

 
with Section 6.3 or 6.6 hereof), this Trust Agreement may not be amended to (i)
change the amount or timing of any Distribution on the Trust Securities or
otherwise adversely affect the amount of any distribution required to be made in
respect of the Trust Securities as of a specified date or (ii) restrict the
right of a Securityholder to institute suit for the enforcement of any such
payment on or after such date; notwithstanding any other provision herein,
without the unanimous consent of the Securityholders (such consent being
obtained in accordance with Section 6.3 or 6.6 hereof), this paragraph (c) of
this Section 10.2 may not be amended.

     (d) Notwithstanding any other provisions of this Trust Agreement, no
Trustee shall enter into or consent to any amendment to this Trust Agreement
which would cause the Trust to fail or cease to qualify for the exemption from
the status of an "investment company" under the 1940 Act or be classified as
other than a grantor trust for United States Federal income tax purposes.

     (e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor, this Trust Agreement may not be amended in
a manner which imposes any additional obligation on the Depositor.

     (f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustees shall promptly provide to the Depositor a copy of such
amendment.

     (g) Neither the Property Trustee nor the Delaware Trustee shall be required
to enter into any amendment to this Trust Agreement which affects its own
rights, duties or immunities under this Trust Agreement.  The Property Trustee
shall be entitled to receive an Opinion of Counsel and an Officers' Certificate
stating that any amendment to this Trust Agreement is in compliance with this
Trust Agreement.

     SECTION 10.3.  Separability.  In case any provision in this Trust Agreement
or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

     SECTION 10.4.  GOVERNING LAW.  THIS TRUST AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND TRUSTEES WITH RESPECT
TO THIS TRUST AGREEMENT IN THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO ITS
CONFLICT OF LAWS PRINCIPLES AND EXCLUDING SECTIONS 3540 AND 3561 OF TITLE 12
THEREOF.

     SECTION 10.5.  Payments Due on Non-Business Day.  If the date fixed for any
payment on any Trust Security shall be a day which is not a Business Day, then
such payment need not be made on such date but may be made on the next
succeeding day which is a Business Day except as otherwise provided in Section
4.1(a) and Section 4.2(d)), with the same force and effect as though made on the
date fixed for such payment, and no interest shall accrue thereon for the period
after such date.

     SECTION 10.6.  Successors.  This Trust Agreement shall be binding upon and
shall inure to the benefit of any successor to the Depositor, the Trust or the
Relevant Trustee, including 

                                       59

 
any successor by operation of law. Except in connection with a consolidation,
merger or sale involving the Depositor that is permitted under Article 8 of the
Indenture and pursuant to which the assignee agrees in writing to perform the
Depositor's obligations hereunder, the Depositor shall not assign its
obligations hereunder.

     SECTION 10.7.  Headings.  The Article and Section headings are for
convenience only and shall not affect the construction of this Trust Agreement.

     SECTION 10.8.  Reports, Notices and Demands.  Any report, notice, demand or
other communications which by any provision of this Trust Agreement is required
or permitted to be given or served to or upon any Securityholder or the
Depositor may be given or served in writing by deposit thereof, first-class
postage prepaid, in the United States mail, hand delivery or facsimile
transmission, in each case, addressed, (a) in the case of a Holder of Preferred
Securities, to such Holder as such Holder's name and address may appear on the
Securities Register; and (b) in the case of the Holder of the Common Securities.
Any notice to Preferred Securityholders shall also be given to such Owners as
have, within two years preceding the giving of such notice, filed their names
and addresses with the Property Trustee for that purpose.  Such notice, demand
or other communication to or upon a Securityholder shall be deemed to have been
sufficiently given, or made, for all purposes, upon hand delivery, mailing or
transmission. Any notice, demand or other communication which by any provision
of this Trust Agreement is required or permitted to be given or served to or
upon the Trust, the Property Trustee, the Delaware Trustee or the Administrative
Trustees shall be given in writing addressed (until another address is published
by the Trust) as follows: (a) with respect to the Property Trustee, to IBJ
Schroder Bank & Trust Company, One State Street, 11th Floor, New York, New York
10004, Attention: Corporate Trust & Agency Department, (b) with respect to the
Delaware Trustee, to Delaware Trust Capital Management, Inc., 300 Delaware
Avenue, 9th Floor, Wilmington, Delaware 19801, Attention: Corporate Trust
Administration, with a copy of any such notice to the Property Trustee at its
address above, and (c) with respect to the Administrative Trustees, to them at
the address for notices to the Depositor, marked "Attention: Secretary".  Such
notice, demand or other communication to or upon the Trust or the Property
Trustee shall be deemed to have been sufficiently given or made only upon actual
receipt of the writing by the Trust or the Property Trustee.

     SECTION 10.9.  Agreement Not to Petition.  Each of the Trustees and the
Depositor agrees for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
9, it shall not file, or join in the filing of, a petition against the Trust
under any bankruptcy, insolvency, reorganization or other similar law
(including, without limitation, the United States Bankruptcy Code)
(collectively, "Bankruptcy Laws") or otherwise join in the commencement of any
proceeding against the Trust under any Bankruptcy Law.  In the event the
Depositor takes action in violation of this Section 10.9, the Property Trustee
agrees, for the benefit of Securityholders, that, at the expense of the
Depositor, it shall file an answer with the bankruptcy court or otherwise
properly contest the filing of such petition by the Depositor against the Trust
or the commencement of such action and raise the defense that the Depositor has
agreed in writing not to take such action and should be stopped and precluded
therefrom and such other defenses, if any, as counsel for the Trustee or the
Trust may assert.  The provisions of this Section 10.9 shall survive the
termination of this Trust Agreement.

                                       60

 
     SECTION 10.10.  Trust Indenture Act; Conflict with Trust Indenture Act.

     (a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.

     (b) The Property Trustee shall be the only Trustee which is the trustee for
the purposes of the Trust Indenture Act.

     (c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control.  If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or to be excluded, as the case may be.

     (d) The application of the Trust Indenture Act to this Trust Agreement
shall not affect the nature of the Trust Securities as equity securities
representing undivided beneficial interests in the assets of the Trust.

     SECTION 10.11.  ACCEPTANCE OF TERMS OF TRUST AGREEMENT, GUARANTEE AND
INDENTURE.  THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST
THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR BENEFICIAL OWNER (INCLUDING THE
ACCEPTANCE OF ANY DISTRIBUTION ON OR AFTER THE DATE HEREOF), WITHOUT ANY
SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN
SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND
AGREEMENT TO SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE
INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER
AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE
BINDING, OPERATIVE AND EFFECTIVE AS THE TRUST AND SUCH SECURITYHOLDER AND SUCH
OTHERS.

     SECTION 10.12.  Counterparts.  This Trust Agreement may contain more than
one counterpart of the signature page and this Trust Agreement may be executed
by the affixing of the signature of each of the Trustees to one of such
counterpart signature pages.  All of such counterpart signature pages shall be
read as though one, and they shall have the same force and effect as though
all of the signers had signed a single signature page.


                                   ARTICLE 11
                              REGISTRATION RIGHTS

                                       61

 
     SECTION 11.1.  Registration Rights.  The Holders of the Preferred
Securities, the Debentures and the Guarantee and the shares of Common Stock of
the Depositor issuable upon conversion of the Debentures and/or the Preferred
Securities (collectively, the "Registrable Securities") are entitled to the
benefits of a Registration Rights Agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to
be duly executed as of the day and year first above written.

                              HMC MERGER CORPORATION
                              as Depositor


                              By:______________________________
                                    Name:
                                    Title:


                              IBJ SCHRODER BANK & TRUST COMPANY,
                              as Property Trustee


                              By:______________________________
                                    Name:
                                    Title:

                              DELAWARE TRUST CAPITAL MANAGEMENT,
                              INC., as Delaware Trustee



                              By:______________________________
                                    Name:
                                    Title:


                              _________________________________
                              Robert E.  Parsons, Jr.,
                              as Administrative Trustee


                              _________________________________
                              Ed Walter
                              as Administrative Trustee

                                       62

 
                              _________________________________
                              Christopher G.  Townsend,
                              as Administrative Trustee

                                       63

 
                                   EXHIBIT A

                              CERTIFICATE OF TRUST
                                       OF
                         HOST MARRIOTT FINANCIAL TRUST
                                        


                                      A-1

 
                                   EXHIBIT B

                              FORM OF CERTIFICATE
                              DEPOSITARY AGREEMENT


                                      B-1

 
                                   EXHIBIT C

THE SECURITIES EVIDENCED HEREBY AND THE COMMON STOCK ISSUABLE UPON THEIR
CONVERSION HAVE NOT BEEN REGISTERED UNDER THE U.S.  SECURITIES ACT OF 1933 (THE
"SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT (A) BY ANY INITIAL INVESTOR THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT, (1) TO A PERSON WHO
THE TRANSFEROR REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER ACQUIRING
FOR ITS OWN ACCOUNT OR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A
TRANSACTION COMPLYING WITH RULE 144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING
WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER (IF AVAILABLE) OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR (B) BY ANY INITIAL INVESTOR THAT IS A QUALIFIED INSTITUTIONAL BUYER OR BY ANY
SUBSEQUENT INVESTOR, AS SET FORTH IN CLAUSE (A) ABOVE OR TO AN INSTITUTION THAT
IS AN ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501(A)(1), (2), (3) OR (7)
IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND, IN EACH CASE (A) AND (B), IN COMPLIANCE WITH ALL APPLICABLE SECURITIES LAWS
OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. SECURITIES OWNED BY
AN INITIAL INVESTOR THAT IS NOT A QUALIFIED INSTITUTIONAL BUYER MAY NOT BE HELD
IN BOOK-ENTRY FORM AND MAY NOT BE TRANSFERRED WITHOUT CERTIFICATION THAT THE
TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS, AS PROVIDED IN THE TRUST
AGREEMENT REFERRED TO BELOW.


                                      C-1

 
                      THIS CERTIFICATE IS NOT TRANSFERABLE

Certificate Number                                   Number of Common Securities

                    Certificate Evidencing Common Securities
                                       of
                         Host Marriott Financial Trust

                               Common Securities
                  (liquidation amount $50 per Common Security)

     Host Marriott Financial Trust, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"), hereby certifies that Host Marriott
Corporation (the "Holder") is the registered owner of _________ common
securities of the Trust representing undivided beneficial interests in the
assets of the Trust (the "Common Securities").  In accordance with Section 5.10
of the Trust Agreement (as defined below) the Common Securities are not
transferable and any attempted transfer hereof shall be void.  The designations,
rights, privileges, restrictions, preferences and other terms and provisions of
the Common Securities are set forth in, and this certificate and the Common
Securities represented hereby are issued and shall in all respects be subject to
the terms and provisions of, the Amended and Restated Trust Agreement of the
Trust dated as of December 2, 1996, as superseded by operation of law pursuant
to a merger by that certain Amended and Restated Agreement of Trust dated as of
December 29, 1998, as the same may be amended from time to time (the "Trust
Agreement") including the designation of the terms of the Common Securities as
set forth therein.  The Holder is entitled to the benefits of the Common
Securities Guarantee Agreement entered into by Host Marriott Corporation, a
Delaware corporation, and IBJ Schroder Bank & Trust Company, as Guarantee
Trustee, dated as of December 2, 1996 (the "Guarantee"), to the extent provided
therein.  The Trust will furnish a copy of the Trust Agreement and the Guarantee
to the Holder without charge upon written request to the Trust at its principal
place of business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

     IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has
executed this certificate this ___ day of ________ 199_.

                              HOST MARRIOTT FINANCIAL TRUST


                              By:__________________________________
                                    Name:
                                    As Administrative Trustee

                                      C-2

 
                PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION

     This is one of the Common Securities referred to in the within-mentioned
Trust Agreement.

Dated:_______________________

                              IBJ SCHRODER BANK & TRUST COMPANY,
                              as Property Trustee


                              By:___________________________________
                                    Authorized Signatory

                                      C-3

 
                                   EXHIBIT D
                                        
IF THE PREFERRED SECURITY IS TO BE A GLOBAL CERTIFICATE, INSERT - This Preferred
Security is a Book-Entry Preferred Securities Certificate within the meaning of
the Trust Agreement hereinafter referred to and is registered in the name of The
Depository Trust Company ("DTC") or a nominee of DTC.  This Preferred Security
is exchangeable for Preferred Securities registered in the name of a person
other than DTC or its nominee only in the limited circumstances described in the
Trust Agreement and no transfer of this Preferred Security (other than a
transfer of this Preferred Security as a whole by DTC to a nominee of DTC or by
a nominee of DTC to DTC or another nominee of DTC) may be registered except in
limited circumstances.

Unless this Preferred Security is presented by an authorized representative of
DTC (55 Water Street, New York), to Host Marriott Financial Trust or its agent
for registration of transfer, exchange or payment, and any Preferred Security
issued is registered in the name of Cede & Co.  or such other name as requested
by an authorized representative of DTC and any payment hereon is made to Cede &
Co.  or to such other entity as is requested by an authorized representative of
DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.

Certificate Number                                Number of Preferred Securities

                                                        CUSIP NO.

                  Certificate Evidencing Preferred Securities
                                        
                                       of

                         Host Marriott Financial Trust

                    6 3/4% Convertible Preferred Securities
                (liquidation amount $50 per Preferred Security)

                                      D-1

 
     Host Marriott Financial Trust, a statutory business trust formed under the
laws of the State of Delaware (the "Trust"), hereby certifies that ______ (the
"Holder") is the registered owner of __________ preferred securities of the
Trust representing an undivided beneficial interest in the assets of the Trust
and designated the Host Marriott Financial Trust 6 3/4% Convertible Preferred
Securities (liquidation amount $50 per Preferred Security) (the "Preferred
Securities").  The Preferred Securities are transferable on the books and
records of the Trust, in person or by a duly authorized attorney, upon surrender
of this certificate duly endorsed and in proper form for transfer as provided in
Section 5.4 of the Trust Agreement (as defined below).  The designations,
rights, privileges, restrictions, preferences and other terms and provisions of
the Preferred Securities are set forth in, and this certificate and the
Preferred Securities represented hereby are issued and shall in all respects be
subject to the terms and provisions of, the Amended and Restated Trust Agreement
of the Trust dated as of December 2, 1996 as superseded by operation of law
pursuant to a merger by that certain Amended and Restated Agreement of Trust
dated as of December 29, 1998, as the same may be amended from time to time (the
"Trust Agreement") including the designation of the terms of Preferred
Securities as set forth therein.  The Holder is entitled to the benefits of the
Guarantee Agreement entered into by Host Marriott Corporation, a Delaware
corporation, and IBJ Schroder Bank & Trust Company, as Guarantee Trustee, dated
as of December 2, 1996 (the "Guarantee"), to the extent provided therein.  The
Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder
without charge upon written request to the Trust at its principal place of
business or registered office.

     Upon receipt of this certificate, the Holder is bound by the Trust
Agreement and is entitled to the benefits thereunder.

                                      D-2

 
     IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has
executed this certificate this ___ day of ________ 199_.


                              HOST MARRIOTT FINANCIAL TRUST


                              By:__________________________________
                                    Name:
                                    An Administrative Trustee

                              PROPERTY TRUSTEE'S CERTIFICATE OF
                              AUTHENTICATION

                              This is one of the Preferred Securities referred
                              to in the within-mentioned Trust Agreement.


Dated:____________________


                              IBJ SCHRODER BANK & TRUST COMPANY,
                              as Property Trustee

                              BY:___________________________________
                                    Authorized Signatory

                                      D-3

 
                                  ASSIGNMENT
                                        
     FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred
Security to:

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert assignee's social security or tax identification number)

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Insert address and zip code of assignee)

and irrevocably appoints

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

agent to transfer this Preferred Security Certificate on the books of the Trust.
The agent may substitute another to act for him or her.

Date:_______________

Signature:_________________

(Sign exactly as our name appears on the other side of this Preferred Security
Certificate)

                                      D-4

 
                      TO BE ATTACHED TO GLOBAL CERTIFICATE

                                   SCHEDULE A
                                        
     The initial liquidation amount of this Global Certificate shall be $______.
The following increases or decreases in the liquidation amount of this Global
Certificate have been made:

Amount of increase in Liquidation Amount of this Liquidation Amount Global Certificate of this Global Signature of including upon Amount of decrease Certificate authorized officer exercise of in Liquidation following such of Trustee or over-allotment Amount of this decrease or Securities Date Made option Global Certificate increase Custodian - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
D-5 EXHIBIT E -- Form of Regulation S Certificate REGULATION S CERTIFICATE (For transfers pursuant to Sections 5.4(b)(i), (iii) and (v) of the Trust Agreement) Property Trustee Attention: Corporate Trust Department Re: 6 3/4% Convertible Quarterly Income Preferred Securities of Host Marriott Financial Trust (the "Securities") Reference is made to the Amended and Restated Trust Agreement, dated as of December 29, 1998 (the "Trust Agreement"), among HMC Merger Corporation (the "Company"), IBJ Schroder Bank & Trust Company, Delaware Trust Capital Management, Inc. and the Administrative Trustees named therein. Terms used herein and defined in the Trust Agreement or in Regulation S or Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to __________ shares of Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s).___________________ CERTIFICATE No(s).______________________ The Person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner". If the Specified Securities are represented by a Global Certificate, they are held through the Clearing Agency participants in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Certificate, they are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be transferred to a person (the "Transferee") who will take delivery in the form of a Regulation S Security. In connection with such transfer, the Owner hereby certifies that, unless such transfer is being effected pursuant to an effective registration statement under the Securities Act, it is being effected in accordance with Rule 904 or Rule 144 under the Securities Act and with all applicable securities laws of the states of the United States and other jurisdictions. E-1 Accordingly, the Owner hereby further certifies as follows: (1) Rule 904 Transfers. If the transfer is being effected in accordance with Rule 904: (A) the Owner is not a distributor of the Securities, an affiliate of the Company or any such distributor or a person acting on behalf of any of the foregoing; (B) the offer of the Specified Securities was not made to a person in the United States; (C) either: (i) at the time the buy order was originated, the Transferee was outside the United States or the Owner and any person acting on its behalf reasonably believed that the Transferee was outside the United States, or (ii) the transaction is being executed in, on or through the facilities of the Eurobond market, as regulated by the Association of International Bond Dealers, or another designated offshore securities market and neither the Owner nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States; (D) no directed selling efforts have been made in the United States by or on behalf of the Owner or any affiliate thereof; (E) if the Owner is a dealer in securities or has received a selling concession, fee or other remuneration in respect of the Specified Securities, and the transfer is to occur during the Restricted Period, then the requirements of Rule 904(c)(1) have been satisfied; and (F) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (2) Rule 144 Transfers. If the transfer is being effected pursuant to Rule 144: (A) the transfer is occurring after a holding period of at least two years (computed in accordance with paragraph (d) of Rule 144) has lapsed since the Specified Securities were last acquired from the Trust or from an affiliate of the Trust, whichever is later, and is being effected in accordance with the applicable amount, manner of sale and notice requirements of Rule 144; or (B) the transfer is occurring after a holding period of at least three years has elapsed since the Specified Securities were last acquired from the Trust or from an affiliate E-2 of the Trust, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Trust. This certificate and the statements contained herein are made for your benefit and the benefit of the Trust and the Purchasers. Dated:_____________________________ (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate) By:____________________________________ Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) E-3 EXHIBIT F Form of Restricted Securities Certificate RESTRICTED SECURITIES CERTIFICATE (For transfers pursuant to Sections 5.4(b)(ii), (iii), (iv) and (v) of the Trust Agreement) Property Trustee Attention: Corporate Trust Department Re: 6 3/4% Convertible Quarterly Income Preferred Securities of Host Marriott Financial Trust (the "Securities") Reference is made to the Amended and Restated Trust Agreement, dated as of December 29, 1998 (the "Trust Agreement"), among HMC Merger Corporation (the "Company"), IBJ Schroder Bank & Trust Company, Delaware Trust Capital Management, Inc. and the Administrative Trustees named therein. Terms used herein and defined in the Trust Agreement or in Regulation S or Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to ___________ shares of Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s).__________________ CERTIFICATE No(s)._____________________ The Person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner". If the Specified Securities are represented by a Global Certificate, they are held through the Clearing Agency or participant in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Certificate, they are registered in the name of the Undersigned, as or on behalf of the Owner. The Owner has requested that the Specified Securities be transferred to a person (the "Transferee") who will take delivery in the form of a Restricted Security. In connection with such transfer, the Owner hereby certifies that, unless such transfer is being effected pursuant to an effective registration statement under the Securities Act, it is being effected in accordance with Rule 144A or Rule 144 under the Securities Act and all applicable securities laws of the states of the F-1 United States and other jurisdictions. Accordingly, the Owner hereby further certifies as follows: (1) Rule 144A Transfers. If the transfer is being effected in accordance with Rule 144A: (A) the Specified Securities are being transferred to a person that the Owner and any person acting on its behalf reasonably believe is a "qualified institutional buyer" within the meaning of Rule 144A, acquiring for its own account or for the account of a qualified institutional buyer; and (B) the Owner and any person acting on its behalf have taken reasonable steps to ensure that the Transferee is aware that the Owner may be relying on Rule 144A in connection with the transfer; and (2) Rule 144 Transfers. If the transfer is being effected pursuant to Rule 144: (A) the transfer is occurring after a holding period of at least two years (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Trust or from an affiliate of the Trust, whichever is later, and is being effected in accordance with the applicable amount, manner of sale, and notice requirements of rule 144; or (B) the transfer is occurring after a holding period of at least three years has elapsed since the Specified Securities were last acquired from the Trust or from an affiliate of the Trust, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Trust. (3) Regulation S Transfers. If the transfer is being effected in accordance with Regulation S: (A) the transfer is being made to a person who is not a U.S. person; or (B) the transferee is not acquiring such Specified Securities for the account or benefit of any U.S. person. This certificate and the statements contained herein are made for your benefit and benefit of the Trust and the Purchasers. Dated:_________________________ (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By:___________________________________ Name: Title: F-2 (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) F-3 EXHIBIT G Form of Unrestricted Securities Certificate UNRESTRICTED SECURITIES CERTIFICATE (For removal of Securities Act Legends pursuant to Section 5.4(c)) Property Trustee Attention: Corporate Trust Department Re: 6 3/4% Convertible Quarterly Income Preferred Securities of Host Marriott Financial Trust (the "Securities") Reference is made to the Amended and Restated Trust Agreement, dated as of December 29, 1998 (the "Trust Agreement"), among HMC Merger Corporation (the "Company"), IBJ Schroder Bank & Trust Company, Delaware Trust Capital Management, Inc. and the Administrative Trustees named therein. Terms used herein and defined in the Trust Agreement or in Regulation S or Rule 144 under the U.S. Securities Act of 1933 (the "Securities Act") are used herein as so defined. This certificate relates to _______________ shares of Securities, which are evidenced by the following certificate(s) (the "Specified Securities"): CUSIP No(s).__________________ CERTIFICATE No(s)._____________________ The person in whose name this certificate is executed below (the "Undersigned") hereby certifies that either (i) it is the sole beneficial owner of the Specified Securities or (ii) it is acting on behalf of all the beneficial owners of the Specified Securities and is duly authorized by them to do so. Such beneficial owner or owners are referred to herein collectively as the "Owner". If the Specified Securities are represented by a Global Certificate, they are held through the Clearing Agency or participant in the name of the Undersigned, as or on behalf of the Owner. If the Specified Securities are not represented by a Global Certificate, they are registered in the name of the Undersigned as or on behalf of the Owner. G-1 The Owner has requested that the Specified Securities be exchanged for Securities bearing no Securities Act Legend pursuant to Section 5.4(c) of the Trust Agreement. In connection with such exchange, the Owner hereby certifies that the exchange is occurring after a holding period of at least three years (computed in accordance with paragraph (d) of Rule 144) has elapsed since the Specified Securities were last acquired from the Trust or from an affiliate of the Trust, whichever is later, and the Owner is not, and during the preceding three months has not been, an affiliate of the Trust. The Owner also acknowledges that any future transfers of the Specified Securities must comply with all applicable securities laws of the states of the United States and other jurisdictions. This certificate and the statements contained herein are made for your benefit and the benefit of the Trust and the Purchasers. Dated:________________________ (Print the name of the Undersigned, as such term is defined in the second paragraph of this certificate.) By:________________________________ Name: Title: (If the Undersigned is a corporation, partnership or fiduciary, the title of the person signing on behalf of the Undersigned must be stated.) G-2 EXHIBIT H NOTICE OF CONVERSION To: IBJ Schroder Bank & Trust Company as Property Trustee of Host Marriott Financial Trust The undersigned owner of these Preferred Securities hereby irrevocably exercises the option to convert these Preferred Securities, or the portion below designated, into Common Stock of HOST MARRIOTT CORPORATION (the "Host Marriott Common Stock") in accordance with the terms of the Amended and Restated Trust Agreement (the "Trust Agreement"), dated as of December 29, 1998, by Robert E. Parsons, Jr., Ed Walter and Christopher G. Townsend, as Administrative Trustees, Delaware Trust Capital Management, Inc., as Delaware Trustee, IBJ Schroder Bank & Trust Company, as Property Trustee, HMC Merger Corporation, as Depositor, and by the Holders, from time to time, of individual beneficial interests in the Trust to be issued pursuant to the Trust Agreement. Pursuant to the aforementioned exercise of the option to convert these Preferred Securities, the undersigned hereby directs the Conversion Agent (as that term is defined in the Trust Agreement) to (i) exchange such Preferred Securities for a portion of the Debentures (as that term is defined in the Trust Agreement) held by the Trust (at the rate of exchange specified in the terms of the Preferred Securities set forth in the Trust Agreement) and (ii) immediately convert such Debentures on behalf of the undersigned, into Host Marriott Common Stock (at the conversion rate specified in the terms of the Preferred Securities set forth in the Trust Agreement). The undersigned does also hereby direct the Conversion Agent that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Any holder, upon the exercise of its conversion rights in accordance with the terms of the Trust Agreement and the Preferred Securities, agrees to be bound by the terms of the Registration Rights Agreement relating to the Host Marriott Common Stock issuable upon conversion of the Preferred Securities. Date:___________, _____ in whole ____ in part ____ Number of Preferred Securities to be converted: ______________________ If a name or names other than the undersigned, please indicate in the spaces below the name or names in which the shares of Host Marriott Common Stock are H-1 to be issued, along with the address or addresses of such person or persons _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ _______________________________________________________ Signature (for conversion only) Please Print or Typewrite Name and Address, Including Zip Code, and Social Security or Other Identifying Number _______________________________________________________ _______________________________________________________ _______________________________________________________ Signature Guarantee:*_________________________ - --------------- *(Signature must be guaranteed by an institution which is a member of the following recognized Signature Guaranty Programs: (i) The Securities Transfer Agent Medallion Program (STAMP); (ii) The New York Stock Exchange Medallion Program (MSP); (iii) the Stock Exchange Medallion Program (SEMP); or (iv) in such other guarantee programs acceptable to the Trustee.) H-2

 
                                                                    Exhibit 10.4



                           FIRST AMENDMENT AND WAIVER
                           --------------------------

          FIRST AMENDMENT AND WAIVER (this "Amendment"), dated as of November
25, 1998, among HOST MARRIOTT CORPORATION, a Delaware corporation ("Host
Marriott"), HOST MARRIOTT HOSPITALITY, INC., a Delaware corporation
("Hospitality"), HMH PROPERTIES, INC., a Delaware corporation ("HMH"), HOST
MARRIOTT, L.P., a Delaware limited partnership (the "Operating Partnership"),
HMC CAPITAL RESOURCES CORP., a Delaware corporation ("CRC"), the lenders (the
"Banks") party to the Credit Agreement referred to below, WELLS FARGO BANK,
NATIONAL ASSOCIATION, THE BANK OF NOVA SCOTIA and CREDIT LYONNAIS NEW YORK
BRANCH, as Co-Arrangers (the "Co-Arrangers"), and BANKERS TRUST COMPANY, as
Arranger and Administrative Agent (the "Administrative Agent").  Unless
otherwise defined herein, all capitalized terms used herein and defined in the
Credit Agreement are used herein as so defined.

                              W I T N E S S E T H:
                              - - - - - - - - - - 

          WHEREAS, Host Marriott, Hospitality, HMH, the Operating Partnership,
CRC, the Banks, the Co-Arrangers and the Administrative Agent are parties to a
Credit Agreement, dated as of June 19, 1997 and amended and restated as of
August 5, 1998 (the "Credit Agreement");

          WHEREAS, the parties hereto wish to amend the Credit Agreement, and
waive certain provisions thereunder, all as herein provided; and

          WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto agree as follows;

          NOW, THEREFORE, it is agreed:

          1.  Notwithstanding anything to the contrary contained in Section
3.02(d) of the Credit Agreement, the Banks hereby agree that HMH may issue up to
$500,000,000 of Indebtedness pursuant to Section 9.04(xi) of the Credit
Agreement (as modified pursuant to Section 3 of this Amendment) on or prior to
December 31, 1998 without any requirement to repay outstanding Term Loans
pursuant to such Section 3.02(d).

          2.  Section 9.03(a) of the Credit Agreement is hereby amended by
deleting the words "shall not be less than $100,000,000" appearing in sub-clause
(II) of the proviso to clause (vi) of such Section 9.03(a) and inserting the
words "shall not exceed $100,000,000" in lieu thereof.

          3.  Notwithstanding anything to the contrary contained in Section
9.04(xi) of the Credit Agreement or in the definition of "Permitted Refinancing
Indebtedness" appearing in Section 11.01 of the Credit Agreement, the Banks
hereby agree that HMH may issue up to $500,000,000 of additional senior notes

 
(the "Additional Senior Notes") on or prior to December 31, 1998 and on terms
and conditions (other than interest rates) no less favorable to HMH than those
set forth in the Senior Note Documents and that such indebtedness shall
constitute "Permitted Refinancing Indebtedness" incurred pursuant to such
Section 9.04(xi) so long as the Net Debt proceeds therefrom are used to
refinance Indebtedness otherwise permitted to be refinance pursuant to Section
9.04(xi) on or prior to June 30, 1999, it being understood and agreed, however,
(i) to the extent that the Net Debt Proceeds from the Additional Senior Notes
are not so used by June 30, 1999, such Indebtedness will be deemed to have been
incurred under (and will otherwise reduce the then available basket under)
Section 9.04(xii) of the Credit Agreement without any requirement by Holdings or
the borrower to demonstrate pro forma covenant compliance at such time and (ii)
                            --- -----                                          
that until the earlier of (x) such time as all of the Net Debt Proceeds from the
Additional Senior Notes are used to effect a permitted refinancing as described
above and (y) June 30, 1999, Holdings and the Borrower will ensure that there is
sufficient availability to incur the Additional Senior Notes (or the portion
thereof not theretofore used to effect such a refinancing) under Section
9.04(xii) of the Credit Agreement.

          4.  In the event (and only in the event) that more than $350,000,000
of Additional Series Notes are issued on or prior to December 31, 1998, Section
9.08 of the Credit Agreement shall be amended by deleting clause (b) thereof in
its entirety and inserting the following new clause (b) in lieu thereof:

          "(b)  Holdings and the Borrower will not permit the Unsecured Interest
     Coverage Ratio (i) for the Test Period ended closet to September 30, 1998
     to be less than 2.00:1.00, and (ii) for any Test Period ending thereafter
     to be less than 2.00:1.00."

          5.  In the event (and only in the event) that more than $350,000,000
of Additional Senior Notes are issued on or prior to December 31, 1998, Section
9.09 of the Credit Agreement shall be deleted in its entirety and the following
new Section 9.09 shall be inserted in lieu thereof:

          "9.09  Minimum Fixed Charge Coverage Ratio.  Holdings and the Borrower
                 -----------------------------------                            
     will not permit the Consolidated Fixed Charge Coverage Ratio (i) for the
     Test period ended closest to September 30, 1998 to be less than 1.50:1.00,
     (ii) for the Test Period ending closest to December 31, 1998 to be less
     than 1.45:1.00 and (iii) for any Test Period ending thereafter to be less
     than 1.50:1.00."

          6.  Section 13.07 of the Credit Agreement is hereby amended by
inserting the following new clause (c) at the end thereof:

          "(c)  Notwithstanding anything to the contrary contained in this
     Agreement, for purposes of determining compliance with Sections 9.08(b) and
     9.09 only in respect of the Test Period ending closest to March 31, 1999,
     to 

                                       2

 
     the extent that the Blackstone Acquisition, and Partnership Roll-Up
     and/or any refinancing of Indebtedness of Holdings or any of its
     Subsidiaries occurs after the last day of such Test Period and on or before
     April 1, 1999, such transactions shall be treated as having occurred on the
     first day of such Test Period."

          7.  (a)  Sections 1, 2 and 3 of this Amendment shall become effective
on the date (the "First Amendment Effective Date") when Host Marriott,
Hospitality, HMH, CRC, the Operating Partnership and the Required Banks shall
have signed a counterpart hereof (whether the same or different counterparts)
and shall have delivered (including by way of facsimile transmission) the same
to the Administrative Agent at the Notice Office and (b) Sections 4, 5 and 6 of
this Amendment shall become effective on the date when Host Marriott,
Hospitality, HMH, CRC, the Operating Partnership and the Supermajority Banks
shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office.

          8.  In order to induce the Banks to enter into this Amendment, each
Credit Party hereto hereby represents and warrants that (i) the representations,
warranties and agreements contained in Section 7 of the Credit Agreement are
true and correct in all material respects on and as of the First Amendment
Effective Date, after giving effect to this Amendment and (ii) there exists no
Default or Event of Default on the First Amendment Effective Date, after giving
effect to this Agreement.

          9.  This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.

          10.  This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.  A complete set of
counterparts shall be lodged with the US Borrower and the Administrative Agent.

          11.  THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.

          12.  From and after the First Amendment Effective Date, all references
in the Credit Agreement and in the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.

                                    *  *  *

                                       3

 
          IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.

                              HOST MARRIOTT CORPORATION

                              By:_____________________________
                                  Title:

                              HOST MARRIOTT HOSPITALITY, INC.

                              By:_____________________________
                                  Title:

                              HMH PROPERTIES, INC.

                              By:_____________________________
                                  Title:

                              HOST MARRIOTT, L.P.
                              By:  HMC Real Estate LLC its General Partners

                              By:_____________________________
                                  Title:

                              HMC CAPITAL RESOURCES CORP.

                              By:_____________________________
                                  Title:

                                       4

 
                                                                    Exhibit 10.5

               SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT
               ------------------------------------------------
                                        
          SECOND AMENDMENT AND CONSENT TO CREDIT AGREEMENT (this "Amendment"),
dated as of December 17, 1998, among HOST MARRIOTT CORPORATION, a Delaware
corporation ("Host Marriott"), HOST MARRIOTT HOSPITALITY, INC., a Delaware
corporation ("Hospitality"), HOST MARRIOTT, L.P., a Delaware limited partnership
(the "Operating Partnership"), HMC CAPITAL RESOURCES CORP., a Delaware
corporation ("CRC"), the lenders (the "Banks") party to the Credit Agreement
referred to below, WELLS FARGO BANK, NATIONAL ASSOCIATION, THE BANK OF NOVA
SCOTIA and CREDIT LYONNAIS NEW YORK BRANCH, as Co-Arrangers (the "Co-
Arrangers"), and BANKERS TRUST COMPANY, as Arranger and Administrative Agent
(the "Administrative Agent").  Unless otherwise defined herein, all capitalized
terms used herein and defined in the Credit Agreement are used herein as so
defined.

                              W I T N E S S E T H:
                              - - - - - - - - - - 

          WHEREAS, Host Marriott, Hospitality, HMH Properties, Inc. (a Delaware
corporation which has merged into the Operating Partnership pursuant to the HMH
Merger), the Operating Partnership, CRC, the Banks, the Co-Arrangers and the
Administrative Agent are parties to a Credit Agreement, dated as of June 19,
1997 and amended and restated as of August 5, 1998 (as amended, modified or
supplemented through, but not including, the date hereof, the "Credit
Agreement");

          WHEREAS, the parties hereto wish to amend the Credit Agreement, and
waive certain provisions thereunder, all as herein provided; and

          WHEREAS, subject to the terms and conditions set forth below, the
parties hereto agree as follows;

          NOW, THEREFORE, it is agreed:

          1.  Conditions Precedent to REIT Conversion.  Section 6 of the Credit
              ---------------------------------------                          
Agreement is amended as follows:

              (a) Subsidiaries Mergers. Schedule IV to the Credit Agreement
                  --------------------  -----------
shall be replaced in its entirety by Schedule IV attached hereto, and all
                                     -----------  
references in the Credit Agreement to Schedule IV (including, without
                                      -----------
limitation, in Section 6.01 thereof) shall be deemed to be references to
Schedule IV attached hereto.
- -----------

              (b) Hospitality Liquidation. All references in the Credit
                  -----------------------
Agreement (including, without limitation, in Section 6.03 thereof) to
"Hospitality Merger" shall instead be deemed to be references to "Hospitality
Liquidation" and all references to "Hospitality Merger Agreement and the other
Hospitality Merger

 
Documents" and to "Hospitality Merger Documents" shall instead be deemed to be
references to "Hospitality Liquidation Documents," as each such term is defined
below in this Amendment.

              (c) REIT Retained Assets.
                  -------------------- 

                  (i) The Credit Agreement is amended by attaching thereto a new
Schedule XI in the form of Schedule XI attached hereto, with Part I and Part II
- -----------                -----------
of such Schedule XI to list certain assets expected to be owned by Holdings from
        -----------
and after the REIT Conversion Date and with Part III of such Schedule XI to list
                                                             ----------- 
certain assets to be contributed to SLC.

                  (ii) Section 6.04(b) of the Credit Agreement is amended as
follows:

                       (A) by adding the following words after the word
"Company" appearing in the second parenthetical in clause (ii) thereof:

                       "and the assets listed in Part III of  Schedule XI";
                                                 -----------  

                       (B) by adding the following parenthetical after the word
"Units" appearing in clause (iii) thereof:

                       "(including those equity interests in the Permitted REIT
     Subsidiaries listed in Part I of Schedule XI)"; and
                                      -----------       

                       (C) by adding the following new clause (v) after clause
(iv) thereof and renumbering the existing clause (v) as clause (vi) thereof:

                       ", (v) any or all of the assets listed in Part II of
Schedule XI".
- -----------

              (d)  Third Party Consents.
                   -------------------- 

                   (i)  Lender Consents.  The Credit Agreement is amended by
                        ---------------
attaching thereto a new Schedule XII in the form of Schedule XII attached
                        ------------                ------------  
hereto, which Schedule XII lists certain Indebtedness of Holdings and its
              ------------    
Subsidiaries which is not expected to be repaid in connection with the REIT
Transaction and with respect to which a required consent of the applicable
lender to one or more components of the REIT Transaction (each a "Lender
Consent") has not been obtained as of December 16, 1998.

                   (ii) Ground Leases. The Credit Agreement is amended by
                        -------------
attaching thereto a new Schedule XIII in the form of Schedule XIII attached
                        -------------                -------------
hereto, which Schedule XIII lists ground leases with respect to certain Hotel
              ------------- 
Properties with respect to which a required consent of the applicable landlord
to one

                                      -2-

 
or more components of the REIT Transaction (each a "Landlord Consent") has not
been obtained as of December 16, 1998.

                  (iii)  Section 6.08(b) of the Credit Agreement is amended by
(i) deleting the third parenthetical appearing therein and replacing it with the
following new parenthetical:

     "(other than (i) Lender Consents with respect to Indebtedness listed on
                                                                            
     Schedule XII in an aggregate principal amount at any time not to exceed the
     ------------                                                               
     Total Unutilized Revolving Loan Commitment at such time, (ii) (I) Landlord
     Consents with respect to the ground leases listed in Part I of Schedule
                                                                    --------
     XIII, (II) until March 31, 1999, Landlord Consents with respect to the
     ----                                                                  
     ground leases listed in Part II of Schedule XIII and (III) until December
                                        -------------                         
     31, 1999, Landlord Consents with respect to the ground leases listed in
     Part III of Schedule XIII and (iii) any other approvals and/or consents
                 -------------                                              
     relating to the REIT Transaction or the other transactions contemplated by
     the REIT Transaction Documents where the failure to obtain the same, either
     individually or in the aggregate, could not reasonably be expected to have
     a material adverse effect on the REIT Transaction or on the business,
     operations, property, assets, liabilities, condition (financial or
     otherwise) or prospects of Holdings, the Borrower, Holdings and its
     Subsidiaries taken as a whole or the Borrower and its Subsidiaries taken as
     a whole)";

and (ii) inserting the following new sentence at the end thereof:

     "Each Principal Credit Party represents and warrants that the failure to
     obtain any of the Lender Consents and/or Landlord Consents referred to
     above in this Section 6.08(b) could not, either individually or in the
     aggregate, reasonably be expected to have a material adverse effect on the
     REIT Transaction or on the business, operations, property, assets,
     liabilities, condition (financial or otherwise) or prospects of Holdings,
     the Borrower, Holdings and its Subsidiaries taken as a whole or the
     Borrower and its Subsidiaries taken as a whole."

          (e) REIT Transaction.  Notwithstanding anything to the contrary
              ----------------                                           
contained in Section 6 or elsewhere in the Credit Agreement, Holdings and its
Subsidiaries shall be entitled to undertake any component of the REIT
Transaction (including, without limitation, the E&P Distribution) whether or not
all components of the REIT Transaction are ultimately completed and whether or
not the REIT Conversion and the REIT Conversion Date ever occur, although
Holdings and its Subsidiaries hereby covenant and agree to use all commercially
reasonable best efforts to effectuate the REIT Conversion once the SLC Spinoff
and the first part of the E&P Distribution have occurred.

                                      -3-

 
          2.  Representations and Warranties.
              ------------------------------ 

              (a) Management Agreements, Franchise Agreements, Operating Leases,
                  -------------------------------------------------------------
Ground Leases; REIT Transaction.  The representations and warranties contained
- -------------------------------                                               
in Section 7.22, Section 7.24 or elsewhere in the Credit Agreement (other than
the representation and warranty contained in Section 6.08(b) thereof as modified
hereby) shall be deemed true and correct in all material respects at any time
made or deemed made notwithstanding (i) the failure to obtain any Lender Consent
as permitted by Section 6.08(b), (ii)  the failure to obtain any Landlord
Consent as permitted by Section 6.08(b) and (iii) the failure to obtain any
other approval and/or consent as permitted by Section 6.08(b), in each case so
long as (A) no independent Default or Event of Default would otherwise occur
under Section 10.03, 10.04, 10.10, 10.11 or 10.13 of the Credit Agreement (as
modified hereby) as a result of the failure to obtain any Lender Consent, any
Landlord Consent and/or any such other approval and/or consent and (B) the
failure to obtain any Lender Consent, any Landlord Consent and/or any such other
approval and/or consent, either individually or in the aggregate, could not
reasonably be expected to have a material adverse effect on the REIT Transaction
or on the business, operations, property, assets, liabilities, condition
(financial or otherwise) or prospects of Holdings, the Borrower, Holdings and
its Subsidiaries taken as a whole or the Borrower and its Subsidiaries taken as
a whole.

              (b) Status as a REIT. Section 7.25 of the Credit Agreement is
                  ----------------
amended by replacing the words "in a position to qualify" therein with the words
"organized in conformity with the requirements for qualification".

          3.  Blackstone Acquisition.  Schedule III to the Credit Agreement
              ----------------------   ------------                        
shall be replaced in its entirety by Schedule III attached hereto, and all
                                     ------------                         
references in the Credit Agreement to Schedule III shall be deemed to be
                                      ------------                      
references to Schedule III attached hereto.
              ------------                 

          4.  Indebtedness.
              ------------ 

              (a) Section 9.04 of the Credit Agreement is amended by (i)
deleting the word "and" appearing at the end of clause (xi) thereof, (ii)
deleting the period appearing at the end of clause (xii) thereof and inserting a
semi-colon in lieu thereof and (iii) inserting the following new clauses (xiii),
(xiv) and (xv) immediately following clause (xii) thereof:

              "(xiii)  Contingent Obligations of the Borrower or any of its
     Subsidiaries under an Operating Lease or any agreement entered into in
     connection therewith, including, without limitation, the obligations listed
     on Schedule XIV (to the extent such obligations constitute Contingent
        ------------                                                      
     Obligations);

                                      -4-

 
               (xiv)  Contingent Obligations of the Borrower or any of its
     Subsidiaries to Host REIT or any Subsidiary of Host REIT in respect of (I)
     the QUIPs Debt or (II) Indebtedness of Host REIT incurred under the REIT
     Transaction Documents; and

               (xv) Contingent Obligations of the Borrower or any of its
     Subsidiaries in respect of Indebtedness of any Subsidiary of the Borrower
     otherwise permitted under this Section 9.04 to any mortgage lender of
     Indebtedness with respect to any Hotel Property in an aggregate principal
     amount not to exceed $50,000,000."

               (b) The Credit Agreement is amended by inserting as Schedule XIV
                                                                   ------------
thereto a new Schedule XIV in the form of Schedule XIV attached hereto, which
              ------------                ------------                       
Schedule XIV lists certain obligations in respect of which the Borrower or any
- ------------                                                                  
Subsidiary thereof may be liable under an Operating Lease or any agreement
entered into in connection therewith.

           5.  Unencumbered EBITDA Ratio.  Section 9.12(b) of the Credit
               -------------------------                                
Agreement is amended by changing the Unencumbered EBITDA Ratio applicable to the
Test Period corresponding to the fiscal quarter ending closest to December 31,
1998 from 0.425:1.00 to 0.40:1.00.

           6.  Business.  Section 9.16 of the Credit Agreement is amended by
               --------                                                     
deleting the first sentence of clause (b) thereof in its entirety and inserting
the following new sentence in lieu thereof:

                   "Notwithstanding anything to the contrary contained in this
     Agreement, from and after the REIT Conversion Date, Holdings will not
     engage in any business activities, will not have any significant assets
     other than (i) any or all of the assets listed in Part I or Part II of
                                                                           
     Schedule XI, (ii) the ownership of the OP Units of the Borrower (or
     -----------                                                        
     interests in Subsidiaries whose assets are OP Units, including, without
     limitation, those Subsidiaries listed in Part I of Schedule XI) and (iii)
                                                        -----------           
     de minimis equity interests in Subsidiaries of the Borrower (other than a
     Subsidiary Guarantor), and will not have any significant liabilities other
     than (A) those under this Agreement, (B) those under the other Documents to
     which it is a party, (C) pre-existing liabilities (including contingent
     liabilities) of Holdings at the time of the REIT Conversion (which
     liabilities will be assumed by the Operating Partnership but which may
     still remain liabilities of Holdings) and (D) liabilities relating to the
     assets set forth in Part I or Part II of Schedule XI."
                                              -----------  

           7.  Certain Lender Consent and Landlord Consent Matters.
               --------------------------------------------------- 

               (a) Default Under Other Agreements. Notwithstanding anything to
                   ------------------------------
the contrary contained in Section 10.04 or elsewhere in the Credit

                                      -5-

 
Agreement, from and after the distribution of the SLC stock in the SLC Spinoff
and until March 31, 1999, (i) no failure to obtain a Lender Consent with respect
to any Indebtedness listed on Schedule XII attached hereto shall give rise to a
                              ------------ 
Default or an Event of Default so long as (A) the aggregate principal amount of
such Indebtedness at any time does not exceed the Total Unutilized Revolving
Loan Commitment at such time, (B) no event of default shall have occurred under
the Senior Note Indenture as a result thereof, (C) the failure to obtain any
Lender Consent, either individually or in the aggregate, could not reasonably be
expected to have a material adverse effect on the REIT Transaction or on the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of Holdings, the Borrower, Holdings and its Subsidiaries
taken as a whole or the Borrower and its Subsidiaries taken as a whole, (D) such
Indebtedness shall not have become due prior to its stated maturity and shall
not have been declared due and payable, and shall not have been required to be
prepaid other than by a regularly scheduled required prepayment, prior to the
stated maturity thereof, unless the Borrower shall be able to satisfy all the
conditions precedent to the incurrence of additional Revolving Loans (assuming
the proceeds of such borrowing were used to repay such Indebtedness) for so long
as such condition exists and (E) the Borrower complies with its obligations
under paragraph 8(a) of this Amendment and (ii) no failure to obtain a Landlord
Consent which would result in an Event of Default relating to any Indebtedness
of Holdings or any of its Subsidiaries under Section 10.04 of the Credit
Agreement (prior to giving effect to this paragraph 7(a)(ii)) shall give rise to
a Default or an Event of Default so long as (A) such Indebtedness shall not have
become due prior to its stated maturity and shall not have been declared due and
payable, and shall not have been required to be prepaid other than by a
regularly scheduled required prepayment, prior to the stated maturity thereof,
(B) no lender in respect of such Indebtedness shall have taken any enforcement
action in respect thereof (other than delivery of a notice of default), (C) no
event of default shall have occurred under the Senior Note Indenture as a result
thereof and (D) the Borrower complies with its obligations under paragraph 8 of
this Amendment. Unless the Required Banks otherwise agree in writing, on April
1, 1999 the provisions of this paragraph 7(a) and the waivers effected hereby
shall cease to be of any further force or effect.

          (b) Adjustment to EBITDA for Terminated Ground Leases.
              -------------------------------------------------  
Notwithstanding anything to the contrary contained in the Credit Agreement, the
following provisions shall apply with respect to those ground leases with
respect to which Landlord Consents are required but have not been obtained.  If
any litigation commences with respect to any such ground lease as a result of
the failure to obtain the applicable Landlord Consent and a final judgment is
rendered against the Borrower or its applicable Subsidiary in such litigation
(whether or not such judgment is appealable) and the result of such judgment is
that the Borrower or its applicable Subsidiary either is required to pay damages
of $1,000,000 or more or the applicable ground lease is terminated and the
Borrower or its applicable Subsidiary must vacate the respective Hotel Property,
then:

                                      -6-

 
          (i)   if only one (1) such ground lease is subject to such an adverse
judgment, then for purposes of determining Consolidated EBITDA under the Credit
Agreement, fifty percent (50%) of the portion of such Consolidated EBITDA
attributable to all ground leases subject to any such litigation (whether or not
any adverse judgment has been rendered) shall be excluded from such calculation;

          (ii)  if two (2) such ground leases are subject to such an adverse
judgment, then for purposes of determining Consolidated EBITDA under the Credit
Agreement, seventy-five percent (75%) of the portion of such Consolidated EBITDA
attributable to all ground leases subject to any such litigation (whether or not
any adverse judgment has been rendered) shall be excluded from such calculation;

          (iii) if three (3) such ground leases are subject to such an adverse
judgment, then for purposes of determining Consolidated EBITDA under the Credit
Agreement, all of such Consolidated EBITDA attributable to all ground leases
subject to any such litigation (whether or not any such adverse judgment has
been rendered) shall be excluded from such calculation; and

          (iv)  if it is determined in a final judgment of a court of competent
jurisdiction that the Borrower or its applicable Subsidiary must vacate a Hotel
Property or the Borrower or its applicable Subsidiary consents thereto in
writing, following the date on which any such final judgment is no longer being
appealed and all rights of appeal have been exhausted, then, in addition to the
provisions of the preceding clauses (i), (ii) or (iii), as applicable, one-
hundred percent (100%) of the portion of Consolidated EBITDA attributable to
such Hotel Property shall be excluded from the calculation of Consolidated
EBITDA under the Credit Agreement.

          (c)   Default Upon Termination of Ground Leases.  Notwithstanding
                -----------------------------------------                  
anything to the contrary contained in the Credit Agreement, upon the effective
termination of a ground lease listed on Schedule XIII and the loss by the
                                        -------------                    
Borrower or its applicable Subsidiary of the right to the continued use of the
respective Hotel Property (as finally determined by a court of competent
jurisdiction and after such final judgment is no longer being appealed or all
rights of appeal have been exhausted or as otherwise consented to in writing by
the Borrower or such Subsidiary, as the case may be) as a result of a failure to
obtain the applicable Landlord Consent, it shall be an Event of Default if the
sum of:

                (i)  the amount of Consolidated EBITDA attributable to the Hotel
Property which was subject to such ground lease, determined for the most
recently ended Test Period; plus

                (ii) the amount of Consolidated EBITDA attributable to each
other Hotel Property which was subject to a ground lease listed on

                                      -7-

 
Schedule XIII and which was effectively terminated or with respect to which the
- -------------
Borrower or its applicable Subsidiary lost the right to the continued use of the
respective Hotel Property (as finally determined by a court of competent
jurisdiction and after such final judgment is no longer being appealed or all
rights of appeal have been exhausted or as otherwise consented to in writing by
the Borrower or such Subsidiary, as the case may be) as a result of a failure to
obtain the applicable Landlord Consent, determined for each such Hotel Property
for the Test Period ending on the most recent March 31, June 30, September 30 or
December 31 occurring prior to the effective termination of such ground lease;

exceeds five percent (5%) of Consolidated EBITDA for the most recently ended
Test Period (without giving effect to any reduction in such Consolidated EBITDA
pursuant to paragraph 7(b) above).

          8.  Reserves under the Credit Agreement, etc..
              ----------------------------------------- 

              (a) Notwithstanding anything to the contrary contained in the
Credit Agreement, until such time as all of the Lender Consents have been
obtained and/or the Indebtedness in respect thereof has been repaid in full, the
Borrower shall not be permitted to incur any Revolving Loans under the Credit
Agreement to the extent that the amount of the Total Unutilized Revolving Loan
Commitment after giving effect to the incurrence of such Revolving Loans would
be less than (A) if prior to December 29, 1998, the lesser of (x) $600,000,000
and the amount necessary to repay in full all Indebtedness in respect of which
Lender Consents have not been so obtained and (B) if on or after December 29,
1998, the amount necessary to repay in full all Indebtedness in respect of which
Lender Consents have not been so obtained (although the Borrower shall be
permitted to incur Revolving Loans the proceeds of which are used to repay all
or any part of any such Indebtedness). In addition, (I) within 10 days after the
last day of each month, commencing with the month ending December 31, 1998, the
Borrower covenants and agrees to deliver to the Administrative Agent a status
report identifying those Lender Consents which have theretofore been obtained as
well as those Lender Consents which still need to be obtained and (II) together
with each delivery of a Notice of Borrowing pursuant to Section 1.03 of the
Credit Agreement, a status report showing the information set forth in the
preceding clause (I) as well as the amount of the Total Unutilized Revolving
Loan Commitment at such time, in each case until such time as all Lender
Consents have been obtained or the underlying Indebtedness has been repaid in
full.

          (b) Within 10 days after the last day of each month, commencing with
the month ending December 31, 1998, the Borrower covenants and agrees to deliver
to the Administrative Agent a status report identifying those Landlord Consents
which have theretofore been obtained as well as those Landlord Consents which
still need to be obtained until such time as all Landlord Consents (other than
those listed in Part I of Schedule XIII) have been obtained.
                          -------------                     

                                      -8-

 
          9.  Definitions.  Section 11.01 of the Credit Agreement is amended as
              -----------                                                      
follows:

              (a) Deletion of Hospitality Merger, etc.. The following
                  ------------------------------------
definitions shall be deleted from Section 11.01 of the Credit Agreement in their
entirety:

                  (i)    Hospitality Merger;

                  (ii)   Hospitality Merger Agreement; and

                  (iii)  Hospitality Merger Documents

              (b) Addition of Hospitality Liquidation, etc..  The following new
                  -----------------------------------------                    
definitions shall be inserted into Section 11.01 of the Credit Agreement in the
correct alphabetical order:

                  "Hospitality Liquidation" shall mean the liquidation of
     Hospitality into Host Marriott in accordance with applicable law and the
     Hospitality Liquidation Documents.

                  "Hospitality Liquidation Documents" shall mean all agreements
     and documents related to the Hospitality Liquidation.

              (c) SLC.  The definition of "SLC" is amended in its entirety as
                  ---                                                        
follows (and the definition of "SLC" appearing in Section 6.04(a) shall be
deemed to be modified accordingly):

                  "SLC" shall mean Crestline Capital Corporation (formerly known
     as HMC Senior Communities, Inc.).

              (d) E&P Distribution. The definition of "E&P Distribution" is
                  ----------------
amended in its entirety as follows:

                  "E&P Distribution" shall mean, collectively, one or more
     distributions to the shareholders of Host Marriott and/or Host REIT of
     cash, securities or other property, with a cumulative aggregate value up to
     the amount estimated in good faith by Host Marriott or Host REIT from time
     to time as being necessary to assure that Host Marriott and Host REIT have
     distributed the accumulated earnings and profits (as referenced in Section
     857(a)(2)(B) of the Code) of Host Marriott as of the last day of the first
     taxable year for which Host REIT's election to be taxed as a real estate
     investment trust is effective. Notwithstanding any other provision of this
     Agreement to the contrary, the E&P Distribution may include shares of
     common stock or redeemable preferred stock of Host REIT (and the Borrower

                                      -9-

 
     may issue OP Units corresponding to such shares), and, if redeemable
     preferred stock is issued in connection with the E&P Distribution, Host
     REIT shall be permitted to redeem (and within 60 days after the issuance
     thereof shall redeem) such redeemable preferred shares (and Borrower shall
     be permitted to redeem the corresponding OP Units) in accordance with the
     terms thereof, provided that the amount of such redemption obligation
                    --------
     actually paid in cash shall be included in the limit on the portion of the
     E&P Distribution payable in cash as set forth in Section 9.03(b).

          (e) Permitted REIT Subsidiary.  The definition of "Permitted REIT
              -------------------------                                    
Subsidiary" is amended in its entirety as follows:

              "Permitted REIT Subsidiary" shall mean those entities listed in
     Part I of Schedule XI or a Wholly-Owned Subsidiary of Holdings established
               -----------  
     or existing solely for the purpose of holding de minimis equity interests
     in Subsidiaries of the Borrower or OP Units.

          (f) REIT Transaction.  The definition of "REIT Transaction" is amended
              ----------------                                                  
as follows:

              (i) clause (vii) thereof shall be deleted in its entirety and
replaced by the following new clause (vii):

                  "the acquisition by the Operating Partnership and its
     Subsidiaries of substantially all of the assets of Holdings and its
     Subsidiaries other than any or all of the assets listed on Schedule XI and
                                                                -----------
     the assets constituting the SLC Spinoff and the E&P Distribution"; and

              (ii) the following words shall be added at the end thereof:

                   "for its first taxable year commencing after the REIT
     Conversion Date."

          (g) Subsidiary.  The definition of "Subsidiary" is amended in its
              ----------                                                   
entirety as follows:

              "Subsidiary" shall mean, as to any Person, (i) any corporation
     more than 50% of whose stock of any class or classes having by the terms
     thereof ordinary voting power to elect a majority of the directors of such
     corporation (irrespective of whether or not at the time stock of any class
     or classes of such corporation shall have or might have voting power by
     reason of the happening of any contingency) is at the time owned by such
     Person and/or one or more Subsidiaries of such Person, (ii) any
     partnership, limited liability company, association, joint venture or other
     entity (other than a corporation) in which such Person and/or one or more
     Subsidiaries of

                                      -10-

 
     such Person has more than a 50% equity interest at the time and (iii) any
     partnership in which such Person or one or more Subsidiaries of such Person
     is, at the time, a general partner and which is controlled by such Person
     in a manner sufficient to permit its financial statements to be
     consolidated with the financial statements of such Person in conformance
     with generally accepted accounting principles and the financial statements
     of which are so consolidated, provided that the term Subsidiary shall
     include for all purposes of this Agreement any Non-Controlled Entity
     (including its Subsidiaries for this purpose) if the Borrower has elected
     to treat such Non-Controlled Subsidiary as a Subsidiary under this
     Agreement, but only so long as the terms of the organizational documents of
     any such Non-Controlled Entity expressly require that at any time that an
     Event of Default exists and is continuing, such Non-Controlled Entity will
     pay, and will cause each of its Subsidiaries to pay, on a quarterly basis,
     the maximum amount of cash Dividends that such Non-Controlled Entity and/or
     any such Subsidiary is permitted to pay under applicable law and under
     contractual restrictions contained in any agreement or instrument
     evidencing, securing or relating to Indebtedness for borrowed money to
     which such Non-Controlled Entity or any Subsidiary thereof is a party or by
     which any of its assets are subject or bound and which is permitted to be
     incurred under this Agreement (although each such Non-Controlled Entity or
     any Subsidiary thereof may retain, and not pay as a Dividend, cash in an
     amount that such Non-Controlled Entity or such Subsidiary reasonably
     determines is necessary to meet its current liabilities and expenses as
     well as to make current anticipated Capital Expenditures). An election
     pursuant to this definition with respect to any Non-Controlled Entity shall
     be made on not less than ten Business Days prior written notice to the
     Administrative Agent and may not be made to the extent that a Default or an
     Event of Default then exists or would result from such an election.

          (h) Addition of Definitions of Landlord Consent and Lender Consent.
              --------------------------------------------------------------  
The following new definitions shall be inserted into Section 11.01 of the Credit
Agreement in the correct alphabetical order:

              "Landlord Consent" shall have the meaning provided in paragraph
     1(d)(ii) of the Second Amendment and Consent, dated as of December 17,
     1998, to this Agreement.

              "Lender Consent" shall have the meaning provided in paragraph
     1(d)(i) of the Second Amendment and Consent, dated as of December 17, 1998,
     to this Agreement.

      10. Effective Date.  This Amendment shall become effective on the
          --------------                                               
date (the "Second Amendment Effective Date") when (i) Host Marriott,
Hospitality, CRC, the Operating Partnership and the Required Banks shall have
signed a 

                                      -11-

 
counterpart hereof (whether the same or different counterparts) and shall have
delivered (including by way of facsimile transmission) the same to the
Administrative Agent at the Notice Office and (ii) Host Marriott and/or the
Borrower shall have paid to each Bank that has signed a counterpart to this
Amendment and delivered the same to the Administrative Agent at the Notice
Office on or prior to 12:00 Noon (New York time) on December 17, 1998 an
amendment fee equal to 7.5 basis points on the amount of each such Bank's
outstanding Term Loans and Revolving Loan Commitment on December 17, 1998.

          11.  Bring-Down of Representations and Warranties; No Default.  In
               --------------------------------------------------------     
order to induce the Banks to enter into this Amendment, each Credit Party party
hereto represents and warrants that (i) the representations, warranties and
agreements contained in Section 7 of the Credit Agreement are true and correct
in all material respects on and as of the Second Amendment Effective Date, after
giving effect to this Amendment, and (ii) there exists no Default or Event of
Default on the Second Amendment Effective Date, after giving effect to this
Amendment.

          12.  Scope of Amendment.  This Amendment is limited as specified and
               ------------------                                             
shall not constitute a modification, acceptance or waiver of any other provision
of the Credit Agreement or any other Credit Document.

          13.  Counterparts.  This Amendment may be executed in any number of
               ------------                                                  
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument.  A complete set
of counterparts shall be lodged with the Borrower and the Administrative Agent.

          14.  Governing Law.  THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
               -------------                                                   
THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAW OF THE STATE OF NEW YORK.

          15.  Amendment to Credit Agreement.  From and after the Second
               -----------------------------                            
Amendment Effective Date, all references in the Credit Agreement and in the
other Credit Documents to the Credit Agreement shall be deemed to be references
to the Credit Agreement as modified hereby.

                                 *  *  *  *  *

          IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.

                                      -12-

 
                            HOST MARRIOTT CORPORATION


                            By:
                                  -----------------------------
                               Title:

                            HOST MARRIOTT HOSPITALITY, INC.


                            By:
                                  -----------------------------
                               Title:

                            HOST MARRIOTT, L.P.
                            By:  HMC Real Estate LLC,
                                 its General Partner

                            By:
                                  -----------------------------
                               Title:

                            HMC CAPITAL RESOURCES CORP.


                            By:
                                  -----------------------------
                               Title:

                                      -13-

 
                            BANKERS TRUST COMPANY,
                            Individually and as Arranger and
                            Administrative Agent

                            By:
                                  -----------------------------
                              Title:

                            WELLS FARGO BANK, NATIONAL ASSOCIATION, Individually
                             and as Co-Arranger
                            


                            By:
                                  -----------------------------
                              Title:

                            THE BANK OF NOVA SCOTIA,
                             Individually and as Co-Arranger


                            By:
                                  -----------------------------
                              Title:

                            CREDIT LYONNAIS NEW YORK BRANCH, Individually and as
                              Co-Arranger


                            By:
                                  -----------------------------
                              Title:

                            BARCLAYS BANK PLC


                            By:
                                  -----------------------------
                              Title:

                            CITICORP USA, INC.


                            By:
                                  -----------------------------
                              Title:

                                      -14-

 
                           NATIONSBANK, N.A.


                            By:
                                  -----------------------------
                              Title:

                            SOCIETE GENERALE, SOUTHWEST AGENCY


                            By:
                                  -----------------------------
                              Title:

                            THE BANK OF NEW YORK


                            By:
                                  -----------------------------
                              Title:

                            DEUTSCHE BANK AG NEW YORK BRANCH AND/OR CAYMAN
                              ISLAND BRANCH


                            By:
                                  -----------------------------
                              Title:

                            By:
                                  -----------------------------
                              Title:

                            DLJ CAPITAL FUNDING, INC.


                            By:
                                  -----------------------------
                              Title:

                                      -15-

 
                            THE FIRST NATIONAL BANK OF CHICAGO


                            By:
                                  -----------------------------
                              Title:

                            AMSOUTH BANK


                            By:
                                  -----------------------------
                              Title:

                            BANK OF AMERICA NT&SA


                            By:
                                  -----------------------------
                              Title:

                            RIGGS BANK N.A.


                            By:
                                  -----------------------------
                              Title:

                            BANK OF HAWAII


                            By:
                                  -----------------------------
                              Title:

                            FIRST AMERICAN BANK TEXAS, S.S.B.


                            By:
                                  -----------------------------
                              Title:

                                      -16-

 
                            FIRST COMMERCIAL BANK, NEW YORK AGENCY


                            By:
                                  -----------------------------
                              Title:


                            MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY


                            By:
                                  -----------------------------
                              Title:


                            THE INTERNATIONAL COMMERCIAL BANK OF CHINA, 
                              NEW YORK AGENCY


                            By:
                                  -----------------------------
                              Title:


                            CHANG HWA COMMERCIAL BANK, LTD., NEW YORK BRANCH


                            By:
                                  -----------------------------
                              Title:

                            CONSECO LIFE INSURANCE COMPANY


                            By:
                                  -----------------------------
                              Title:

                                      -17-

 
                            BANK LEUMI USA


                            By:
                                  -----------------------------
                              Title:

                            By:
                                  -----------------------------
                              Title:

                            KZH-CNC CORPORATION


                            By:
                                  -----------------------------
                              Title:

                            ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG


                            By:
                                  -----------------------------
                              Title:

                            By:
                                  -----------------------------
                              Title:

                                      -18-

 
                                                                    Exhibit 10.6


                 THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT
                 ----------------------------------------------
                                        
          THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT (this "Amendment"),
dated as of March 15, 1999, among HOST MARRIOTT CORPORATION, a Maryland
corporation ("Host REIT"), as successor by merger to Host Marriott Corporation,
a Delaware corporation, HOST MARRIOTT, L.P., a Delaware limited partnership (the
"Operating Partnership"), the lenders (the "Banks") party to the Credit
Agreement referred to below, WELLS FARGO BANK, NATIONAL ASSOCIATION, THE BANK OF
NOVA SCOTIA and CREDIT LYONNAIS NEW YORK BRANCH, as Co-Arrangers (the "Co-
Arrangers"), and BANKERS TRUST COMPANY, as Arranger and Administrative Agent
(the "Administrative Agent").  Unless otherwise defined herein, all capitalized
terms used herein and defined in the Credit Agreement are used herein as so
defined.

                              W I T N E S S E T H:
                              - - - - - - - - - - 

          WHEREAS, Host REIT, the Operating Partnership, the Banks, the Co-
Arrangers and the Administrative Agent are parties to a Credit Agreement, dated
as of June 19, 1997 and amended and restated as of August 5, 1998 (as amended,
modified or supplemented through, but not including, the date hereof, the
"Credit Agreement");

          WHEREAS, the parties hereto wish to amend the Credit Agreement, and
waive certain provisions thereunder, all as herein provided; and

          WHEREAS, subject to the terms and conditions set forth below, the
parties hereto agree as follows;

          NOW, THEREFORE, it is agreed:

          1.  For the purpose of allowing the Borrower to continue to directly
own (A) limited partnership interests in each of (i) HMC AP LP, (ii) HMC
Charlotte LP, (iii) HMC Toronto Airport LP and (iv) HMC Toronto EC LP, and (B)
managing limited liability company interests in each of (i) HMC AP GP LLC, (ii)
HMC Charlotte GP LLC, (iii) HMC Toronto Airport GP LLC and (iv) HMC Toronto EC
GP LLC, all of which entities are not Look-Through Subsidiaries, the Banks
hereby waive Section 8.11(b) of the Credit Agreement to the extent, but only to
the extent, necessary for such allowances.

          2.  Section 7 of the Second Amendment and Consent to Credit Agreement,
dated as of December 17, 1998, among Host REIT, the Operating Partnership, the
Banks, the Co-Arrangers and the Administrative Agent (the "Second Amendment") is
amended, to the extent, but only to the extent, necessary to extend the time by
which (i) Toronto Eaton Centre must obtain a Lender Consent (as defined in the
Second Amendment), by (a) changing the date "March 31, 1999" appearing therein
to "April 30, 1999" and (b) changing the date "April 1, 1999" 

 
appearing therein to "May 1, 1999", (ii) New Jersey Park Ridge must obtain a
Landlord Consent (as defined in the Second Amendment), by (x) changing the date
"March 31, 1999" appearing therein to "December 31, 1999" and (y) changing the
date "April 1, 1999" appearing therein to "January 1, 2000" and (iii) Virginia
Key Bridge must obtain a Landlord Consent (as defined in the Second Amendment)
in connection with the Ground Lease with John E. Fowler and the Pear G. Fowler
Foundation, by (x) changing the date "March 31, 1999" appearing therein to
"April 30, 1999" and (y) changing the date "April 1, 1999" appearing therein to
"May 1, 1999".

          3.  Section 9.01(vii) of the Credit Agreement is amended by deleting
clause (vii) thereof in its entirety and inserting the following new clause
(vii) in lieu thereof:

          "(vii) to the extent that the respective Indebtedness is permitted to
     be incurred at such time pursuant to Section 9.04(xii), Liens securing
     Permitted Non-Recourse Indebtedness incurred by any Specified Subsidiary as
     and to the extent permitted by the definition of "Permitted Non-Recourse
     Indebtedness;".

          4.  Section 9.02(vii) of the Credit Agreement is amended by deleting
the number "$100,000,000" appearing in sub-clause (v)(B) thereof and inserting
the number "$150,000,000" in lieu thereof.

          5.  (A)  Section 9.04(xi) of the Credit Agreement is amended by (i)
deleting the word "or" at the end of the sub-clause (x) therein and inserting a
comma in lieu thereof and (ii) inserting after the words "Section 9.04(x))" in
sub-clause (y) therein the following words: "or (z) to refinance up to
$250,000,000 of Permitted Refinancing Indebtedness that is incurred after March
15, 1999 and on or before June 30, 2000 and is secured by the New York Marriott
Marquis Hotel but only to the extent that such Permitted Refinancing
Indebtedness does not constitute intercompany Indebtedness among or between
Holdings or any of its Subsidiaries".

              (B)  Section 9.04(xii) of the Credit Agreement is amended by
deleting the proviso in sub-clause (iii) thereof and inserting the following new
proviso in lieu thereof:

          "provided, however, that up to $400,000,000 in aggregate outstanding
           -----------------                                                  
     principal amount of such Indebtedness at any time (less the aggregate
     principal amount of all Excess Permitted Refinancing Indebtedness
     outstanding at such time) may be secured Indebtedness in the form of
     Permitted Non-Recourse Indebtedness, Capitalized Lease Obligations,
     Construction Loans (although such Construction Loans may not exceed
     $150,000,000 in aggregate principal amount outstanding at any time), and/or
     purchase money Indebtedness in respect of equipment and materials, and".

                                      -2-

 
              (C) Section 9.04 of the Credit Agreement is further amended by (i)
inserting "(i)" immediately before the words "in no event" appearing in the last
sentence thereof and (ii) inserting the following words at the end of such last
sentence:

                  "and (ii) in no event shall the aggregate outstanding
     principal amount of all Excess Permitted Refinancing Indebtedness incurred
     pursuant to clause (xi) above, when added to the aggregate outstanding
     principal amount of all Indebtedness incurred pursuant to clause (xii)
     above, exceed $1,200,000,000 at any time outstanding".

          6.  Section 9.08 of the Credit Agreement is amended by deleting clause
(a) thereof in its entirety and inserting the following new clause (a) in lieu
thereof:

                  "(a) Holdings and the Borrower will not permit the
     Consolidated Interest Coverage Ratio for any Test Period (i) ending on or
     prior to the last day of Holdings' fiscal quarter ending closest to June
     30, 2000, to be less than 2.25:1.00, (ii) ending after such date and on or
     prior to the last day of Holdings' fiscal quarter ending closest to
     December 31, 2000, to be less than 2.30:1.00, (iii) ending after such date
     and on or prior to the last day of Holding's fiscal quarter ending closest
     to June 30, 2001, to be less than 2.375:1.00 and (iv) ending after such
     date, to be less than 2.50:1.00."

          7.  The Credit Agreement is amended by deleting Section 9.11 thereof
in its entirety and inserting the following new Section 9.11 in lieu thereof:

          "9.11 Maximum Total Leverage Ratio.  Holdings and the Borrower will
                -----------------------------                                
not permit the Total Leverage Ratio at any time during a period set forth below
to be greater than the ratio set forth opposite such period below:

                        Period                               Ratio
                        ------                               -----
          Effective Date through but not 
          including the last day of Holdings' 
          fiscal quarter ending closest to
          September 30, 2000                                 5.50:1.00
 
 
 
          The last day of Holdings' fiscal 
          quarter ending closest to September 
          30, 2000 through but not including 
          the last day of Holdings' fiscal 
          quarter ending closest to March 31, 
          2001                                               5.25:1.00
 
 
                                     -3- 
 

 
          The last day of Holdings' fiscal 
          quarter ending closest to March 31, 
          2001 through but not including the 
          last day of Holdings' fiscal quarter 
          ending closest to September 30, 2001               5.00:1.00
 
          The last day of Holdings' fiscal 
          quarter ending closest to September 30, 
          2001 through but not including the last 
          day of Holdings' fiscal quarter
          ending closest to March 31, 2002                   4.75:1.00
 
          Thereafter                                         4.50:1.00;


provided, however, that in the event of any issuance by Holdings, the Borrower
- -----------------                                                             
or any of its Subsidiaries of capital stock or other equity securities, for each
$50,000,000 (or portion thereof) of Net Equity Proceeds (other than Net Equity
Proceeds received from Holdings, the Borrower or any of its Subsidiaries) in
excess of the first $150,000,000 of Net Equity Proceeds (other than Net Equity
Proceeds received from Holdings, the Borrower or any of its Subsidiaries) in the
aggregate received after March 15, 1999, the maximum permitted Total Leverage
Ratio, for each period set forth above, will be reduced by 0.0375 (with such
reduction to be effective 45 days after each such issuance), provided further,
                                                             ---------------- 
that in no event will the maximum permitted Total Leverage Ratio at any time
during a period set forth above be reduced to below the ratio set forth opposite
the period below which encompasses the corresponding period (or portion thereof)
set forth above:

                        Period                               Ratio
                        ------                               -----
          Effective Date through but not 
          including the last day of Holdings' 
          fiscal quarter ending closest to 
          June 30, 1999                                      5.50:1.00
 
          The last day of Holdings' fiscal 
          quarter ending closest to June 30, 
          1999 through but not including the 
          last day of Holdings' fiscal quarter 
          ending closest to December 31, 1999                5.25:1.00
 
          The last day of Holdings' fiscal 

                                      -4-

 
          quarter ending closest to December 
          31, 1999 through but not including 
          the last day of Holdings' fiscal 
          quarter ending closest to June 30, 
          2000                                               5.00:1.00
 
          The last day of Holdings' fiscal 
          quarter ending closest to June 30, 
          2000 through but not including
          the last day of Holdings' fiscal 
          quarter ending closest to March 31, 
          2002                                               4.75:1.00
 
          Thereafter                                         4.50:1.00"

          8.  Section 9.12 of the Credit Agreement is amended by deleting clause
(b) thereof in its entirety and inserting the following new clause (b) in lieu
thereof:


              "(b)   Unencumbered EBITDA Ratio. Holdings and the Borrower will
                     --------------------------
not permit the Unencumbered EBITDA Ratio for any Test Period ending on the last
day of a fiscal quarter of Holdings set forth below to be less than the ratio
opposite such fiscal quarter below:

          Fiscal Quarter Ending                         Ratio
          ---------------------                         -----
              Closest To
              ----------

          September 30, 1998                          0.425:1.00
          December 31, 1998                           0.425:1.00
                            
          March 31, 1999                              0.425:1.00
          June 30, 1999                               0.475:1.00
          September 30, 1999                           0.50:1.00
          December 31, 1999                            0.50:1.00
                            
          March 31, 2000                               0.50:1.00
          June 30, 2000                                0.50:1.00
          September 30, 2000                           0.50:1.00
          December 31, 2000                            0.50:1.00
                            
          March 31, 2001                               0.50:1.00
          June 30, 2001                                0.50:1.00
          September 30, 2001                           0.55:1.00
          December 31, 2001                            0.55:1.00

                                      -5-

 
          March 31, 2002                               0.55:1.00
          June 30, 2002                                0.55:1.00
          September 30, 2002                           0.60:1.00
          December 31, 2002                            0.60:1.00
                            
          March 31, 2003                               0.60:1.00
          June 30, 2003                                0.60:1.00"

          9.  Section 9.14(vii) of the Credit Agreement is amended by adding
after the words "the Specified Subsidiary" the following words: "or Specified
Subsidiaries".

         10.  Section 11.01 of the Credit Agreement is amended as follows: 

              (a) The definition of "Consolidated Interest Expense" is amended
by deleting the date "June 30, 2000" appearing therein and inserting the date
"June 30, 2001" in lieu thereof.

              (b) The definition of "Consolidated Total Debt" is amended by
inserting the following text immediately after the words "Permitted Non-Recourse
Indebtedness," appearing therein:

                  "plus, without duplication, the maximum amount available to be
     drawn under all letters of credit, bankers acceptances and similar
     obligations issued for the account of the Borrower or any of its
     Subsidiaries and all unpaid drawings or reimbursement obligations in
     respect thereof,".

              (c) The definition of "Excess Cash Flow" is amended by inserting
the following text immediately after the words "Refinancing Transaction"
appearing in the second parenthetical of clause (b)(ii) thereof:

                  ", repayments to the extent made with Indebtedness, Insurance
     Proceeds or Condemnation Proceeds, equity issuances or capital
     contributions or Net Sale Proceeds".

              (d) The definition of "Permitted Non-Recourse Indebtedness" is
amended in its entirety as follows:

                  "Permitted Non-Recourse Indebtedness" shall mean, with respect
     to any Specified Subsidiary, Indebtedness permitted to be incurred by such
     Specified Subsidiary pursuant to Section 9.04(xii), which Indebtedness (i)
     shall be secured only by the Real Property, including any fixtures,
     furniture, equipment and other personal property related thereto and the

                                      -6-

 
     revenues and proceeds derived therefrom, of the Specified Subsidiary that
     has incurred such Indebtedness, (ii) shall be made expressly non-recourse
     to Holdings and its other Subsidiaries (subject to customary limited
     recourse for such customary exceptions as fraud, intentional misconduct,
     intentional misrepresentation, misapplication of proceeds, environmental
     liabilities and similar matters) and (iii) shall have (A) a final maturity
     date of not earlier than August 5, 2004, (B) a remaining amortization
     schedule based upon a schedule of no less than 20 years and (C) a market
     rate of interest."

          (e) The definition of "Permitted Refinancing Indebtedness" is amended
by:

              (i)   adding after the words "Existing Indebtedness" therein the
     following words: ", up to $250,000,000 of Indebtedness that is incurred
     after March 15, 1999 and on or before June 30, 2000 and is secured by the
     New York Marriott Marquis Hotel (but only to the extent that such Permitted
     Refinancing Indebtedness does not constitute intercompany Indebtedness
     among or between Holdings or any of its Subsidiaries)";

              (ii)  deleting clause (i) of the proviso thereof in its entirety
     and inserting the following new clause (i) in lieu thereof:

                    "(i) the principal amount (or accreted value, if applicable)
          of such Permitted Refinancing Indebtedness does not exceed the
          principal amount (or accreted value, if applicable) of the
          Indebtedness so Refinanced (plus any additional amount or value
          pursuant to the proviso at the end of this definition) plus (x) the
          reasonable costs and fees associated therewith, (y) (A) up to an
          additional $25,000,000 of Indebtedness that is incurred after March
          15, 1999 and on or before June 30, 2000 and is secured by the New York
          Marriott Marquis Hotel and (B) up to an additional $25,000,000 of
          Indebtedness that is incurred after March 15, 1999 and on or before
          May 31, 2002 and is secured by the Harbor Beach Resort, less, in
          either case, any such Indebtedness that is also intercompany
          Indebtedness permitted pursuant to Section 9.04(iv) or (v), and (z) up
          to an additional $400,000,000 in aggregate principal amount of such
          Permitted Refinancing Indebtedness (less the aggregate principal
          amount of secured Indebtedness incurred pursuant to the proviso in 
          sub-clause (iii) of Section 9.04(xii) and outstanding at such time) of
          the Borrower and its Subsidiaries (such additional Permitted
          Refinancing Indebtedness referred to in this sub-clause (z), the
          "Excess Permitted Refinancing Indebtedness");";

              (iii) inserting the following words before the semi-colon at the
     end of clause (ii) of the proviso thereof:

                                      -7-

 
                   ", provided that the remaining amortization schedule with
          respect to up to $4,250,000 in aggregate principal amount of Permitted
          Refinancing Indebtedness relating to the Harbor Beach Resort that is
          incurred from Marriott International, Inc. may be based upon a
          remaining amortization schedule of no less than 8 years";

               (iv) deleting clause (iv) of the proviso thereof in its entirety
     and inserting the following new clause (iv) in lieu thereof:

                    "(iv) no Permitted Refinancing Indebtedness shall have
          different obligors, or greater guarantees or security, than the
          Indebtedness being Refinanced (except that, (x) from and after the
          REIT Conversion Date, such Permitted Refinancing Indebtedness may be
          incurred by the Borrower and/or one or more Subsidiary Guarantors so
          long as such Permitted Refinancing Indebtedness is unsecured, except
          as otherwise permitted by Section 9.01(iv), and (y) in connection with
          the simultaneous Refinancing of individual Indebtedness of all of the
          Subsidiaries that each own a Designated Hotel securing all or any part
          of the Indebtedness to be Refinanced, such Subsidiaries (or their
          successors in a merger contemplated by Section 9.02(xi) or (xii)) may
          jointly incur Permitted Refinancing Indebtedness, which Indebtedness
          may be secured and cross-collateralized only by one or more of the
          Designated Hotels and shall otherwise be expressly non-recourse to
          Holdings and its other Subsidiaries (subject to customary limited
          recourse for such customary exceptions as fraud, intentional
          misconduct, intentional misrepresentation, misapplication of proceeds,
          environmental liabilities and similar matters)) and"; and

               (v) adding the following words to the end of clause (v) of the
     proviso thereof:

                    "; provided further that if the principal amount (or
          accreted value, if applicable) of the Permitted Refinancing
          Indebtedness described in (iv)(y) above is secured and cross-
          collateralized by less than all of the Designated Hotels, then the
          aggregate principal amount (or accreted value, if applicable) of all
          of the Indebtedness that, in one or more instances, is secured by a
          Designated Hotel immediately prior to the incurrence of such Permitted
          Refinancing Indebtedness and is prepaid at the same time that such
          Permitted Refinancing Indebtedness is incurred shall be deemed to be
          Indebtedness that is Refinanced in connection with such Permitted
          Refinancing Indebtedness)".

               (f) The definition of "Specified Indebtedness for Borrowed Money"
is amended by inserting the following proviso at the end thereof:

                                      -8-

 
               "; provided further, that Specified Indebtedness for Borrowed 
                  ----------------                                       
     Money shall not include (A) up to $250,000,000 of Permitted Refinancing
     Indebtedness that is incurred after March 15, 1999 by a Subsidiary of the
     Borrower that is not a Subsidiary Guarantor and is secured by the New York
     Marriott Marquis and (B) up to $105,000,000 of Permitted Refinancing
     Indebtedness that is incurred after March 15, 1999 by a Subsidiary of the
     Borrower that is not a Subsidiary Guarantor and is secured by the Harbor
     Beach Resort, less, in either case, any such Indebtedness that is also
     intercompany Indebtedness permitted pursuant to Section 9.04(iv) or (v)."

          (g) The definition of "Specified Subsidiary" is deleted and the
following new definition of "Specified Subsidiary" is inserted in lieu thereof:

              "Specified Subsidiary" shall mean any Subsidiary of the Borrower
     so long as such Subsidiary has no material assets other than the single
     Hotel Property to be encumbered with Permitted Non-Recourse Indebtedness
     incurred by such Subsidiary pursuant to Section 9.04(xii).

          (h) The following new definitions shall be inserted into Section 11.01
of the Credit Agreement in the correct alphabetical order:

              (i)   "Construction Loan" shall mean Indebtedness incurred by a
     Specified Subsidiary pursuant to Section 9.04(xii) to finance the
     construction or development of a new Hotel or the expansion or renovation
     of a then existing Hotel, which Indebtedness (in either case) may only be
     secured by such Hotel.

              (ii)  "Designated Hotel" shall mean each of the following Hotels:
     New York Marriott Marquis; Hyatt Regency, Burlingame; Hyatt Regency,
     Cambridge; Hyatt Regency, Reston; Swissotel, Atlanta; Swissotel, Boston;
     Swissotel, Chicago; and Swissotel, New York.

              (iii) "Excess Permitted Refinancing Indebtedness" shall have the
     meaning provided in Section 11.01 in the definition of "Permitted
     Refinancing Indebtedness".

          11.  The Banks hereby agree that the Borrower and its Subsidiaries
may, in connection with the incurrence of the Permitted Refinancing Indebtedness
referred to in clause (iv)(y) of the definition of "Permitted Refinancing
Indebtedness", establish special purpose Subsidiaries for the sole purpose of
owning (and whose sole material assets shall constitute) individual Designated
Hotels and that (i) such Subsidiaries shall not be required to enter into the
Subsidiaries Guaranty if prohibited from doing so by the terms of the Permitted
Refinancing Indebtedness secured by the Designated Hotels (but only so long as
such prohibitions are in effect, after which time such Subsidiaries shall be
required to 

                                      -9-

 
enter into the Subsidiaries Guaranty to the extent and in the manner required by
Section 8.18(d)) of the Credit Agreement and (ii) notwithstanding anything to
the contrary in Sections 9.02 or 9.05 of the Credit Agreement, the Borrower and
its Subsidiaries may contribute individual Designated Hotels to such special
purpose Subsidiaries.

          12.  Effective Date.  This Amendment shall become effective on the
               --------------                                               
date (the "Third Amendment Effective Date") when (i) Host REIT, the Operating
Partnership and the Required Banks shall have signed a counterpart hereof
(whether the same or different counterparts) and shall have delivered (including
by way of facsimile transmission) the same to the Administrative Agent at the
Notice Office, provided that Sections 6 and 7 of this Amendment shall become
effective on the date when Host REIT, the Operating Partnership and the
Supermajority Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at the Notice Office and (ii)
the Borrower shall have paid to each Bank that has signed a counterpart of this
Amendment and delivered the same to the Administrative Agent at the Notice
Office on or prior to 1:00 p.m. (New York time) on March 26, 1999 an amendment
fee equal to 25 basis points on the amount of each such Bank's outstanding Terms
Loans and Revolving Loan Commitment on March 26, 1999.

          13.  Bring-Down of Representations and Warranties; No Default.  In
               --------------------------------------------------------     
order to induce the Banks to enter into this Amendment, each Credit Party party
hereto represents and warrants that (i) the representations, warranties and
agreements contained in Section 7 of the Credit Agreement are true and correct
in all material respects on and as of the Third Amendment Effective Date, both
before and after giving effect to this Amendment, and (ii) there exists no
Default or Event of Default on the Third Amendment Effective Date, both before
and after giving effect to this Amendment.

          14.  Scope of Amendment.  This Amendment is limited as specified and
               ------------------                                             
shall not constitute a modification, acceptance or waiver of any other provision
of the Credit Agreement or any other Credit Document.

          15.  Counterparts.  This Amendment may be executed in any number of
               ------------                                                  
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument.  A complete set
of counterparts shall be lodged with the Borrower and the Administrative Agent.

          16.  Governing Law.  THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
               -------------                                                   
THE PARTIES HEREUNDER SHALL BE CONSTRUED IN 

                                     -10-

 
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.

          17.  Amendment to Credit Agreement.  From and after the Third
               -----------------------------                           
Amendment Effective Date, all references in the Credit Agreement and in the
other Credit Documents to the Credit Agreement shall be deemed to be references
to the Credit Agreement as modified hereby.

                                 *  *  *  *  *

          IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.

                            HOST MARRIOTT CORPORATION


                            By:____________________________
                               Title:

                            HOST MARRIOTT, L.P.
                            By:  Host Marriott Corporation,
                                 its General Partner

                            By:____________________________
                               Title:


                                     -11-

 
                                                                    Exhibit 10.7

                              HOST MARRIOTT, L.P.

                      EXECUTIVE DEFERRED COMPENSATION PLAN



                               As amended and restated effective January 1, 1999

 
                               TABLE OF CONTENTS
                               -----------------
 
                                                                            Page
                                                                            ----

ARTICLE I    DEFINITIONS.................................................      2
 
       1.1   Administrator...............................................      2
       1.2   Benefit Allocation Agreement................................      2
       1.3   Code........................................................      2
       1.4   Company.....................................................      2
       1.5   Committee...................................................      2
       1.6   Compensation................................................      2
       1.7   Contribution Date...........................................      2
       1.8   Deferral Percentage.........................................      2
       1.9   Deferred Compensation.......................................      2
       1.10  Deferred Compensation Reserve...............................      2
       1.11  Director....................................................      3
       1.12  Effective Date..............................................      3
       1.13  Election....................................................      3
       1.14  Election Year...............................................      3
       1.15  Employee....................................................      3
       1.16  Host Marriott Corporation...................................      3
       1.17  Participant.................................................      3
       1.18  Plan........................................................      4
       1.19  Retirement and Savings Plan.................................      4
       1.20  Subsidiary..................................................      4
       1.21  Termination of Services.....................................      4
 
ARTICLE II   PARTICIPANT ELECTIONS.......................................      5
 
       2.1   Deferred Compensation Reserve...............................      5
       2.2   Annual Elections............................................      5
       2.3   Form of Election............................................      5
 
ARTICLE III  PARTICIPANT ACCOUNTS                                              7
 
       3.1   Individual Accounts.........................................      7
       3.2   Company Accruals............................................      7
       3.3   Crediting of Earnings.......................................      8
       3.4   Accounts Do Not Result in Property Rights...................      8
       3.5   Tax-Qualified Plans.........................................      8
       3.6   Non Assignment of Interests.................................      8
 
                                      -i-

 
ARTICLE IV   DISTRIBUTIONS...............................................      9
 
        4.1  Commencement of Distribution................................      9
        4.2  Beneficiaries...............................................     10
        4.3  Emergency Distributions.....................................     10
        4.4  Discharge of Obligation For Payment.........................     10
 
ARTICLE V    ADMINISTRATION..............................................     12
 
        5.1  Administrator...............................................     12
        5.2  Expenses....................................................     12
        5.3  Acceleration of Payments....................................     12
        5.4  Indemnification.............................................     12
        5.5  Administration of Directors Plan............................     12
 
ARTICLE VI   MISCELLANEOUS...............................................     13
 
        6.1  Disclaimer of Rights........................................     13
        6.2  No Trust Created............................................     13
        6.3  Amendment or Termination of Plan............................     13
        6.4  Effect of Plan..............................................     13
        6.5  Severability................................................     13
        6.6  Applicable Law..............................................     14
 
ARTICLE VII  SPECIAL RULES FOR PRE-EFFECTIVE DATE EMPLOYEES..............     15
 
        7.1  Governing Rules.............................................     15
 

                                     -ii-

 
                              HOST MARRIOTT, L.P.
                      EXECUTIVE DEFERRED COMPENSATION PLAN


                                   PREAMBLE
                                   --------

     WHEREAS, Host Marriott Corporation sponsors the Host Marriott Corporation
Executive Deferred Compensation Plan; and

     WHEREAS, HMC intends to enter into certain transactions pursuant to a plan
to reorganize its business operations so that it will qualify as a real estate
investment trust ("Host REIT Conversion"); and

     WHEREAS, as part of the Host REIT Conversion, (i) Host Marriott Corporation
will transfer its liabilities, including but not limited to liabilities relating
to employee benefits to Host Marriott, L.P. and (ii) Host Marriott Corporation
will merge with and into HMC Merger Corporation (to be renamed Host Marriott
Corporation); and

     WHEREAS, pursuant to the Contribution Agreement, Host Marriott Corporation
and Host Marriott, L.P. have also agreed to enter into an agreement allocating
responsibilities with respect to employee compensation, benefits, labor, and
certain other employment matters pursuant to the terms and conditions set forth
in the Employee Benefits and Other Employment Matters Allocation Agreement (the
"Allocation Agreement"); and

     WHEREAS, pursuant to the Allocation Agreement, Host Marriott Corporation
shall transfer to Host Marriott, L.P. sponsorship of the Host Marriott
Corporation Executive Deferred Compensation Plan (the "Plan") and all
liabilities and obligations for accrued benefits (including any earnings
attributable to such benefits) for Retained Individuals and Retained Employees,
effective as of Contribution Date (as such terms are defined in the Allocation
Agreement) and the name of the Plan shall be changed to the Host Marriott, L.P.
Executive Deferred Compensation Plan (the "Plan"); and

          NOW, THEREFORE, set forth herein are the terms of two plans, the Host
Marriott L.P. Executive Deferred Compensation Plan (the "Executive Plan") and
the Host Marriott, L.P. Non-Employee Directors Deferred Compensation Plan (the
"Director Plan") (individually, the "Plan", collectively the "Plans").

                                       1

 
                                   ARTICLE I
                                  DEFINITIONS

     For purposes of this Plan, unless the context requires otherwise, the
following words and phrases, when used herein with initial capital letters,
shall have the meanings indicated:

      1.1  "Administrator" means the person appointed by the Committee pursuant
            -------------                                                      
to Article 5.1 of this Plan to administer this Plan.

      1.2  "Benefit Allocation Agreement" means the Employee Benefits &
            ----------------------------                               
Other Employment Matters Allocation Agreement entered into between Host Marriott
Corporation, Host Marriott, L.P. and Crestline Capital Corporation in connection
with the Host REIT Conversion.

      1.3  "Code" shall refer to the Internal Revenue Code of 1986, as
            ----                                                      
amended, or any successor statute, including the regulations issued thereunder.

      1.4  "Company" shall refer, with respect to the Executive Plan,  to Host
            -------                                                           
Marriott, L.P. and any Subsidiary that (a) elects to join the Plan, and (b)
obtains the consent of the Committee to do so, and with respect to the Director
Plan, Host Marriott Corporation..

      1.5  "Committee" means the Compensation Policy Committee appointed by the
            ---------                                                          
Board of Directors of Host Marriott Corporation.

      1.6  "Compensation" means: (a) for purposes of the Executive Plan,
            ------------                                                 
all wages or salary, overtime, cash bonus, annual leave, sick leave, funeral
leave and holiday pay payable by the Company to an Employee, benefits under the
Host Marriott, L.P. Flexible Benefits Plan, and "Flexible Compensation" as
defined in Section 5.1 of the Retirement Plan, all without regard to any
Elections made by the Employee to defer such amounts under the Plan or in
accordance with any other plan or agreement with the Company, but excluding any
and all other forms of compensation and (b) for purposes of the Director Plan,
all directors' fees payable by the Company to a non-employee director of Host
Marriott Corporation.

     1.7   "Contribution Date" means the Contribution Date as defined in the
            -----------------                                               
Benefit Allocation Agreement.

      1.8  "Deferral Percentage" means the percentage of a Participant's
            -------------------                                         
Compensation for the Election Year to be deferred in accordance with an Election
pursuant to Article II of the Plan.

      1.9  "Deferred Compensation" means Compensation with respect to which
            ---------------------                                          
a Participant has made an Election to defer receipt thereof in accordance with
Article II of the Plan, and Section 401(k) Contributions, if any, elected in
accordance with Article V of the Retirement and Savings Plan.

      1.10 "Deferred Compensation Reserve" means the book reserve reflecting
            -----------------------------                                   
the total aggregate amounts credited to the individual accounts of Participants
under Article III of the Plan.

                                       2

 
      1.11 "Director" means a member of the Board of Directors of Host
            --------                                                  
Marriott Corporation.

      1.12 "Effective Date" means the Contribution Date.
            --------------                              

      1.13 "Election" means an election made by a Participant in accordance
            --------                                                       
with Article II of this Plan.

      1.14 "Election Year" means the fiscal year of the Company for which a
            -------------                                                  
Participant earns Compensation with respect to which the Participant makes an
Election pursuant to Article II of the Plan.

      1.15 "Employee" means any individual employed by the Company and any
            --------                                                      
Retained Employee or Retained Individual as such terms are defined in the
Allocation Agreement.

      1.16 "Host Marriott Corporation" means Host Marriott Corporation, a
Delaware corporation for the period before the Contribution Date (as such term
is defined in the Allocation Agreement) and  Host Marriott Corporation, a
Maryland corporation, for the period beginning on or after the Contribution
Date.

     1.17  "Participant" means:
            -----------        

            (a)  For purposes of the Executive Plan,

                 (i)    All Employees of the Company who are notified by the
Administrator that they are eligible to participate in this Plan and (A) whose
annual base salary plus cash bonus before any Election under this Plan exceeds
$120,000, or such other amount designated by the Committee; or (B) who have
three years of service with the Company, are bonus-eligible and whose annual
base salary before any Election under this Plan exceeds $75,000, or such other
amount designated by the Committee; or (C) who are select management employees
of an acquired company who are covered by a deferred compensation program of
such acquired company;

                 (ii)   All Employees who participated in the Retirement and
Savings Plan (or with respect to the Election Year beginning on the Effective
Date, the Host Marriott Corporation (HMC) Retirement and Savings Plan and Trust)
during the immediately preceding calendar year, and were subject to a reduction
during such year in the amounts allocable to their "Company Contribution
Accounts" in the Retirement and Savings Plan (or with respect to the Election
Year, the Host Marriott Corporation (HMC) Retirement and Savings Plan and Trust)
for such year as a result of Section 401(m) of the Code;

                 (iii)  All Employees who participated in the Retirement and
Savings Plan during the current fiscal year of the Company and who have
Compensation in excess of the limits set forth under Section 401(a)(17) of the
Code, provided such Employees have not made an election to participate for the
      --------
current year under paragraph (a) of this section;

                                       3

 
                 (iii)  Former Participants, terminated Participants, and their
beneficiaries, as appropriate to the context.

           (b)   For purposes of the Director Plan,

                 (i)    All non-employee Directors of Host Marriott Corporation;
and

                 (ii)   Former Directors and their beneficiaries, as appropriate
to the context.

     1.18  "Plan" means the Host Marriott L.P. Executive Deferred
            ----                                                 
Compensation Plan or the Host Marriott, L.P. Director Deferred Compensation
Plan, as appropriate to the context.

     1.19  "Retirement and Savings Plan" means the Host Marriott, L.P.
            ---------------------------                               
Retirement and Savings Plan and Trust.

     1.20  "Subsidiary" means either (a) a member of a controlled group of
            ----------                                                    
corporations of which the Company is a member, or (b) an unincorporated trade or
business which is under common control by or with the Company as determined in
accordance with Section 414(c) of the Code.  For purposes hereof, a "controlled
group of corporations" shall have the meaning set forth in Section 1563(a) of
the Code, determined without regard to Sections 1563(a)(4) and (e)(3)(C) of the
Code.

     1.21  "Termination of Services" means:
            -----------------------        

            (a)  For purposes of the Executive Plan:

                 (i)    termination of employment with the Company in any of
the following circumstances:

                        (A) Where the Employee voluntarily resigns or retires;

                        (B) Where the Employee is discharged;

                        (C) Where the Employee is totally and permanently
disabled and thereby unable to perform the usual duties of his employment with
the Company, as determined by the Administrator in accordance with standards set
forth in the Retirement and Savings Plan; or

                        (D) Where the Employee dies;

            (b)  For purposes of the Director Plan, the date the Participant
ceases to be a member of the Board of Directors of Host Marriott Corporation.

                                       4

 
                                   ARTICLE II
                             PARTICIPANT ELECTIONS


      2.1  Deferred Compensation Reserve.  The Company shall establish and
maintain a book reserve (the "Deferred Compensation Reserve"), to which it shall
credit the total aggregate amount designated by Participants each year in
Elections pursuant to Section 2.3(d).

      2.2  Annual Elections.

           (a) Each Participant shall have the option to designate in an
Election in the form prescribed in Section 2.3 an amount or a percentage of such
Participant's Compensation for any Election Year to be credited to the Deferred
Compensation Reserve; provided, however, that the Committee shall have the right
to approve or disapprove such Election by any Participant, in whole or in part,
in the sole discretion of the Administrator.

           (b) Elections shall be made on or before the last business day of the
fiscal year immediately preceding the Election Year.  Notwithstanding the
foregoing, a Participant may make an Election during the Election Year with
respect to Compensation earned for any subsequent payroll period of the Company
that begins during the remainder of the Election Year, provided such Election is
made within 30 days of notification by the Administrator of the Participant's
eligibility to participate in the Plan.

           (c) Except as provided in Section 4.3, an Election shall be
irrevocable with respect to all Compensation earned during an Election Year.
Notwithstanding the foregoing, an Election made as to an Election Year shall not
remain in effect with respect to Compensation earned for any subsequent year.

     2.3   Form of Election.

           (a)   Each Election shall be made on a form provided by the
Administrator within the period described in Section 2.2(b), and shall designate
either (i) a Deferral Percentage; (ii) a fixed dollar amount of the
Participant's Compensation for the Election Year to be deferred; (iii) a fixed
dollar amount of the Participant's Compensation for the Election Year to be paid
currently; or (iv) any combination of these methods with the consent of the
Administrator acting in his or her sole discretion; provided, however, that a
Participant who is also a participant in the Host Marriott Corporation Non-
Employee Directors' Deferred Stock Compensation Plan for the concurrent Election
Year may only designate a Deferral Percentage.  Such Elections shall designate a
distribution commencement date and manner of distribution in accordance with
Section 4.1; provided, however, that such distribution commencement date shall
be no later or earlier than the respective dates specified in Section 4.1(a).
If no designation is received by the Administrator within the prescribed time
period, the Administrator shall elect the time and manner of distribution and
notify the Participant of such selection.

                                       5

 
           (b)   Each Participant shall be entitled to Deferred Compensation for
the Election Year in an amount determined as follows: (i) if the Participant
elects a Deferral Percentage in accordance with paragraph (a)(i) of this
section, an amount equal to the product of such Deferral Percentage times the
Participant's total Compensation for each pay period of the Election Year; (ii)
if the Participant elects to designate a fixed dollar amount to be deferred in
accordance with paragraph (a)(ii) of this section, the amount so deferred; (iii)
if the Participant elects to designate a fixed dollar amount to be paid
currently in accordance with paragraph (a)(iii) of this section, the amount by
which such Participant's total Compensation for the Election Year exceeds such
fixed dollar amount; or (iv) if the Participant elects a combination of the
above in accordance with paragraph (a)(iv) of this section, the appropriate
amount shall be determined by the Administrator based on the above principles.

           (c)   Deferred Compensation shall first be credited to the
Participant's "Section 401(k) Contribution Account" in the Retirement and
Savings Plan to the extent designated by the Participant as "Section 401(k)
Contributions" in accordance with the terms of the Retirement and Savings Plan,
or to such lesser extent permitted by law provided the amount so designated
corresponds to the maximum amount permissible under Sections 401(k)(3), 402(g)
or 415 of the Code, as amended.

           (d)   The difference between the total amount determined under
paragraph (b) of this section and the amount determined under paragraph (c) of
this section shall be credited to the Deferred Compensation Reserve on behalf of
the Participant. In addition, there shall also be credited to the Deferred
Compensation Reserve on behalf of Participants described in Section 1.17(a)(iii)
the difference between (i) the total amount of "After-tax Savings" plus "Section
401(k) Contributions" in the Retirement and Savings Plan elected by each such
Participant for the current fiscal year, and (ii) the amount of "After-tax
Savings" and "Section 401(k) Contributions" permitted to be contributed to the
Retirement and Savings Plan for the current fiscal year on behalf of each such
Participant under the Compensation limits set forth in Section 401(a)(17) of the
Code. The preceding sentence shall be applied after first taking into account
limitations under Section 401(m) of the Code on such amounts.

           (e)   For purposes of this Section 2.3, Participants eligible to make
Elections provided herein shall include only Participants described in Sections
1.17(a)(i) and (b)(i), and shall exclude all other Participants.  Participants
described in Section 1.17(a)(i)(B) shall be entitled to make Elections only with
respect to an amount of Compensation not exceeding such Participant's bonus for
a year during which a timely Election is made as provided herein.  In addition
to any other Election permitted under this Section 2.3, each Participant
described in Section 1.17(a)(i)(C) shall also be entitled to make an Election to
have Deferred Compensation credited to his or her account in this Plan in an
amount equal to the amount which such Participant agrees to forfeit under a
deferred compensation plan of an acquired company.

                                       6

 
                                  ARTICLE III
                              PARTICIPANT ACCOUNTS


     3.1   Individual Accounts. The Administrator shall establish and maintain
records reflecting each Participant's interest in the Deferred Compensation
Reserve to which the Administrator shall credit Deferred Compensation in
accordance with each Participant's Election pursuant to Section 2.3(d), Company
Accruals pursuant to Section 3.2, Forfeiture Accruals pursuant to Section 3.3,
and earnings pursuant to Section 3.4.

     3.2   Company Accruals. The Company shall credit to the Deferred
Compensation Reserve on behalf of each Participant an amount ("Company
Accruals") each Election Year which shall be determined in the following manner:

           (a)   The Administrator shall determine for the Election Year the
ratio for allocating "Company Contributions" under Section 6.4 of the Retirement
Plan.

           (b)   The Administrator shall then determine for each Participant in
this Plan an amount equal to six percent (6%) of the Participant's total
Compensation for the Election Year, or, if less, the sum of (i) the
Participant's Deferred Compensation for the Election Year (as determined under
Section 2.3(b)) and (ii) the amount of the Participant's After-Tax Basic Savings
contributed to the Retirement Plan for the Election Year in accordance with
Section 4.2 of the Retirement Plan. The Committee may in its sole discretion
limit the dollar amount of a Participant's Deferred Compensation taken into
account for purposes of this Section 3.2 based on uniform standards, provided
that the Administrator notifies such Participant of such limitation on or prior
to the due date for Elections under Section 2.2(b).

           (c)   The amount determined in paragraph (b) of this section shall be
reduced by subtracting (i) the amount credited to the Participant as "Combined
Basic Savings" in the Retirement and Savings Plan for the Election Year.

           (d)   The Administrator shall then allocate to the Deferred
Compensation Reserve on behalf of each Participant the product of (i) the ratio
determined in accordance with paragraph (a) of this section, times (ii) the
amount determined in accordance with paragraph (c) of this section.

           (e)   The Administrator shall allocate to the Deferred Compensation
Reserve on behalf of each Participant described in Section 1.13(b) the amount of
any reduction of allocations to the "Company Contribution Accounts" of such
Participants under Section 6.7 of the Retirement and Savings Plan as of the same
date such amounts would have been allocated under the Retirement and Savings
Plan but for such reduction; provided however, as of the same date such amounts
would have been allocated under the Retirement and Savings Plan but for such
reduction, that in no event shall an amount be credited to a Participant's
account herein under this paragraph (e) if an equivalent amount is distributed
currently to such Participant.

                                       7

 
           (f)   In addition to the foregoing, the Administrator shall allocate
to the Deferred Compensation Reserve on behalf of each Participant described in
Section 1.13(b)(ii) an amount equal to the difference between (i) the total
amount of allocations that would have been made to the "Company Contribution
Account" of such Participant in the Retirement and Savings Plan for the current
fiscal year in the absence of the Compensation limits set forth in Section
401(a)(17) of the Code, and (ii) the amount permitted to be allocated under such
Compensation limi t

           (g)   Company Accruals under this Section 3.2 shall be allocated only
on behalf of Participants in the Plan (other than terminated Participants) as of
the last day of the fiscal year of the Company for which the allocation is made.

     3.3   Crediting of Earnings.  The Company shall credit earnings to the
Deferred Compensation Reserve in an amount determined as follows:

           (a)   Company contributions determined in accordance with Section 3.2
and earnings attributable thereto, along with forfeitures determined in
accordance with Section 3.3 and earnings attributable thereto, shall be credited
with earnings at the same rate and with the same frequency as earnings credited
to the "Stable Value Fund" described in the Retirement and Savings Plan.

           (b)   Deferred Compensation allocated to the Deferred Compensation
Reserve in accordance with Section 2.3(d), along with earnings attributable
thereto, shall be credited with earnings at the same rate and with the same
frequency as earnings credited to the "Stable Value Fund" described in the
Retirement and Savings Plan.

     3.4   Accounts Do Not Result in Property Rights.

           (a)   The Deferred Compensation Reserve and the accounts maintained
thereunder on behalf of each Participant are for administrative purposes only,
and do not vest in the Participants any right, title or interest in such reserve
or such accounts, except as expressly set forth in this Plan.

           (b)   Title to and beneficial ownership of any assets, whether cash
or investments which the Company may designate to make payments of Deferred
Compensation hereunder, shall at all times remain in the Company, and no
Participant shall have any property interest whatsoever in any specific assets
of the Company.

     3.5   Tax-Qualified Plans. Amounts credited to a Participant's account in
the Deferred Compensation Reserve shall not be deemed compensation to such
Participant for purposes of computing employer contributions or benefits under
any tax-qualified plan of deferred compensation maintained by the Company.

     3.6   No Assignment of Interests.  The rights of Participants or any
other persons to the payment of amounts from the Deferred Compensation Reserve
under this Plan shall not be assigned, transferred, pledged or encumbered except
by will or by the laws of descent and distribution.


                                       8

 
                                  ARTICLE IV
                                 DISTRIBUTIONS

     4.1   Commencement of Distribution.

           (a)   Except as otherwise specified in paragraph (d) of this section
or Section 4.3, Deferred Compensation, Company Accruals, Forfeiture Accruals and
earnings thereon credited to a Participant's account shall become distributable
as soon as administratively feasible following notification to the Administrator
of such Participant's Termination of Services or death (whichever occurs first).
Distribution shall be made in the manner specified in paragraph (b) of this
section. Alternatively, a Participant may elect in accordance with Section
2.3(a) for distribution to commence prior to Termination of Services, but no
earlier than the beginning of the sixth (6th) fiscal year of the Company
following the Election Year for which such Deferred Compensation was earned, if
applicable, or otherwise in a single lump sum cash payment. Such distribution
prior to Termination of Services will be permitted only to the extent that it
relates to an Election Year or Years for which the amount deferred exceeds six
percent (6%) of the Participant's total Compensation for such Election Year, and
the amount so distributed will consist solely of the amount of such excess
inclusive of any earnings attributable thereto.

           (b)(l)   A Participant shall designate in an Election made in
accordance with Section 2.3 whether distribution of his account shall be made in
the form of (i) a single lump sum cash payment; (ii) annual cash installments
payable over a designated term not to exceed ten (10) years; or (iii) any other
manner of distribution requested by the Participant, with the consent of the
Administrator acting in his or her sole discretion.  Notwithstanding the
foregoing, a Participant who is actively employed by the Company or serving on
the Company's Board of Directors shall be entitled to a change in the manner of
distribution of his account under paragraph (a) of this section as designated on
a form provided by the Administrator, with the consent of the Committee acting
in its sole discretion.  An approved request for change shall become effective
on the first anniversary (the "Anniversary Date") of the date such request was
received by the Administrator, provided such request shall be invalid if the
Participant has a Termination of Services as described in Section 1.17 (but not
including Section 1.17(b) or (c)) prior to the Anniversary Date, or, as to
Deferred Compensation relating to any Election Year, if any amount of such
Deferred Compensation for an Election Year would otherwise become distributable
prior to the Anniversary Date.  Notwithstanding the foregoing, a Participant who
has a Termination of Services as described in Section 1.17(b) or (c) may cancel
the request for change at his or her option as designated on a form provided by
the Administrator.

           (b)(2)   A Participant requesting a change pursuant to paragraph
(b)(l) of this section shall be prohibited from making an Election in accordance
with Section 2.3, and any Election previously made shall be ineffective, to the
extent such Election applies to the next Election Year beginning after the date
of the Participant's change request.

           (b)(3)   No earnings shall be credited under Section 3.4(a) on
amounts allocated to the Deferred Compensation Reserve under Section 3.2(e) for
the period from the date of a Participant's 

                                       9

 
Termination of Services (or the date on which a Participant's status as a member
of the Company's Board of Directors ceases) until the date of the first
distribution of such amounts, in the event a change in the manner of
distribution of such amounts has been approved by the Committee as provided
above.

           (c)   If payment is deferred and paid in installments in accordance
with paragraph (b) of this section, the remaining balance in the Participant's
account shall continue to be credited with earnings as provided in Sections 3.1
and 3.4(b).

           (d)   Notwithstanding the foregoing, no distribution shall be made of
Company Accruals credited to a Participant's account under Section 3.2, of
Forfeiture Accruals credited under Section 3.3, or of earnings credited thereon
under Section 3.4(a), except to the extent such amounts would be vested if they
had been contributed on behalf of the Participant as Company contributions or
forfeitures under the Retirement Plan.  For this purpose, such amounts shall be
deemed to vest in accordance with the schedule set forth in Section 7.3 of the
Retirement and Savings Plan, and nonvested amounts shall be forfeited if the
Participant terminates employment with the Company in circumstances in which the
Participant would not be fully vested under the Retirement and Savings Plan.
The Company shall have no further obligation to the Plan or to any Participant
for nonvested amounts forfeited hereunder.

     4.2   Beneficiaries.   Each Participant may designate a beneficiary on
a form provided by the Administrator to receive distributions made pursuant to
Section 4.1; provided, however, that the beneficiary designated by the
Participant under the Retirement Plan shall be deemed to be the beneficiary
under this Plan unless the Participant specifically designates otherwise.  If no
beneficiary is designated under the Retirement and Savings Plan or under this
Plan, or if the beneficiary shall not survive the Participant, the Participant
shall be deemed to have designated the following beneficiaries (if then living)
in the following order of priority: (i) spouse; (ii) children; including adopted
children, in equal shares; (iii) parents, in equal shares; and (iv) the
Participant's estate.

     4.3   Emergency Distributions.  Notwithstanding the provisions of Section
4.1, the vested portion of a Participant's account may be distributed prior to
such Participant's Termination of Services, death, or other distribution date
elected by the Participant in the sole discretion of the Committee.
Distribution shall be made under this Section 4.3 only in cases of serious
financial emergency which is beyond the control of the Participant, as
determined by the Committee, and only if failure to make the distribution would
result in severe financial hardship to the Participant or beneficiary.  Amounts
distributed under this Section 4.3 shall not exceed the amount needed to satisfy
such emergency and to pay all applicable taxes on the amount of the
distribution.

     4.4   Discharge of Obligation For Payment.  If the Administrator shall find
that any person to whom any payment is payable under this Plan is unable to care
for such person's affairs because of illness or accident, or is a minor, any
payment due (unless a prior claim therefor shall have been made by a duly
appointed guardian, committee or other legal representative) may be paid to the
spouse, a child, a parent, or a brother or sister, or to any person deemed by
the Administrator to have incurred expense for such person otherwise entitled to
payment, in such manner and 

                                      10

 
proportions as the Administrator may determine. Any such payment shall be
complete discharge of the liabilities of the Company under this Plan.


                                      11

 
                                   ARTICLE V
                                 ADMINISTRATION


     5.1   Administrator.  The Committee shall appoint an Administrator who
shall be responsible for the management, operation and administration of the
Plan. The Administrator shall have full power and authority to interpret,
construe and administer this Plan and the Administrator's interpretations and
construction thereof, and actions hereunder, including any valuation of the
Deferred Compensation Reserve, or the amount or recipient of the payment to be
made therefrom, shall be binding and conclusive on all persons for all purposes.
The Company shall not be liable to any person for any action taken or omitted in
connection with the interpretation and administration of this Plan unless
attributable to willful misconduct or lack of good faith by the Company.

     5.2   Expenses.  The expenses of administering this Plan shall be borne by
the Company and shall not be charged against the Deferred Compensation Reserve.

     5.3   Acceleration of Payments.  Notwithstanding anything in this Plan to
the contrary, the Committee in its sole discretion may direct the Administrator
to pay any or all amounts credited to a Participant's account in a single lump
sum cash payment or accelerate payment of installments distributable under
Article IV of this Plan, in order to clear out small balances, terminate the
Plan, or otherwise to relieve costs of maintaining and administering the Plan.

     5.4   Indemnification.  To the extent permitted by applicable state law,
the Company shall indemnify and save harmless the Board of Directors and each
member or delegate thereof, each employee or delegate thereof, so long as it is
composed of individuals appointed by the Company, the Plan Administrator and
each employee or delegate thereof, against any and all expenses, liabilities and
claims, including legal fees to defend against such liabilities and claims,
arising out of their discharge of responsibilities under or incident to the
Plan, excepting only expenses and liabilities arising out of willful misconduct
or gross negligence. This indemnity shall not preclude such further indemnities
as may be available under insurance purchased by the Company or provided by the
Company under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, as such indemnities are permitted under state law.
Payments with respect to any indemnity and payment of expenses or fees under
this section shall be made only from assets of the Company and shall not be made
directly or indirectly from Trust assets.

     5.5   Administration of Directors Plan.  The Directors Plan shall be
administered solely in the State of Maryland.  All actions with respect to
Directors will occur in the State of Maryland.


                                      12

 
                                   ARTICLE VI
                                 MISCELLANEOUS


     6.1   Disclaimer of Rights.  Nothing contained herein shall be construed as
conferring upon any Participant the right to continue in the employ or service
of or to maintain a relationship with the Company as an executive or in any
other capacity.

     6.2   No Trust Created.  Nothing contained in this Plan and no action taken
pursuant to the provisions of this Plan shall create or be construed to create a
trust of any kind, or a fiduciary relationship between the Company and any
person, including any Participant or any other person. Any amounts which may be
credited to the Deferred Compensation Reserve shall continue for all purposes to
be a part of the general funds of the Company and no person other than the
Company shall by virtue of the provisions of this Plan have any interest in such
funds.  To the extent that any person acquires a right to receive payments from
the Company under this Plan, such right shall be no greater than the right of
any unsecured general creditor of the Company.

     6.3   Amendment or Termination of Plan.

           (a)   The Board of Directors of the Company may amend or terminate
the Plan at any time and from time to time, and/or distribute all account
balances under the Plan, pursuant to written resolutions adopted by such Board
of Directors. In no event will any such amendment or termination of the Plan
have the effect of reducing the accrued account balance or then vested
percentage of any Participant under this Plan.

           (b)   If a determination is made by the Internal Revenue Service that
the account balance of any Participant is subject to current income taxation,
such account balance will be immediately distributed to the Participant or the
Participant's beneficiary to the extent of such taxable amount; provided,
however, that if the Participant is contesting the above mentioned determination
of the Internal Revenue Service, the Administrator may in his or her sole
discretion delay distribution until the determination is final.

           (c)   In the event the Retirement and Savings Plan is terminated, the
Committee may at its sole discretion distribute all account balances under this
Plan.  Alternatively, in the event of such termination the Committee may at its
sole discretion establish another basis for crediting earnings under this Plan,
provided that any rate so credited shall not be less than the Company's
borrowing rate from time to time.

     6.4   Effect of Plan. This Plan shall be binding upon and inure to the
benefit of the Company, its successors and assigns, and the Participants and
their heirs, beneficiaries, executors, administrators and legal representatives.

     6.5   Severability.  If any provision of this Plan shall for any reason be
invalid or unenforceable, the remaining provisions shall nevertheless remain in
full force and effect.

                                      13

 
     6.6   Applicable Law. This Plan shall be construed in accordance with and
governed by the laws of the State of Maryland.


                                      14

 
                                  ARTICLE VII
                 SPECIAL RULES FOR PRE-EFFECTIVE DATE EMPLOYEES


     7.1   Governing Rules.  Notwithstanding anything contained elsewhere in
this Plan to the contrary, the following rules shall apply to Employees who were
employed by Host Marriott Corporation on the date before the Effective Date.

           (a)   Any election in effect under the Host Marriott Corporation
Executive Deferred Compensation Plan, and the Host Marriott Corporation (HMC)
Retirement and Savings Plan and Trust (the "Prior Profit Sharing Plan") on the
date before the Effective Date shall continue to be effective under this Plan
for the Election Year beginning on or immediately after the Effective Date, and
any compensation taken into account under the Prior Profit Sharing Plan shall be
taken into account under this Plan for purposes of Articles II and IV for the
such Election Year.

           (b)   Any notification by the administrator under the Host Marriott
Corporation Executive Deferred Corporation Plan as in effect on or prior to the
Effective Date (the "Prior Plan") concerning eligibility to participate in such
plan for the 1999 year shall continue to be effective under this Plan for the
Election Year beginning on or after the Effective Date.

           (c)   Any service with Host Marriott Corporation prior to the
Effective Date shall be taken into account in determining service with the
Company for purposes of determining years of service under Section 1.17(a)(i).

           (d)   For purposes of Section 1.17(a)(iii), participation in the Plan
for the 1999 Election Year shall include participation in the Prior Plan for
such year.

           (e)   Any approved request in effect under the Prior Plan to change
the Participant's manner of distribution of his account shall continue to be
effective under this Plan as if such request had been approved under this Plan.

           (f)   Any beneficiary designation in effect under the Prior Plan on
the date before the Effective Date shall continue to be effective under this
Plan.


                                      15

 
                            CERTIFICATE OF SECRETARY
- --------------------------------------------------------------------------------

     I, the undersigned secretary of Host Marriott Corporation (the
"Corporation") as General Partner of Host Marriott L.P., do hereby certify that
the attached copy of the Host Marriott, L.P. Executive Deferred Compensation
Plan (the "Executive Plan") and the Host Marriott, L.P. Non-Employee Director
Deferred Compensation Plan (the "Director Plan") is a true and correct copy of
the Plans and that there have been no amendments or modifications to the Plans
that are not reflected in this copy.

     IN WITNESS WHEREOF, I have hereunto set my hand and seal of Host Marriott
Corporation as of the 1st day of January, 1999.



                                    ------------------------------   
                                    Christopher G. Townsend
                                    Secretary

 
                                                                   Exhibit 10.14


                AMENDMENT NO. 5 DATED AS OF DECEMBER 18, 1998 TO
             DISTRIBUTION AGREEMENT DATED AS OF SEPTEMBER 15, 1993
                       BETWEEN HOST MARRIOTT CORPORATION
                        AND MARRIOTT INTERNATIONAL, INC.


          Host Marriott Corporation (f/k/a Marriott Corporation, "Host
Marriott"), Marriott International, Inc. ("MII") and Host Marriott Services
Corporation desire to adopt this Amendment to the Distribution Agreement between
Host Marriott and MII dated as of September 15, 1993 (the "Original Agreement,"
and, as amended hereby and by that certain Amendment No. 1 to the Original
Agreement dated as of December 29, 1995, that certain Amendment No. 2 to the
Original Agreement dated as of June 21, 1997, that certain Amendment No. 3 to
the Original Agreement dated as of March 3, 1998 and that certain proposed
Amendment No. 4 to the Original Agreement expected to be entered into after the
date hereof, the "Distribution Agreement").

          WHEREAS, by letter dated December 10, 1998, Southeastern Asset
Management, Inc. ("Southeastern"), an investment advisor registered under
Section 203 of the Investment Advisers Act of 1940, advised Host Marriott that
approximately 135 accounts over which Southeastern has either investment
discretion, voting authority, or both, currently own in the aggregate 40,923,400
shares of Host Marriott Common Stock, or approximately 19.97% of the 204,954,447
shares of Host Marriott Common Stock outstanding on the record date for the Host
Marriott Special Meeting held on December 15, 1998 to approve the merger (the
"Merger") of Host Marriott with and into HMC Merger Corporation, a Maryland
corporation to be renamed "Host Marriott Corporation" ("Host REIT") after the
Merger;

          WHEREAS, Host Marriott expects that, on the date hereof, its Board of
Directors will declare a special dividend (the "Special Dividend") to
stockholders of record on December 28, 1998 entitling such stockholders to elect
to receive such Special Dividend in the form of cash or Host Marriott Common
Stock; and

          WHEREAS, the parties hereto desire to amend the Distribution Agreement
in connection with such Special Dividend.

          NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto hereby agree as follows:


          1.  Section 6.07 of the Distribution Agreement shall be amended by
adding and reserving for further Amendment subsections (j) and (k) and adding
subsection (l) as follows:

 
          (j)  [Reserved for proposed Amendment No. 4]

          (k)  [Reserved for proposed Amendment No. 4]

          (l)  Notwithstanding anything contained in this Section 6.07 or any
               other section of this Agreement, Southeastern Asset Management,
               Inc. ("Southeastern"), an investment advisor registered under
               Section 203 of the Investment Advisers Act of 1940, shall not be
               deemed to have triggered the Right if such Right would otherwise
               have been triggered until such time (if ever) as it becomes the
               Beneficial Owner of a number of shares of Voting Stock in excess
               of the sum (the "Maximum Number") of (i) 40,923,400 shares of
               Voting Stock plus (ii) such number of shares of Voting Stock
               actually acquired by Southeastern through accounts over which it
               exercises investment discretion, voting authority or both as the
               result of any election (or deemed election) to receive Voting
               Stock in payment of the Special Dividend (or, prior to the date
               of any such election or deemed election, such number of shares of
               Voting Stock which it can elect to receive in payment of the
               Special Dividend) declared by Host Marriott on December 18, 1998
               to stockholders of record on December 28, 1998 (as the number
               representing the sum of (i) and (ii) may be adjusted to give
               effect to stock splits, stock dividends, subdivisions,
               combinations, reclassifications or similar events, to the extent
               appropriate), which dividend payment obligations will be assumed
               by HMC Merger Corporation, a Maryland corporation ("Host REIT"),
               in connection with the merger of Host Marriott with and into Host
               REIT; provided, however, that if at any time after December 28,
                     --------  -------                                        
               1998, Southeastern shall be the Beneficial Owner of a number of
               shares of Voting Stock representing less than 20% of the total
               voting power of the then outstanding shares of Voting Stock and
               if Southeastern shall become at any time thereafter the
               Beneficial Owner of a number of shares of Voting Stock
               representing 20% or more of the total voting power of the then
               outstanding shares of Voting Stock, Southeastern shall thereupon
               be deemed to have triggered the Right; provided further, that if
                                                      -------- -------         
               the number of shares of Voting Stock beneficially owned by
               Southeastern is reduced to less than 20% of the total voting
               power of the then outstanding Voting Stock as a result of
               dispositions of Voting Stock in the ordinary course of trading
               for its clients' accounts within a five (5) consecutive trading
               day period, and Southeastern reacquires the beneficial ownership
               of the number of shares so disposed, again in the ordinary course

                                      -2-

 
               of trading for its clients' accounts, within twenty (20)
               consecutive trading days immediately after such five (5) day
               trading period, then such reacquisition (subject always to the
               Maximum Number) shall not be deemed to have triggered the Right.
               Nothing herein is intended to grant, or shall be construed as
               granting, to Southeastern, any of its affiliates or any of
               Southeastern's funds or accounts a waiver from the ownership
               limit (or any provision thereof) under the Charter of Host REIT.

          2.   Except as specifically amended hereby, the Distribution Agreement
continues in full force and effect without modification and is hereby ratified
and confirmed in all respects.

          3.   This Amendment may be executed in any number of counterparts,
which, when taken together, shall constitute a single binding instrument.



                   [signatures appear on the following page]

                                      -3-

 
          IN WITNESS WHEREOF, the parties have caused this Amendment No. 5 to be
duly executed and delivered as of December 18, 1998.


                                   MARRIOTT INTERNATIONAL, INC.
        
        
                                   By:________________________
                                   Name:______________________
                                   Title:_____________________
        
        
                                   HOST MARRIOTT CORPORATION
        
        
                                   By:________________________
                                   Name:______________________
                                   Title:_____________________
        
        
        
                                   HOST MARRIOTT SERVICES CORPORATION
        
        
                                   By:________________________
                                   Name:______________________
                                   Title:_____________________


The undersigned is executing this Amendment for the purpose of acknowledging and
consenting to the provisions hereof.


                                   HMC MERGER CORPORATION
                         
                                   By:________________________
                                   Name:______________________
                                   Title:_____________________


                                      -4-

 
                                                                   Exhibit 10.16

                                Amendment to the
                             Distribution Agreement
                                    between
                           Host Marriott Corporation
                                      and
                       Host Marriott Services Corporation
                                        

          WHEREAS, Host Marriott Corporation ("Host Marriott") and Host Marriott
Services Corporation ("Services"), made and entered into a Distribution
Agreement (the "Agreement") as of December 22, 1995;

          WHEREAS, Section 11.05 of the Agreement provides that the Agreement
may be amended in writing executed by the parties; and

          WHEREAS, Host Marriott intends to enter into certain transactions
pursuant to a plan to reorganize its business operations so that effective as of
January 1, 1999 it will qualify as a "real estate investment trust" under
Sections 856 through 859 of the Internal Revenue Code of 1986, as amended ("Host
REIT Conversion"); and

          WHEREAS, the Internal Revenue Code may limit certain payments that may
be received by Host Marriott after the Host REIT Conversion;

          NOW, THEREFORE, BE IT

          RESOLVED, that the Agreement be, and it hereby is, amended as follows:

          1.  Section 1.01 shall be amended by adding the following terms and
their definitions:

          Code:  the Internal Revenue Code of 1986, as amended.
          -----                                                

          Host REIT Conversion:  certain transactions entered into by Host
          ---------------------                                           
Marriott pursuant to a plan to reorganize its business operations so that it
will qualify as a real estate investment trust as of January 1, 1999.

          2.  Article XI shall be amended by adding the following new Section
11.15 to the end:

          Section 11.15  Limits on Payments to Host Marriott.  This Section
                         -----------------------------------               
11.15 shall become effective as of the Host REIT Conversion.  Notwithstanding
any other provision of this Agreement to the contrary, the 

 
payments otherwise to be made by Services to Host Marriott under this Agreement
(the "Required Payments"), shall not exceed (i) the sum of (A) the maximum
amount that can be paid to Host Marriott in any taxable year without causing
Host Marriott to fail to meet the requirements of Code Sections 856(c)(2) and
(3), determined as if the payment of such amount did not constitute income
described in Code Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) ("Qualifying
Income"), as determined by independent accountants to Host Marriott, and (B) in
the event Host Marriott receives a letter from outside counsel (the
"Indemnification Payment Tax Opinion") indicating that Host Marriott has
received a ruling from the IRS holding that Host Marriott's receipt of the
Required Payments otherwise to be paid under this Agreement would either
constitute Qualifying Income or would be excluded from gross income of Host
Marriott within the meaning of Code Sections 856(c)(2) and (3) (the "REIT
Requirements") or that the receipt by Host Marriott of the remaining balance of
the Required Payments to be made under this Agreement following the receipt of
and pursuant to such ruling would not be deemed constructively received prior
thereto, the Required Payments less the amount otherwise paid or payable under
clause (A) above. Services' obligation to pay any unpaid portion of any Required
Payment shall terminate three years from the date such payment otherwise would
have been made but for this Section 11.15. In the event that Host Marriott is
not able to receive the full Required Payment that otherwise would be due under
this Agreement as and when such payments otherwise would be required to be made,
Services shall place the unpaid amount in escrow and shall not release any
portion thereof to Host Marriott unless and until Services, receives either one
of the following: (i) a letter from Host Marriott's independent accountants
indicating the maximum amount that can be paid at that time to Host Marriott
without causing Host Marriott to fail to meet the REIT Requirements or (ii) an
Indemnification Payment Tax Opinion, in either of which events Services shall
pay to Host Marriott the lesser of the unpaid Required Payments or the maximum
amount stated in the letter referred to in (i) above.

                                       2

 
          IN WITNESS WHEREOF, the parties have executed this Amendment to the
Agreement as of December 28, 1998.


                                        HOST MARRIOTT CORPORATION



                                        By:
                                           -------------------------------- 
                                        Name:
                                        Title:


                                        HOST MARRIOTT SERVICES               
                                        CORPORATION                     



                                        By:
                                           -------------------------------- 
                                        Name:
                                        Title:


                                       3

 
                                                                   EXHIBIT 10.18

                               LICENSE AGREEMENT



         THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of
this ___ day of December, 1998 by and among HOST MARRIOTT CORPORATION, a
Delaware corporation ("HM Corporation"), HOST MARRIOTT, L.P., a Delaware limited
partnership ("HM Operating Partnership")(HM Corporation and HM Operating
Partnership being collectively referred to as the "HM Parties"), MARRIOTT
INTERNATIONAL, INC., a Delaware corporation ("Marriott International") and
MARRIOTT WORLDWIDE CORPORATION, a Maryland corporation ("MWC")(MWC and Marriott
International being collectively referred to as the "Marriott International
Parties")


                                    RECITALS


         A. HM Corporation, directly and through subsidiaries, is engaged as its
principal business in developing, purchasing, leasing, selling and owning, but
not managing, hotel properties which hotel properties are principally managed by
Marriott International and its subsidiaries and, as additional businesses, the
ownership of restaurants, real estate, office buildings and other real estate
(the "Development and Ownership Business"). Pursuant to its conversion to a
publicly-traded real estate investment trust, HM Corporation will be merged into
HMC Merger Corporation, a newly-formed Maryland corporation (the "Merger"). Upon
the effectiveness of the Merger, HMC Merger Corporation will be renamed Host
Marriott Corporation. In connection with the Merger, substantially all of the
Development and Ownership Business will be transferred to HM Operating
Partnership. HM Corporation will be the sole general partner of and have Control
(as defined herein) over HM Operating Partnership.

 
         B. Marriott International, directly and through its subsidiaries, is
engaged in the business of lodging operation, management and franchising, senior
living services management, timeshare resort development and operation, and food
and other products procurement and distribution (the "Management Business").

         C. HM Corporation (previously known as Marriott Corporation) and
Marriott International are parties to that certain Assignment and License
Agreement dated as of October 8, 1993 (the "Assignment and License Agreement")
under which (i) Marriott Corporation assigned to Marriott International certain
trademark, service mark, trade name and related rights pursuant to Section 2 of
that agreement, and (ii) Marriott International licensed to Marriott Corporation
certain trade name and related rights pursuant to Section 3 of that agreement.

         D. Effective upon the Merger, the parties desire to revoke and replace
those portions of the Assignment and License Agreement pursuant to which HM
Corporation was granted a license to use certain Marriott Marks, and to enter
into a new license agreement which shall provide the HM Parties certain limited
rights to use certain of the Marriott Marks in accordance with and subject to
the terms of this Agreement.

         NOW, THEREFORE, in consideration of the foregoing, the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

         NOW, THEREFORE, in consideration of the foregoing, the mutual promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

            1. Definitions. As used herein, the following terms have the
               -----------
meanings set forth below:

         "Change of Control" shall mean any of the following: (i) any single
          -----------------
Person or group of Persons acting in concert shall have elected a majority of
the board of directors of HM Corporation; (ii) any single Person or group of
Persons acting in 

                                       2

 
concert, shall have acquired beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934), directly or indirectly, or shall have entered into a contract or
arrangement that, upon consummation, will result in its or their acquisition of,
the power to exercise, directly or indirectly, Control over HM Corporation or HM
Operating Partnership; (iii) HM Corporation ceases to be the sole general
partner of HM Operating Partnership; or (iv) the inability or loss of right of
HM Corporation to exercise Control over HM Operating Partnership.

         "Control" shall mean the possession, direct or indirect, of the power
          -------
to direct or cause the direction of the management and policies of a Person,
whether through ownership of securities, by contract or otherwise. For purposes
of this Agreement, acting as general partner of a partnership shall be
considered "Control" of such partnership.

         "Development and Ownership Business" has the meaning set forth in
          ----------------------------------
Recital A.

         "Dispute" has the meaning set forth in Section 6.
          -------

         "Expenses" has the meaning set forth in Section 6.
          --------

         "HM Corporation" has the meaning set forth in the first paragraph of
          --------------
this Agreement. For purposes of its execution hereof, HM Corporation is signing
this Agreement in both its capacity as the successor and current party to the
Assignment and License Agreement and as the entity that has merged into HMC
Merger Corporation and is the sole general partner of HM Operating Partnership.

         "HM Name" has the meaning set forth in Section 2.
          -------

         "HM Operating Partnership" has the meaning set forth in Recital A.
          ------------------------

         "HM Parties" means HM Corporation and HM Operating Partnership.
          ---------- 


                                       3

 
         "HM Subsidiaries" means the partnerships and corporations listed on
          ---------------
Exhibit A that have a Marriott Mark as a part of their partnership or corporate
name as of the date of this Agreement.

         "Indemnified Party" has the meaning set forth in Section 6.
          ----------------- 

         "Indemnitor" has the meaning set forth in Section 6.
          ----------

         "Infringing Marks" has the meaning set forth in Section 7.
          ----------------

         "License" has the meaning set forth in Section 2.
          -------

         "LP Name" has the meaning set forth in Section 2.
          -------

         "Management Business" has the meaning set forth in Recital B.
          -------------------

         "Marriott International" has the meaning set forth in the first
          ----------------------
paragraph of this Agreement.

         "Marriott International Parties" has the meaning set forth in the first
          ------------------------------
paragraph of this Agreement.

         "Marriott International Indemnitee" has the meaning set forth in
          ---------------------------------
Section 6.

         "Marriott Marks" means any name or mark owned by a Marriott
          --------------
International Party, whether registered or unregistered, including but not
limited to CAMELBACK INN, COURTYARD, DESERT SPRINGS, FAIRFIELD, FORUM, MARQUIS,
MARRIOTT, or RESIDENCE INN.

         "Person" means any individual, corporation, partnership, association,
          ------
trust company or other entity or organization, including any government entity
or authority.

         "Subsidiary" means, with respect to any Person, (i) any corporation of
          ---------- 
which at least a majority in interest of the outstanding voting stock (having by
the terms thereof voting power under ordinary circumstances to elect a majority
of the directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, 


                                       4

 
owned or controlled by such Person, by one or more Subsidiaries of such Person,
or by such Person and one or more of its Subsidiaries, or (ii) any non-corporate
entity in which such Person, one or more Subsidiaries of such Person, or such
Person and one or more Subsidiaries of such Person, directly or indirectly, at
the date of determination thereof, has at least a majority ownership interest.

         "Sub Names" means the names of those HM Subsidiaries and affiliates as
          --------- 
identified on Exhibit A attached hereto that have a Marriott Mark as a part of
              --------- 
their partnership or corporate name as of the date of this Agreement.

               2. Revocation of Prior License and New License to HM Parties.
                  ---------------------------------------------------------

                  a. Revocation of Prior License. Upon the effectiveness of the
                     ---------------------------
Merger, the terms and conditions of the Assignment and License Agreement
relating to the granting of a license to HM Corporation to use the "Licensed
Marks"(as defined therein), including Section 3 thereof, are revoked and of no
further force or effect. In the event of any conflict between the terms of this
Agreement and the terms of the Assignment and License Agreement relating to the
use of the "Licensed Marks", the terms of this Agreement shall control.

                  b. License. Upon the effectiveness of the Merger, the Marriott
                     -------
International Parties hereby grant to the HM Parties a non-exclusive, royalty
free, and worldwide right and license to use certain of the Marriott Marks in
the following limited contexts and purposes, and subject to the conditions
described in Section 2.c below (the "License").

                     (1)    Context. The License to use certain of the Marriott 
                            ------- 
Marks is limited specifically to the following uses and contexts:

                            (i)   For HM Corporation to use the "Marriott" name
as part of the corporate name "Host Marriott Corporation" (the "HM Name") and
for HM Operating Partnership to use the "Marriott" name as part of the
partnership name "Host Marriott, L.P." (the "LP Name").

                                       5

 
                         (ii)  For the HM Subsidiaries to use certain of the
Marriott Marks as part of the Sub Names, as such marks are currently in use by
the HM Subsidiaries as of the date of this Agreement, and further subject to the
following:

                               (x) The License with respect to the names of
corporate HM Subsidiaries shall expire six (6) months from the date of execution
of this Agreement, by which time the HM Parties shall have caused (or used their
reasonable best efforts to cause and continues to pursue to completion
thereafter) all of the corporate HM Subsidiaries to adopt new names which do not
contain any Marriott Mark;

                               (y) The HM Parties shall use their reasonable 
efforts to cause all of the partnership HM Subsidiaries (other than HM Operating
Partnership) to adopt new names (not incorporating any of the Marriott Marks);
and

                               (z) In the event the HM Parties cease to have
Control over any HM Subsidiary, the License with respect to such HM Subsidiary
shall cease and terminate.

                         (iii) For all purposes of this Agreement, the Marriott
Marks shall not be used in a manner other than as part of the HM Name, the LP
Name and the Sub Names.

                     (2) Purposes. The License to use the Marriott Marks in the
                         --------
contexts described in Section 2.b(1) is limited specifically to the following
purposes:

                         (i)   The Marriott Marks shall be used as part of the
HM Name, the LP Name and the Sub Names only (x) to identify HM Corporation, HM
Operating Partnership and the HM Subsidiaries for corporate or partnership name
purposes, as further described in Section 2.d below and (y) except as
specifically provided in Section 2.b(2)(ii) below, only in connection with HM

                                       6

 
Corporation's, HM Operating Partnership's and the HM Subsidiaries' activities
relating directly to the Development and Ownership Business. With respect to
that portion of the Development and Ownership Business consisting of the
ownership of restaurants, senior living, office buildings and other real estate,
the HM Parties agree that any additional business (i.e. beyond the business
conducted as of the date hereof) in such areas shall not be undertaken by
entities utilizing the Marriott Mark as part of their name, the intent being
that to the extent the HM Parties are engaged in such business as of the date
hereof, they may maintain such business in their current corporate ownership
structure, but that new business in such areas will not utilize in any manner
the Marriott Marks as part of the ownership structure. The License does not
include, and HM Corporation, HM Operating Partnership and the HM Subsidiaries
are not permitted, any use of the Marriott Marks as trademarks or service marks
for any goods or services, or any use of the Marriott Marks in connection with
the operation or management of any business other than the Development and
Ownership Business including, without limitation, any use of the Marriott Marks
in connection with the Management Business or in soliciting agreements from
hotel or other property owners to any HM Party to manage, operate or franchise
hotel, senior living, lodging, office, or timeshare properties.

                         (ii)   Notwithstanding any provision hereof to the
contrary, for purposes of engaging in other businesses outside of the
Development and Ownership Business, any HM Party may do so without violating the
provisions of Section 2.b(2)(i) above, provided such other businesses are
conducted by an entity that does not utilize in any manner whatsoever the
Marriott Marks in its name or the conduct of its business (other than to
identify its corporate affiliation with HM Corporation, HM Operating Partnership
and/or the HM Subsidiaries (as the case may be), solely for the purposes of
satisfying legal requirements (such as SEC statements and other reports and
documents required to be filed with governmental agencies) or describing
corporate ownership for contractual purposes, but in no event for corporate
identification, marketing or solicitation purposes or any other 

                                       7

 
purpose wherein a Marriott Mark would be used in the context of the identity of
such business that is promoted to the general public).

         c. Conditions. The License is subject to the following conditions:
            ----------

            (1) HM Corporation's corporate name remains HOST MARRIOTT 
CORPORATION (provided that if HM Corporation changes its corporate structure,
the word "corporation" could be changed as necessary, and with the consent of
Marriott International, not to be unreasonably withheld, to incorporate the
proper legal term for such structure, such as "Host Marriott Trust");

            (2) HM Operating Partnership's partnership name remains HOST 
MARRIOTT, L.P.;

            (3) The majority of all hotels owned by the HM Parties are managed 
by, or operated pursuant to franchises granted by, Marriott International or an
entity controlled by Marriott International; and

            (4) At least sixty percent (60%) of the gross revenues of the HM
Parties (on a consolidated basis, including gross revenues of subsidiaries and
affiliates as are reported on a consolidated basis), is derived from the
business of developing, purchasing, leasing, selling and owning, but not
managing, hotel properties.

         d. Use of the Marriott Marks for Corporate and Partnership
            -------------------------------------------------------
Identification Purposes Only. As described above, the only purposes for which
- ----------------------------
the Marriott Marks may be used pursuant to the License (as part of the names of
HM Name, the LP Name and the Sub Names) is for corporate or partnership (as
appropriate) identification of HM Corporation, HM Operating Partnership and the
HM Subsidiaries as entities engaged in the Development and Ownership Business.
Examples of such use include filings with the Securities and Exchange Commission
and other governmental entities, annual reports, invoices, shipping documents,
mailing labels, business cards and stationery, materials distributed to
investors, 

                                       8

 
and other similar uses where a name is used to identify a corporation
or partnership. Any use of the Marriott Marks (as part of the names of HM Name,
the LP Name and the Sub Names) in any promotional materials or advertising,
including electronic medium such as the Internet, shall be to identify HM
Corporation, HM Operating Partnership and the HM Subsidiaries as entities in the
Development and Ownership Business, and shall not be used to promote any goods
or services.

         e. Use of Marriott Marks on the Internet and as a Domain Name. HM
            ----------------------------------------------------------
Corporation shall be permitted to post materials on the Internet and use the HM
Name as part of a domain name (i.e. www.hostmarriott.com) without violating the
restrictions of Section 2.d, subject to the following:

            (1) the materials available to the public at any HM Corporation
produced or sponsored web page, or similar electronic site that is connected to
a domain name using the HM Name (i) are in compliance with the restrictions
contained in this Agreement and (ii) include a notice stating that "MARRIOTT is
a registered trademark of Marriott International, Inc., used pursuant to
license."

           (2) such web site shall not be used in any manner to engage in or
conduct activities that constitute the Management Business, including, without
limitation, the making of reservations through or over such web site, provided
however, that such web site may contain a connection (or "link") to the
authorized web sites of Marriott International, Inc. and its Affiliates.

         f. Use of Marriott Marks in Facilities Signage. HM Corporation is
            -------------------------------------------
permitted to use the HM Name on signage at its corporate offices such as
corporate headquarters or any of its regional offices, provided such corporate
offices are private offices, which are not part of the general public operation
at any lodging (including restaurant), healthcare or retirement facility owned,
developed, managed, operated or franchised by any HM Party. No other use of the
Marriott Marks is permitted on any signage at any other building, with the

                                       9

 
exception that the HM Name, the LP Name or the Sub Names, as appropriate, may be
used on postings such as liquor licenses when a statute or regulation requires
the identity of the corporate or partnership owners on the posting.

         g. Use of Marriott Marks in Countries Outside the United States. The HM
            ------------------------------------------------------------
Parties shall not use the Marriott Marks in any country outside the United
States without providing Marriott International with advance notice of such
contemplated use and allowing the Marriott International Parties sufficient time
to take such actions as the Marriott International Parties reasonably deem
necessary to secure, or protect against impairment of, rights in the Marriott
Marks. The HM Parties shall cooperate with the Marriott International Parties in
connection with their efforts to secure and protect rights in the Marriott
Marks. Notwithstanding the foregoing, HM Corporation may continue to use the
Marriott Marks (as part of the HM Name) in countries where it currently
operates, subject to its cooperation with the Marriott International Parties in
connection with their efforts to secure and protect rights in the Marriott
Marks.

         h. Restrictions on Use of the Marriott Marks Generally. No HM Party
            ---------------------------------------------------
shall operate or conduct any business in any form that uses the Marriott Marks,
if such business either (1) is outside the present operating format of the
Development and Ownership Business conducted by HM Corporation as of the date of
this Agreement, (2) expands the manner in which the HM Name, the LP Name and the
Sub Names are currently used, or (3) competes with the Management Business.

         i. Prohibition Against Certain Uses of the Marriott Marks. This
            ------------------------------------------------------
Agreement does not grant to the HM Parties any right or license to use the
Marriott Marks (1) alone or in any' other manner except as expressly allowed
herein, and (2) in any manner in which MARRIOTT is not immediately preceded by
the word "HOST", subject only to the express and limited exceptions for use as
part of the names of HM Name, the LP Name and the Sub Names as noted above.

     3. Marriott International's Ownership of Marks.
        -------------------------------------------

                                       10

 
         a. The HM Parties acknowledge, without representation, warranty or
inquiry, that the Marriott International Parties are the exclusive owners of the
Marriott Marks. The HM Parties agree that, except for the right to use the
Marriott Marks as provided in this Agreement, or as provided by Section 22 of
this Agreement, the HM Parties, from and after the date hereof, have no right,
title or interest in or to any of the marks licensed by Marriott International
under the Assignment and License Agreement, and the HM Parties agree, on their
own behalf and on behalf of their Subsidiaries that the license provisions
contained in the Assignment and License Agreement are expressly revoked and
superseded by this Agreement. The HM Parties agree that all uses of the Marriott
Marks and the goodwill associated with such uses shall inure solely to the
benefit of the Marriott International Parties, and upon termination of the HM
Parties rights to use the Marriott Marks as provided in this Agreement, all
right and interest of the HM Parties in and to the Marriott Marks shall revert
fully to the Marriott International Parties.

         b. The HM Parties agree to cooperate fully with the Marriott
International Parties in recording appropriate assignment and other documents
evidencing the Marriott International Parties' ownership of the Marriott Marks.
The HM Parties agree to take no action inconsistent with the Marriott
International Parties' ownership of and interest in the Marriott Marks. The
Marriott International Parties agree to cooperate fully with the HM Parties in
recording appropriate documents evidencing the License to the HM Parties.

         c. The HM Parties shall not attack the validity of the Marriott Marks,
the Marriott International Parties' ownership thereof, or any of the terms of
this Agreement, or assist any third party in doing any of the same, and the HM
Parties hereby waive any right to contest the validity of the Marriott Marks.

     4.  Limitations on Use of the Licensed Name. The right to use the
         ---------------------------------------
Marriott Marks granted to the HM Parties in Section 2 of this Agreement is
expressly subject to the following conditions:

                                       11

 
         a. All uses of the Marriott Marks, other than any use in effect as of
the date of this Agreement, shall be subject to Marriott International's prior
written approval on the basis of samples submitted by the HM Parties with a
written description of the intended use or uses. If such samples and uses are
approved, they shall be made in strict conformance with such reasonable
specifications or requirements as Marriott International shall establish, as
such specifications or requirements may be modified by Marriott International
from time to time.

         b. All displays of the Marriott Marks as permitted hereunder shall bear
such copyright, trademark, service mark and other notices as Marriott
International shall reasonably require, and the HM Parties shall adhere to any
other reasonable and customary posting requirements developed by Marriott
International with respect to the Marriott Marks.

         c. The HM Parties shall not use the Marriott Marks (including display
of the HM Name, the LP Name and the Sub Names) as part of or in conjunction
with, any other names or marks except with Marriott International's prior
written approval (which approval shall not be unreasonably withheld) or as
expressly provided in Section 2. Such prior written approval by Marriott
International shall be provided within 15 days after receipt of such requests
from the HM Parties. In the absence of a written disapproval within 15 days, the
use or intended use by the HM Parties shall be presumed to be consistent with
this Agreement.

         d. The HM Parties shall not use the Marriott Marks, or any name, term
or design that is confusingly similar to the Marriott Marks, except as expressly
authorized in this Agreement or consented to by Marriott International in
writing, and the HM Parties shall not attempt to register or aid any third party
in using or attempting to register any such name, mark, term or design.
Notwithstanding this subsection or any other section of this Agreement, use by
HM 

                                       12

 
Corporation of the "HM" service mark (since it does not contain the word
"Marriott") shall not be subject to the terms and conditions of this Agreement.

         e. The HM Parties shall not use the Marriott Marks in any manner that
will indicate that they are using such Marriott Marks other than as a licensee
of the Marriott International Parties.

         f. The HM Parties shall not use the Marriott Marks in any manner that
will: (1) negatively impact or disparage the image or reputation of the Marriott
International Parties or of HM Corporation, HM Operating Partnership and the HM
Subsidiaries, and/or (2) dilute the distinctiveness of the HM Name, the LP Name
and the Sub Names, or the Marriott Marks.

Any breach of the foregoing provisions may be remedied by the remedies set forth
in (i) Section 10 of this Agreement, and (ii) Section 13 of this Agreement as
applicable.

     5.  Quality Control.
         ---------------
 
         a. The Marriott International Parties are familiar with the general
quality of the services now provided by the HM Parties in the Development and
Ownership Business and find, at the present time, the quality of such services
to be acceptable. All activities conducted by HM Corporation, HM Operating
Partnership and the HM Subsidiaries, for so long as their names contain any
Marriott Marks, shall be provided substantially in accordance with the quality
standards of the HM Parties now in place.

         b. The HM Parties shall use their reasonable best efforts to ensure
that the Marriott International Parties shall have the right, at reasonable
times and with prior notice, to inspect any facility owned or developed by HM
Corporation, HM Operating Partnership or any of the HM Subsidiaries at any time
for the purpose of determining whether they have met or are meeting the quality
standards required under this Agreement. The HM Parties shall promptly produce
and deliver (at its own expense) to Marriott International such examples of its
use 

                                       13

 
of the Marriott Marks as the Marriott International Parties shall reasonably
request.

            c. Any breach of the foregoing provisions of this Section 5 may be
remedied by the remedies set forth in (i) Section 10 of this Agreement, and (ii)
Section 13 of this Agreement as applicable.

         6. Limitation of Liability; Indemnity.
            ----------------------------------

            a. IN NO EVENT SHALL THE MARRIOTT INTERNATIONAL PARTIES BE LIABLE
FOR ANY MATTER WHATSOEVER RELATING TO THE USE BY ANY HM PARTIES OF THE HM NAME,
LP NAME, AND THE SUB NAMES EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN SECTION 6
AND SECTION 7 OF THIS AGREEMENT.

            b. The HM Parties shall indemnify, defend and hold harmless the
Marriott International Parties and their respective subsidiaries, affiliates and
their respective employees, representatives, directors, officers and agents
(each, a "Marriott International Indemnitee") from and against any and all
costs, judgments, liabilities and expenses, including, without limitation,
interest, penalties, attorney and third party fees, and all other amounts paid
in the investigation, litigation, defense and/or settlement (collectively,
"Expenses") resulting from any actual or potential claim, demand, dispute,
notice, lawsuit, administrative proceeding or other action (collectively,
"Disputes") that relate in any way to use of the Marriott Marks by the HM
Parties in violation of this Agreement.

            c. The Marriott International Parties shall indemnify, defend and
hold harmless the HM Parties and the HM Subsidiaries and their respective
employees, representatives, directors, officers and agents from and against all
Expenses resulting from any Disputes that relate in any way to (i) the provision
or promotion of goods or services by any Marriott International Party under, or
any other usage by such party of, the Marriott Marks, or (ii) the liabilities

                                       14

 
and obligations described in subsection 8.c.(iii) of the Assignment and License
Agreement.

            d. If any Dispute is asserted against any party that would entitle
such party to indemnification pursuant to Section 6.b or 6.c, any party who
seeks indemnification (the "Indemnified Party") shall give written notice
thereof to the party or parties from whom indemnification is sought (the
"Indemnitor") promptly, but in no event later than thirty (30) days after the
General Counsel of such Indemnified Party receives notice of such Dispute;
provided, however, that the Indemnified Party's failure to give the Indemnitor
- --------  -------
prompt notice shall not bar the Indemnified Party's right to indemnification
unless such failure has materially prejudiced the Indemnitor's ability to defend
such Dispute. The Indemnitor shall have the right to employ counsel reasonably
acceptable to the Indemnified Party to defend any such Dispute and to
compromise, settle or otherwise dispose of the same, if the Indemnitor deems it
advisable to do so, at the sole cost and expense of the Indemnitor; provided,
                                                                    --------
however, the Indemnitor shall not settle or consent to the entry of any judgment
- -------
in any Dispute without first obtaining (i) an unconditional release of the
Indemnified Party from all liability with respect to all claims underlying such
Dispute and/or (ii) the prior written consent of the Indemnified Party, such
consent not to be unreasonably withheld, conditioned or delayed. Each Indemnitor
and each Indemnified Party will fully cooperate with each other in any such
Dispute and shall make available to each other any books or records useful for
the defense of any such Proceeding.

      7. Infringement Proceedings. The Marriott International Parties shall
         ------------------------
take those steps they deem necessary, in their reasonable judgment, to protect
their rights and interest in the Marriott Marks. Promptly upon receiving notice
or knowledge thereof, the HM Parties shall provide Marriott International with
written notice of any unauthorized use or potentially infringing use by third
parties of the Marriott Marks, or of the HM Name, the LP Name or the Sub Names,
or any confusingly similar trademarks, service marks, trade names, terms or
designs 

                                       15

 
(collectively "Infringing Marks") which comes to their attention. The Marriott
International Parties shall have the right, in their sole discretion and at
their sole cost and expense, to commence infringement, unfair competition or
other actions regarding any such use by third parties of any Infringing Marks.
The HM Parties shall cooperate with and assist Marriott International in its
investigation and prosecution of any of the foregoing. In the event that the
Marriott International Parties decline to commence such an action with respect
to the Marriott Marks or the HM Name, the LP Name or the Sub Names or any
confusingly similar mark, the HM Parties may commence, at the HM Parties' sole
cost and expense, such an action in its capacity as a licensee of such Marriott
Marks; provided, however, that the HM Parties must obtain the prior written
       --------  -------
approval of Marriott International regarding commencement of such action, such
consent not to be unreasonably withheld. Notwithstanding the foregoing to the
contrary, Marriott International retains the right, in its sole discretion, to
control the prosecution of such action by the HM Parties. If at any time
Marriott International concludes, in its reasonable judgment, that the
prosecution of such action might impair or in any way diminish the Marriott
International Parties' rights or interests in or to the name or mark(s) at issue
in such action, Marriott International may withdraw its prior consent. In any
action commenced by the HM Parties pursuant to this Section, the HM Parties
shall keep Marriott International fully and timely informed of any development
in such action and upon request, the HM Parties shall provide to Marriott
International any copies of documents related to such action. In any such
action, the HM Parties shall not consent to the entry of any judgment in such
action or agree to settle such action, in whole or in part, without obtaining
the prior written approval of Marriott International. Nothing in this section
shall prevent the HM Parties from protecting their own rights to tradenames or
marks that do not involve the Marriott Mark, such as protecting their rights to
the "Host" name, or, in the event Marriott International declines to prosecute
an action with respect to the infringement of the HM Name, the LP Name or the
Sub Names, to take such actions as the HM Parties deem necessary to protect its
rights to such names.

                                       16

 
      8. Relationship of Parties. Nothing in this agreement shall be construed 
         -----------------------
to create any relationship among the parties of agency, partnership, or joint
venturer or render any party liable for any debts or obligations incurred by any
other party hereto. No party is authorized to enter into agreements for or on
behalf of any other party hereto, to collect any obligation due or owed to any
such party, or to bind any other party in any manner whatsoever.

      9. Assignment and Sublicense. No HM Party may assign any rights under this
         -------------------------
Agreement or sublicense any rights to use the Marriott Marks, or the HM Name,
the LP Name or the Sub Names, in whole or in part, to any party without the
prior written consent of Marriott International (which consent may be withheld
in the sole discretion of Marriott International). Upon any assignment or
sublicense entered into in accordance with this Section 9, such assignee or
sublicensee shall enter into an assignment or sublicense agreement with the HM
Parties, in a form reasonably satisfactory to Marriott International, pursuant
to which such assignee or sublicensee agrees to comply with, and be bound by,
the terms of this Agreement and acknowledges the status of Marriott
International as an intended third party beneficiary of such assignment or
sublicense agreement. If requested by Marriott International, such assignee or
sublicensee shall also execute an instrument or instruments pursuant to which
such assignee or sublicensee shall be bound by, and become a party to, this
Agreement. Any purported assignment or sublicense by either of the HM Parties
not in compliance with the terms of this Agreement shall be null and void.
Subject to the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties and their successors and assigns. No third party
beneficiaries are intended by execution and delivery of this Agreement.

      10. Termination of License; Change of Control. This Agreement shall at
          -----------------------------------------
all times remain in full force unless terminated for a reason specified in and
in accordance with this Section 10. Marriott International may:

                                       17

 
         a. terminate the License, upon thirty (30) days written notice to the
HM Parties, upon a Change of Control; or

         b. terminate the License, immediately upon notice, if either of the HM
Parties becomes insolvent, files for bankruptcy, reorganization, liquidation,
dissolution, or receivership, is adjudicated bankrupt or takes the benefit of
any act in force or legally permissible procedure for the relief of insolvent
debtors; or

         c. terminate the License, immediately upon notice, if either of the HM
Parties, or any HM Subsidiary, attempts to sell, assign, license, sublicense or
otherwise transfer any or all rights to use Marriott Marks in violation of this
Agreement; or

         d. terminate the License, upon sixty (60) days written notice to the HM
Parties, if either of the HM Parties breaches any term of this Agreement,
provided that if the breaching HM Party cures such breach within sixty (60) days
following such written notice by Marriott International, then such termination
shall not be effective; or

         e. terminate the License, upon thirty (30) days written notice to the
HM Parties, upon the failure of either of the HM Parties to satisfy any of the
conditions contained in Section 2.c hereof, provided that if the breaching HM
Party satisfies such condition within thirty (30) days following such written
notice by Marriott International, then such termination shall not be effective.

     The HM Parties hereby agree to notify Marriott International in writing
immediately upon the occurrence of an event constituting a Change of Control or
failure to satisfy a condition contained in Section 2.c hereof.

     11. Effect of Termination.
         ---------------------

         a. For a period of one hundred eighty (180) days after the termination
of this Agreement, HM Corporation, HM Operating Partnership and the HM
Subsidiaries shall be entitled to continue to use the Marriott Marks in

                                       18

 
accordance with the terms of this Agreement, but only for the purpose of
effecting an orderly transition to the use of new names. Upon the expiration of
such one hundred eighty (180) day period, the HM Parties shall:

            (i)   Immediately discontinue use of the Marriott Marks, refrain 
from using any marks, terms or designs similar or confusingly similar to the
Marriott Marks, and no longer possess any right or interest in the Marriott
Marks; and

            (ii)  If the Marriott International Parties require, cooperate with 
the Marriott International Parties to apply to the appropriate authorities to
cancel from all governmental records the recording of this Agreement or
recording the HM Parties as a registered user; and

            (iii) Already have taken all steps necessary to change each of the 
HM Name, the LP Name and the Sub Names to a name that does not contain any of
the Marriott Marks or anything similar thereto.

         b. In the event of any termination of this Agreement, the License
granted hereunder shall be terminated pursuant to Section 10 with respect to all
uses of the Marriott Marks by all of the HM Parties and the HM Subsidiaries,
regardless of the cause of the termination.

         c. Notwithstanding any termination of this Agreement, (1) the
provisions of Sections 3.c, 4.d, 6, and 13 of this Agreement shall remain in
full force and effect in perpetuity and (2) the provisions of Section 11 of this
Agreement shall remain in effect until satisfied in full.

     12. Severability. The invalidity or partial invalidity or unenforceability 
         ------------
of any provision of this Agreement shall not affect the validity or
enforceability of any other provisions.

     13. Remedies.
         --------

         a. The HM Parties, on the one hand, and the Marriott International
Parties, on the other hand, acknowledge and agree that money 

                                       19

 
damages would be inadequate relief for any breach or threatened breach by the
other of its obligations hereunder, and that upon such breach, the non-breaching
party or parties, as the case may be, shall be entitled to injunctive or other
equitable relief for any breach or threatened breach thereof.

         b. The HM Parties acknowledge that a failure of HM Corporation, HM
Operating Partnership and the HM Subsidiaries to cease use of the Marriott Marks
and the HM Name, the LP Name and the Sub Names after termination of this
Agreement, its use of the Marriott Marks or the HM Name, the LP Name or the Sub
Names in any way that negatively impacts or disparages the Marriott Marks, or
its attempt to assign any of its rights in violation of this Agreement will
result in immediate and irreparable damage to Marriott International. The HM
Parties acknowledge and admit that there is no adequate remedy at law for such
breaches of this Agreement, and the HM Parties agree that in the event of such
breaches (individually or collectively), Marriott International shall be
entitled to equitable relief by way of a preliminary injunction and such other
relief as any court with jurisdiction may deem just and proper.

     14. Choice of Law. This Agreement shall be construed under and enforced
         -------------
in accordance with the laws of the State of Maryland.

     15. Attorneys' Fees. If any party commences an action against the other
         ---------------
with respect to this Agreement, the prevailing party in such action shall be
entitled to an award of reasonable costs and expenses of litigation, including
reasonable attorneys' fees, to be paid by the non-prevailing party.

     16. Entire Agreement. This Agreement constitutes the entire agreement
         ----------------
and understanding among the parties with respect to its subject matter, is
intended as a complete and exclusive statement of the terms of their agreement,
and supersedes any prior or contemporaneous agreement or understanding related
to the subject matter hereof.

                                       20

 
     17. Amendments. This Agreement may not be amended, supplemented or
         ---------- 
modified in any respect except by written agreement among the parties, duly
signed by their respective authorized representatives.

     18. Counterparts. This Agreement may be executed in one or more
         ------------
counterparts, each of which shall be deemed an original, and all such
counterparts together shall constitute but one and the same instrument.

     19. Waiver. The HM Parties may waive any breach of this Agreement by
         ------
Marriott International and Marriott International may waive any breach of this
Agreement by the HM Parties; provided, however, that no such waiver shall be
                             --------  -------
deemed effective unless in writing, signed by the waiving party, and
specifically designating the breach waived. No waiver shall constitute a
continuing waiver of similar or other breaches.

     20. Notices. All notices and other communications hereunder shall be in
         -------
writing and shall be delivered by hand, by facsimile or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which such notice is received:

     If to the HM Parties:
     Host Marriott
     10400 Fernwood Road
     Washington, D.C. 20058 (registered or certified mail)
     Bethesda, Maryland 20817 (express mail or courier)
     Attention:  General Counsel
     Dept. 72/923

     FAX NO. (301) 380-3588

                                       21

 
     If to one or more of the Marriott International Parties:    
     Marriott International, Inc.                               
     One Marriott Drive                                         
     Washington, D.C. 20058 (registered or certified mail)      
     Attention:  General Counsel                                
     Dept. 52/923                                               
     FAX NO. 301/380-6727                                       
                       or                                       
     10400 Fernwood Road                                        
     Bethesda, Maryland 20817 (express mail or courier)         
     Attention: General Counsel                                 
     Dept. 52/923                                               
     FAX NO. 301/380-6727                                        

or to such other address as one party may designate to the other by written
notice given in accordance with this Section 20.

     21. Further Assurances. The parties hereto hereby covenant and agree to
         ------------------
execute and deliver all such documents, make such government filings, and to do
or cause to be done all such acts or things as may be necessary to complete and
effect the transactions contemplated hereby.

     22. Other Agreements. The parties acknowledge that they have entered into
         ----------------
franchise and management agreements regarding specific properties, and various
agreements with specific partnership HM Subsidiaries, and that such franchise,
management and other agreements may grant certain rights to use the Marriott
Marks in connection with their respective properties. Nothing in this Agreement
shall be construed to limit or expand the rights granted under such agreements.

                                       22

 
     23. Headings. The descriptive headings of the several sections of this
         --------
Agreement are for convenience only and do not constitute a part of the Agreement
or affect its meaning or interpretation.

     24. No Undue Influence. This Agreement is executed voluntarily and without
         ------------------
any duress or undue influence on the parties or their officers, employees,
agents, or attorneys, and no party is relying on any inducement, promises or
representations made by any other party or any of its officers, employees,
agents or attorneys other than as set forth herein. The parties hereto
acknowledge that they have been represented in the negotiations for and in the
preparation of this Agreement by counsel, that they have had this Agreement
fully explained to them by such counsel, and that they are aware of the contents
of this Agreement and of its legal effect.

                                       23

 
     IN WITNESS WHEREOF, a duly authorized representatives of each
party has executed this Agreement as of the date first written above.


                                 HOST MARRIOTT CORPORATION
                                 By:                                            
                                    -----------------------------
                                   Its:                                         
                                       --------------------------

                                 MARRIOTT INTERNATIONAL, INC.
                                 By:                                            
                                    -----------------------------
                                   Its:                          
                                       --------------------------               

                                 MARRIOTT  WORLDWIDE CORPORATION
                                 By:                             
                                    -----------------------------               
                                   Its:                          
                                       --------------------------               

                                 HOST MARRIOTT, L.P.
                                 By: Host Marriott Corporation, general partner
                                 By:                             
                                    -----------------------------               
                                   Its:                          
                                       --------------------------               

                                       24

 
STATE OF MARYLAND        )
COUNTY OF MONTGOMERY     )        ss:

                  Before me, a Notary Public, in and for said County and State,
on this day personally appeared____________ , the____________ of Host Marriott
Corporation, known to me as the person whose name is subscribed to the foregoing
instrument.

                  Given under my hand and seal this __ day of ___________, 1998.



                                                     ---------------------
                                                         Notary Public

My commission Expires:                                        
                      ---------------------

STATE OF MARYLAND        )
COUNTY OF MONTGOMERY     )        ss:


                  Before me, a Notary Public, in and for said County and State,
on this day personally appeared_________________ , the______________ of Marriott
International, Inc., known to me as the person whose name is subscribed to the
foregoing instrument.

                  Given under my hand and seal this__ day of__ , 1998.




                                                      -------------------
                                                         Notary Public
My Commission Expires:

                                       25

 
STATE OF MARYLAND        )
COUNTY OF MONTGOMERY     )        ss:

                 Before me, a Notary Public, in and for said county and state,
on this day personally appeared__________ , the____________ of Marriott
Worldwide Corporation, known to me as the person whose name is subscribed to the
foregoing instrument.

  
                 Given under my hand and seal this ___ day of __________, 1998.


                                             ----------------------------------
                                                         Notary Public
My Commission Expires:                               
                       -------------

STATE OF MARYLAND        )
COUNTY OF MONTGOMERY     )        ss:

                 Before me, a Notary Public, in and for said County and State,
on this day personally appeared______________ , the______________ of Host
Marriott Corporation, known to me as the person whose name is subscribed to the
foregoing instrument.

                 Given under my hand and seal this ____ day of ___________ 1998.



                                             ----------------------------------
                                                         Notary Public
My Commission Expires:                               
                      ---------------------

                                       26

 
                                    EXHIBIT A

                                  SUBSIDIARIES
                                  ------------ 
   (those marked by an asterisk are those which appear to have Marriott Marks)

1.)       Beachfront Properties, Inc.
2.)       Bossier RIBM Two LLC
3.)       Bossier RIBM Two, Inc. (Non-consolidated)
4.)       CBM Associates II, LLC
5.)       CBM Funding Corporation
6.)       CBM One Corporation
7.)       CBM One Holdings, Inc.
8.)       CBM Two Corporation
9.)       CRF Lodging I, Inc.
* 10.)    Courtyard II Associates Management Corporation
* 11.)    Courtyard II Finance Company
13.)      DS Hotel LLC
14.)      Durbin LLC
15.)      FGI Financing I Corporation
16.)      Farrell's Ice Cream Parlour Restaurants, Inc.
*18.)     Forum Alpha Investments, Inc. (being renamed Crestline Alpha
          Investments, Inc.)
*19.)     Forum Delaware, Inc. (being renamed Crestline Delaware, Inc.)
*20.)     Forum Group, Inc. (being renamed Crestline Group, Inc.)
*21.)     Forum Ohio Healthcare, Inc. (being renamed Crestline Ohio Healthcare, 
          Inc.)
*22.)     Forum Pueblo Norte, Inc. (being renamed Crestline Pueblo Norte, Inc.)
*23.)     Forum Retirement, Inc. (being renamed Crestline Retirement, Inc.)
*24.)     Forum of Kentucky, Inc. (being renamed Crestline of Kentucky, Inc.)
25.)      G.L. Insurance Corporation
26.)      HMA-GP, Inc.
27.)      HMC Airport, Inc.
28.)      HMC Atlanta LLC
29.)      HMC BN Corporation
30.)      HMC Boynton Beach, Inc.
31.)      HMC California Leasing Corp.
32.)      HMC Capital Corporation
33.)      HMC Capital LLC
34.)      HMC Capital Resources Corp.
35.)      HMC Chicago LLC
36.)      HMC Desert LLC
37.)      HMC Diversified LLC
38.)      HMC East Side Financial Corporation
39.)      HMC East Side, Inc.
40.)      HMC Gateway, Inc.

 
41.)      HMC Hanover LLC
42.)      HMC Hartford, Inc.
43.)      HMC Hotel Development Corporation
44.)      HMC Leisure Park Corporation
45.)      HMC Manhattan Beach, Inc.
46.)      HMC Merger Corporation
47.)      HMC Mexpark, Inc.
48.)      HMC NGL, Inc.
49.)      HMC Naples Golf, Inc.
50.)      HMC Partnership Holdings, Inc.
51.)      HMC Partnership Properties LLC
52.)      HMC Pavilion, Inc.
53.)      HMC Polanco, Inc.
54.)      HMC Potomac LLC
55.)      HMC Properties I LLC
56.)      HMC Properties II LLC
57.)      HMC Real Estate LLC
58.)      HMC Retirement Properties, Inc.
59.)      HMC SFO LLC
60.)      HMC SFO, Inc.
61.)      HMC Seattle LLC
62.)      HMC Ventures, Inc.
63.)      HMC Waterford, Inc.
64.)      HMC Westport Corporation
65.)      HMH General Partner Holdings, Inc.
*66.)     HMH HPT Courtyard, INC..
*67.)     HMH HPT Residence Inn, Inc.
68.)      HMH Marina LLC
69.)      HMH Marina, Inc.
70.)      HMH Norfolk, Inc.
71.)      HMH Pentagon Corporation
72.)      HMH Pentagon LLC
73.)      HMH Properties, Inc.
74.)      HMH Realty Company, Inc.
75.)      HMH Restaurants, Inc.
76.)      HMH Rivers, Inc.
77.)      HMH WTC LLC
78.)      HMH WTC, Inc.
79.)      HMP Capital Ventures, INC.
80.)      HMP Financial Services Corporation
81.)      HMP Sandalwood Holdings, Inc.
82.)      Hanover Hotel Acquisition Corp.
83.)      Host Airport Hotels, Inc.
84.)      Host LaJolla, Inc.
*85.)     Host Marriott Corporation

 
*86.)     Host Marriott Financial Trust
*87.)     Host Marriott Hospitality, Inc.
88.)      Hot Shoppes, Inc.
89.)      Hotel Properties Management, Inc.
90.)      LTJ Senior Communities Corporation
91.)      MDSM Finance LLC
92.)      MHP Acquisition Corp.
93.)      MHP II Acquisition Corp.
94.)      MOHS Corporation
95.)      Marina Hotel LLC
*96.)     Market Street Marriott LLC
*97.)     Marriott Condominium Development Corporation
*98.)     Marriott DSM LLC
*99.)     Marriott Desert Springs Corporation
*100.)    Marriott FIBM One Corporation
*101.)    Marriott Family Restaurants, Inc. of Illinois (being renamed MFR of
          Illinois LLC)
*102.)    Marriott Family Restaurants, Inc. of Vermont (being renamed MFR of
          Vermont LLC)
*103.)    Marriott Family Restaurants, Inc. of Wisconsin (being renamed MFR of
          Wisconsin, LLC)
*104.)    Marriott Financial Services, Inc.
*105.)    Marriott Hanover Hotel Corporation
*106.)    Marriott MDAH One Corporation
*107.)    Marriott MHP Two Corporation
*108.)    Marriott Marquis Corporation
*109.)    Marriott PLP Corporation
*110.)    Marriott Park Ridge Corporation
*111.)    Marriott Properties, Inc.
*112.)    Marriott RIBM Three Corporation
*113.)    Marriott RIBM Two Corporation
*114.)    Marriott Realty Sales, Inc.
*115.)    Marriott SBM One Corporation
*116.)    Marriott SBM Two Corporation
*117.)    Marriott SBM Two LLC
*118.)    Marriott's Bickford's Family Fare, Inc.
*119.)    Marriott/Portman Finance Corporation (non-consolidated)
120.)     PM Financial Corporation
121.)     PRM Corporation
122.)     Panther GenPar, Inc.
123.)     Park Ridge L.L.C.
124.)     Philadelphia Airport Hotel Corporation
125.)     Philadelphia Market Street Hotel Corporation
126.)     RIBM One Corporation
127.)     S.D. Hotels, Inc.

 
128.)     SFM Finance Corporation
*129.)    Saga Property Leasing Corporation
*130.)    Saga Restaurants, Inc.
*131.)    San Diego Marriott Marina LLC
132.)     Sparky's Virgin Islands, Inc.
133.)     Tecon Hotel Corporation
134.)     Willmar Distributors LLC
135.)     Willmar Distributors, Inc.
136.)     YBG Associates LLC


                                  PARTNERSHIPS
                                  ------------

         Atlanta Marriott Marquis Limited Partnership 
         Camelback Inn Associates Limited Partnership 
         Courtyard by Marriott Limited Partnership 
         Courtyard by Marriott II Limited Partnership 
         Desert Springs Marriott Limited Partnership 
         Fairfield Inn by Marriott Limited Partnership 
         Forum Retirement Communities I, L.P. 
         Forum Retirement Communities II, L.P.
         Forum Retirement Partners, L.P. 
         Hanover Marriott Limited Partnership
         Marriott Diversified American Hotels, L.P. 
         Marriott Hotel Properties Limited Partnership 
         Marriott Hotel Properties II Limited Partnership
         Marriott Residence Inn Limited Partnership 
         Marriott Residence Inn II Limited Partnership 
         Marriott Residence Inn USA Limited Partnership
         Marriott Suites Limited Partnership
         Mutual Benefit/Marriott Hotel Associates I Limited Partnership 
         Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P.
         Times Square Marquis Hotel, L.P.
         Wellsford-Marriott Park Ridge Hotel Limited Partnership

 
                                                                   Exhibit 10.19


                            NONCOMPETITION AGREEMENT

     THIS NONCOMPETITION AGREEMENT ("Agreement") is made and entered into as of
December 28, 1998, between and among HOST MARRIOTT CORPORATION, a Delaware
corporation ("HMC"), HOST MARRIOTT, L.P., a Delaware limited partnership (the
"Operating Partnership," together with HMC "Host"), CRESTLINE CAPITAL
CORPORATION, a Maryland corporation ("CCC"), FERNWOOD HOTEL ASSETS, INC., a
Delaware corporation ("Fernwood") and ROCKLEDGE HOTEL PROPERTIES, INC., a
Delaware corporation ("Rockledge").  As used in this Agreement, the terms
"Host," "CCC," "Fernwood" and "Rockledge" shall mean Host, CCC, Fernwood and
Rockledge, respectively, and their respective Subsidiaries and Affiliates (as
such terms are defined in Section 1).

     WHEREAS, in connection with (i) the lease of substantially all of the full-
service hotels owned by Host, and the sublease of certain limited-service hotels
leased by Host from third parties, to CCC (each, a "Hotel Lease" and, together,
the "Hotel Leases") and (ii) the lease by Fernwood or Rockledge to CCC of
certain furniture, furnishing, fixtures, soft goods, case goods, equipment and
other similar items for use in the hotels ("FF&E") under certain leases entered
into in connection with the Hotel Leases (the "FF&E Leases"), in each case as
part of the REIT Conversion (as defined in Section 1), Host, CCC, Fernwood and
Rockledge have agreed to enter into this Agreement; and

     WHEREAS, as of the date hereof, CCC's principal business consists of owning
the Senior Living Community Business, the Hotel Leasing Business, the Asset
Management Services Business and the Swissotel Management Company Interest (as
such terms are defined in Section 1); and

     WHEREAS, as of the date hereof, Host's principal business consists of
owning the Host Business and the Non-Controlled Subsidiary Interests (as such
terms are defined in Section 1).

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, in the Hotel Leases and the FF&E Leases, and in the related
agreements entered into pursuant to or related to the Hotel Leases or the FF&E
Leases, and for other valuable consideration, the receipt and sufficiency of
which are hereby mutually acknowledged, Host, CCC, Fernwood and Rockledge agree
as follows:

 
                                  ARTICLE ONE


                                  DEFINITIONS

1.   Definitions.

     The following terms when used herein shall have the meanings set forth
below:

     "Affiliates" shall mean any Person directly or indirectly controlling or
      ----------                                                             
controlled by, or under direct or indirect common control with, Host, Fernwood,
Rockledge or CCC, as the case may be.  For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, through the
ownership of voting securities, by contract, or otherwise.  Notwithstanding the
foregoing, (i) Host's Affiliates shall not include CCC, Marriott International,
Inc., Fernwood, Rockledge or any other Non-Controlled Subsidiary, or their
respective Subsidiaries or Affiliates, (ii) CCC's Affiliates shall not include
Host, Marriott International, Inc., Fernwood, Rockledge or any other Non-
Controlled Subsidiary or their respective Subsidiaries or Affiliates, (iii)
Fernwood's Affiliates shall not include Host, CCC, Marriott International, Inc.,
Rockledge or any other Non-Controlled Subsidiary, or their respective
Subsidiaries or Affiliates and (iv) Rockledge's Affiliates shall not include
Host, CCC, Marriott International, Inc., Fernwood or any other Non-Controlled
Subsidiary, or their respective Subsidiaries or Affiliates.

     "Asset Management Services Business" means the provision of asset
      ----------------------------------                              
management services to owners of hotels, including without limitation, (i)
administration of contracts, (ii) review of operating and financial results,
financial statements, budgets, revenue projections and capital spending plans
with hotel managers and owners, (iii) administration of facility loans, (iv)
negotiation of third party management arrangements, (v) assessment of market
conditions, (vi) negotiation of regulatory issues and (vii) provision of advice
and information in connection with acquisitions or dispositions of hotels.

     "Carried Interest" shall mean with respect to any Person (the "Paying
      ----------------                                                    
Person"), any right of another Person (by reason of its status as a general
partner, sponsor or otherwise) (the "Recipient Person") either (i) to receive a
specific portion of the earnings or assets of the Paying Person once other
investors in the Paying Person have received an agreed upon return on their
investment in the Paying Person or (ii) to receive payments or other
distributions which are disproportionate to the Recipient Person's investment in
the Paying Person.

     "CCC" shall have the meaning set forth in the first paragraph of this
      ---                                                                 
Agreement.

                                      -2-

 
     "CCC Managed Hotel" shall have the meaning given to it in the definition of
      -----------------                                                         
"Permitted Operating Lease."

     "Code" shall mean the Internal Revenue Code of 1986, as amended.
      ----                                                           

     "Compete" shall mean (i) to conduct or participate or engage in, or bid
      -------                                                               
for, or otherwise pursue, a business, whether as a principal, sole proprietor,
partner, stockholder, or agent of, or consultant or lender to, or manager for,
any Person or in any other capacity, or (ii) to have any ownership or financial
interest in any Person or business which conducts, participates or engages in,
or bids for, or otherwise pursues, a business, whether as a principal, sole
proprietor, partner, stockholder, or agent of, investor in, or consultant or
lender to or manager for, any Person or in any other capacity.

     "FF&E" shall have the meaning set forth in the second paragraph of this
      ----                                                                  
Agreement.

     "FF&E Leases" shall have the meaning set forth in the second paragraph of
      -----------                                                             
this Agreement.

     "Fernwood" shall have the meaning set forth in the first paragraph of this
      --------                                                                 
Agreement.

     "Franchise Business" shall mean the ownership or operation of any single or
      ------------------                                                        
multiple full-service hotel management or franchise system operating under one
or more common brand names.  Without otherwise expanding the definition of
"Franchise Business,"  the term "Franchise Business" shall not include (i) the
operation of hotels, whether owned by CCC or otherwise, pursuant to a franchise
or similar license agreement with the owner or operator of the brand name as
long as such owner or operator is not CCC, including the operation of full-
service hotels owned by owners other than CCC pursuant to leases or management
agreements, (ii) any business or activity with respect to limited-service hotels
or (iii) any asset management activities undertaken with respect to hotels for
the owners of such hotels.

     "Host" shall have the meaning set forth in the first paragraph of this
      ----                                                                 
Agreement.

     "Host Business" shall mean the business of owning, investing in, lending
      -------------                                                          
money to, or otherwise financing, full-service hotels, including without
limitation the Initial Hotels, acquiring additional existing and newly developed
full-service hotels, developing and constructing for ownership by Host full-
service hotels, and improving and expanding the Initial Hotels and any
additional full-service hotels in which Host acquires an interest.  The term
"Host Business" shall not include, without limitation, (i) any business or other
activity with respect to limited-service hotels or (ii) any business or other
activity with respect to full-service hotels other 

                                      -3-

 
than the acquisition, development or ownership of full-service hotels or equity
interests therein.

     "Host REIT" shall mean HMC Merger Corporation, a Maryland corporation into
      ---------                                                                
and with which HMC will merge as part of the REIT Conversion.

     "Hotel Lease" shall have the meaning set forth in the second paragraph of
      -----------                                                             
this Agreement.

     "Hotel Leasing Business" means the business of any Person of leasing, as
      ----------------------                                                 
the tenant or subtenant, limited-service or full-service hotel properties from a
REIT pursuant to a lease under which the rental payments made by such Person to
the lessor qualify as "rents from real property" within the meaning of Section
856(d) of the Code where such Person will not be the operator or manager of such
hotel (other than through a contractual arrangement with a third-party manager
that is not an Affiliate of such Person).  Without otherwise expanding the
foregoing, the term "Hotel Leasing Business" shall not include any lease of a
limited-service or full-service hotel property (i) from a lessor that is not a
REIT, (ii) from a lessor that is a REIT but pursuant to a lease under which the
rental payments made to the lessor do not qualify as "rents from real property"
within the meaning of Section 856(d) of the Code, or (iii) where the lessee (or
any Affiliate of the lessee) will be the operator or manager of such hotel
(other than through a contractual arrangement with a third-party manager that is
not an Affiliate of the lessee).

     "Hotel Management Business" means the business of managing, operating or
      -------------------------                                              
franchising limited-service or full-service hotel properties on behalf of third
parties with respect to matters incident to the operation of such properties
including, without limitation, management services with respect to food,
beverages, housekeeping, laundry, vending, plant and equipment operation and
maintenance, grounds care, gift or merchandise shops within such properties,
reservations, sales and marketing services, conference and meeting facilities,
health rooms, swimming and other sports facilities and all other services
related to the operation of such hotel properties.

     "Initial Hotels" shall mean the full-service hotels operated primarily
      --------------                                                       
under the Marriott, Ritz-Carlton, Four Seasons, Swissotel and Hyatt brand names
in which Host will initially have controlling interests or own outright
following the REIT Conversion, as set forth on Schedule A hereto.
                                               ----------        

     "Lease Term" shall mean the period commencing on the lease commencement
      ----------                                                            
date and ending on the initial expiration date of the lease, or, in the case of
any extension or renewal of any lease which may be exercised solely at the
lessee's option (other than renewals or extensions which provide for rent at
then prevailing fair market rental rates), the expiration of the extension or
renewal period.

                                      -4-

 
     "Leased Hotel Equity Value" shall mean for a hotel the Leased Hotel Present
      -------------------------                                                 
Value of such hotel less the outstanding third party debt (provided by lenders
unrelated to the owner of the hotel) with respect to such hotel at the
commencement of the Lease Term or reasonably anticipated at such time to become
outstanding.  For purposes of the foregoing, any debt that is secured directly
by the hotel, incurred by the owner of the hotel, or directly or indirectly
secured by an equity interest in the entity owning the hotel shall be taken into
account.

     "Leased Hotel Present Value" shall mean the estimated total economic
      --------------------------                                         
benefit to be derived from the leased property during the Lease Term, which
shall equal the sum of (1) the present value (calculated by applying a discount
factor which is appropriate in light of the leased property's condition and
overall market conditions at the time of determination of such economic value)
of the projected total net operating income from the leased property for the
Lease Term (before any deductions for rental payments to be made under the lease
and before any deductions for debt service on the hotel or of the tenant or
subtenant, but after any deductions for base management fees (but without
deduction for "incentive management fees" that are based upon operating profit
of the hotel or proceeds from the sale or refinancing of the hotel)) and (2) the
present value (calculated by applying a discount factor which is appropriate in
light of the leased property's condition and overall market conditions at the
time of determination of such economic value) of the projected residual value of
the leased property at the expiration of the Lease Term, computed by applying a
capitalization rate which is appropriate in light of the leased property's
expected condition and overall market conditions as of such date to the
projected annual net operating income (before any deductions for rental payments
to be made under the lease, and before any deductions for debt service on the
hotel or of the tenant or subtenant, but after deduction for any base management
fees that a buyer of the hotel would be required to assume (or if greater, an
imputed reasonable market-level base management fee) (but without any deduction
for "incentive management fees" that are based upon the operating profit of the
hotel or proceeds from a sale or refinancing of the hotel)) as of the last day
of the Lease Term.

     "Managed Hotel Equity Value" shall mean, with respect to any CCC Managed
      --------------------------                                             
Hotel, the Managed Hotel Present Value of such hotel less the third party debt
(provided by lenders unrelated to the owner of the hotel) outstanding (or
reasonably contemplated to become outstanding) with respect to such hotel at the
commencement of the Management Agreement Term (computed as of the time specified
in the specific provision of this Agreement where the term is being used).  For
purposes of the foregoing, any debt that is secured directly by the hotel,
incurred by the owner of the hotel, or directly or indirectly secured by an
equity interest in the entity owning the hotel shall be taken into account.

     "Managed Hotel Present Value" shall have the meaning given to it in
      ---------------------------                                       
subsection (ii) of the definition of "Permitted Full-Service Management
Agreement" 

                                      -5-

 
(computed as of the time specified in the specific provision of this Agreement
where the term is being used).

     "Management Agreement Term" shall have the meaning given to it in the
      -------------------------                                           
definition of "Permitted Full-Service Management Agreement."

     "Merger" shall mean the merger of HMC with and into Host REIT as part of
      ------                                                                 
the REIT Conversion.

     "1998 Noncompetition Agreement" shall have the meaning set forth in Section
      -----------------------------                                             
4.1.B. hereof.

     "Non-Controlled Subsidiary" shall mean any taxable corporation, including
      -------------------------                                               
without limitation Fernwood and Rockledge, in which the Operating Partnership
owns, directly or through a Subsidiary, more than fifty percent (50%) of the
economic interest but which the Operating Partnership, either directly or
through a Subsidiary, does not control.  For purposes of this definition,
"control," when used with respect to any Non-Controlled Subsidiary, means the
power to direct the management and policies of such Non-Controlled Subsidiary,
directly or indirectly, through the ownership of voting securities, by contract,
or otherwise.

     "Non-Controlled Subsidiary Interests" shall mean the economic interests
      -----------------------------------                                   
held by the Operating Partnership, either directly or through a Subsidiary, in
the Non-Controlled Subsidiaries.

     "Operating Partnership" shall have the meaning set forth in the first
      ---------------------                                               
paragraph of this Agreement.

     "Permitted Full-Service Lease" shall mean either a Permitted REIT Lease or
      ----------------------------                                             
a Permitted Operating Lease.

     "Permitted Full-Service Management Agreement" shall mean a management
      -------------------------------------------                         
agreement entered into by CCC (or to be entered into by CCC) with respect to a
full-service hotel where CCC will be the manager but CCC will not also be the
lessee with respect to such full-service hotel and with respect to which the
estimated economic benefit to be derived by CCC from such management contract
(including any base, incentive and other similar management fees) during the
period commencing on the management agreement commencement date and ending on
the initial termination date for such management agreement, or, in the case of
any extension or renewal of any management agreement which may be exercised
solely at the manager's option (other than renewals or extensions which provide
for management fees at then prevailing fair market rates), the termination of
the extension or renewal period (the "Management Agreement Term"), computed as
described in clause (i) below, shall not exceed twenty percent (20%) of the
estimated Managed Hotel Present Value (as defined below) (and if CCC is making a
direct or 

                                      -6-

 
indirect investment with respect to the hotel, the condition in Section
3.B(v)(D) shall have been satisfied). For purposes of the foregoing:

              (i)  The estimated economic benefit to be derived by CCC during
          the Management Agreement Term shall equal the present value of the
          projected management fees (including base management fees, incentive
          management fees, and other similar fees payable to CCC pursuant to the
          management agreement, but not including expense reimbursements),
          calculated by applying a discount factor which is appropriate in light
          of overall market conditions at the time of determination of such
          economic value and the risk to the manager associated with the
          proposed management agreement fee structure; and

              (ii) The term "Managed Hotel Present Value" means the estimated
          total economic benefit to be derived from the managed property during
          the Management Agreement Term, which shall equal the sum of (1) the
          present value (calculated by applying a discount factor which is
          appropriate in light of the managed property's condition and overall
          market conditions at the time of determination of such economic value)
          of the projected total net operating income from the managed property
          for the Management Agreement Term (before any deductions for rental
          payments to be made under any lease and before any deductions for debt
          service on the hotel or of the tenant or subtenant, but after any
          deductions for base management fees (but without deduction for
          "incentive management fees" that are based upon operating profit of
          the hotel or proceeds from the sale or refinancing of the hotel)) and
          (2) the present value (calculated by applying a discount factor which
          is appropriate in light of the managed property's condition and
          overall market conditions at the time of determination of such
          economic value) of the projected residual value of the managed
          property at the expiration of the Management Agreement Term, computed
          by applying a capitalization rate which is appropriate in light of the
          managed property's expected condition and overall market conditions as
          of such date to the projected annual net operating income (before any
          deductions for debt service on the hotel or of the tenant or subtenant
          and before any deductions for rent but after deduction for any base
          management fee that a buyer of the hotel would be required to assume
          (or if greater, an imputed reasonable market-level base management
          fee) (but without any deduction for "incentive management fees" that
          are based upon operating profit of the hotel or proceeds from a sale
          or refinancing of the hotel) as of the last day of the Management
          Agreement Term (the "Managed Hotel Present Value").

                                      -7-

 
     All of the various determinations of net operating income from the managed
property provided for above, together with the various adjustments thereto, and
the discount rates and capitalization rates to be applied in making the
computations provided for above shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment and to
Section 5.1 of this Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).

          "Permitted Operating Lease" shall mean a lease by CCC with respect to
           -------------------------                                           
a full-service hotel where CCC will be the operator or manager of the hotel
(other than through a contractual arrangement with a third-party manager) (a
"CCC Managed Hotel"), and which meets the following conditions:

               (i) If the lessor is a Publicly-Traded REIT or a Permitted
          Private REIT and the lease is such that the rental payments made
          thereunder by CCC to the lessor qualify as "rents from real property"
          within the meaning of Section 856(d) of the Code, the estimated
          economic benefit to be derived by CCC from the lease and any related
          management contract (including both management fees, including any
          base, incentive and other similar management fees, and any operating
          profit to be retained by the tenant or subtenant in such capacity)
          during the Lease Term, computed as described in clause (iii) below,
          shall not exceed either twenty-five percent (25%) of the Leased Hotel
          Present Value, or fifty percent (50%) of the Leased Hotel Equity Value
          of such hotel.

               (ii) If the lessor is not either a Publicly-Traded REIT or a
          Permitted Private REIT or if the lease is such that the rental
          payments made thereunder by CCC to the lessor will not qualify as
          "rents from real property" within the meaning of Section 856(d) of the
          Code, the estimated economic benefit to be derived by CCC from the
          lease and any related management contract (including both management
          fees, including any base, incentive and other similar management fees,
          and any operating profit to be retained by the tenant or subtenant in
          such capacity) during the Lease Term, computed as described in clause
          (iii) below, shall not exceed either twenty percent (20%) of the
          Leased Hotel Present Value, or forty percent (40%) of the Leased Hotel
          Equity Value of such hotel.

               (iii)  For purposes of subparagraphs (i) and (ii) above, the
          estimated economic benefit to be derived by CCC during the Lease Term
          shall equal the present value of the sum of (1) the projected net
          operating income to be received by the tenant or subtenant,
          respectively, from the leased property for the Lease Term (after
          deduction for rental payments but before deduction for debt service on

                                      -8-

 
          the hotel or of the tenant or subtenant and including any residual
          payments to be received by the tenant or subtenant at any time during
          the Lease Term (including on the last day thereof)) and (2) the
          projected management fees to be received by CCC, the tenant or the
          subtenant during the Lease Term (including base management fees,
          incentive management fees, and other similar fees payable to CCC
          pursuant to the management agreement, but not including expense
          reimbursements), calculated by applying a discount factor which is
          appropriate in light of the leased property's condition and overall
          market conditions at the time of determination of such economic value
          and the risk to the tenant or subtenant associated with the proposed
          lease structure.

     All of the various determinations of net operating income from the leased
property provided for above, together with the various adjustments thereto, and
the discount rates and capitalization rates to be applied in making the
computations provided for above shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment and to
Section 5.1 of this Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).

     "Permitted Private REIT" shall mean an entity that would be a Publicly-
      ----------------------                                               
Traded REIT but for the fact that shares of capital stock or other units of
equity interests of the REIT that are generally entitled to vote for the
election of directors or similar managers are not listed or admitted to trading
on the New York Stock Exchange or the American Stock Exchange or designated for
quotation on the Nasdaq National Market, or any successor to any of the
foregoing, so long as CCC's lease or sublease of a full-service hotel from such
entity and any other investment in or with respect to such full-service hotel
would not cause CCC to violate Section 3.D.

     "Permitted REIT Lease" shall mean a lease by CCC that is with respect to a
      --------------------                                                     
full-service hotel where CCC will not be the operator or manager of such hotel
(other than through a contractual arrangement with a third-party manager) and
which meets the following conditions:

               (i) the lessor must be a Publicly-Traded REIT or a Permitted
          Private REIT and the rental payments made by CCC to the lessor must
          qualify as "rents from real property" within the meaning of Section
          856(d) of the Code; and

               (ii) the estimated economic benefit to be derived by the tenant
          or subtenant, as applicable, during the Lease Term shall not exceed
          fifteen percent (15%) of the Leased Hotel Present Value.

                                      -9-

 
               (iii)  For purposes of clause (ii) above, the estimated economic
          benefit to be derived by the tenant or subtenant during the Lease Term
          shall equal the present value of the projected net operating income to
          be received by the tenant or subtenant, respectively, from the leased
          property for the Lease Term (after deduction for rental payments but
          before deduction for debt service on the hotel or of the tenant or
          subtenant and including any residual payments to be received by the
          tenant or subtenant at any time during the Lease Term (including on
          the last day thereof)), calculated by applying a discount factor which
          is appropriate in light of the leased property's condition and overall
          market conditions at the time of determination of such economic value
          and the risk to the tenant or subtenant associated with the proposed
          lease structure.

     All of the various determinations of net operating income from the leased
property provided for above, together with the various adjustments thereto, and
the discount rates and capitalization rates to be applied in making the
computations provided for above shall be as reasonably determined by CCC
(subject to the review and approval of Host in its reasonable judgment and to
Section 5.1 of this Agreement in the event that there is a disagreement between
Host and CCC with respect thereto).

     "Person" shall mean any person, firm, corporation, general or limited
      ------                                                              
partnership, association, or other entity.

     "Primary Host Lessee" shall mean the lessee of more than 25% by number of
      -------------------                                                     
the Initial Hotels.

     "Publicly-Traded REIT" shall mean a REIT whose shares of capital stock or
      --------------------                                                    
other units of equity interests that are generally entitled to vote for the
election of directors or similar managers are listed or admitted to trading on
the New York Stock Exchange or the American Stock Exchange or designated for
quotation on the Nasdaq National Market, or any successor to any of the
foregoing.  The term "Publicly-Traded REIT" shall include any Person whose
operations are consolidated with those of a Publicly-Traded REIT under generally
accepted accounting principles or in which the Publicly-Traded REIT otherwise
owns, directly or indirectly, a twenty-five percent (25%) or greater equity
interest so long as, in either case, the Publicly-Traded REIT must take the
assets and operations of such Person into account in determining whether it
satisfies the income and asset requirements of Section 856(c) of the Code.

     "REIT" shall mean a "real estate investment trust" within the meaning of
      ----                                                                   
Sections 856 through 859 of the Code.

     "REIT Conversion" shall mean the reorganization of Host's business
      ---------------                                                  
operations to permit Host REIT to qualify as a REIT, including the Merger and
the 

                                     -10-

 
other transactions described in the Prospectus/Consent Solicitation that is
part of the Registration Statement filed with the Securities and Exchange
Commission by Host REIT and the Operating Partnership on Form S-4 (File No. 333-
55807).

     "Rockledge" shall have the meaning set forth in the first paragraph of this
      ---------                                                                 
Agreement.

     "Senior Living Community Business" shall mean, as to any Person, the
      --------------------------------                                   
business of developing, acquiring, owning or investing in, existing and newly
developed retirement community properties (including, without limitation,
assisted living facilities, independent care facilities and nursing homes),
improving and expanding the retirement community properties (including, without
limitation, assisted living facilities, independent care facilities and nursing
homes) owned and acquired by such Person and/or operating retirement community
properties (including, without limitation, assisted living facilities,
independent care facilities and nursing homes) for other owners thereof (whether
pursuant to a management agreement, operating agreement, lease, license or
otherwise).

     "Subsidiaries" shall mean corporations or other entities which are more
      ------------                                                          
than ten percent (10%) owned, directly or indirectly, by Host, CCC, Fernwood or
Rockledge, as the case may be, and partnerships in which Host, CCC, Fernwood or
Rockledge, as the case may be, or a Subsidiary thereof, is a general partner.
Notwithstanding the foregoing, Host's Subsidiaries shall not include Fernwood,
Rockledge or any other Non-Controlled Subsidiary which becomes a party to this
Agreement or otherwise agrees to be bound by terms which are substantially the
same as those set forth in Section 2.

     "Swissotel Management Company Interest" means CCC's 25% interest in
      -------------------------------------                             
Swissotel Management (U.S.A.) L.L.C.

     "Transfer" shall mean the sale, conveyance, disposal of or other transfer
      --------                                                                
of ownership, title or other interest.

                                  ARTICLE TWO


               NONCOMPETITION WITH RESPECT TO THE SENIOR LIVING 
                              COMMUNITY BUSINESS

2.   Certain Restrictions on Host, Fernwood and Rockledge.

     A.  Except as provided in Section 2.C., from the date hereof until December
31, 2003, neither Host, Fernwood nor Rockledge shall Compete in the Senior
Living Community Business.

                                     -11-

 
     B.  Except as provided in Section 2.C., from the date hereof until the
earlier of (i) December 31, 2008 and (ii) the date on which CCC is no longer the
Primary Host Lessee, neither Host, Fernwood nor Rockledge shall Compete in the
Hotel Leasing Business.

     C.  Neither Section 2.A. nor Section 2.B. shall prohibit Host, Fernwood or
Rockledge from engaging in the following activities:

          (i)    the ownership of any equity interest in any Person which
     Competes in the Senior Living Community Business or the Hotel Leasing
     Business if Host, Fernwood or Rockledge, as the case may be, directly or
     indirectly, is the beneficial owner of not more than five percent (5%) of
     such Person's outstanding equity interests, including for such purpose any
     Carried Interest in such Person, whether or not earned (based upon the
     maximum percentage applicable for such Carried Interest) and cannot, by
     reason of the ownership of such equity interest or otherwise, have any
     right to control such Person (including, but not limited to, control
     resulting from a general partner interest, special rights as a manager of a
     limited liability company or similar entity, contractual or other rights to
     representation on the board of such Person that are disproportionate to
     Host's, Fernwood's or Rockledge's, as the case may be, equity ownership in
     such Person, disproportionate voting rights with respect to Host's,
     Fernwood's or Rockledge's, as the case may be, equity position, or veto or
     approval rights as to major decisions);

          (ii)   the acquisition (by merger, stock purchase or otherwise) of, or
     the purchase of assets from, any Person who Competes in the Senior Living
     Community Business or the Hotel Leasing Business if the fair market value,
     on the acquisition date, of the acquired assets which relate to activities
     which Compete with the Senior Living Community Business or the Hotel
     Leasing Business, as the case may be, do not constitute more than ten
     percent (10%) of the total purchase price for the transaction; or

          (iii)  (A) the leasing, directly or indirectly, by Host from Fernwood
     or Rockledge or by Fernwood or Rockledge from Host of limited-service or
     full-service hotel properties, (B) the leasing, directly or indirectly, by
     Host of properties pursuant to the leases listed on Schedule B attached
     hereto, including any renewals or extensions thereof, (C) the leasing,
     directly or indirectly, by Host, Fernwood or Rockledge from any other
     Person of limited-service or full-service hotel properties where Host,
     Fernwood or Rockledge, as the case may be, has a direct or indirect equity
     interest in such Person sufficient for such Person to be consolidated with
     Host for financial accounting purposes, or (D) any leasing, directly or
     indirectly, by Host, Fernwood, Rockledge or any other Non-Controlled
     Subsidiary, as lessee, of full-service hotels or limited-service hotels
     pursuant to leases that would not fall within the scope of the term "Hotel
     Leasing Business."

                                     -12-

 
     D.  Each of Host, Fernwood and Rockledge agrees that, from the date hereof
until December 31, 2000, it will not solicit, hire or induce the termination of
employment of, a person who is employed by CCC at the time of, or was employed
by CCC at any time within three months prior to, such solicitation, hiring or
inducement and whose grade is, or, if applicable, was at the time of the
termination of his employment with CCC, the equivalent of Host's current grade
56 or above.

                                 ARTICLE THREE


                NONCOMPETITION WITH RESPECT TO THE HOST BUSINESS

3.   Certain Restrictions on CCC.

     A.  Except as provided in Section 3.B., from the date hereof until the
earlier of (i) December 31, 2008 and (ii) the date on which CCC is no longer the
Primary Host Lessee, (a) CCC shall not Compete in the Host Business, and (b) CCC
shall not, without the consent of Host, in its sole and absolute discretion,
either enter into any leases with respect to full-service hotels other than
Permitted Full-Service Leases or enter into any management agreements with
respect to full-service hotels other than Permitted Full-Service Management
Agreements and management agreements in connection with Permitted Operating
Leases.

     B.  Section 3.A. shall not prohibit CCC from engaging in the following
activities:

          (i)   any activity (including any investments) undertaken by CCC that
     is necessary to and reasonably connected with its business of acting as a
     lessee of full-service hotels, including acquisitions of property and
     assets used in such hotels that are incidental to CCC's role as lessee
     (such as "hotel working capital" and "furniture, fixtures and equipment" in
     a manner similar to that contemplated under the Hotel Leases) but excluding
     loans to or equity investments in the lessor or any of its Affiliates
     except to the extent permitted under clause (v) below;

          (ii)  any activity undertaken by CCC with respect to the Asset
     Management Services Business;

          (iii) the ownership of any equity interest in any Person which
     Competes in the Host Business if CCC, directly or indirectly, is the
     beneficial owner of not more than five percent (5%) or more of such
     Person's outstanding equity interests, including for such purpose any
     Carried Interest in such Person, whether or not earned (based upon the
     maximum percentage applicable for such Carried Interest) and cannot, by
     reason of the ownership of such equity interest or otherwise, have any
     right to control such Person 

                                     -13-

 
     (including, but not limited to, control resulting from a general partner
     interest, special rights as a manager of a limited liability company or
     similar entity, contractual or other rights to representation on the board
     of such Person that are disproportionate to CCC's equity ownership in such
     Person, disproportionate voting rights with respect to CCC's equity
     position, or veto or approval rights as to major decisions);

          (iv) the acquisition (by merger, stock purchase or otherwise) of, or
     the purchase of assets from, any Person who Competes in the Host Business
     if the fair market value, on the acquisition date, of the acquired assets
     which relate to activities which Compete with the Host Business do not
     constitute more than ten percent (10%) of the total purchase price for the
     transaction; or

          (v)  the provision of financing for any full-service hotel (whether
     directly or by participation in a lender syndicate) so long as the
     following conditions are met:

               (A) on the date on which CCC becomes contractually committed to
          provide such financing (1) CCC is (or in connection with such
          financing will become) the lessee (or lessee and manager) of such
          hotel pursuant to a lease which is a Permitted Full-Service Lease, (2)
          CCC is (or in connection with such financing will become) the manager
          of such hotel pursuant to a management agreement which is a Permitted
          Full-Service Management Agreement, or (3) CCC has a bona fide contract
          to become either the lessee (or lessee and manager) of such hotel
          pursuant to a lease which would be a Permitted Full-Service Lease or
          the manager of such hotel pursuant to a management agreement which
          would be a Permitted Full-Service Management Agreement upon completion
          of the construction and development or stabilization of such hotel and
          upon satisfaction of reasonable conditions;

               (B) if such financing is in the form of a loan, (x) the present
          value of CCC's interest in the hotel represented by such financing
          (determined applying the principles set forth in clause (E) below)
          does not exceed fifteen percent (15%) of the Leased Hotel Present
          Value or Managed Hotel Present Value, as applicable, of the hotel
          which is subject to such financing, each determined as of the date on
          which CCC becomes contractually committed to provide such financing,
          and (y) such loan does not include any equity participation feature
          (whether in the form of warrants, options, a conversion right,
          interest payments based upon profits, revenues, and/or appreciation,
          or otherwise) that would cause CCC to violate clause (C) below at any
          time, assuming for purposes of such determination that CCC would
          exercise any and all options and other rights that it might have in
          connection with such loan (provided that the foregoing shall not

                                     -14-

 
          prevent the exercise by CCC of its rights upon foreclosure of such
          indebtedness unless the default with respect to such indebtedness
          giving the right to such foreclosure had occurred or was imminent at
          the time CCC acquired such indebtedness),

               (C) if such financing is in the form of an equity investment,
          directly or indirectly, in the full-service hotel or the Person
          owning, directly or indirectly, such hotel, CCC will not beneficially
          own (and will not have any right to acquire beneficial ownership of)
          more than fifteen percent (15%) of the outstanding Leased Hotel Equity
          Value or Managed Hotel Equity Value, as applicable, computed on the
          date on which CCC becomes contractually committed to make such equity
          investment (including for such purpose any Carried Interest in the
          Person which owns such hotel, whether or not earned (based upon the
          maximum percentage applicable for such Carried Interest)), and CCC
          cannot, by reason of the ownership of such equity interest or
          otherwise, have any right to control the hotel or the Person owning
          such hotel (including, but not limited to, control resulting from a
          general partner interest, special rights as a manager of a limited
          liability company or similar entity, contractual or other rights to
          representation on the board of such Person that are disproportionate
          to CCC's equity ownership in such Person, disproportionate voting
          rights with respect to CCC's equity position, or veto or approval
          rights as to major decisions), and

               (D) the following condition, as applicable, is satisfied:

               (1) if the Permitted Full-Service Lease will not be a Permitted
               Operating Lease where the lessor is a Publicly-Traded REIT or a
               Permitted Private REIT and with respect to which the rental
               payments made thereunder by CCC to the lessor qualify as "rents
               from real property" within the meaning of Section 856(d) of the
               Code, the combined economic interest of CCC in the full-service
               hotel under such Permitted Full-Service Lease (calculated as set
               forth in the definition of "Permitted REIT Lease" or "Permitted
               Operating Lease," as applicable) and the present value of CCC's
               interest in the hotel represented by any financing or equity
               interests described in clauses (B) and (C) above (determined
               applying the principles set forth in clause (E) below), all
               determined as of the date CCC becomes contractually committed to
               make such investment, cannot exceed either (x) twenty percent
               (20%) of the Leased Hotel Present Value, on the date CCC becomes
               contractually committed to provide such financing, of the hotel
               which is subject to such financing, or (y) 


                                     -15-

 
               forty percent (40%) of the Leased Hotel Equity Value of such
               hotel on such date; or

               (2) if the Permitted Full-Service Lease will be a Permitted
               Operating Lease where the lessor is a Publicly-Traded REIT or a
               Permitted Private REIT and with respect to which the rental
               payments made thereunder by CCC to the lessor qualify as "rents
               from real property" within the meaning of Section 856(d) of the
               Code, the combined economic interest of CCC in the full-service
               hotel under such Permitted Full-Service Lease (calculated as set
               forth in the definition of "Permitted REIT Lease" or "Permitted
               Operating Lease," as applicable) and the present value of CCC's
               interest in the hotel represented by any financing or equity
               interests described in clauses (B) and (C) above (determined
               applying the principles set forth in clause (E) below), all
               determined as of the date CCC becomes contractually committed to
               make such investment, cannot exceed either (x) twenty-five
               percent (25%) of the Leased Hotel Present Value, on the date CCC
               becomes contractually committed to provide such financing, of the
               hotel which is subject to such financing, or (y) fifty percent
               (50%) of the Leased Hotel Equity Value of such hotel on such
               date; or

               (3) if CCC is a party to, or has a bona fide contract to become a
               party to, a Permitted Full-Service Management Agreement, the
               combined economic interest of CCC in the full-service hotel under
               such Permitted Full-Service Management Agreement (calculated as
               set forth in the definition of "Permitted Full-Service Management
               Agreement") and the present value of CCC's interest in the hotel
               represented by any financing or equity interests described in
               clauses (B) and (C) above (determined applying the principles set
               forth in clause (E) below), all determined as of the date CCC
               becomes contractually committed to make such investment, cannot
               exceed either (x) twenty percent (20%) of the Managed Hotel
               Present Value, on the date CCC becomes contractually committed to
               provide such financing, of the hotel which is subject to such
               financing, or (y) forty percent (40%) of the Managed Hotel Equity
               Value of such hotel on such date.  (Payments to a third party
               unrelated to the owner of the hotel to purchase an existing
               management agreement do not constitute an investment subject to
               the foregoing provisions.)

               (E)  For purposes of this Section 3.B.(v), the present value of
          CCC's interest in any financing or equity interests shall be
          determined 

                                     -16-

 
          by computing the present value of the cash flow projected to be
          received by CCC with respect to such financing or equity interest
          during the Lease Term or the Management Agreement Term, as applicable,
          assuming that the hotel is sold for its projected fair market value at
          the expiration of the Lease Term or Management Agreement Term, as
          applicable, and the proceeds of such sale are applied to repay debt
          and make distributions to equity owners in accordance with their
          respective interests, calculated by applying a discount factor which
          is appropriate in light of overall market conditions at the time of
          determination of such economic value and the risk to CCC associated
          with the proposed financing or equity interest. All of the various
          determinations of cash flow projected to be received from the proposed
          financing or equity interest and the discount rates to be applied in
          making the computations provided for above (and any capitalization
          rates to be applied for determining projected fair market values at
          the expiration of the Lease Term or Management Agreement Term, as
          applicable) shall be as reasonably determined by CCC (subject to the
          review and approval of Host in its reasonable judgment and to Section
          5.1 of this Agreement in the event that there is a disagreement
          between Host and CCC with respect thereto).

     C.  CCC agrees that, from the date hereof until December 31, 2000, it will
not solicit, hire, or induce the termination of employment of, a person who is
employed by Host, Fernwood or Rockledge at the time of, or was employed by Host,
Fernwood or Rockledge at any time within three months prior to, such
solicitation, hiring or inducement and whose grade, is or, if applicable, was at
the time of the termination of his employment with Host or Fernwood or
Rockledge, the equivalent of Host's current grade 56 or above.

     D.  Notwithstanding any other provision of this Agreement, until the
expiration of the period set forth in Section 3.A., CCC shall not lease or
sublease any full-service hotel from a REIT that is not a Publicly-Traded REIT
unless the combined investments, if any, of CCC in such lease and any other
leases of full-service hotels from REITs that are not Publicly-Traded REITs
(including any security or other deposits provided by CCC to the landlord) and
any financing or equity interests in hotels leased from such REITs (or in the
Persons owning such hotels) (with the value thereof determined using the
methodology described in Section 3.B(v)(E) above as of the date on which the
determination is being made under this Paragraph D) does not exceed the greater
of $125,000,000 or fifteen percent (15%) of the book value of CCC's assets as of
such date.

                                     -17-

 
                                  ARTICLE FOUR


           LIMITATION ON ENGAGEMENT IN THE HOTEL MANAGEMENT BUSINESS

4.   Certain Restrictions on CCC.

     A.  Except as provided in Sections 4.1.B. and 4.1.C., CCC shall be entitled
to Compete in the Hotel Management Business.

     B.  CCC acknowledges that the provisions of that certain Restated
Noncompetition Agreement between and among Host and Marriott International,
Inc., dated March 3, 1998 (the "1998 Noncompetition Agreement"), applies to it
and that such 1998 Noncompetition Agreement has been amended effective the date
hereof to include CCC as a party thereto.

     C.  Notwithstanding the foregoing Section 4.1.A., from the date hereof
until the earlier of (i) December 31, 2008 and (ii) the date on which CCC is no
longer the Primary Host Lessee, CCC shall comply with the following
restrictions:

               (i)    CCC shall not, without the consent of Host in its sole
          discretion, engage in the Hotel Management Business with regard to any
          hotels owned by Host, provided that, the foregoing shall not be deemed
          to prohibit CCC from acting in its capacity as a lessee of hotels
          owned by Host where CCC has engaged another Person who is not a
          Affiliate of CCC to manage or operate, within the meaning of the term
          "Hotel Management Business," the leased hotels.

               (ii)   CCC shall not engage in the Hotel Management Business with
          regard to any full-service hotels not owned by Host unless either (a)
          if CCC is not the lessee (or sublessee) with respect to such hotel,
          the management agreement with respect to such hotel is a Permitted
          Full-Service Management Agreement, or (b) if CCC is either the lessee
          or sublessee with respect to such hotel, the lease with respect to
          such hotel is a Permitted Full-Service Lease and CCC is compliance
          with the conditions set forth in Section 3.B(v) with respect to such
          hotel.

               (iii)  CCC shall not Compete in the Franchise Business.

     D.  Notwithstanding anything herein to the contrary, nothing in this
Agreement shall prohibit CCC from owning the Swissotel Management Company
Interest or any activities undertaken by Swissotel Management (U.S.A.) L.L.C.

                                     -18-

 
                                  ARTICLE FIVE

                                 MISCELLANEOUS

5.1  Arbitration of Certain Matters.

     Host, CCC, Fernwood and Rockledge agree that any controversy or dispute
concerning any calculation or determination of value, present values, net
operating income, anticipated cash flow, capitalization rate or sales arising
under the definition of "Host Leasing Business," "Leased Hotel Equity Value,"
"Leased Hotel Present Value," "Permitted Full-Service Management Agreement,"
"Managed Hotel Present Value," or "Managed Hotel Equity Value"   in Section 1,
or under Section 2.C.(ii), Section 3.B.(iv), Section 3.B.(v), or Section 3.E
hereof, including without limitation any dispute as to whether as determination
of any of the foregoing by CCC is reasonable, shall be settled in arbitration in
accordance with the Rules of the American Arbitration Association then in
effect.  Such arbitration shall take place in Washington, D.C.  Any judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.  The arbitrators shall not, under any circumstances, have
any authority to award punitive, consequential, exemplary or similar damages,
and may not, in any event, make any ruling, finding or award that does not
conform to the terms and conditions of this Agreement.  Nothing contained in
this Section 5.1 shall limit or restrict in any way the right or power of a
party at any time to seek injunctive relief in any court and to litigate the
issues relevant to such request for injunctive relief before such court (i) to
restrain the other party from breaching this Agreement, or (ii) for specific
enforcement of this Section 5.1.  The parties agree that any legal remedy
available to a party with respect to a breach of this Section 5.1 will not be
adequate and that, in addition to all other legal remedies, each party is
entitled to an order specifically enforcing this Section 5.1.  Neither party nor
the arbitrators may disclose the existence or results of any arbitration under
this Agreement or any evidence presented during the course of the arbitration
without the prior written consent of both parties, except as required to fulfill
applicable disclosure and reporting obligations, or as otherwise required by
agreements with third parties, or by law.

5.2  Entire Agreement.

     This Agreement, the Hotel Leases, the FF&E Leases and the 1998
Noncompetition Agreement constitute the entire agreement of the parties
concerning the subject matter hereof.

5.3  Modification.

     This Agreement may only be amended, modified or supplemented in a written
agreement signed by both parties hereto.


                                     -19-

 
5.4  Waiver.

     No term or condition of this Agreement shall be deemed to have been waived,
nor shall there be any estoppel against the enforcement of any provision hereof,
except by written instrument of the party charged with such waiver or estoppel.

5.5  Severability.

     Host, CCC, Fernwood and Rockledge agree that the period of restriction and
the lack of geographical area of restriction imposed upon the parties are fair
and reasonable, are reasonably required for the protection of each of the
parties hereto and have been specifically negotiated and carefully tailored with
a view to preventing the serious and irreparable injury the other party will
suffer in the event of competition by such party with the other party during the
time periods set forth herein.  If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect as though the invalid portions were not a part
hereof.  If the provisions of this Agreement relating to the geographical area
of restriction or the period of restriction shall be deemed to exceed the
maximum geographical area or period which a court having jurisdiction over the
matter would deem enforceable, such area or period shall, for purposes of this
Agreement, be deemed to be the maximum geographical area or period which such
court would deem valid and enforceable.

5.6  Remedies.

     CCC, Host, Fernwood and Rockledge agree that irreparable damage would occur
in the event any of the provisions of this Agreement were not to be performed in
accordance with the terms hereof, and that their remedy at law for any breach of
the other party's obligations hereunder would be inadequate.  CCC, Host,
Fernwood and Rockledge agree and consent that temporary and permanent injunctive
relief may be granted in any proceeding which may be brought to enforce any
provision hereof without the necessity of proof of actual damage.

     The parties hereby agree that the obligations of each of Host, Fernwood and
Rockledge hereunder are independent and that none of them shall have any
liability for the breach by any of the others of such other's obligations
hereunder.  CCC and Host agree that, in the event that any Non-Controlled
Subsidiary which is not a party to this Agreement engages in any activity in
which Host is prohibited from engaging under this Agreement, CCC shall not be
entitled to terminate this Agreement but Host shall indemnify and hold CCC
harmless from any liabilities, damages, losses and reasonable expenses incurred
by CCC as a result thereof.


                                     -20-

 
5.7  Enforceability.

     The terms, conditions and promises contained in this Agreement shall be
binding upon and shall inure to the benefit of each of the parties hereto, their
heirs, personal representatives, or successors and assigns.  Without limiting
the generality of the foregoing, the parties agree that, following the Merger,
Host REIT shall be deemed to be a successor of Host under this Agreement.  Each
of the parties hereto shall cause its Subsidiaries which are not Non-Controlled
Subsidiaries to comply with such party's obligations hereunder.  Nothing herein,
expressed or implied, shall be construed to give any other Person any legal or
equitable rights hereunder.

5.8  Assignment and Successors and Assigns.

     Neither party shall, without the prior written consent of the other, assign
any rights or delegate any obligations under this Agreement.  Notwithstanding
anything herein to the contrary, the restrictions, rights and obligations set
forth herein shall be treated as follows:  in the event Host Transfers all or
substantially all of the Host Business, the transferee thereof shall
automatically be bound by the terms of this Agreement; in the event CCC
Transfers all or substantially all of the Senior Living Community Business or
all or substantially all of the Hotel Leasing Business or all or substantially
all of the Asset Management Services Business, the transferee thereof shall
automatically be bound by the terms of this Agreement; and, in the event either
Fernwood or Rockledge Transfers all or substantially all of its business of
leasing FF&E to lessees of full and limited-service hotels, the transferee
thereof shall automatically be bound by the terms of this Agreement.  The
parties acknowledge that, upon the effectiveness of the Merger, Host REIT shall
succeed to all of the rights and obligations of HMC under this Agreement.

5.9  Consent to Jurisdiction.

     Subject to Section 5.1 hereof, the parties irrevocably submit to the
exclusive jurisdiction of (i) the Courts of the State of Maryland in Montgomery
County, and (ii) if federal jurisdiction exists, the United States District
Court for the State of Maryland for the purposes of any suit, action or other
proceeding arising out of this Agreement.

5.10  Interpretation.

     When a reference is made to this Agreement to a Section, Article, or
Schedule, such reference shall be to a Section, Article, or Schedule of this
Agreement unless otherwise indicated.  The headings contained in this Agreement
are for reference purposes only and shall neither affect the meaning or
interpretation of this Agreement, nor define or limit the scope or intent of any

                                     -21-

 
provision or part hereof.  Whenever the words "include," or "includes," or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."

5.11  Notices.

      All notices and other communications hereunder shall be in writing and
shall be delivered by hand, by telecopier with computer generated acknowledgment
of receipt, by mail or by Federal Express or similar expedited commercial
carrier, to the parties at the following addresses (or at such other addresses
for a party as shall be specified by like notice), postpaid and certified with
return receipt requested (if by mail), or with all freight charges prepaid (if
by Federal Express or similar carrier), and shall be deemed given on the date of
acknowledged receipt, in the case of a notice by telecopier, and, in all other
cases, on the date of receipt or refusal:

                                     -22-

 
          To Host:

               Host Marriott Corporation
               10400 Fernwood Road
               Bethesda, Maryland 20817
               Attention: Christopher G. Townsend, Senior Vice
                          President, General Counsel and
                          Corporate Secretary
               Fax No.: 301/380-3588

          To CCC:

               Crestline Capital Corporation
               10400 Fernwood Road
               Bethesda, Maryland 20817
               Attention: General Counsel
               Fax No.: 240/694-2040

          with a copy to:

               Crestline Capital Corporation
               10400 Fernwood Road
               Bethesda, Maryland 20817
               Attention: Executive Vice President - Asset Management
               Fax No.: 240/694-2082


          To Fernwood:

               Fernwood Hotel Assets, Inc.
               10400 Fernwood Road
               Bethesda, Maryland 20817
               Attention: President
               Fax: 301/380-6338

          With a copy to:

               Host Marriott Corporation Law Department,
                as agent for Fernwood Hotel Assets, Inc.
               10400 Fernwood Road
               Bethesda, Maryland 20817
               Attention: Christopher G. Townsend, Senior Vice
                          President, General Counsel and
                          Corporate Secretary
                Fax No.: 301/380-3588
 
                                     -23-

 
          To Rockledge:

               Rockledge Hotel Properties, Inc.
               10400 Fernwood Road
               Bethesda, Maryland  20817
               Attention: President
               Fax: 301/380-5188

          With a copy to:

               Host Marriott Corporation Law Department,
                as agent for Rockledge Hotel Properties, Inc.
               10400 Fernwood Road
               Bethesda, Maryland 20817
               Attention: Christopher G. Townsend, Senior Vice
                          President, General Counsel and
                          Corporate Secretary
               Fax No.: 301/380-3588

5.12  Governing Law.

      This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland, regardless of the laws that might be applied
under applicable principles of conflicts of laws.

5.13  Relationship of Parties.

      It is understood and agreed that nothing in this Agreement shall be deemed
or construed by the parties or any third party as creating an employer-employee,
principal/agent, partnership or joint venture relationship between or among the
parties.

                                     -24-

 
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered, all as of the day and year first above written.


                              CRESTLINE CAPITAL CORPORATION



                              By:
                                 ----------------------------------
                              Name:  Bruce D. Wardinski
                              Title: President and Chief Executive   
                                     Officer



                              HOST MARRIOTT CORPORATION



                              By:
                                 ----------------------------------
                              Name:
                              Title:



                              HOST MARRIOTT, L.P.

                              By:  HMC REAL ESTATE LLC,
                                   General Partner


                              By:
                                 ----------------------------------
                              Name:
                              Title:


                              FERNWOOD HOTEL ASSETS, INC.



                              By:
                                 ----------------------------------
                              Name:
                              Title:
 


                                     -25-

 
                              ROCKLEDGE HOTEL PROPERTIES, INC.



                              By:
                                 ----------------------------------
                              Name:
                              Title:


          The undersigned is executing this Agreement solely for the purpose of
acknowledging and consenting to the provisions of the last sentence of Section
5.8 hereof.


                              HMC MERGER CORPORATION



                              By:
                                 ----------------------------------
                              Name:
                              Title:


                                     -26-

 
                                   Schedule A
                                   ----------

                                 Initial Hotels
                                 --------------

                                        

 
                                   Schedule B
                                   ----------

                            Certain Permitted Leases
                            ------------------------

                                        

 
                                                                   Exhibit 10.26

                              HOST MARRIOTT, L.P.

                          RETIREMENT AND SAVINGS PLAN

 
                                                     Effective December 28, 1998

 
                                TABLE OF CONTENTS
                                -----------------

                                                                      Page No.
                                                                      --------

ARTICLE I
   DEFINITIONS .......................................................     2
   1.1      Account ..................................................     2
   1.2      Actual Contribution Percentage ...........................     2
   1.3      Actual Deferral Percentage ...............................     2
   1.4      Additional After-tax Savings .............................     2
   1.5      Additions ................................................     2
   1.6      Administrative Expenses ..................................     2
   1.7      Affiliated Company .......................................     2
   1.8      After-tax Savings ........................................     2
   1.9      After-tax Savings Account ................................     2
   1.10     Allocable Portion ........................................     2
   1.11     Allocation Agreement .....................................     3
   1.12     Alternate Payee ..........................................     3
   1.13     Annuity Starting Date ....................................     3
   1.14     Authorized Leave of Absence ..............................     3
   1.15     Basic After-tax Savings ..................................     3
   1.16     Beneficiary ..............................................     3
   1.17     Board of Directors .......................................     3
   1.18     Code .....................................................     3
   1.19     Combined Basic Savings ...................................     3
   1.20     Committee ................................................     4
   1.21     Company ..................................................     4
   1.22     Company Contribution Account .............................     4
   1.23     Compensation .............................................     4
   1.24     Distributee ..............................................     5
   1.25     Effective Date ...........................................     5
   1.26     Eligible Rollover Distribution ...........................     5
   1.27     Eligible Retirement Plan .................................     5
   1.28     Employee .................................................     5
   1.29     Entry Date ...............................................     6
   1.30     ERISA ....................................................     6
   1.31     Fiduciary ................................................     6
   1.32     Fiscal Year ..............................................     6
   1.33     Flexible Compensation ....................................     6
   1.34     FLSA .....................................................     6
   1.35     Fund .....................................................     6
   1.36     Hardship .................................................     7
   1.37     Highly Compensated Employee ..............................     7
   1.38     Hire Date ................................................     7
   1.39     Host Marriott, L.P. ......................................     7

                                       i

 
   1.40     Investment Expenses ......................................     7
   1.41     Maximum Permissible Amounts ..............................     7
   1.42     Month ....................................................     8
   1.43     Month of Credit ..........................................     8
   1.44     Named Fiduciary ..........................................     8
   1.45     Participant ..............................................     8
            (a) Former Participant ...................................     8
            (b) Terminated Participant ...............................     8
            (c) Retired Participant ..................................     8
            (d) Disabled Participant .................................     8
            (e) Deceased Participant .................................     8
   1.46     Participating Company ....................................     8
   1.47     Permanent Disability .....................................     8
   1.48     Period of Severance ......................................     9
   1.49     Plan .....................................................     9
   1.50     Plan Administrator .......................................     9
   1.51     Plan Year ................................................     9
   1.52     Predecessor Company ......................................     9
   1.53     Prior Plan ...............................................     9
   1.54     Pro Rata Share of Administrative Expenses ................     9
   1.55     Qualified Domestic Relations Order or QDRO ...............     9
   1.56     Qualified Joint and Survivor Annuity or QJSA .............     9
   1.57     Qualifying Employer Real Property ........................     9
   1.58     Qualifying Employer Securities ...........................    10
   1.59     Reemployment Date ........................................    10
   1.60     Required Beginning Date ..................................    10
   1.61     Section 401(k) Contribution ..............................    10
   1.62     Section 401(k) Contribution Account ......................    10
   1.63     Separation Date ..........................................    10
   1.64     Service ..................................................    11
   1.65     Spousal Consent ..........................................    11
   1.66     Spouse or Surviving Spouse ...............................    11
   1.67     Subaccount ...............................................    11
   1.68     Subsidiary or Affiliated Company .........................    12
   1.69     Trustees .................................................    12
   1.70     Trust Agreement ..........................................    12
   1.71     Trust Fund ...............................................    12
   1.72     Valuation Date ...........................................    12

                                       ii

 
ARTICLE II
  ELIGIBILITY AND PARTICIPATION ......................................    13
  2.1 Eligibility and Participation ..................................    13
      (a)  Eligibility ...............................................    13
      (b)  Commencement of Participation .............................    13
      (c)  Continued Participation ...................................    13
      (d)  Participation Voluntary ...................................    13
  2.2 Reemployment of Employee .......................................    13
      (a)Eligibility Upon Reemployment ...............................    13
  2.3 Termination of Plan Participation ..............................    13
  2.4 Readmission of Former Participant ..............................    13
  2.5 Participation During Authorized Leave of Absence or During         
      Employment by Subsidiary Which Has Not Joined Plan .............    13
  2.6 Treatment of Participants Who Cease Being Employees Pursuant to    
      Section 1.29 ...................................................    14
                                                                         
ARTICLE III                                                              
  COMPANY CONTRIBUTION ...............................................    15
  3.1 Amount of Contribution .........................................    15
  3.2 Time of Payment of Contributions ...............................    15
  3.3 Form of Payment of Contributions ...............................    15
  3.4 Return of Contributions to Company .............................    15
                                                                         
ARTICLE IV                                                               
  PARTICIPANTS' AFTER-TAX SAVINGS ....................................    17
  4.1 Participant After-tax Savings ..................................    17
  4.2 Amount of After-tax Savings ....................................    17
  4.3 Payroll Deduction ..............................................    17
  4.4 Change in Rate of After-tax Savings ............................    17 
  4.5 Payment to Trustees ............................................    17
  4.6 Investment of Participants' After-tax Savings ..................    17
  4.7 In-Service Withdrawal of After-tax Savings .....................    17
  4.8 Effect of Termination of Plan or Discontinuance of After-Tax       
      Contributions ..................................................    17
                                                                         
ARTICLE V                                                                
  SECTION 401(k) CONTRIBUTIONS .......................................    18
  5.1 Designation of Flexible Compensation ...........................    18
  5.2 Section 401(k) Contributions ...................................    18
  5.3 Election Rules .................................................    18
      (a)  Method of Election ........................................    18
      (b)  Effective Date of Election ................................    18
      (c)  Revocation or Amendment ...................................    18
  5.4 Compensation Reduction .........................................    19
  5.5 Limitations on Section 401(k) Contributions ....................    19
  5.6 Actual Deferral Percentage Tests ...............................    19
  5.7 Recharacterization of Certain Section 401(k) Contributions .....    19
                                                                         
                                       iii

 
   5.8   Coordination of After-tax Savings and Section 401(k) 
         Contributions ...............................................    19
   5.9   Payment to Trustees .........................................    20
   5.10  Distribution of Section 401(k) Contributions ................    20
         (a)  Restrictions on Distributions ..........................    20
         (b)  In-Service Withdrawal of Section 401(k) Contributions ..    20
   5.12  Effect of Termination of Plan or Discontinuance of Section 
         401(k) Contributions ........................................    21

ARTICLE VI
   ALLOCATION OF CONTRIBUTIONS
   AND NET INCOME AMONG PARTICIPANTS .................................    22
   6.1   Maintenance of Separate Accounts ............................    22
   6.2   Allocation to After-tax Savings Accounts ....................    22
   6.3   Allocation to Section 401(k) Contribution Account ...........    22
   6.4   Allocation of Company Contribution ..........................    22
   6.5   (a)  Limitation on After-tax Savings and Company 
         Contributions ...............................................    23
         (b)  Multiple Use of the Alternative Limitation .............    23
   6.6   Correcting Excess Aggregate Contributions ...................    24
   6.7   Special Provision for Allocating Company Contributions ......    25
   6.8   Allocation of Net Income ....................................    25
   6.9   Use of Forfeitures ..........................................    25
   6.10  Use of Unclaimed Benefits ...................................    25
         (a)  Method of Allocation ...................................    25
         (b)  Reduction in Forfeitures ...............................    25
   6.11  Allocation Limitations ......................................    25
         (a)  Maximum Additions ......................................    26
         (b)  Correction of Excess ...................................    26
         (c)  Further Limitations on Additions .......................    26
   6.12  Transfers From Other Qualified Plans ........................    26
         (a)  Manner of Rollover or Direct Transfer ..................    26
         (b)  Governing Provisions ...................................    27
                                                                            
ARTICLE VII                                                                    
   VESTING ...........................................................    28
   7.1   Vesting of After-tax Savings Account ........................    28
   7.2   Vesting of Section 401(k) Contribution Account ..............    28
   7.3   Vesting of Company Contribution Account .....................    28
         (a)  Vesting Schedule .......................................    28
         (b)  Service to be Credited Upon Resumption of Employment ...    28
         (c)  Definition of Service ..................................    28
         (d)  Automatic 100% Vesting .................................    29
                                                                             
ARTICLE VIII
         TERMINATION AND DISTRIBUTION
         UPON RETIREMENT, DEATH OR DISABILITY ........................    30
   8.1   Retirement ..................................................    30

                                       iv

 
   8.2  Death .........................................................    30
   8.3  Disability ....................................................    30
   8.4  Valuation of Account Balances .................................    30
   8.5  Available Payment Options .....................................    30
   8.6  Spousal Consent Rules .........................................    31
        (a)    Revocation of an Annuity ...............................    31
        (b)    Waiver of Qualified Joint and Survivor Annuity .........    31
        (c)    Written Explanation ....................................    32
        (d)    Result of Effective Waiver .............................    32
        (e)    Spousal Consent ........................................    32
   8.7  Distributions Upon Married Participant's Death ................    33
   8.8  General Distribution Requirements .............................    33
        (a)    Distributions to Participants ..........................    33
        (b)    Distributions to Beneficiary ...........................    33
        (c)    Commencement of Distribution ...........................    34
   8.9  Form of Payment ...............................................    35
   8.10 Mandatory Cash-Out of Small Accounts ..........................    35
   8.11 Account Balance ...............................................    35
   8.12 Special Rule for Rollovers Out of the Plan ....................    35
                                                                         
ARTICLE IX                                                               
   TERMINATION AND DISTRIBUTION UPON TERMINATION                        
   OF EMPLOYMENT OTHER THAN FOR RETIREMENT,                              
   DEATH OR DISABILITY ................................................    36
   9.1  Terminated Participant ........................................    36
   9.2  Distribution of After-tax Savings and Section 401(k)              
        Contributions..................................................    36
   9.3  Distribution of Vested Company Contribution Account ...........    36
   9.4  Mandatory Cash-Out of Small Accounts ..........................    36
   9.5  Unvested Company Contributions ................................    37
        (a)    Forfeiture .............................................    37
        (b)    Restoration of Forfeiture ..............................    37
        (c)    Distribution Prior to Reemployment .....................    37
   9.6  Account Balance ...............................................    37
   9.7  Special Rule for Rollovers Out of the Plan ....................    37
                                                                         
                                        v
                                                                         

 
ARTICLE X
   DISTRIBUTION DURING CONTINUED EMPLOYMENT ..........................   38
  10.1 Withdrawal of After-tax Savings ...............................   38
       (a)    Withdrawal of Additional After-tax Savings..............   38
       (b)    Withdrawal of Basic After-tax Savings ..................   38
       (c)    Valuation of After-tax Savings Account .................   38
       (d)    Form of Payment ........................................   38
       (e)    Taxation of Withdrawal .................................   38
  10.2 Withdrawal of Section 401(k) Contribution .....................   38
  10.3 Withdrawal of Vested Company Contribution Account..............   38
  10.4 Readmission of Former Participant to Plan .....................   38
  10.5 Distributions Upon Attainment of Age 59-1/2 ...................   39
  10.6 Account Balance ...............................................   39
  10.7 Hardship Withdrawals ..........................................   39
       (a)    Terms of Hardship Withdrawals ..........................   39
       (b)    Restrictions ...........................................   39
       (c)    Committee Guidelines and Determination .................   40
  10.8 Special Rule for Rollovers Out of the Plan ....................   40
                                                                      
ARTICLE XI                                                   
  LOANS TO PARTICIPANTS ..............................................   41
  11.1 General Provisions ............................................   41
  11.2 Maximum Loan Amount ...........................................   41
  11.3 Minimum Loan Amount ...........................................   41
  11.4 Repayment Period ..............................................   42
  11.5 Terms and Conditions ..........................................   42
  11.6 Nondiscrimination .............................................   42
  11.7 Decision of the Plan Administrator ............................   43
  11.8 Offset of Account Balance .....................................   43
  11.9 Default .......................................................   43
                                                                      
ARTICLE XII                                                           
  BENEFICIARIES ......................................................   44
  12.1 Designation of Beneficiary ....................................   44
  12.2 Manner of Designation .........................................   44
  12.3 Absence of Valid Designation of Beneficiary ...................   44
  12.4 Beneficiary Bound by Plan Provisions ..........................   44
                                                                      
ARTICLE XIII                                                          
  QUALIFIED DOMESTIC RELATIONS ORDERS ................................   45
  13.1 Governing Provisions ..........................................   45
                                                         
                                       vi

 
ARTICLE XIV 
   PARTICIPANT'S DIRECTED INVESTMENTS ................................    46
   14.1  Election by Participants ....................................    46
   14.2  Election Rules ..............................................    46
         (a) Election to be in Writing ...............................    46
         (b) Effective Date of Election ..............................    46
         (c) Revocation of Election ..................................    46
         (d) Change in Election ......................................    46
         (e) Default Election ........................................    47
   14.3  Transfer Date ...............................................    47
   14.4  Confirmation ................................................    47
   14.5  Subdivision of Accounts .....................................    47
         (a) Establishment of Subaccounts ............................    47
         (b) Allocation of After-tax Savings, Section 401(k) 
             Contributions, Company Contributions and Forfeitures 
             Among Subaccounts .......................................    47
   14.6  Investment Funds ............................................    47
         (a) Committee's Responsibility for Funds ....................    47
         (b) Investment Policy of Funds ..............................    48
         (c) Funds ...................................................    48
             (1) Stable Value Fund ...................................    48
             (2) Spectrum Income Fund ................................    48
             (3) Balanced Fund .......................................    48
             (4) Blue Chip Growth Fund ...............................    48
             (5) Host Marriott Corporation Common Stock Fund .........    48
             (6) International  Stock Fund ...........................    49
             (7) New Horizons Fund ...................................    49
   14.7  Voting Rights ...............................................    49
   14.8  Allocation of Income of Funds ...............................    49
   14.9  Investment Authority of Former Employees ....................    49
   14.10 Investment for the Benefit of Incompetents ..................    49
   14.11 Rules of Committee ..........................................    49

ARTICLE XV
   PLAN FIDUCIARIES ..................................................    50 
   15.1  Plan Fiduciaries ............................................    50 
         (a) Named Fiduciary .........................................    50 
         (b) Profit Sharing Committee ................................    50 
         (c) Trustees ................................................    50 
   15.2  Fiduciary Duty ..............................................    50 
   15.3  Agents and Advisors .........................................    51 
         (a) Employment of Agents ....................................    51 
         (b) Delegation to Agents and Plan Administrator .............    51
         (c) Appointment of Investment Manager .......................    51
   15.4  Administrative Action........................................    51
         (a) Action by Majority ......................................    51
         (b) Right to Vote ...........................................    51

                                      vii

 
         (c) Authority to Execute Documents ..........................    52
   15.5  Liabilities and Indemnifications ............................    52
         (a) Liability of Fiduciaries ................................    52
         (b) Indemnity by Company ....................................    52
   15.6  Plan Expenses and Taxes......................................    52
         (a) Plan Expenses ...........................................    52
         (b) Taxes ...................................................    52
   15.7  Records and Financial Reporting .............................    52
         (a) Book of Account .........................................    52
         (b) Financial Reporting Under ERISA .........................    53
   15.8  Compliance with ERISA and Code ..............................    53
   15.9  Prohibited Transactions .....................................    53
   15.10 Foreign Assets ..............................................    53
   15.11 Exclusive Benefit of Trust Fund .............................    53
   15.12 Board of Directors Resolution ...............................    53

ARTICLE XVI
   PLAN ADMINISTRATION ...............................................    54
   16.1  Administration of the Plan ..................................    54
         (a) Authority to Administer .................................    54
         (b) Delegation of Authority to Plan Administrator ...........    54
         (c) Finality of Decision ....................................    54
   16.2  Claims ......................................................    54
         (a) Claims for Benefits .....................................    54
         (b) Notice of Claim Denied ..................................    54
         (c) Request for Review of Denial ............................    55
         (d) Decision on Review of Denial ............................    55
                                                                             
ARTICLE XVII
   PARTICIPATING COMPANY WITHDRAWAL FROM PLAN;
   TERMINATION OR MERGER OF THE PLAN .................................    56
   17.1  Voluntary Withdrawal from Plan ..............................    56
         (a) Withdrawal By Participating Company .....................    56
         (b) Segregation of Trust Assets Upon Withdrawal .............    56
         (c) Exclusive Benefit of Participants .......................    56
         (d) Applicability of Withdrawal Provisions ..................    56
   17.2  Amendment of Plan ...........................................    56
   17.3  Voluntary Termination of Plan ...............................    57
         (a) Right to Terminate Plan .................................    57
         (b) Merger or Consolidation of Plan and Trust ...............    58
         (c) Termination of Plan and Trust Fund ......................    58
   17.4  Discontinuance of Contributions .............................    58
   17.5  Rights to Benefits Upon Termination of Plan or Complete 
         Discontinuance of Contributions .............................    58

ARTICLE XVIII

                                      viii

 
   ELECTION TO PARTICIPATE BY SUBSIDIARIES ...........................    59
   19.1  Consent Required for Subsidiaries to Join Plan ..............    59

ARTICLE XIX
   MISCELLANEOUS PROVISIONS ..........................................    60
   19.1  Status of Employment ........................................    60
   19.2  Liability of Company ........................................    60
   19.3  Information .................................................    60
         (a) Supplied by Named Fiduciary, the Committee or Trustees ..    60
         (b) Supplied by Company .....................................    60
   19.4  Provisions of Plan to Control ...............................    60
   19.5  Payment for Benefit of Incompetent ..........................    60
   19.6  Account to be Charged Upon Payment ..........................    61
   19.7  Tax Qualification of Plan ...................................    61
   19.8  Deductibility of Company Contributions ......................    61
   19.9  Restriction on Alienation or Assignment .....................    61
   19.10 Unclaimed Benefits ..........................................    61
   19.11 Recovery of Plan Benefits Payment Made by Mistake ...........    62
   19.12 Bonding .....................................................    62
   19.13 Titles and Captions .........................................    62
   19.14 Execution of Counterparts ...................................    62
   19.15 Governing Law ...............................................    62
   19.16 Separability ................................................    62
   19.17 Supplements and Appendices ..................................    62
   19.18 Military Service ............................................    62
   19.19 Employer Securities .........................................    62
                                                                            
ARTICLE XX
   TOP HEAVY PROVISIONS ..............................................    63
   20.1  Determination of Top Heavy Status ...........................    63
   20.2  Definitions .................................................    63
   20.3  Requirements if Plan a Top Heavy Plan .......................    64

                                      ix
                                                                               

 
                              HOST MARRIOTT, L.P.

                          RETIREMENT AND SAVINGS PLAN
                          ---------------------------


                                    PREAMBLE
                                    --------

     WHEREAS, Host Marriott, L.P. has entered into the Employee Benefits and
Other Employment Matters Allocation Agreement between Host Marriott Corporation,
Host Marriott, L.P. and Crestline Capital Corporation (the "Agreement") entered
into in connection with the distribution of outstanding common shares of the
Company (the "Distribution");

     WHEREAS, pursuant to the Agreement, Host Marriott, L.P. assumed sponsorship
of the Host Marriott Corporation (HMC) Retirement and Savings Plan;

     NOW, THEREFORE, Host Marriott, L.P. hereby amends and restates the Host
Marriott Corporation (HMC) Retirement and Savings Plan effective as of December
28, 1998, such plan  to be hereafter named the Host Marriott, L.P. Retirement
and Savings Plan.

 
                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

     When used in this instrument, the following words and phrases have the
indicated meanings except where the contrary is expressly stated:

      1.1  "Account" shall have the meaning set forth in Section 6.1.
            -------                                                  

      1.2  "Actual Contribution Percentage" means, for a given Plan Year,
            ------------------------------                               
the average of the ratios, calculated separately for each Participant in a
group, of (a) the sum of After-tax Savings credited to the Participant's After-
tax Savings Account and Company contributions and forfeitures allocable to the
Participant's Company Contribution Account for the Plan Year to (b) the
Participant's Compensation for such Plan Year.

      1.3  "Actual Deferral Percentage" means, for a given Plan Year, the
            --------------------------
average of the ratios, calculated separately for each Participant in a group, of
(a) the Section 401(k) Contributions made on behalf of such Participant by the
Company for the Plan Year to (b) the Participant's Compensation for such Plan
Year.

      1.4  "Additional After-tax Savings" means After-tax Savings not included
            ----------------------------
in Combined Basic Savings for a payroll period.

      1.5  "Additions" means, with respect to each Participant for any Fiscal
            ---------                                                        
Year, the total of (a) the Company contributions and forfeitures allocated for
the Fiscal Year to the Participant's Company Contribution Account, plus (b)
Section 401(k) Contributions allocated for the Fiscal Year to the Participant's
Section 401(k) Contributions Account, plus (c) the After-tax Savings allocated
for the Fiscal Year to the Participant's After-tax Savings Account.

      1.6  "Administrative Expenses" means the administrative expenses described
            -----------------------                                             
in Section 15.6(a).

      1.7  "Affiliated Company" means a "Subsidiary", as defined in Section
            ------------------   
1.68.

      1.8  "After-tax Savings" means the after-tax savings deposited into the
            -----------------                                                
Trust Fund by a Participant in accordance with Article IV.

      1.9  "After-tax Savings Account" shall have the meaning set forth in
            -------------------------                                     
Section 6.1(a).

     1.10  "Allocable Portion" means, for purposes of Section 11.2, the lesser
            -----------------                                                 
of: (a) fifty percent (50%) of the Participant's vested Account balance; or (b)
$50,000, reduced by the excess of (1) the highest outstanding balance of any
previous loan from the Plan and any other plans of the Company or a Subsidiary
during the one-year period ending on the day before the date on which the
current loan is made over (2) the outstanding balance of any previous loan from
the Plan and any other plans of the Company or a Subsidiary on the date on which
the current loan is made.

                                      -2-

 
     1.11  "Allocation Agreement" means the Employee Benefits & Other Employment
            --------------------                                                
Matters Allocation Agreement entered into by and between Host Marriott
Corporation, Host Marriott, L.P. and Crestline Capital Corporation.

     1.12  "Alternate Payee" means any Spouse, former Spouse, child or other
            ---------------                                                 
dependent of a Participant who is entitled under a Qualified Domestic Relations
Order to receive all, or part of, the benefits payable to that Participant under
the Plan.

     1.13  "Annuity Starting Date" means the first day of the first period for
            ---------------------                                             
which an amount is received as an annuity by reason of retirement or disability.

     1.14  "Authorized Leave of Absence" means any absence authorized by the
            ---------------------------                                     
Company under the Company's standard personnel practices provided that the
Employee or Participant returns within the period of authorized absence.  An
absence due to service in the Armed Forces of the United States shall be
considered an Authorized Leave of Absence provided that the absence is caused by
war or other emergency, or provided that the Employee or Participant is required
to serve under the laws of conscription in time of peace, and further provided
that the Employee or Participant returns to employment with the Company within
the period provided by law.  Except for service in the Armed Forces of the
United States in accordance with the preceding sentence, an Authorized Leave of
Absence may not extend beyond two (2) years.

     1.15  "Basic After-tax Savings" means After-tax Savings included in
            -----------------------
Combined Basic Savings for a payroll period.

     1.16  "Beneficiary" means the person or persons designated as a beneficiary
            -----------                                                         
pursuant to Article XII.

     1.17  "Board of Directors" means the Board of Directors of Host Marriott
            ------------------                                               
Corporation, a Delaware corporation and the General Partner of Host Marriott,
L.P.

     1.18  "Code" means the Internal Revenue Code of 1986, as amended, or any
            ----                                                             
successor statute, including the regulations issued thereunder.

     1.19  "Combined Basic Savings" means the sum of a Participant's After-tax
            ----------------------                                            
Savings and Section 401(k) Contributions for each payroll period, provided that
such sum shall include only an amount up to six percent (6%) of Compensation for
each payroll period.  If the sum of a Participant's After-tax Savings and
Section 401(k) contributions for a payroll period exceed six percent (6%), the
Participant's 401(k) contributions shall be included in Combined Basic Savings
before After-tax Savings.

     1.20  "Committee" means the Profit Sharing Committee appointed by the Board
            ---------                                                           
of Directors pursuant to Section 15.1(b).

     1.21  "Company" means Host Marriott, L.P. and any affiliate or Subsidiary
            -------                                                           
that elects to join the Plan with the consent of the Board of Directors.

                                      -3-

 
     1.22  "Company Contribution Account" shall have the meaning set forth in
            ----------------------------                                     
Section 6.1(c).

     1.23  "Compensation" means:
            ------------        

           (a)  Except as hereinafter specified, (1) earned income, wages,
salary, overtime, cash bonus, commissions, annual leave, sick leave and holiday
pay, paid by the Company to an Employee, and (2) gratuities reported by the
Employee to the Company and the Internal Revenue Service, all without regard for
any election under Article V or any elections made by the Participant under any
plan maintained by the Company pursuant to Section 125 of the Code, but
excluding any and all other forms of compensation.  Notwithstanding the
foregoing, Compensation taken into account for each Employee for a Plan Year
shall not exceed One Hundred Sixty Thousand Dollars ($160,000) or such other
amount as the United States Secretary of Treasury may designate under Section
401(a)(17) of the Code.

           (b)  For purposes of the limitation on contributions and benefits
under Section 415 of the Code as set forth in Section 6.11, a Participant's
wages, salaries, and fees for professional services, and other amounts received
for personal services actually rendered in the course of employment with the
Company to the extent that the amounts are includable in gross income
(including, but not limited to, commissions, gratuities reported by the Employee
to the Company and the Internal Revenue Service, bonuses, fringe benefits,
reimbursements or other expenses allowable under a nonaccountable plan (as
described in Section 1.62-2(c) of the Treasury Regulations) annual leave, sick
leave and holiday pay) and including amounts contributed by the Company pursuant
to a salary reduction agreement and which are not includible in the gross income
of the Participant under Sections 125, 402(g)(3) or 402(h)(1)(B) of the Code,
and excluding the following:

           (1)  Company contributions to a plan of deferred compensation
which (except as provided above with respect to Sections 125, 402(g)(3) and
402(h)(1)(B) of the Code) are not included in the Employee's gross income for
the taxable year in which contributed, or any distribution from a plan of
deferred compensation;

           (2)  Amounts realized from the exercise of a nonqualified stock
option, or when restricted stock (or property) held by the Employee either
becomes freely transferable or is no longer subject to a substantial risk of
forfeiture; and

           (3)  Amounts realized from the sale, exchange or other disposition
of stock acquired under a qualified stock option.

     1.24  "Distributee" means a Participant, Former Participant, Retired
            -----------                                                  
Participant, Disabled Participant, the Surviving Spouse of a Deceased
Participant, and an Alternate Payee.

     1.25  "Effective Date" means December 28, 1998.
            --------------                          

     1.26  "Eligible Rollover Distribution" means any distribution of all or a
            ------------------------------                                    
portion of the Distributee's Account balance, except that an Eligible Rollover
Distribution does not include (a) any 

                                      -4-

 
distribution that is one of a series of substantially equal periodic payments
(not less frequently than annually) made for the life (or life expectancy) of
the Distributee or the joint lives (or joint life expectancies) of the
Distributee and the Distributee's designated Beneficiary, or for a specified
period of ten (10) years or more, (b) any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code, and (c) the
portion of any distribution that is not includable in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
Company securities).

     1.27  "Eligible Retirement Plan" means an individual retirement account
            ------------------------                                        
(described in Section 408(a) of the Code), an individual retirement annuity
(described in Section 408(b) of the Code), an annuity plan (described in Section
403(a) of the Code), or a qualified trust (described in Section 401(a) of the
Code), that accepts the Distributee's Eligible Rollover Distribution.  However,
in the case of an Eligible Rollover Distribution to the Spouse, an "Eligible
Retirement Plan" means an individual retirement account or individual retirement
annuity only.

     1.28  "Employee" means any person classified as an "employee" and employed
            --------                                                           
by a Participating Company other than: (a) a person who is covered by a
collective bargaining agreement, if there is evidence to show that retirement
benefits were the subject of good faith bargaining between a Participating
Company and the employee representatives with whom such agreement was entered;
(b) a nonresident alien who receives no earned income (within the meaning of
Section 911(d)(2) of the Code) from a Participating Company which constitutes
income from sources within the United States (within the meaning of Section
861(a)(3) of the Code); (c) a participant in a profit sharing plan, pension plan
or other retirement plan (other than the Plan, the Host Marriott, L.P. Executive
Deferred Compensation Plan or the Host Marriott Corporation and Host Marriott,
L.P. Comprehensive Stock and Cash Incentive Plan or the Host Marriott
Corporation Non-Employee Directors' Deferred Stock Compensation Plan) maintained
by Host Marriott Corporation or Host Marriott, L.P. or an affiliate, whether or
not the plan or the trust of such plan is intended to qualify under Section 401
of the Code; and (d) a leased employee (within the meaning of Section 414(n) of
the Code).

     Employees are classified as follows:

           Class A consists of all Employees not included in Class B whose base
           -------                                                             
compensation is stated in terms of hourly rates of pay including those who
receive gratuities collected and distributed by the employer.

           Class B consists of all management and professional Employees whose
           -------                                                            
base compensation at the time the determination is to be made is stated in terms
of a weekly or annual salary, or whose base compensation is stated in terms of
hourly rates but who receive management benefits, regardless of whether such
Employees are exempt from the overtime pay requirements of the FLSA.

     Unless specifically referring to a particular class, any and all provisions
of this Plan shall apply to all Employees regardless of classification.

                                      -5-

 
     1.29  "Entry Date" means the first day of the four week accounting period
            ----------
of the Company immediately following receipt by the Plan Administrator of an
application for admission to the Plan in writing, or in such other form
authorized by the Plan Administrator; provided, however, that Employees who were
employed by Host Marriott Corporation on the day immediately prior to the
Effective Date shall be eligible to participate in the Plan on the Effective
Date. The Board of Directors may, with respect to persons who become Employees
by virtue of having been employed by any business entity the stock or
substantially all of the assets of which are acquired by Host Marriott, L.P. or
any affiliate or Subsidiary or the management of which is assumed by the
Company, establish by written resolution as a special Entry Date, solely for
such Employees, the date of such acquisition or assumption of management.

     1.30  "ERISA" means the Employee Retirement Income Security Act of 1974, as
            -----                                                               
amended from time to time.

     1.31  "Fiduciary" means any person who (a) exercises any discretionary
            ---------                                                      
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of the
Plan's assets; (b) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any monies or other property of the Plan, or
has any authority or responsibility to do so; or (c) has any discretionary
authority or discretionary responsibility in the administration of the Plan.
The term "Fiduciary" includes the Named Fiduciary, the Trustees and any person
to whom fiduciary responsibilities have been delegated pursuant to Section 15.3.

     1.32  "Fiscal Year" means each year beginning on the first day of each
            -----------                                                    
fiscal year of Host Marriott, L.P. and ending on the last day of each fiscal
year of Host Marriott, L.P.  Effective December 28, 1998, the fiscal year is the
calendar year.  The Fiscal Year shall be the "limitation year" of the Plan for
purposes of the limitation on contributions and benefits under Section 415 of
the Code, or any successor provision thereto.

     1.33  "Flexible Compensation" shall have the meaning set forth in Section
            ---------------------                                             
5.l.

     1.34  "FLSA" means the Fair Labor Standards Act, as amended from time to
            ----                                                             
time.

     1.35  "Fund" means any of the separate funds in which Participants'
            ----
Accounts may be placed and which are allocated and invested in accordance with
Article XIV.

     1.36  "Hardship" means the existence of an immediate and heavy financial
            --------                                                         
need of the Participant.  A need exists if it is necessary for the following:

           (a)   expenses for medical care previously incurred by the
Participant, his spouse or any of his dependents or necessary for these persons
to obtain medical care within the limits of Section 213(d) of the Code;

           (b)   purchase (excluding mortgage payments) of a principal residence
for the Participant;

                                      -6-

 
           (c)   payment of tuition, related education fees and room and board
for the next 12 months of post-secondary education for the Participant, his
spouse, children or dependents;

           (d)   payment to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence; and

           (e)   any other event determined by the Commissioner of Internal
Revenue.

     1.37  "Highly Compensated Employee" means any Employee or former Employee
            ---------------------------                                       
who performs service for a Participating Company during the Plan Year and who
(I) for the prior Plan Year received Compensation from the Participating Company
as determined for purposes of Section 415 of the Code in excess of $80,000 (as
adjusted pursuant to Code Section 415(d)); or (ii) during the Plan Year or the
prior Plan Year was a 5% owner (as defined in Code Section 416(I)(1)).

     1.38  "Hire Date" means, for any Employee, the date on which he first
            ---------                                                     
becomes entitled to credit for an hour for which he is directly or indirectly
paid or entitled to be paid by the Company or a Subsidiary for the performance
of employment services.

     1.39  "Host Marriott, L.P." means Host Marriott, L.P., a Delaware
           --------------------                                       
limited partnership, or any successor thereto by merger, consolidation or the
acquisition of substantially all of the assets and business thereof.

     1.40  "Investment Expenses" means all expenses which under generally
            -------------------                                          
accepted accounting principles would be classified as investment expenses,
including, without limitation, investment manager's or advisor's fees and
expenses, custodial fees, fees of broker-dealers for effecting investment
transactions or rendering investment advice, expenses relating to the making of
investments and expenses relating to the recovery of any investment in a
bankrupt or insolvent entity.

     1.41  "Maximum Permissible Amounts" means the lesser of:
            ---------------------------                      

           (a)   $30,000, or such higher amount to which such amount may be
adjusted or, pursuant to Section 415(f) of the Code, to implement special rules
applicable to combining more than one defined contribution plan as a single
plan; or

           (b)   Twenty-five percent (25%) of the Participant's Compensation as
provided in Section 1.23(b).

     1.42  "Month" means any calendar month.
            -----                           

     1.43  "Month of Credit" means any Month during the entire period of which
            ---------------
an Employee is employed by the Company. For purposes of the foregoing, a Month
of Credit shall be deemed to commence on the day of hire and end on the close of
business on the day preceding the next month's anniversary thereof. Months of
Credit are cumulative and need not be successive. Notwithstanding any other
provision to the contrary, a Participant's Months of Credit under the Plan shall
include 

                                      -7-

 
Months of Credit, if any, credited to such Participant under the Prior
Plan immediately before the Effective Date.

     1.44  "Named Fiduciary" means the Committee in its role as named fiduciary
            ---------------                                                    
of the Plan as set forth in Section 15.1(a).

     1.45  "Participant" means an Employee of the Company who has been admitted
            -----------                                                        
to participation in this Plan in accordance with Article II.  As appropriate to
the context a "Participant" may include one or more of the following sub-
definitions.

           (a)   "Former Participant" means any present Employee of the Company
                  ------------------                                           
who, after having been a Participant, ceases to participate in the Plan.

           (b)   "Terminated Participant" means any prior Employee of the
                  ----------------------
Company who, after having been a Participant, terminated his employment other
than by retirement, death or Permanent Disability, and has any vested balance in
the Plan.

           (c)   "Retired Participant" means any Participant who retires from
                  -------------------                                        
employment in accordance with Section 8.1 and who has any vested balance in the
Plan.

           (d)   "Disabled Participant" means any Participant who terminates
                  --------------------
from employment as a result of a Permanent Disability and who has any vested
balance in the Plan.

           (e)   "Deceased Participant" means any Participant who terminates
                  --------------------                                      
employment by reason of death and who leaves any vested balance in the Plan.

     1.46  "Participating Company" means Host Marriott, L.P. or any affiliate or
            ---------------------                                               
Subsidiary that has elected to join the Plan with the consent of the Host
Marriott Corporation's Board of Directors. All of the Participating Companies
constitute the "Company", as defined in Section 1.21.

     1.47  "Permanent Disability" means that the Participant, as a result of a
            --------------------                                              
disability, will be prevented on a permanent basis from engaging in any
occupation for which he is reasonably qualified by education, training or
experience as certified by a competent medical authority designated by the Named
Fiduciary to make such determination.  The foregoing shall include disability
attributable to the permanent loss or loss of use of a member or function of the
body, or to the permanent disfigurement of the Participant.

     The determination of the existence of a Permanent Disability shall be made
by the Plan Administrator and shall be final and binding upon the Participant
and all other parties.

     1.48  "Period of Severance" means the period of time commencing on the
            -------------------                                            
Separation Date and ending on the Participant's Reemployment Date.

     1.49  "Plan" means the Host Marriott, L.P. Retirement and Savings Plan,
            ----                                                            
including any amendments thereto.

                                      -8-

 
     1.50  "Plan Administrator" means the person to whom the duties of Plan
            ------------------                                             
Administrator are delegated pursuant to Section 15.3(b).

     1.51  "Plan Year" shall mean, for Plan Years beginning after the Effective
            ---------                                                          
Date, the same meaning as "Fiscal Year" in Section 1.33; for the Plan Year in
which the Effective Date occurs, the Plan Year shall mean January 4, 1998
through December 31, 1998; for other Plan Years beginning before the Effective
Date, Plan Year shall mean the Fiscal Year of Host Marriott Corporation.

     1.52  "Predecessor Company" means Host Marriott Corporation.
            -------------------                                  

     1.53  "Prior Plan" means the Host Marriott Corporation (HMC) Retirement and
            ----------                                                          
Savings Plan and Trust, as in effect prior to the Effective Date.

     1.54  "Pro Rata Share of Administrative Expenses" means the amount
            -----------------------------------------                  
determined by multiplying the Administrative Expenses of the Plan by a fraction,
the numerator of which is the total value of each Fund and the denominator of
which is the total aggregate value of all such Funds.

     1.55  "Qualified Domestic Relations Order" or "QDRO" shall have the same
            ----------------------------------      ----                     
meaning as "qualified domestic relations order" under Section 414(p) of the Code
and the Treasury Regulations thereunder.

     1.56  "Qualified Joint and Survivor Annuity" or "QJSA" means an annuity
            ------------------------------------      ----                  
purchased from a commercial insurance company with the Participant's Account
that pays a benefit for the life of the Participant with a survivor annuity for
the life of the Participant's Surviving Spouse in an amount elected by the
Participant of either fifty percent (50%) or one hundred percent (100%) of the
amount being paid to the Participant during his lifetime.

     1.57  "Qualifying Employer Real Property" means parcels of real property
            ---------------------------------                                
(and related personal property) which are leased to the Company or an Affiliated
Company (a) if a substantial number of the parcels are dispersed geographically;
and (b) if each parcel and the improvements thereon are suitable (or adaptable
without excessive cost) for more than one use.

     1.58  "Qualifying Employer Securities" means (a) any stocks or other equity
            ------------------------------                                      
securities issued by the Company or an Affiliated Company; or (b) any bonds,
debentures, notes or certificates or other evidences of indebtedness of the
Company or an Affiliated Company which are described in Section 503(e) of the
Code and Section 407(e) of ERISA.

     1.59  "Reemployment Date" means, for any Employee, the first date following
            -----------------                                                   
the Employee's Separation Date on which he first becomes entitled to credit for
an hour for which he is directly or indirectly paid or entitled to be paid by
the Company or a Subsidiary for the performance of employment duties.

     1.60  "Required Beginning Date" means April 1 of the calendar year
            -----------------------
following the calendar year in which the Participant attains age 70-1/2 or, if
later, the calendar year in which the Participant retires from the Company;
provided, however, that in the case of a Participant who is a 5% owner (as
defined in Code section 416), Required Beginning Date means April 1 of the
calendar year 

                                      -9-

 
following the calendar year in which the Participant attains age 70-1/2; and
provided, further, that in the case of a Participant who attained age 70-1/2
before January 1, 1988, Required Beginning Date means the April 1 following the
later of the calendar year in which he (a) attained age 70-1/2; or (b) the
sixtieth (60th) day following the close of the Plan Year in which the
Participant terminates employment with the Company, provided such date is not
later than April 1 of the calendar year following the calendar year during which
such termination occurs, unless he was a five percent (5%) owner (as defined in
Section 416 of the Code) of the Company with respect to the Plan Year ending in
the calendar year in which the he attains age 70-1/2, in which case, clause (b)
shall not apply.

     1.61  "Section 401(k) Contribution" shall have the meaning set forth in
            ---------------------------                                     
Section 5.2.

     1.62  "Section 401(k) Contribution Account" shall have the meaning set
            ----------------------------------- 
forth in Section 6.1(b).

     1.63  "Separation Date" means the earlier of:
            ---------------                       

           (a) Any date on which an Employee's employment with the Company
terminates by reason of voluntary termination, discharge, retirement or death;
or

           (b) The first anniversary of the first date of a period in which the
Employee remains absent from active employment with the Company for some reason
other than voluntary termination, discharge, retirement, death, approved leave
of absence, or military service.

     Provided, however, that, solely for the purpose of determining whether a
Period of Severance has occurred, if an Employee is absent from service beyond
the first anniversary of the first date of absence by reason of a "maternity or
paternity leave", then the Separation Date of such Employee shall be the second
anniversary of the first date of such absence.  For purposes of this Section,
"maternity or paternity leave" means termination of employment or absence from
work due to:  (I) the pregnancy of the Participant, (ii) the birth of a child of
the Participant, (iii) the placement of a child in connection with the adoption
of the child by a Participant, or (iv) the caring for a Participant's child
during the period immediately following the child's birth or placement for
adoption.  The Plan Administrator shall determine, under rules of uniform
application and based on information provided to the Plan Administrator by the
Participant, whether or not the Participant's termination of employment or
absence from work is due to "maternity or paternity leave".

     1.64  "Service" means an Employee's or a Participant's period of employment
            -------                                                             
with the Company; the Predecessor Company prior to the Effective Date; and as a
leased employee (within the meaning of Section 414(n) of the Code) unless the
leased employee is covered by a safe harbor plan described in Section 414(n)(5)
of the Code; and any other employer that is required to be aggregated with the
Company under section 414 of the Code, as determined in accordance with Article
VII.  Employment of an Employee or a Participant by any of the following
employers shall be treated as Service:

           (a)   A Subsidiary, both prior to and after becoming a Subsidiary, if
such Subsidiary has elected to join the Plan.

                                     -10-

 
           (b)   A Subsidiary, after becoming a Subsidiary, if such Subsidiary
has not elected to join the Plan.

     In addition, the Board of Directors shall have the authority by adopting
written resolutions to recognize employment of an Employee or a Participant by
any of the following employers as Service:

           (a)   A Subsidiary, prior to becoming a Subsidiary, if such
Subsidiary has not elected to join the Plan.

           (b)   Any business entity substantially all of the assets of which
are acquired by Host Marriott, L.P. or any affiliate or Subsidiary or whose
management is assumed by the Company; provided that such recognition shall apply
uniformly to all employees of any such employer.

     1.65  "Spousal Consent" means a Spouse's written consent which acknowledges
            ---------------                                                     
the effect of the Participant's election and is witnessed by a Plan
representative or notary public.  Spousal Consent may be in the form of a
specific consent, general consent or limited general consent, as provided in
Section 8.6(e).

     1.66  "Spouse" or "Surviving Spouse" means the spouse or surviving spouse
            ------      ----------------
of the Participant, provided that a former spouse will be treated as the spouse
or surviving spouse and a current spouse will not be treated as the spouse or
surviving spouse to the extent provided in a Qualified Domestic Relations Order.

     1.67  "Subaccount" means the portion of a Participant's Account placed in
            ----------                                                        
each Fund pursuant to Article XIV.

     1.68  "Subsidiary" or "Affiliated Company" means (a) a member of a
            ----------