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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 18, 1999 Commission File No. 0-25087
HOST MARRIOTT, L.P.
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 52-2095412
- ------------------------ ----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Units outstanding
Class at July 27, 1999
- ----------------- ----------------
Units of limited partnership interest 292,854,286
Units of Cumulative Redeemable Preferred limited partnership interest 585,777
INDEX
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Part I. FINANCIAL INFORMATION (Unaudited): Page No.
--------
Condensed Consolidated Balance Sheets - 3
June 18, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Twenty-four Weeks Ended
June 18, 1999 and June 19, 1998
Condensed Consolidated Statements of Cash Flows - 8
Twenty-four Weeks Ended June 18, 1999 and
June 19, 1998
Notes to Condensed Consolidated Financial Statements 9
Management's Discussion and Analysis of Results of 22
Operations and Financial Condition
Quantitative and Qualitative Disclosures about Market Risk 29
Part II. OTHER INFORMATION AND SIGNATURE 30
- 2 -
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
June 18, December 31,
1999 1998
----------- -----------
(unaudited)
ASSETS
------
Property and equipment, net............. $7,214 $7,201
Notes and other receivables (including
amounts due from affiliates of $131 million
and $134 million, respectively)........ 219 203
Rent receivable......................... 86 --
Due from managers....................... -- 19
Investments in affiliates............... 45 33
Other assets............................ 414 370
Cash and cash equivalents............... 310 436
------ ------
$8,288 $8,262
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes......................... $2,546 $2,246
Mortgage debt........................ 2,230 2,438
Convertible debt obligation to Host 567 567
Marriott............................
Other................................ 456 447
------ ------
5,799 5,698
Accounts payable and accrued expenses... 150 204
Deferred income taxes................... 96 97
Other liabilities....................... 420 460
------ ------
Total liabilities................ 6,465 6,459
------ ------
Minority interest....................... 144 147
Limited Partnership interests of third
parties at redemption value
(representing 64.6 million units at
June 18, 1999 and
December 31, 1998)............... 783 892
Partners' Capital
General partner...................... 1 1
Limited partner...................... 898 767
Accumulated other comprehensive loss. (3) (4)
------ ------
Total shareholders' equity....... 896 764
------ ------
$8,288 $8,262
====== ======
See Notes to Condensed Consolidated Financial Statements
- 3 -
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended June 18, 1999 and June 19, 1998
(unaudited, in millions)
1999 1998
---- ----
REVENUES
Rental income (Note 2)........ $ 325 $ --
Hotel sales
Rooms........................ -- 511
Food and beverage............ -- 222
Other........................ -- 54
Interest income............... 8 10
Net gains on property 4 51
transactions.................
Equity (loss) in earnings of 1 (2)
affiliates...................
Other......................... 3 3
----- -----
Total revenues.............. 341 849
----- -----
EXPENSES
Depreciation.................. 67 60
Property-level expenses....... 62 60
Hotel operating expenses
Rooms........................ -- 113
Food and beverage............ -- 158
Other department costs and -- 185
deductions..................
Management fees (including
Marriott International
management fees of $55 -- 50
million in 1998)............
Minority interest............. 8 14
Interest expense.............. 109 76
Dividends on Host
Marriott-obligated
mandatorily redeemable
convertible preferred
securities of a subsidiary
trust whose sole assets are
the convertible subordinated
debentures due 2026
("Convertible Preferred
Securities")................. -- 8
Corporate expenses............ 8 9
REIT Conversion expenses...... -- 6
Other expenses................ 5 5
----- -----
259 744
----- -----
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES........... 82 105
Provision for income taxes...... -- (43)
----- -----
INCOME FROM CONTINUING
OPERATIONS..................... 82 62
INCOME FROM DISCONTINUED
OPERATIONS, net of taxes....... -- 4
----- -----
INCOME BEFORE EXTRAORDINARY
GAIN........................... 82 66
Extraordinary item-gain on
forgiveness of debt....... 13 --
----- -----
NET INCOME...................... $ 95 $ 66
===== =====
See Notes to Condensed Consolidated Financial Statements
- 4 -
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twelve weeks ended June 18, 1999 and June 19, 1998
(unaudited)
BASIC EARNINGS PER UNIT:
CONTINUING OPERATIONS................... $0.26 $0.29
Discontinued operations (net of income
taxes)................................. -- 0.02
Extraordinary item-gain on forgiveness
of debt................................ 0.06 --
----- -----
BASIC EARNINGS PER UNIT:................ $0.32 $0.31
===== =====
DILUTED EARNINGS PER UNIT:
CONTINUING OPERATIONS................... $0.27 $0.26
Discontinued operations (net of income
taxes)................................. -- 0.02
Extraordinary item-gain on forgiveness
of debt................................ 0.04 --
----- -----
DILUTED EARNINGS PER UNIT............... $0.31 $0.28
===== =====
See Notes to Condensed Consolidated Financial Statements
- 5 -
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twenty-four weeks ended June 18, 1999 and June 19, 1998
(unaudited, millions)
1999 1998
------ ------
REVENUES
Rental income (Note 3).................. $ 611 $ --
Hotel sales.............................
Rooms................................. -- 1,020
Food and beverage..................... -- 444
Other................................. -- 110
Interest income......................... 16 24
Net gains on property transactions...... 16 52
Equity (loss) in earnings of affiliates. 2 (1)
Other................................... 3 5
----- ------
Total revenues........................ 648 1,654
----- ------
EXPENSES
Depreciation.......................... 133 113
Property-level expenses............... 120 122
Hotel operating expenses
Rooms................................ -- 227
Food and beverage.................... -- 321
Other department costs and
deductions.......................... -- 374
Management fees (including Marriott
International management fees
of $102 million in 1998)............ -- 108
Minority interest...................... 13 30
Interest expense....................... 217 152
Dividends on Host Marriott-obligated
mandatorily redeemable convertible
preferred securities of a subsidiary
trust whose sole assets are the
convertible subordinated debentures
due 2026 ("Convertible Preferred
Securities")......................... -- 17
Corporate expenses..................... 16 21
REIT conversion expenses............... -- 6
Other expenses......................... 9 10
----- ------
508 1,501
----- ------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES............................ 140 153
Provision for income taxes............... -- (63)
----- ------
INCOME FROM CONTINUING OPERATIONS........ 140 90
INCOME FROM DISCONTINUED OPERATIONS,
net of taxes............................ -- 6
----- ------
INCOME BEFORE EXTRAORDINARY ITEM......... 140 96
Extraordinary item--gain on
forgiveness of debt.................... 13 --
----- ------
NET INCOME............................... $ 153 $ 96
===== ======
See Notes to Condensed Consolidated Financial Statements
6
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Twenty-four weeks ended June 18, 1999 and June 19, 1998
(unaudited)
BASIC EARNINGS PER UNIT:
CONTINUING OPERATIONS........................... $0.46 $0.42
Discontinued operations (net of income taxes)... -- 0.03
Extraordinary item-gain on forgiveness of debt.. 0.06 --
BASIC EARNINGS PER UNIT:........................ $0.52 $0.45
===== =====
DILUTED EARNINGS PER UNIT:
CONTINUING OPERATIONS........................... $0.47 $0.39
Discontinued operations (net of income taxes)... -- 0.02
Extraordinary item-gain on forgiveness of debt.. 0.04 --
----- -----
DILUTED EARNINGS PER UNIT....................... $0.51 $0.41
===== =====
See Notes to Condensed Consolidated Financial Statements
- 7 -
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
Twenty-four weeks ended June 18, 1999 and June 19, 1998
(unaudited, in millions)
1999 1998
------ ------
OPERATING ACTIVITIES
Income from continuing operations.................... $ 140 $ 153
Adjustments to reconcile to cash from
continuing operations:
Depreciation and amortization..................... 135 114
Income taxes...................................... -- 45
Gain on sale of hotel properties.................. (16) (51)
Equity in earnings of affiliates..................... (2) 1
Changes in operating accounts........................ (170) (86)
Other................................................ 24 27
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Cash from continuing operations................... 111 203
Cash from discontinued operations................. -- 3
------ ------
Cash from operations.............................. 111 206
------ ------
INVESTING ACTIVITIES
Proceeds from sales of assets........................ 35 209
Acquisitions......................................... (4) (358)
Capital expenditures:
Renewals and replacements......................... (86) (77)
Development projects.............................. (75) (18)
Other investment.................................. (16) (14)
Purchases of short-term marketable -- (97)
securities..........................................
Sales of short-term marketable -- 405
securities..........................................
Note receivable advances, net of (17) 4
collections.........................................
Affiliate collections, net........................... -- 14
Other................................................ -- (25)
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Cash (used in) from investing (163) 43
activities from continuing
operations.......................................
Cash used in investing activities -- (2)
from discontinued operations..................... ------ ------
Cash (used in) from investing (163) 41
activities....................................... ------ ------
FINANCING ACTIVITIES
Issuances of debt, net............................... 413 5
Repurchase of units.................................. (3) --
Distributions........................................ (130) --
Scheduled principal repayments....................... (23) (18)
Debt prepayments..................................... (323) (49)
Other................................................ (8) (31)
------ ------
Cash used in financing activities (74) (93)
from continuing operations.......................
Cash used in financing activities -- (150)
from discontinued operations..................... ------ ------
Cash used in financing activities................. (74) (243)
INCREASE (DECREASE) IN CASH AND CASH $ (126) $ 4
EQUIVALENTS......................................... ======= =======
Non-cash financing activities:
Assumption of mortgage debt for the $ -- $ 164
acquisition of, or purchase of ======= =======
controlling interests in,
certain hotel properties
See Notes to Condensed Consolidated Financial Statements
- 8-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION
Host Marriott Corporation ("Host Marriott"), operating through an umbrella
partnership REIT structure, is the owner of hotel properties. Host Marriott
operates as a self-managed and self-administered real estate investment trust
("REIT") and its operations are conducted through an operating partnership
and its subsidiaries. As REITs are not currently permitted to derive revenues
directly from the operation of hotels, Host Marriott leases substantially all
of its hotels to subsidiaries of Crestline Capital Corporation ("Crestline"
or the "Lessee") and certain other lessees.
In these condensed consolidated financial statements, the "Company" or "Host
Marriott" refers to Host Marriott Corporation and its consolidated
subsidiaries before, and Host Marriott, L.P. and its consolidated
subsidiaries (the "Operating Partnership"), after Host Marriott Corporation's
conversion to a REIT (the "REIT Conversion"). Host Marriott Corporation is
presented as the predecessor to the Operating Partnership since the Operating
Partnership and its subsidiaries received substantially all of the continuing
operations, assets and liabilities of Host Marriott Corporation and its
subsidiaries.
On December 15, 1998, shareholders of Host Marriott 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. 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 REIT and is the sole general partner of the
Operating Partnership. On December 29, 1998, Host Marriott completed the
previously announced spin-off of Crestline 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
Corporation owned (the "Distribution"). In connection with the REIT
Conversion, Host Marriott contributed its hotels and substantially all of its
other assets and liabilities to the Operating Partnership and subsidiaries
(the "Contribution") in exchange for units of partnership interest in the
Operating Partnership. The Contribution was accounted for at Host Marriott's
historical basis. As of June 18, 1999, Host Marriott owned approximately 78%
of the Operating Partnership.
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. All historical
financial statements presented have been restated to conform to this
presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of the
Company and its subsidiaries have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading. However, the unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of June 18, 1999 and
December 31, 1998, and the results of operations for the twelve and twenty-
four weeks ended June 18, 1999 and June 19, 1998 and cash flows for the
twenty-four weeks ended June 18, 1999 and June 19, 1998.
- 9 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The statements of operations for the twelve and twenty-four weeks ended June
19, 1998 and the cash flows for the twenty-four weeks ended June 18, 1998
reflect the historical results of Host Marriott as discussed in Note 1.
Interim results are not necessarily indicative of fiscal year performance
because of the impact of seasonal and short-term variations.
The Company's leases have remaining terms ranging from 2 to 10 years, subject
to earlier termination upon the occurrence of certain contingencies, as
defined. The rent due under each lease is the greater of base rent or
percentage rent, as defined. Percentage rent applicable to room, food and
beverage and other types of hotel revenue varies by lease and is calculated
by multiplying fixed percentages by the total amounts of such revenues over
specified threshold amounts. Both the minimum rent and the revenue thresholds
used in computing percentage rents are subject to annual adjustments based on
increases in the United States Consumer Price Index and the Labor Index, as
defined. Certain amounts of the percentage rent recognized are considered
contingent until such time as the revenue recognized exceeds annual
thresholds, which are determined individually by property. For the twelve and
twenty-four weeks ended June 18, 1999, $138 million and $253 million of
contingent rent is included in the statement of operations, respectively.
3. RENTAL REVENUE
The Company's 1999 revenue primarily represents the rental income from its
leased hotels and is not comparable to 1998 hotel revenues which reflect
gross sales generated by the properties. Also, in December 1998 the Company
retroactively adopted Emerging Issues Task Force Issue No. 97-2, "Application
of FASB Statement No. 94 and APB Opinion No. 16 to Physician Management
Entities and Certain Other Entities with Contractual Management
Arrangements." The impact of the adoption of Issue 97-2 on the condensed
consolidated financial statements for the twelve and twenty-four weeks ended
June 19, 1998 was to increase both revenues and operating expenses by
approximately $456 million and $922 million, respectively, with no impact on
net income or earnings per share.
The comparison of the 1999 quarterly results with 1998 is also affected by a
change in the reporting period for the Company's hotels not managed by
Marriott International, which resulted in the 1998 year-to-date historical
results adjusted to exclude December 1997 and include May 1998 and the 1998
second quarter adjusted to reflect March through May 1998. The 1999 results
reflect comparable periods. The change in reporting was required as part of
the REIT Conversion.
The table below represents hotel sales for all periods presented.
Twelve Weeks Ended Twenty-four Weeks Ended
------------------ -----------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
------- ------- --------- ----------
(in millions) (in millions)
Hotel Sales
Rooms $ 672 $ 511 $1,272 $1,020
Food and beverage 310 222 578 444
Other 72 54 135 110
------ ----- ------ ------
Total hotel sales $1,054 $ 787 $1,985 $1,574
====== ===== ====== ======
4. EARNINGS PER UNIT
Basic earnings per unit is computed by dividing net income by the weighted
average number of units. Diluted earnings per unit is computed by dividing
net income as adjusted for potentially dilutive securities, by the weighted
average number of units outstanding plus other potentially dilutive
securities. Diluted
- 10 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
earnings per unit was adjusted for the impact of the Convertible Preferred
Securities as they were dilutive for all periods presented.
A reconciliation of the number of units utilized for the calculation of
diluted earnings per unit follows:
Twelve Weeks Twenty-four Weeks
Ended Ended
----------------------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
------ ------ ------- -------
(in millions) (in millions)
Weighted average number of units
outstanding............................... 292.5 216.1 292.0 215.9
Assuming distribution of units to Host
Marriott Corporation for Host
Marriott Corporation common shares
granted under the comprehensive stock plan,
less shares assumed purchased at average
market price............................. 5.8 4.2 5.8 4.3
Assuming distribution of common shares
issuable for warrants, less Shares
assumes purchased at average market
price.................................... -- 0.1 -- 0.1
Assuming conversion of minority
operating partnership units
issuable............................... 9.2 -- 9.2 --
Assuming conversion of Convertible
debt to Host Marriott................... 35.8 35.8 35.8 35.8
------ ------ ------ ------
Units utilized for the calculation of
diluted earnings per unit.............. 343.3 256.2 342.8 256.1
====== ====== ====== ======
A reconciliation of net income to earnings used for the calculation of diluted earnings per unit follows:
Twelve Weeks Twenty-four Weeks
Ended Ended
---------------------------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- --------- --------- ---------
(in millions) (in millions)
Net income................................ $ 95 $ 66 $ 153 $ 96
Interest on debt obligation to Host
Marriott, net of taxes................... 8 5 17 10
Minority interest expense, assuming
conversion of OP units................... 1 -- 3 --
------ ------ ------ ------
Earnings used for the calculation of
diluted earnings per unit................ $ 104 $ 71 $ 173 $ 106
====== ====== ====== ======
5. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On March 15, 1999 and June 15, 1999, the Board of Directors of Host Marriott
declared cash dividends of $0.21 per share of Host Marriott Corporation
common stock and corresponding distributions of $0.21 per unit of limited
partnership interest ("OP Unit"). The first quarter dividend and distribution
was paid on April 14, 1999 to shareholders and unitholders of record on March
31, 1999. The second quarter dividend and distribution was paid on July 14,
1999 to shareholders and unitholders of record on June 30, 1999.
The 1998 earnings per share has been restated to reflect the impact of the
stock portion of a special dividend totaling 11.9 million shares of common
stock issued in February, 1999 as a result of the REIT Conversion.
6. ACQUISITIONS AND PROPERTY EXPANSIONS
On December 30, 1998, the Company acquired a portfolio of twelve luxury
hotels and other assets from the Blackstone Group, a Delaware limited
partnership, and a series of funds controlled by affiliates of Blackstone
- 11 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Real Estate Partners. The Company issued approximately 47.7 million OP Units
and assumed debt and made cash payments of approximately $920 million and
distributed 1.4 million of the shares of Crestline common stock to the
Blackstone Real Estate Partners. Approximately 23.9 million OP Units were
redeemable as of June 30, 1999.
The Company also completed a 210-room extension of the Philadelphia Marriott
in April 1999 at a cost of approximately $37 million.
7. DISPOSITION
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a gain of $10 million, which was
followed by the May 1999 sale of the 221-room Saddle Brook Marriott for $15
million resulting in a gain of $4 million.
8. DEBT ISSUANCES AND REFINANCING
In February 1999, the Company issued $300 million of 8 3/8% Series D senior
notes due in 2006. The senior notes were used to refinance, or purchase, debt
which had been acquired through the merger of certain partnerships or the
purchase of hotel properties in connection with the REIT Conversion in
December 1998.
The Company has offered to exchange Series D Senior notes for Series E Senior
notes on a one-for-one basis. The terms of the Series E Senior notes and the
Series D Senior notes will be substantially identical except that the Series
E Senior notes will be freely transferable by the holders. The offer to
exchange expires at 5:00 p.m. on August 25, 1999.
In April 1999, a subsidiary of the Company completed the refinancing of the
$245 million mortgage on the New York Marriott Marquis, maturing June 2000.
The Company was required to make a principal payment of $1.25 million on June
30, 1999. In connection with the refinancing, the Company renegotiated the
management agreement and recognized an extraordinary gain of $13 million on
the forgiveness of accrued incentive management fees by the manager. This
mortgage was subsequently refinanced as part of the $665 million financing
agreement discussed in note 11.
9. 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.
Substantially all of the Company's revenues are earned through leases with
Crestline. With respect to 1998, the allocation of taxes is not evaluated at
the segment level or reflected in the following information because the
Company does not believe the information is material to the readers of the
financial statements.
The Company's segmented revenues and income (loss) from continuing operations
before income taxes are as follows (in millions):
- 12 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Twelve Weeks Ended June 18, 1999
--------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues.............................. $ 335 $ 6 $ 341
Income (loss) from continuing
operations before income taxes....... 97 (15) 82
Twelve Weeks Ended June 19, 1998
--------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues.............................. $ 797 $ 52 $ 849
Income from continuing operations
before income taxes.................. 82 23 105
Twenty-four Weeks Ended June 18, 1999
-------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues.............................. $ 639 $ 9 $ 648
Income (loss) from continuing
operations before income taxes....... 172 (32) 140
Twenty-four Weeks Ended June 19, 1998
-------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues.............................. $1,598 $ 56 $1,654
Income from continuing operations
before income taxes.................. 153 -- 153
As of June 18, 1999, the Company's foreign operations consisted of four hotel
properties located in Canada. There were no intercompany sales between the
properties and the Company. The following table presents rental revenues in 1999
and hotel revenues in 1998 for each of the geographical areas in which the
Company owns hotels (in millions):
Twelve Weeks Ended Twenty-four Weeks Ended
----------------------- -------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
----- ----- ----- ------
United States.............. $ 335 $ 825 $ 638 $1,604
International.............. 6 24 10 50
----- ----- ----- ------
Total.................... $ 341 $ 849 $ 648 $1,654
===== ===== ===== ======
10. Comprehensive Income
The Company's other comprehensive income consists of foreign currency
translation adjustments and changes in the value of the right to receive up
to 1.4 million shares of Host Marriott Services Corporation's common stock
or an equivalent cash value subsequent to the exercise of the options held
by certain former and current employees of Marriott International at Host
Marriott Service Corporation's option. For the twelve and twenty-four weeks
ended June 18, 1999, comprehensive income totaled $97 million and $154
million, respectively. Comprehensive income was $67 million and $97 million
for the twelve and twenty-four weeks ended June 18, 1998. As of June 18,
1999 and December 31, 1998 the Company's accumulated other comprehensive
loss was approximately $3 million and $4 million, respectively.
11. Subsequent Events
In July 1999, the Company entered into a financing agreement pursuant to
which it borrowed $665 million due 2009 at a fixed rate 7.47 percent. The
New York Marriott Marquis as well as seven other hotels serve
- 13 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
as collateral. The proceeds from this financing were used to refinance
existing mortgage indebtedness maturing at various times through 2000.
In July 1999, the Company sold 4.0 million shares of 10% Class A cumulative
redeemable preferred stock with a $0.01 par value. Holders of the stock are
entitled to receive cumulative cash dividends at a rate of 10% per annum of
the $25.00 per share liquidation preference. Dividends are payable
quarterly in arrears commencing October 15, 1999. After August 3, 2004 the
Company has the option to redeem the Class A preferred stock for $25.00 per
share, plus accrued and unpaid dividends to the date of redemption. The
Class A preferred stock ranks senior to the common stock, and the
authorized Series A Junior Participating preferred stock. The Class A
preferred stockholders generally have no voting rights.
In June 1999, the Company acquired by merger Timewell Group, L.P. and
Timeport, L.P. which each own limited partnership interests in the
partnership that owns the New York Marriott Marquis. As part of the merger,
the general partners of Timewell Group, L.P. and Timeport, L.P. received
345,559 and 240,218 cumulative redeemable preferred OP Units, respectively.
The preferred OP Units are convertible into OP Units on a one-for-one
basis, subject to certain adjustments, at any time beginning one year after
the merger at the option of the holders. At any time beginning two years
after the merger, the Company can redeem the preferred OP units for OP
Units or cash.
In June 1999, the Company refinanced the debt on the San Diego Marriott
Hotel and Marina. The mortgage is for $195 million for a term of 10 years
at a rate of 8.45%. In addition, the Company issued $23 million of mortgage
debt on the Philadelphia Marriott in July 1999 at an interest rate of
approximately 8.6%, maturing 2009.
12. SUMMARIZED LEASE POOL FINANCIAL STATEMENTS
As discussed in Note 2, as of June 18, 1999, almost all the properties of
the Company and its subsidiaries were leased to Crestline Capital
Corporation and managed by Marriott International, Inc. In conjunction with
these leases, Crestline and certain of its subsidiaries entered into
limited guarantees of the lease obligations of each lessee. The full-
service hotel leases are grouped into four lease pools, with Crestline's
guarantee limited to the greater of 10% of the aggregate rent payable for
the preceding year or 10% of the aggregate rent payable under all leases in
the respective pool. Additionally, the lessee's obligation under each lease
agreement is guaranteed by all other lessees in the respective lease pool.
As a result, the Company believes that the operating results of each full-
service lease pool may be material to the Company's financial statements.
Financial information of certain pools related to the sublease agreements
for limited service properties are not presented, as the Company believes
they are not material to the Company's financial statements. Financial
information of Crestline may be found in its quarterly and annual filings
with the Securities and Exchange Commission. Further information regarding
these leases and Crestline's limited guarantees may be found in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1998. The results of operations for the twelve and twenty-four weeks ended
June 18, 1999 and summarized balance sheet data as of June 18, 1999 of the
lease pools in which the Company's hotels are organized are as follows (in
millions):
- 14 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Twelve Weeks Ended June 18, 1999
-------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------- ------- ------- ------- --------
Hotel Sales
Rooms $144 $157 $141 $145 $ 587
Food and beverage 68 76 67 81 292
Other 16 16 19 19 70
------- ------- ------- ------- --------
Total hotel sales 228 249 227 245 949
Operating Costs and Expenses
Rooms 33 36 34 31 134
Food and beverage 51 55 47 56 209
Other 57 55 57 55 224
Management fees 11 16 10 17 54
Lease expense 72 83 76 83 314
------- ------- ------- ------- --------
Total operating expenses 224 245 224 242 935
------- ------- ------- ------- --------
Operating Profit 4 4 3 3 14
Corporate and Interest Expenses -- (1) -- -- (1)
------- ------- ------- ------- --------
Income before taxes 4 3 3 3 13
Income taxes (2) (1) (1) -- (4)
------- ------- ------- ------- --------
Net Income $ 2 $ 2 $ 2 $ 3 $ 9
======= ======= ======= ======= ========
Twenty-four Weeks Ended June 18, 1999
-------------------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------- ------- ------- ------- --------
Hotel Sales
Rooms $273 $294 $268 $273 $1,108
Food and beverage 127 137 128 153 545
Other 30 29 38 34 131
------- ------- ------- ------- --------
Total hotel sales 430 460 434 460 1,784
Operating Costs and Expenses
Rooms 64 68 63 58 253
Food and beverage 97 102 91 104 394
Other 110 107 107 103 427
Management fees 20 30 21 33 104
Lease expense 133 147 146 157 583
------- ------- ------- ------- --------
Total operating expenses 424 454 428 455 1,761
------- ------- ------- ------- --------
Operating Profit 6 6 6 5 23
Corporate and Interest Expenses (1) (1) (1) (1) (4)
------- ------- ------- ------- --------
Income before taxes 5 5 5 4 19
Income taxes (2) (2) (2) (1) (7)
------- ------- ------- ------- --------
Net Income $ 3 $ 3 $ 3 $ 3 $ 12
======= ======= ======= ======= ========
As of June 18, 1999
----------------------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------- --------
Assets..................... $ 49 $ 43 $ 46 $ 46 $ 184
Liabilities................ 46 40 43 43 172
Equity..................... 3 3 3 3 12
- 15 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
13. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
All subsidiaries of the operating partnership guarantee the Company's
senior notes except those among the twenty full service hotels listed below
and HMH HPT Residence Inn, LLC and HMH HPT Courtyard, LLC, the lessees of
the Residence Inn and Courtyard properties, respectively. The separate
financial statements of each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented because management has concluded that such
financial statements are not material to investors. The guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several and
each Guarantor Subsidiary is a wholly owned subsidiary of the Company. The
non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") own the
following full-service hotels: the Albany Marriott; Atlanta Marriott
Marquis; Grand Hyatt, Atlanta; Harbor Beach Marriott Resort; Hartford
Marriott; Hyatt Regency, Cambridge; Hyatt Regency, Reston; Manhattan Beach
Marriott; Minneapolis Southwest Marriott; New York Marriott Marquis;
Ontario Airport Marriott; Pittsburgh City Center Marriott; The Ritz-
Carlton, Amelia Island; San Diego Marriott Hotel and Marina; San Diego
Mission Valley Marriott; Swissotel, Atlanta; Swissotel, Boston; Swissotel,
Chicago; The Drake (Swissotel) New York; and the Oklahoma City Waterford
Marriott.
The following condensed combined consolidating information sets forth the
financial position as of June 18, 1999 and December 31, 1998 and results of
operations for the twelve weeks and twenty-four weeks ended June 18, 1999
and June 19, 1998, respectively, and cash flows for the twenty-four weeks
ended June 18, 1999 and June 19, 1998 of the parent, Guarantor Subsidiaries
and the Non-Guarantor Subsidiaries.
- 16 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Consolidating Balance Sheets
(in millions)
June 18, 1999
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Property and equipment, net............. $1,223 $3,784 $2,207 $ -- $7,214
Investments in affiliate................ 1,366 -- -- (1,321) 45
Notes and other receivables............. 817 54 19 (671) 219
Other assets............................ 144 194 189 (27) 500
Cash and cash equivalents............... 157 122 31 -- 310
------ ------ ------ ------- ------
Total assets......................... $3,707 $4,154 $2,446 $(2,019) $8,288
====== ====== ====== ======= ======
Debt.................................... $1,598 $2,860 $1,128 $ (354) $5,232
Convertible debt obligations to Host 567 -- -- -- 567
Marriott...............................
Deferred income taxes................... 50 39 7 -- 96
Other liabilities....................... 72 581 240 (323) 570
------ ------ ------ ------- ------
Total liabilities.................... 2,287 3,480 1,375 (677) 6,465
Minority interests...................... 15 56 73 -- 144
Limited partner interest of third 783 -- -- -- 783
parties at
redemption value
Owner's capital 622 618 998 (1,342) 896
------ ------ ------ ------- ------
Total liabilities and owner's $3,707 $4,154 $2,446 $(2,019) $8,288
capital ====== ====== ====== ======= ======
December 31, 1998
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Property and equipment, net............. $1,172 $3,796 $2,233 $ -- $7,201
Investments in affiliate................ 1,038 -- -- (1,005) 33
Notes and other receivables............. 782 52 19 (650) 203
Other assets............................ 259 145 141 (156) 389
Cash and cash equivalents............... 330 91 15 -- 436
------ ------ ------ ------- ------
Total assets......................... $3,581 $4,084 $2,408 $(1,811) $8,262
====== ====== ====== ======= ======
Debt.................................... $1,438 $2,837 $1,183 $ (327) $5,131
Convertible debt obligation to Host 567 -- -- -- 567
Marriott...............................
Deferred income taxes................... 51 39 7 -- 97
Other liabilities....................... 97 600 252 (285) 664
------ ------ ------ ------- ------
Total liabilities.................... 2,153 3,476 1,442 (612) 6,459
Minority interests...................... 15 56 76 -- 147
Limited partner interest of third 892 -- -- -- 892
parties at
redemption value
Owner's capital 521 552 890 (1,199) 764
------ ------ ------ ------- ------
Total liabilities and owner's $3,581 $4,084 $2,408 $(1,811) $8,262
capital ====== ====== ====== ======= ======
- 17 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Twelve Weeks Ended June 18, 1999
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES................................ $ 76 $173 $105 $(13) $ 341
Depreciation............................ (15) (35) (17) -- (67)
Property-level expenses................. (11) (23) (28) -- (62)
Hotel operating expenses................ -- -- -- -- --
Minority interest....................... (17) (4) (2) 15 (8)
Interest expense........................ (27) (55) (25) (2) (109)
Dividends on convertible preferred
securities............................. -- -- -- -- --
Corporate expenses...................... (2) (5) (1) -- (8)
Other expenses.......................... (3) (1) (1) -- (5)
----- ----- ----- ----- -----
Income from continuing operation........ 1 50 31 -- 82
----- ----- ----- ----- -----
Income before extraordinary gain........ 1 50 31 -- 82
Extraordinary item-gain on forgiveness
of debt................................ -- -- 13 -- 13
----- ----- ----- ----- -----
NET INCOME.............................. $ 1 $ 50 $ 44 $ -- $ 95
===== ===== ===== ===== =====
Twelve Weeks Ended June 19, 1998
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES................................ $ 309 $ 473 $ 56 $11 $ 849
Depreciation............................ (25) (30) (5) -- (60)
Property-level expenses................. (30) (43) 13 -- (60)
Hotel operating expenses................ (192) (279) (35) -- (506)
Minority interest....................... (15) 7 2 (8) (14)
Interest expense........................ (2) (48) (23) (3) (76)
Dividends on convertible preferred
securities............................. (8) -- -- -- (8)
Corporate expenses...................... (2) (5) (2) - (9)
REIT Conversion expenses................ (6) -- -- -- (6)
Other expenses.......................... (4) (1) -- -- (5)
----- ----- ----- ----- -----
Income from continuing operations
before taxes........................... 25 74 6 -- 105
Provision for income taxes.............. (10) (31) (2) -- (43)
----- ----- ----- ----- -----
Income from continuing operations....... 15 43 4 -- 62
Income from discontinued operations..... 4 -- -- -- 4
----- ----- ----- ----- -----
NET INCOME.............................. $ 19 $ 43 $ 4 $ -- $ 66
===== ===== ===== ===== =====
- 18 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Operations
(in millions)
Twenty-four Weeks Ended June 18, 1999
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES................................ $138 $ 334 $191 $(15) $ 648
Depreciation............................ (28) (70) (35) -- (133)
Property-level expenses................. (21) (45) (54) -- (120)
Hotel operating expenses................ -- -- -- -- --
Minority interest....................... (18) (7) (3) 15 (13)
Interest expense........................ (68) (103) (46) -- (217)
Dividends on convertible preferred
securities............................. -- -- -- -- --
Corporate expenses...................... (3) (9) (4) -- (16)
Other expenses.......................... (7) (1) (1) -- (9)
---- ----- ----- ----- -----
Income before extraordinary gain........ (7) 99 48 -- 140
Extraordinary item-gain on forgiveness
of debt................................ -- -- 13 -- 13
---- ----- ----- ----- -----
NET INCOME (LOSS)....................... $ (7) $ 99 $ 61 $ -- $ 153
==== ===== ===== ===== =====
Twenty-four Weeks Ended June 19, 1998
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES................................ $ 558 $ 851 $ 250 $5 $ 1,654
Depreciation............................ (39) (57) (17) -- (113)
Property-level expenses................. (41) (63) (18) -- (122)
Hotel operating expenses................ (344) (530) (156) -- (1,030)
Minority interest....................... (27) (6) (2) 5 (30)
Interest expense........................ (21) (94) (37) -- (152)
Dividends on convertible preferred
securities............................. (17) -- -- -- (17)
Corporate expenses...................... (5) (11) (5) - (21)
REIT Conversion expenses................ (6) -- -- -- (6)
Other expenses.......................... (9) (1) -- -- (10)
----- ----- ----- ----- -------
Income from continuing operations
before taxes........................... 49 89 15 -- 153
Provision for income taxes.............. (20) (37) (6) -- (63)
----- ----- ----- ----- -------
Income from continuing operations....... 29 52 9 -- 90
Income from discontinued operations..... 6 -- -- -- 6
----- ----- ----- ----- -------
NET INCOME.............................. $ 35 $ 52 $ 11 $ -- $ 96
===== ===== ===== ===== =======
- 19 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Condensed Combined Statements of Cash Flows
(in millions)
Twenty-four Weeks Ended June 18, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------- ------------ ------------ ------------
OPERATING ACTIVITIES
Cash (used in) from operations.......... $ (5) $ 116 $ -- $ 111
------- ------------ ------------ ------------
INVESTING ACTIVITIES
Cash received from sales of assets...... 1 34 -- 35
Capital expenditures.................... (49) (107) (21) (177)
Acquisitions............................ -- -- (4) (4)
Other................................... (17) -- -- (17)
------- ------------ ------------ ------------
Cash used in investing activities....... (65) (73) (25) (163)
------- ------------ ------------ ------------
FINANCING ACTIVITIES
Repayment of debt....................... (25) (256) (65) (346)
Issuances of debt....................... (2) 256 159 413
Transfers to/from Parent................ 65 (12) (53) --
Distributions........................... (130) -- -- (130)
Repurchase of units..................... (3) -- -- (3)
Other................................... (8) -- -- (8)
------- ------------ ------------ ------------
Cash (used in) from financing activities (103) (12) 41 (74)
------- ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH $ (173) $ 31 $ 16 $ (126)
EQUIVALENTS ======= ============ ============ ============
- 20 -
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Twenty-four Weeks Ended June 19, 1998
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
-------- ------------ --------------- ------------
OPERATING ACTIVITIES
Cash from continuing operations......... $ 43 $ 144 $ 16 $ 203
Cash from discontinued operations....... 3 -- -- 3
-------- ------------ --------------- ------------
Cash from operations.................... 46 144 16 206
-------- ------------ --------------- ------------
INVESTING ACTIVITIES
Cash received from sales of assets...... 209 -- -- 209
Capital expenditures.................... (28) (62) (19) (109)
Acquisitions............................ (229) (15) (114) (358)
Sales of short-term marketable 308 -- -- 308
securities, net........................
Other................................... (7) -- -- (7)
-------- ------------ --------------- ------------
Cash from (used in) investing 253 (77) (133) 43
activities from
continuing operations
Cash used in investing activities (2) -- -- (2)
from discontinued -------- ------------ --------------- ------------
Operations
Cash from (used in) investing 251 (77) (133) 41
activities -------- ------------ --------------- ------------
FINANCING ACTIVITIES
Repayment of debt (55) (10) (2) (67)
Issuances of debt 5 -- -- 5
Transfers to/from Parent (52) (51) 103 --
Other (31) -- -- (31)
-------- ------------ --------------- ------------
Cash (used in) from financing (133) (61) 101 (93)
activities from
continuing operations
Cash used in financing activities (150) -- -- (150)
from discontinued -------- ------------ --------------- ------------
operations
Cash (used in) from financing (283) (61) 101 (243)
activities -------- ------------ --------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS $ 14 $ 6 $ (16) $ 4
======== ============ =============== ============
- 21 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
Results of Operations
- ---------------------
Revenues. Our historical revenues have primarily represented gross property-
level sales from hotels, net gains on property transactions, interest income and
equity in earnings of affiliates. As of January 1, 1999, we lease substantially
all of our hotels to subsidiaries of Crestline Capital Corporation. As a result
of these leases, we no longer record property-level revenues and expenses,
rather we recognize rental income on the leases. Thus, 1999 revenues and
expenses are not comparable with prior periods. Note 3 to the financial
statements presents a table comparing gross hotel sales for all periods
presented to facilitate an investor's understanding of the operation of our
properties. The comparison of the 1999 quarterly results with 1998 is also
affected by a change in the reporting period for our hotels not managed by
Marriott International, which resulted in the 1998 year-to-date historical
results adjusted to exclude December 1997 and include May 1998 and the 1998
second quarter adjusted to reflect March through May 1998. The 1999 results
reflect comparable periods. The change in reporting was required as part of the
REIT conversion.
Year-to-date results for 1999 were driven by the addition of 36 properties in
1998. The increase in hotel sales reflects growth in room revenues generated per
available room or REVPAR. For comparable properties, REVPAR increased 3.7% to
$120.85 for the second quarter of 1999. Year-to-date REVPAR increased 4% to
$120.67. On a comparable basis, average room rates increased approximately 2%
and 3% for the second quarter and year-to-date, respectively, while average
occupancy increased one percent for both periods.
Interest income decreased as the result of a lower level of cash and marketable
securities held during the first half of 1999 compared to the first half of
1998.
The net gain on property transactions for 1999 primarily resulted from the $10
million gain on the sale of the 479-room Minneapolis/Bloomington Marriott for
approximately $35 million and the $4 million gain on the sale of the 221-room
Saddle Brook Marriott for approximately $15 million.
Expenses. As discussed above, hotel revenues and hotel operating costs are not
comparable with the prior year. The lessee pays certain property-level costs
including management fees and we receive a rent payment, which is net of those
costs. Property-level costs which are comparable, including depreciation,
property taxes, insurance, ground and equipment rent increased 8% to $129
million for the second quarter
- 22 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1999 versus the second quarter 1998 and increased $18 million or 8% to $253
million year-to-date, primarily reflecting the depreciation from the 36
properties acquired during 1998.
Minority Interest. Minority interest expense decreased $6 million to $8 million
for the second quarter of 1999 and decreased $17 million to $13 million year-to-
date, primarily reflecting the impact of the consolidation of partnerships which
occurred in connection with the REIT conversion.
Interest Expense. Interest expense increased 43% to $109 million in the second
quarter of 1999 and increased 43% to $217 million year-to-date, primarily due to
the issuance of senior notes, establishment of a new credit facility, interest
expense on the convertible debt obligation to Host Marriott and additional
mortgage debt on properties acquired in 1998.
Dividends on Convertible Preferred Securities. The dividends on Convertible
Preferred Securities reflect the dividends accrued for the first half of fiscal
year 1998 on the $550 million in 6 3/4% Convertible Preferred Securities. The
Convertible Preferred Securities are held by the REIT. The dividends paid by the
REIT are supported by the $567 million debt obligation to Host Marriott on the
balance sheet. The Operating Partnership incurs interest expense on the debt
obligation, and, therefore, no dividends are included in the current period
statement of operations.
Corporate Expenses. Corporate expenses decreased $1 million to $8 million for
the second quarter of 1999 and decreased $5 million to $16 million year-to-date,
resulting primarily from the timing of certain project costs not incurred in
1999 and lower compensation costs.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations for the
second quarter of 1998 and year-to-date as restated for the spin-off of
Crestline.
Extraordinary Gain. In connection with the refinancing of the mortgage and the
renegotiation of the management agreement on the New York Marriott Marquis, we
recognized an extraordinary gain of $13 million on the forgiveness of debt for
accrued incentive management fees by the manager.
Net Income. Our net income increased $29 million for the second quarter of 1999
to $95 million and increased $57 million to $153 million for year-to-date 1999.
FFO and EBITDA
- --------------
We consider Funds From Operations or FFO as defined by the National Association
of Real Estate Investment Trusts and our consolidated earnings before interest
expense, income taxes, depreciation, amortization and other non-cash items or
EBITDA 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 our
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 FFO presentation.
- 23 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management believes that FFO is a meaningful disclosure that will help the
investment community to better understand our financial performance, including
enabling its shareholders and analysts to more easily compare our performance to
other Real Estate Investment Trusts. FFO increased $37 million, or 32%, to $152
million in the second quarter of 1999 over the second quarter of 1998. However,
FFO as presented may not be comparable to amounts calculated by other companies.
For periods prior to 1999, the FFO disclosed represents comparative FFO (FFO
plus deferred tax expense). The following is a reconciliation of income from
continuing operations to FFO (in millions):
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------- -------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- --------- -------- --------
Income from continuing operations $ 82 $ 62 $ 147 $ 90
Depreciation and amortization 67 62 135 114
Other real estate activities (5) (51) (16) (52)
Partnership adjustments 8 (2) 3 (7)
REIT conversion expenses -- 6 -- 6
Deferred taxes -- 29 -- 39
Discontinued operations -- 9 -- 16
-------- -------- -------- --------
Funds From Operations $ 152 $ 115 $ 269 $ 206
======== ======== ======== ========
EBITDA increased $47 million, or 23%, to $255 million in the second quarter of
1999 and $70 million, or 17%, to $481 million year-to-date. Hotel EBITDA
increased $41 million, or 19%, to $263 million in the second quarter of 1999 and
$67 million or 16% to $493 million year-to-date, reflecting comparable hotel
EBITDA growth, as well as incremental EBITDA from 1998 acquisitions offset by
amounts representing hotel sales which are retained by Crestline.
The following is a reconciliation of EBITDA to income from continuing operations
(in millions):
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------- -------------------------
June 18, June 19, June 18, June 19,
1999 1998 1999 1998
-------- -------- -------- --------
EBITDA $ 255 $ 208 $ 481 $ 411
Interest expense (109) (76) (217) (152)
Dividends on Convertible Preferred -- (8) -- (17)
Securities
Depreciation and amortization (67) (62) (135) (114)
Minority interest expense (8) (14) (13) (30)
Income taxes -- (43) -- (63)
Other non-cash charges, net 11 57 24 55
-------- -------- -------- --------
Income from continuing $ 82 $ 62 $ 140 $ 90
operations ======== ======== ======== ========
Our interest coverage, defined as EBITDA divided by cash interest expense, was
2.7 times for the 1999 second quarter, 3.0 times for the 1998 second quarter and
2.5 times for full year 1998. The ratio of earnings to fixed charges was 1.7 to
1.0 for the second quarter of 1999 and 2.0 to 1.0 for the second quarter of
1998.
Cash Flows and Financial Condition
- ----------------------------------
We reported a decrease in cash and cash equivalents of $126 million during the
twenty-four weeks ended June 18, 1999. Cash from continuing operations was $111
million through the second quarter of 1999 and $203 million through the second
quarter of 1998. The $92 million decrease in cash from continuing operations
resulted principally from an increase in rent receivable resulting from the
timing of the receipt
- 24 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
of cash payments. There was no cash activity related to discontinued operations
for the second quarter of 1999; however, cash from discontinued operations
totaled $3 million through the second quarter of 1998.
Cash used in investing activities from continuing operations was $163 million
through the second quarter of 1999. Cash from investing activities from
continuing operations was $43 million through the second quarter of 1998. Cash
used in investing activities through the second quarter of 1999 includes capital
expenditures of $177 million, mostly related to renewals and replacements on
existing properties and development projects. In addition, we generated $35
million of cash from the net sale of assets, primarily the
Minneapolis/Bloomington property. There was no cash related to investing
activities from discontinued operations through the second quarter 1999;
however, cash used in investing activities from discontinued operations totaled
$2 million year-to-date 1998. Property and equipment balances include $145
million and $78 million for construction in progress as of June 18, 1999 and
December 31, 1998, respectively. The current balance primarily relates to
properties in Tampa, Orlando, Memphis and various other expansion and
development projects.
Cash used in financing activities from continuing operations was $74 million
through the second quarter of 1999 and $93 million through the second quarter of
1998. Cash used in financing activities for 1999 includes $323 million in
prepayment of debt, offset by $413 million in debt issuances for 1999. Both
financing activities were related to our February 1999 issuance of $300 million
of 8-3/8% Series D Senior notes due in 2006 and the refinancing of the New York
Marriott Marquis.
The Series D Senior notes were used to refinance, or purchase, debt which had
been assumed through the merger of certain partnerships or the purchase of hotel
properties in connection with the REIT conversion in December 1998. In August
1999, we intend to exchange Series D Senior notes for Series E Senior notes on a
one-for-one basis. The terms of the Series E Senior notes and the Series D
Senior notes will be substantially identical except that the Series E Senior
notes are freely transferable by the holders.
In April 1999, a subsidiary completed the refinancing of the $245 million
mortgage on the New York Marriott Marquis, maturing June 2000. We subsequently
refinanced this mortgage as part of the $665 financing agreement completed in
the third quarter of 1999.
Cash used in financing activities also reflects $69 million in dividend payments
for a special dividend declared in December 1998 and paid in February 1999. In
addition, on March 15, 1999 and June 15, 1999, the Board of Directors declared
regular cash distributions of $0.21 per OP unit. The first quarter distribution
was paid on April 14, 1999. The second quarter distribution was paid on July 14,
1999 to unitholders and is not reflected in the cash flow statement.
There was no cash related to financing activities from discontinued operations
through the second quarter of 1999; however, cash used in financing activities
from discontinued operations totaled $150 million through the second quarter of
1998.
In July 1999, the Company sold 4.0 million shares of 10% Class A Cumulative
Redeemable Preferred Stock with a $0.01 par value. Holders of the stock are
entitled to receive cumulative cash dividends at a rate of 10% per annum of the
$25.00 per share liquidation preference. Dividends are payable quarterly in
arrears on October 15, 1999. After August 3, 2004 we have the option to redeem
the Class A preferred stock for $25.00 per share, plus accrued and unpaid
dividends to the date of redemption. The Class A
- 25 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
preferred stock ranks prior to the common stock and the authorized Series A
Junior Participating preferred stock. The Class A preferred stockholders
generally have no voting rights.
We also entered into a financing agreement for $665 million due 2009 at a fixed
rate of 7.47%. The proceeds from this financing were used to refinance existing
mortgage indebtedness maturing at various times through 2000.
In June 1999, we acquired by merger Timewell Group, L.P. and Timeport, L.P.,
which each own limited partnership interests in the partnership that owns the
New York Marriott Marquis. As part of the merger, the general partners of
Timewell Group, L.P. and Timeport, L.P. received 345,559 and 240,218 cumulative
redeemable preferred OP Units, respectively. The preferred OP Units are
convertible into OP Units on a one-for-one basis, subject to certain
adjustments, at any time beginning one year after the merger at the option of
the holders. At any time, beginning two years after the merger, we can redeem
the preferred OP units for OP Units or cash.
Also in June 1999, we refinanced the debt on the San Diego Marriott Hotel and
Marina. The mortgage is for $195 million for a term of 10 years at a rate of
8.45%. In addition, we completed a 210-room extension of the Philadelphia
Marriott in April 1999 at a cost of approximately $37 million. The mortgage on
the Philadelphia Marriott was refinanced in July 1999 for $23 million at an
interest rate of approximately 8.6%, maturing in 2009.
On December 30, 1998, we acquired a portfolio of twelve luxury hotels and other
assets from the Blackstone Group, a Delaware limited partnership, and a series
of funds controlled by affiliates of Blackstone Real Estate Partners. We issued
approximately 47.7 million OP Units and assumed debt and made cash payments of
approximately $920 million and distributed 1.4 million of the shares of
Crestline common stock to the Blackstone Real Estate Partners. Approximately
23.9 million OP Units were redeemable as of June 30, 1999.
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 lessee.
- 26 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 engaged a third
party to review our Year 2000 in-house readiness and found no problems with any
mission critical systems. 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. We do, however, have
the normal disaster recovery procedures in place should we have a systems
failure.
Third-Party Systems. We rely upon operational and financial 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. We continue to receive verbal and written assurances that these
third parties are, or will be, Year 2000 compliant on time. To the extent these
changes impact 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 system 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 system 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.
- 27 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering understanding
of, and commitment to, the problem and its potential risks; (ii) Inventory:
identifying and locating systems and technology components that may be affected;
(iii) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues; (iv) Planning: defining the technical
solutions and labor and work plans necessary for each affected system; (v)
Remediation/Replacement: completing the programming to renovate or replace the
problem software or hardware; (vi) Testing and Compliance Validation: conducting
testing, followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology back
into the business environment; and (viii) 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
documentation and quantified results weighted for System Criticality. As of June
18, 1999, the Awareness, Inventory, Assessment, and Planning phases were
complete for IT Applications, BIS, and Building Systems. For IT Applications,
the Remediation/Replacement and Testing phases were 95 percent complete.
Compliance Validation had been completed for approximately 85 percent of key
systems, with most of the remaining work in its final stage. For BIS and
Building Systems, Remediation/Replacement is substantially complete with a
target date of September 1999. For BIS, Testing and Compliance Validation is in
progress. Testing is over 95% complete for Building Systems for which
approximately five percent require further remediation/replacement and re-
testing, and Compliance Validation is in progress. Implementation and Quality
Assurance is 80 percent complete for IT Applications. For BIS, Implementation is
substantially complete while Quality Assurance is in progress. Both
Implementation and Quality Assurance are in progress for 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 services, 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. Where Marriott International has not
received satisfactory responses it is addressing the potential risks of failure
through its contingency planning process.
- 28 -
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Marriott International has established a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes guidance 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. Marriott International is monitoring the progress of the managed and
franchised properties towards Year 2000 compliance.
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 depends
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 may 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 following the REIT Conversion, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have certain derivative and other financial instruments that are sensitive to
changes in interest rates, including interest rate swap agreements and debt
obligations. The interest recognized on the debt obligations and interest rate
swap instruments is based on various LIBOR terms, which were 4.9% and 5.8%,
respectively, at June 18, 1999 and 5.1% and 5% at December 31, 1998,
respectively. The interest rates, fair values and future maturities associated
with these financial instruments have not changed materially from the amounts
reported in our annual report on Form 10-K except for the refinancing and
termination discussed below.
We repaid a $40 million variable rate mortgage with proceeds from the $300
million senior notes offering discussed in Note 8 to the financial statements
during the first quarter of 1999. We terminated the associated swap agreement
incurring a termination fee of approximately $1 million.
In July 1999, we completed the refinancing of approximately $790 million of
outstanding variable rate mortgage debt and terminated the related interest rate
swap agreements. See Note 11 to the condensed consolidated financial statements.
As a result of the termination of the interest rate swap agreements we no longer
have derivatives outstanding. As of July 27, 1999, our remaining variable debt
consists of the credit facility and the mortgage debt on the Ritz-Carlton Amelia
Island property.
- 29 -
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time the subject of, or involved in, judicial
proceedings. Management believes that any liability or loss resulting from such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
None.
- 30 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT, L.P.
BY: HOST MARRIOTT CORPORATION
Its General Partner
July 27, 1999 /s/ Donald D. Olinger
- ------------- --------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
- 31 -
5
1,000,000
6-MOS
DEC-31-1999
JAN-01-1999
JUN-18-1999
310
0
305
0
0
0
8,308
1,094
8,288
0
2,546
0
0
0
895
8,288
611
648
0
508
0
0
217
140
0
140
0
13
0
153
0
0
