SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 20, 1997 Commission File No. 1-5664
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Delaware 53-0085950
----------------------- ----------------------
(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
-- --
Shares outstanding
Class at July 18, 1997
- ------------------- ----------------
Common Stock, $1.00
par value per share 203,317,000
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HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX
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Page No.
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Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
June 20, 1997 and January 3, 1997
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Twenty-four Weeks Ended June 20,
1997 and June 14, 1996
Condensed Consolidated Statements of Cash Flows - 6
Twenty-four Weeks Ended June 20, 1997 and
June 14, 1996
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 11
Operations and Financial Condition
Part II. OTHER INFORMATION AND SIGNATURE 17
- 2 -
PART I. FINANCIAL INFORMATION
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
June 20, January 3,
1997 1997
---------- ----------
(unaudited)
ASSETS
------
Property and Equipment, net............................................................ $ 4,292 $ 3,805
Notes and Other Receivables (including amounts due from
affiliates of $149 million and $156 million, respectively)........................... 182 297
Due from Hotel Managers................................................................ 105 89
Investments in Affiliates.............................................................. 11 11
Other Assets........................................................................... 228 246
Cash and Cash Equivalents.............................................................. 509 704
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$ 5,327 $ 5,152
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes issued by the company or its subsidiaries............................... $ 985 $ 1,021
Mortgage debt........................................................................ 1,634 1,529
Other................................................................................ 96 97
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2,715 2,647
Accounts Payable and Accrued Expenses.................................................. 51 74
Deferred Income Taxes.................................................................. 496 464
Other Liabilities...................................................................... 340 290
---------- ----------
Total Liabilities 3,602 3,475
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Company-obligated Mandatorily Redeemable Convertible Preferred
Securities of a Subsidiary Trust Holding Company, Substantially
All of Whose Assets are the Convertible Subordinated Debentures
due 2026 ("Convertible Preferred Securities")........................................ 550 550
---------- ----------
Shareholders' Equity
Common Stock, 300 million shares authorized; 202.9 million
shares and 202.0 million shares issued and outstanding,
respectively....................................................................... 203 202
Additional Paid-in Capital........................................................... 936 926
Retained Earnings (Deficit).......................................................... 36 (1)
---------- ----------
Total Shareholders' Equity 1,175 1,127
---------- ----------
$ 5,327 $ 5,152
========== ==========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended June 20, 1997 and June 14, 1996
(unaudited, in millions, except per common share amounts)
1997 1996
-------- --------
REVENUES
Hotels............................................................................. $ 264 $ 165
Net gains (losses) on property transactions........................................ 1 (3)
Equity in earnings of affiliates................................................... 2 1
Other ............................................................................. 3 4
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Total revenues................................................................... 270 167
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OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$36 million and $24 million in 1997 and 1996, respectively)...................... 140 98
Other ............................................................................. 6 7
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Total operating costs and expenses............................................... 146 105
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OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST...................................................... 124 62
Minority interest...................................................................... (13) (1)
Corporate expenses..................................................................... (9) (8)
Interest expense....................................................................... (59) (51)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (8) --
Interest income........................................................................ 10 10
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INCOME BEFORE INCOME TAXES............................................................. 45 12
Provision for income taxes............................................................. (19) (5)
-------- --------
NET INCOME............................................................................. $ 26 $ 7
======== ========
NET INCOME PER COMMON SHARE............................................................ $ .13 $ .03
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 4 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-four weeks ended June 20, 1997 and June 14, 1996
(unaudited, in millions, except per common share amounts)
1997 1996
-------- --------
REVENUES
Hotels............................................................................ $ 512 $ 291
Net gains (losses) on property transactions....................................... 2 (2)
Equity in earnings of affiliates.................................................. 3 2
Other ............................................................................ 5 6
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Total revenues.................................................................. 522 297
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OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$78 million and $41 million in 1997 and 1996, respectively)..................... 291 181
Other ............................................................................ 16 16
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Total operating costs and expenses.............................................. 307 197
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OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST..................................................... 215 100
Minority interest..................................................................... (24) (2)
Corporate expenses.................................................................... (18) (17)
Interest expense...................................................................... (122) (99)
Dividends on Convertible Preferred Securities of a subsidiary trust................... (17) --
Interest income....................................................................... 22 16
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INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM.............................................................. 56 (2)
Provision for income taxes............................................................ (24) (3)
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INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................................... 32 (5)
Extraordinary item - gain on extinguishment of debt
(net of income taxes of $3 million)................................................ 5 --
-------- --------
NET INCOME (LOSS)..................................................................... $ 37 $ (5)
======== ========
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item.............................................. $ .16 $ (.03)
Extraordinary item - gain on extinguishment of debt (net of income taxes)............ .02 --
-------- --------
NET INCOME (LOSS) PER COMMON SHARE................................................... $ .18 $ (.03)
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 5 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four weeks ended June 20, 1997 and June 14, 1996
(unaudited, in millions)
1997 1996
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OPERATING ACTIVITIES
Income (loss) before extraordinary items............................................... $ 32 $ (5)
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization...................................................... 102 67
Income taxes....................................................................... - 6
Equity in (earnings) losses of affiliates.......................................... (3) (2)
Changes in operating accounts...................................................... 24 4
Other.............................................................................. 38 24
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Cash from continuing operations.................................................... 193 94
Cash used in discontinued operations............................................... - (4)
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Cash from operations............................................................... 193 90
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INVESTING ACTIVITIES
Proceeds from sales of assets.......................................................... 6 350
Less noncash proceeds.............................................................. - (33)
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Cash received from sales of assets .................................................... 6 317
Acquisitions........................................................................... (156) (255)
Capital expenditures:
Renewals and replacements.......................................................... (60) (42)
Other.............................................................................. (18) (35)
Note receivable collections............................................................ 4 3
Affiliate collections, net............................................................. 10 8
Other ................................................................................. 14 (42)
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Cash used in investing activities.................................................. (200) (46)
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FINANCING ACTIVITIES
Issuances of debt...................................................................... 84 38
Issuances of common stock.............................................................. 3 404
Scheduled principal repayments......................................................... (44) (16)
Debt prepayments ...................................................................... (236) (33)
Other ................................................................................. 5 28
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Cash from (used in) financing activities........................................... (188) 421
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... $ (195) $ 465
======== ========
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of
certain hotel properties......................................................... $ 258 $ 235
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 6 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying condensed consolidated financial statements of Host
Marriott Corporation and subsidiaries (the "Company") have been prepared by
the Company 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 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 January 3, 1997.
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 20, 1997
and the results of operations for the twelve and twenty-four weeks ended
June 20, 1997 and June 14, 1996 and cash flows for the twenty-four weeks
ended June 20, 1997 and June 14, 1996. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
2. On December 29, 1995, the Company distributed to its shareholders through a
special tax-free dividend (the "Special Dividend") all of the outstanding
shares of common stock of Host Marriott Services Corporation ("HM
Services"), formerly a wholly-owned subsidiary of the Company, which, as of
the date of the Special Dividend, owned and operated food, beverage and
merchandise concessions businesses at airports, on tollroads and at
stadiums, arenas and other attractions (the "Operating Group"). Cash used
in discontinued operations through the first half of 1996 represents the
1996 payment of expenses related to the Special Dividend accrued during
1995.
3. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions, and equity in
earnings (losses) of affiliates. House profit reflects the net revenues
flowing to the Company as property owner and represents hotel operating
results less property-level expenses excluding depreciation, real and
personal property taxes, ground and equipment rent, insurance, lease
payments and management fees and certain other costs, which are classified
as operating costs and expenses.
House profit generated by the Company's hotels for 1997 and 1996 consists
of:
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- -----------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(in millions)
Sales
Rooms.................................................... $ 423 $ 283 $ 831 $ 530
Food & Beverage.......................................... 175 111 346 209
Other.................................................... 39 27 80 52
---------- ---------- ---------- ----------
Total Hotel Sales...................................... 637 421 1,257 791
---------- ---------- ---------- ----------
Department Costs
Rooms.................................................... 95 66 187 128
Food & Beverage.......................................... 128 83 255 162
Other.................................................... 19 15 40 28
---------- ---------- ---------- ----------
Total Department Costs................................. 242 164 482 318
---------- ---------- ---------- ----------
Department Profit........................................... 395 257 775 473
Other Deductions............................................ 131 92 263 182
---------- ---------- ---------- ----------
House Profit........................................... $ 264 $ 165 $ 512 $ 291
=========== ========== ========== ==========
- 7 -
4. Net income (loss) per common share is computed based on the weighted
average number of common shares outstanding. Common equivalent shares and
other potentially dilutive securities have been excluded from the weighted
average number of outstanding shares as they were not material or were
antidilutive for the twelve and twenty-four weeks ended June 20, 1997 and
the twenty-four weeks ended June 14, 1996. The weighted average shares were
202.8 million and 201.9 million for the twelve weeks ended June 20, 1997
and June 14, 1996, respectively, and 202.6 million and 177.3 million for
the twenty-four weeks then ended, respectively.
5. As of June 20, 1997, the Company had minority interests in 24 affiliates
that own an aggregate of 250 properties, 30 of which are full-service
properties, managed by Marriott International, Inc. The Company's equity in
earnings of affiliates was $2 million and $1 million for the twelve weeks
ended June 20, 1997 and June 14, 1996, respectively and $3 million and $2
million for the twenty-four weeks then ended, respectively.
Combined summarized operating results reported by affiliates follows:
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- -----------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(in millions)
Sales
Revenues.................................................... $ 162 $ 195 $ 303 $ 371
Operating expenses:
Cash charges (including interest)........................ (91) (113) (185) (223)
Depreciation and other non-cash charges.................. (45) (57) (95) (116)
---------- --------- ---------- ----------
Income before extraordinary items........................... 26 25 23 32
Extraordinary items......................................... (6) -- 12 --
---------- ---------- ---------- ----------
Net income............................................... $ 20 $ 25 $ 35 $ 32
========== ========== ========== ==========
On January 15, 1997, the Company acquired a controlling interest in the
Marriott Hotel Properties Limited Partnership ("MHPLP") for approximately
$268 million, including $231 million in assumed mortgage debt. MHPLP owns
the 1,503-room Marriott Orlando World Center and a 50.5% controlling
partnership interest in the 624-room Marriott Harbor Beach Resort.
On April 3, 1997, the Company acquired a controlling interest in the
Hanover Marriott Limited Partnership ("Hanover LP") for $42 million,
including $27 million in assumed mortgage debt. Hanover LP, an affiliated
partnership of the Company, owns the 353-room Hanover Marriott Hotel near
Morristown, New Jersey.
6. During the first quarter of 1997, the Company acquired the 306-room
Ritz-Carlton, Marina del Rey, for $57 million and a controlling interest in
the 197-room Waterford Hotel in Oklahoma City, Oklahoma, for $18 million,
which has been converted to the Marriott brand. In addition, the Company
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.
During the second quarter of 1997, the Company acquired a controlling
interest in the 404-room Norfolk Waterside Marriott for $33 million.
During the third quarter of 1997, the Company acquired a controlling
interest in a newly-formed partnership that owns the 380-room Hartford
Marriott Farmington Hotel near Hartford, Connecticut for $26 million,
including $22 million in assumed mortgage debt.
- 8 -
7. In March 1997, the Company purchased 100% of the outstanding bonds secured
by a first mortgage on the San Francisco Marriott Hotel. 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.
8. In March 1997, the Company obtained $90 million in first mortgage financing
secured by the Philadelphia Marriott Hotel. The mortgage bears interest at
a fixed rate of 8.49% and matures in April 2009.
9. On June 21, 1997, the Company acquired the outstanding common stock of
Forum Group, Inc. (the "Forum Group") from Marriott Senior Living Services,
Inc., a subsidiary of Marriott International, Inc. ("Marriott
International"). The Company purchased the Forum Group portfolio of 29
premier senior living communities for approximately $460 million, including
approximately $270 million in debt ($60 million of which was provided by
Marriott International). In addition, the Company plans to add
approximately 1,060 units to these communities for approximately $107
million ($19 million of which was completed as of closing) through an
expansion plan which will be completed by January 1999. The properties will
continue to be managed by Marriott International.
10. On June 19, 1997, HMC Capital Resources Corporation ("Capital Resources"),
a wholly-owned subsidiary of the Company, entered into a revolving line of
credit agreement ("Line of Credit") with a group of commercial banks under
which it may borrow up to $500 million for certain permitted uses. On June
19, 2000, any outstanding borrowings on the Line of Credit convert to a
term loan arrangement with all unpaid advances due June 19, 2004.
Borrowings under the Line of Credit bear interest at either the Eurodollar
rate plus 1.7% or the prime rate plus 0.7% at the option of the Company. An
annual fee of 0.35% is charged on the unused portion of the commitment. The
Line of Credit is originally secured by six hotel properties, with a
carrying value of approximately $450 million at June 20, 1997, contributed
to Capital Resources and is guaranteed by the Company. As a result of this
transaction, the Company terminated its line of credit with Marriott
International.
11. During the third quarter of 1997, HMH Properties, Inc. ("Properties") and
HMC Acquisition Properties, Inc. ("Acquisitions"), indirect, wholly-owned
subsidiaries of the Company, completed consent solicitations (the "Consent
Solicitations") with holders of their senior notes to amend certain
provisions of their senior notes indentures. The Consent Solicitations
facilitated the merger of Acquisitions with and into Properties (the
"Merger"). 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 Consent Solicitations and the Merger, Properties issued
an aggregate of $600 million of 8 7/8% senior notes (the "New Senior
Notes") at par with a maturity of July 2007. Properties received net
proceeds of approximately $570 million, which will be used to fund future
acquisitions of, or the purchase of interests in, full-service hotels and
other lodging-related properties, which may include senior living
communities, as well as for general corporate purposes. The New Senior
Notes are guaranteed on a joint and several basis by certain of Properties'
subsidiaries and rank pari passu in right of payment with all other
existing and future senior indebtedness of Properties.
12. The Company is required to adopt SFAS No. 128, "Earnings per Share" in the
fourth quarter of 1997. Early adoption of SFAS No. 128 is not permitted,
- 9 -
although pro forma disclosure is encouraged, if material. The adoption of
SFAS No. 128 is not expected to have a material effect on the Company's
consolidated financial statements. Earnings (loss) per share determined
based on the method in SFAS No. 128 for the twelve weeks and twenty-four
weeks ended June 20, 1997 and June 14, 1996 did not have a material impact
on the Company's consolidated financial statements. Therefore, pro forma
results for SFAS No. 128 have not been presented.
The Company is also required to adopt SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" in fiscal year 1998. The adoption of
these statements is not expected to have a material effect on the Company's
consolidated financial statements.
- 10 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain matters discussed in this Form 10-Q are forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995 and as such may
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations will be
attained. These risks are detailed from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
RESULTS OF OPERATIONS
- ---------------------
REVENUES. Revenues primarily represent house profit from the Company's hotel
properties, net gains (losses) on property transactions and equity in earnings
(losses) of affiliates. Revenues increased $103 million, or 62%, to $270 million
for the second quarter of 1997 from $167 million for the second quarter of 1996.
Year-to-date revenues rose $225 million, or 76%, to $522 million. The Company's
revenue and operating profit were impacted by:
- - improved lodging results for comparable full-service hotel properties;
- - the addition of 23 full-service hotel properties during 1996 and seven
full-service properties during the first half of 1997; and
- - the 1996 sale and leaseback of 16 of the Company's Courtyard properties and
18 of the Company's Residence Inns.
Hotel revenues increased $99 million, or 60%, to $264 million in the second
quarter of 1997 and $221 million, or 76%, to $512 million for year-to-date 1997,
as all three of the Company's lodging concepts reported growth in room revenues
generated per available room ("REVPAR") and results reflected the impact of the
addition of 30 full-service properties acquired in 1996 and through the second
quarter of 1997.
Hotel sales (gross hotel sales, including room sales, food and beverage sales,
and other ancillary sales such as telephone sales) increased $216 million, or
51%, to $637 million in the second quarter of 1997 and $466 million, or 59%, to
nearly $1.3 billion year-to-date, reflecting the REVPAR increases for comparable
units and the addition of 30 full-service properties in 1996 and 1997. Improved
results for the Company's full-service hotels were driven by an increase in
REVPAR for comparable units of 14% to $110.53 for the 1997 second quarter and
16% to $107.01 year-to-date. On a comparable basis for the Company's
full-service properties, average room rates increased 11% for the 1997 second
quarter and 12% year-to-date, while average occupancy increased over two
percentage points for the 1997 second quarter and almost three percentage points
year-to-date. The Company's year-to-date 1997 results were positively impacted
by the exclusion of the New Year's holiday from the 1997 results due to the
timing of the Company's fiscal year-end and the milder winter weather in 1997.
Results were further enhanced by a two and three percentage point increase in
- 11 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
the house profit margin for comparable properties for the 1997 second quarter
and year-to-date, respectively, because the Company's hotels are obtaining
better operating leverage as a result of increases in room rates.
The Company's leased limited-service properties continued to perform well. The
Company's moderate- price Courtyard properties reported a REVPAR increase of
over 9% for the 1997 second quarter and almost 11% year-to-date. The increase in
REVPAR was primarily a result of a 9% increase in average room rates and a
slight increase in average occupancy for the 1997 second quarter. On a
year-to-date basis, average room rates increased 9% and average occupancy
increased over one percentage point. The Company's extended-stay Residence Inns
reported an increase in REVPAR of 9% and nearly 8% for the 1997 second quarter
and year-to-date, respectively, due primarily to increases in average room rates
of 12% and 11% for the 1997 second quarter and year-to-date, respectively, while
average occupancy decreased over two percentage points for the 1997 second
quarter and almost three percentage points year-to-date. Due to the high
occupancy of these properties, the Company expects future increases in REVPAR to
be driven by room rate increases, rather than occupancy increases. However,
there can be no assurance that REVPAR will continue to increase in the future.
OPERATING COSTS AND EXPENSES. Operating costs and expenses principally consist
of depreciation, management fees, real and personal property taxes, ground,
building and equipment rent, insurance and certain other costs. Operating costs
and expenses increased $41 million to $146 million in the second quarter of 1997
from $105 million in the second quarter of 1996, primarily representing
increased hotel operating costs, including depreciation. Year-to-date operating
costs and expenses increased $110 million to $307 million. Hotel operating costs
increased $42 million to $140 million for the second quarter of 1997 and $110
million to $291 million year-to-date, primarily due to the addition of 30
full-service properties during 1996 and through the second quarter of 1997 and
increased management fees and rentals tied to improved property results, as well
as the impact of the lease payments on the Courtyard and Residence Inn
properties which have been sold and leased back. As a percentage of hotel
revenues, hotel operating costs and expenses decreased to 53% and 57% of
revenues in the second quarter of 1997 and year-to-date 1997, respectively, from
59% and 62% of revenues in the second quarter of 1996 and year-to-date 1996,
respectively, due to the significant increases in REVPAR discussed above, as
well as the operating leverage as a result of a significant portion of the
Company's hotel operating costs and expenses being fixed.
OPERATING PROFIT. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $62 million,
or 100%, to $124 million for the second quarter of 1997 and $115 million, or
115%, to $215 million year-to-date. Hotel operating profit increased $57
million, or 85%, to $124 million, or 47% of hotel revenues, for the second
quarter of 1997 from $67 million, or 41% of hotel revenues, for the second
quarter of 1996. Year-to-date hotel operating profit increased $111 million, or
101%, to $221 million, or 43% of hotel revenues, for 1997 compared to $110
million, or 38% of hotel revenues, for 1996. In nearly all markets, the
Company's hotels recorded improvements in comparable operating results. In
particular, the Company's hotels on the east and west coasts benefitted from the
upscale full-service room supply and demand imbalance. Hotels in New York City,
Philadelphia and Washington, D.C. performed particularly well, along with
properties in San Francisco/Silicon Valley and in Southern California. The
Company's suburban Atlanta properties generally reported decreased results due
to higher activity in 1996 related to the Summer Olympics.
- 12 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CORPORATE EXPENSES. Corporate expenses increased $1 million for the 1997 second
quarter and year-to-date, respectively, to $9 million for the 1997 second
quarter and $18 million year-to-date. As a percentage of revenues, corporate
expenses decreased to 3% of revenues in the second quarter of 1997 and
year-to-date from 5% in the second quarter of 1996 and 6% year-to-date. This
reflects the Company's efforts to control its corporate expenses in spite of the
substantial growth in revenues.
INTEREST EXPENSE. Interest expense increased 16% to $59 million in the second
quarter of 1997 and 23% to $122 million year-to-date, primarily due to
additional debt of approximately $950 million incurred in connection with the
1996 and 1997 full-service hotel additions.
DIVIDENDS ON CONVERTIBLE PREFERRED SECURITIES OF SUBSIDIARY TRUST. The Dividends
on Convertible Preferred Securities reflect the dividends accrued during the
first half of fiscal year 1997 on the $550 million in 6.75% Convertible
Preferred Securities issued by the Company in December 1996.
INTEREST INCOME. Interest income remained at $10 million for the second quarter
of 1997. On a year-to-date basis, interest income increased $6 million to $22
million, primarily reflecting the interest income on the proceeds generated by
the December 1996 offering of Convertible Preferred Securities, which were
subsequently invested in the acquisition of full-service lodging properties and
the repayment of indebtedness.
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Income before extraordinary item for
the second quarter of 1997 was $26 million, compared to $7 million for the
second quarter of 1996. The 1997 year-to-date income before extraordinary items
was $32 million compared to a $5 million loss for 1996 year-to-date.
EXTRAORDINARY GAIN. In March 1997, the Company purchased 100% of the outstanding
bonds secured by a first mortgage on the San Francisco Marriott Hotel. The
Company 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, 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.
NET INCOME (LOSS). The Company's net income for the second quarter of 1997 was
$26 million ($.13 per share), compared to $7 million ($.03 per share) for the
second quarter of 1996. Net income for year-to-date 1997 was $37 million ($.18
per share) compared to a $5 million ($.03 per share) net loss for year-to-date
1996.
EBITDA and COMPARATIVE FFO
- --------------------------
The Company's consolidated Earnings Before Interest Expense, Taxes,
Depreciation, Amortization and other non-cash items ("EBITDA") increased $67
million, or 63%, to $174 million in the 1997 second quarter and $146 million, or
80%, to $328 million year-to-date. Hotel EBITDA increased $71 million, or 68%,
to $175 million in the second quarter of 1997 and $145 million, or 80%, to $327
million year-to-date. Full-service hotel EBITDA increased $71 million, or 72%,
to $170 million for the second quarter of 1997 and $153 million, or 92%, to $319
million year-to-date, reflecting comparable full-service hotel EBITDA growth, as
well as incremental EBITDA from 1996 and 1997 acquisitions. On a comparable
basis, full-service hotel EBITDA increased 18% and 23%, respectively, on a
REVPAR increase of 14% and 16%, respectively, for the 1997 second quarter and
year-to-date.
- 13 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a reconciliation of EBITDA to the Company's income (loss)
before extraordinary item:
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- -----------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(in millions)
EBITDA............................................................ $ 174 $ 107 $ 328 $ 182
Interest expense.................................................. (59) (51) (122) (99)
Dividends on Convertible Preferred Securities..................... (8) -- (17) --
Depreciation and amortization..................................... (51) (33) (102) (67)
Income taxes...................................................... (19) (5) (24) (3)
Loss on dispositions of assets and other non-cash
charges, net..................................................... (11) (11) (31) (18)
---------- ---------- ---------- ----------
Income (loss) before extraordinary item....................... $ 26 $ 7 $ 32 $ (5)
========== ========== ========== ==========
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, improved to 3.1 times for the 1997 second quarter from 2.2 times for
the 1996 second quarter and 2.8 times for year-to-date 1997 compared to 1.9
times for year-to-date 1996.
The Company reported Comparative Funds From Operations ("Comparative FFO," which
represents Funds From Operations, as defined by the National Association of Real
Estate Investment Trusts, plus deferred tax expense) to help the investment
community to better understand the financial performance of the Company. The
Company has begun disclosing Comparative FFO this quarter in order to better
serve its shareholders and analysts, many of whom find this information useful
to compare the Company's performance to Real Estate Investment Trusts ("REITs").
Comparative FFO increased $39 million, or 85%, to $85 million in the second
quarter of 1997 and $75 million, or 107%, to $145 million year-to-date. The
following is a reconciliation of the Company's income (loss) before
extraordinary item to Comparative FFO:
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------------- ---------------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
----------- ----------- ---------- -----------
Income (loss) before extraordinary item............. $ 26 $ 7 $ 32 $ (5)
Depreciation and amortization....................... 50 33 101 67
Other real estate activities........................ (1) 4 2 5
Partnership adjustments............................. 2 1 - 2
Deferred taxes...................................... 8 1 10 1
---------- ----------- ---------- ----------
Comparative Funds From Operations............... $ 85 $ 46 $ 145 $ 70
========== =========== ========== ==========
The Company considers EBITDA and Comparative FFO to be indicative measures of
the Company's operating performance due to the significance of the Company's
long-lived assets and because such data is considered useful by the investment
community to better understand the Company's results, and can be used to measure
the Company's 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,
and income taxes have been, and will be, incurred which are not reflected in the
EBITDA presentation.
- 14 -
CASH FLOWS AND FINANCIAL CONDITION
- ----------------------------------
The Company reported a decrease in cash and cash equivalents of $195 million
during the twenty-four weeks ended June 20, 1997. This decrease is primarily due
to the $219 million prepayment of the bonds secured by the San Francisco
Marriott Hotel and the acquisition of seven full-service properties during the
first half of 1997. This decrease is offset by the new mortgage financing
obtained on the Philadelphia Marriott Hotel. In addition, cash flow from
continuing operations through the second quarter of 1997 increased $99 million
to $193 million due to improved lodging results.
Cash used in investing activities was $200 million through the second quarter of
1997, while cash used in investing activities was $46 million through the second
quarter of 1996. Cash used in investing activities through the second quarter of
1997 includes capital expenditures of $78 million, primarily related to renewals
and replacements on existing properties and $156 million for seven full-service
hotel acquisitions.
During first quarter of 1997, the Company acquired a controlling interest in the
Marriott Hotel Properties Limited Partnership ("MHPLP") for approximately $268
million, including $231 million in assumed mortgage debt. MHPLP, an affiliated
partnership of the Company, owns the 1,503-room Marriott Orlando World Center
and a 50.5% controlling partnership interest in the 624-room Marriott Harbor
Beach Resort. The Company also acquired the 306-room Ritz-Carlton, Marina del
Rey, for $57 million and a controlling interest in the 197-room Waterford Hotel
in Oklahoma City, Oklahoma, which has been converted to the Marriott brand, for
$18 million. In addition, the Company completed the acquisition of the 504-room
New York Marriott Financial Center, after acquiring the mortgage on the hotel
for $101 million in the fourth quarter of 1996.
During the second quarter of 1997, the Company acquired a controlling interest
in the Hanover Marriott Limited Partnership ("Hanover LP") for $42 million,
including $27 million in assumed mortgage debt. Hanover LP, an affiliated
partnership of the Company, owns the 353-room Hanover Marriott Hotel near
Morristown, New Jersey. The Company also acquired a controlling interest in the
404-room Norfolk Waterside Marriott for $33 million.
During the third quarter of 1997, the Company acquired a controlling interest in
a newly-formed partnership that owns the 380-room Hartford Marriott Farmington
Hotel near Hartford, Connecticut for $26 million, including $22 million in
assumed mortgage debt.
On June 21, 1997, the Company acquired the outstanding common stock of Forum
Group, Inc. (the "Forum Group") from Marriott Senior Living Services, Inc., a
subsidiary of Marriott International, Inc. ("Marriott International"). The
Company purchased the Forum Group portfolio of 29 premier senior living
communities for approximately $460 million, including approximately $270 million
in debt ($60 million of which was provided by Marriott International). In
addition, the Company plans to add approximately 1,060 units to these
communities for approximately $107 million ($19 million of which was completed
as of closing) through an expansion plan which will be completed by January
1999. The properties will continue to be managed by Marriott International.
Cash used in financing activities was $188 million through the second quarter of
1997, while cash from financing activities was $421 million through the second
quarter of 1996. Cash used in financing activities through the second quarter of
1997 includes the $219 million prepayment of the outstanding bonds secured by
the San Francisco Marriott Hotel, partially offset by the $90 million in
mortgage financing obtained on the Philadelphia Marriott Hotel. Cash from
financing activities for the first half of 1996 includes the issuance of 31.6
million shares of common stock for net proceeds of nearly $400 million.
On June 19, 1997, HMC Capital Resources Corporation ("Capital Resources"), a
wholly-owned subsidiary of the Company, entered into a revolving line of credit
agreement ("Line of Credit") with a group of commercial banks under which it may
borrow up to $500 million for certain permitted uses. On June 19, 2000, any
outstanding borrowings on the Line of Credit convert to a term loan arrangement
with all unpaid advances due June 19, 2004. Borrowings under the Line of Credit
bear interest at either the Eurodollar rate plus 1.7% or the prime rate plus
0.7% at the option of the Company. An annual fee of 0.35% is charged on the
unused portion of the commitment. The Line of Credit is originally secured by
six hotel properties, with a carrying value of approximately $450 million at
June 20, 1997, contributed to Capital Resources and is guaranteed by the
Company. As a result of this transaction, the Company terminated its line of
credit with Marriott International.
- 15 -
During the third quarter of 1997, HMH Properties, Inc. ("Properties") and HMC
Acquisition Properties, Inc. ("Acquisitions"), indirect, wholly-owned
subsidiaries of the Company, completed consent solicitations (the "Consent
Solicitations") with holders of their senior notes to amend certain provisions
of their senior notes indentures. The Consent Solicitations facilitated the
merger of Acquisitions with and into Properties (the "Merger"). 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 Consent Solicitations and the Merger, Properties issued an
aggregate of $600 million of 8 7/8% senior notes (the "New Senior Notes") at par
with a maturity of July 2007. Properties received net proceeds of approximately
$570 million, which will be used to fund future acquisitions of, or the purchase
of interests in, full-service hotels and other lodging-related properties, which
may include senior living communities, as well as for general corporate
purposes. The New Senior Notes are guaranteed on a joint and several basis by
certain of Properties' subsidiaries and rank pari passu in right of payment with
all other existing and future senior indebtedness of Properties.
- 16 -
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. Exhibit:
#11 Statement Re: Computation of Earnings (Loss) Per Common Share
b. Reports on Form 8-K:
- May 2, 1997 -- Report of the announcement that the Company reported
its 1997 first quarter results.
- May 16, 1997 -- Report of the announcement that the Company completed
its tender offer for limited partnership units in Marriott Hotel
Properties Limited Partnership ("MHP"). Financial statements of MHP
and pro forma financial information reflecting the acquisition were
included.
- July 7, 1997 -- Report of the announcement that the Company completed
the acquisition of the outstanding common stock of Forum Group, Inc.,
from a subsidiary of Marriott International.
- 17 -
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 CORPORATION
July 31, 1997 /s/ Donald D. Olinger
- ------------- -----------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
- 18 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF EARNINGS (LOSS) PER COMMON SHARE
(in millions, except per share amounts)
Twelve Weeks Ended Twenty-four Weeks Ended
---------------------- -----------------------
June 20, June 14, June 20, June 14,
1997 1996 1997 1996
---------- ---------- ---------- ----------
(in millions)
Net income (loss)................................................. $ 26 $ 7 $ 37 $ (5)
========== ========== ========== ==========
Primary Earnings (Loss) Per Common Share
Shares:
Weighted average number of common shares outstanding.............. 202.8 193.1 202.6 177.3
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at average market *............................................. -- 5.9 -- --
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at average market *............... -- 2.8 -- --
---------- ---------- ---------- ----------
202.8 201.8 202.6 177.3
========== ========== ========== ==========
Primary Earnings (Loss) Per Common Share.......................... $ .13 $ .03 $ .18 $ (.03)
========== ========== ========== ==========
Fully Diluted Earnings (Loss) Per Common Share
Shares:
Weighted average number of common shares outstanding.............. 202.8 193.1 202.6 177.3
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at higher of average or ending market *......................... -- 6.0 -- --
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at higher of average or
ending market *................................................. -- 2.8 -- --
---------- ---------- ---------- ----------
202.8 201.9 202.6 177.3
========== ========== ========== ==========
Fully Diluted Earnings (Loss) Per Common Share.................... $ .13 $ .03 $ .18 $ (.03)
========== ========== ========== ==========
____________
* Common equivalent shares and other potentially dilutive securities were not
material, or were antidilutive, for the twelve and twenty-four weeks ended
June 20, 1997 and the twenty-four weeks ended June 14, 1996.