SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 12, 1997 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 October 10, 1997
Common Stock, $1.00
par value per share 203,700,000
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets - 3
September 12, 1997 and January 3, 1997
Condensed Consolidated Statements of Operations - 4
Twelve Weeks and Thirty-six Weeks Ended
September 12, 1997 and September 6, 1996
Condensed Consolidated Statements of Cash Flows - 6
Thirty-six Weeks Ended September 12, 1997 and
September 6, 1996
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 11
Operations and Financial Condition
Part II. OTHER INFORMATION AND SIGNATURE 18
- 2 -
PART I. FINANCIAL INFORMATION
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
September 12, January 3,
1997 1997
----------- ---------
(unaudited)
ASSETS
------
Property and Equipment, net............................................................ $ 5,008 $ 3,805
Notes and Other Receivables (including amounts due from
affiliates of $25 million and $156 million, respectively)............................ 57 297
Due from Hotel Managers................................................................ 105 89
Investments in Affiliates.............................................................. 11 11
Other Assets........................................................................... 270 246
Cash and Cash Equivalents.............................................................. 911 704
-------- --------
$ 6,362 $ 5,152
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes issued by the company or its subsidiaries............................... $ 1,585 $ 1,021
Mortgage debt........................................................................ 1,849 1,529
Other................................................................................ 200 97
-------- --------
3,634 2,647
Accounts Payable and Accrued Expenses.................................................. 90 74
Deferred Income Taxes.................................................................. 517 464
Other Liabilities...................................................................... 382 290
-------- --------
Total Liabilities 4,623 3,475
-------- --------
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; 203.2 million
shares and 202.0 million shares issued and outstanding,
respectively....................................................................... 203 202
Additional Paid-in Capital........................................................... 944 926
Retained Earnings (Deficit).......................................................... 42 (1)
-------- --------
Total Shareholders' Equity 1,189 1,127
-------- --------
$ 6,362 $ 5,152
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve weeks ended September 12, 1997 and September 6, 1996
(unaudited, in millions, except per common share amounts)
1997 1996
--------- --------
REVENUES
Hotels............................................................................. $ 224 $ 164
Senior living communities.......................................................... 16 --
Net gains (losses) on property transactions........................................ 1 1
Other ............................................................................. 5 2
--------- --------
Total revenues................................................................... 246 167
--------- --------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$33 million and $22 million in 1997 and 1996, respectively)...................... 142 110
Senior living communities (including Marriott International
management fees of $3 million in 1997)........................................... 9 --
Other ............................................................................. 6 8
--------- --------
Total operating costs and expenses............................................... 157 118
--------- --------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST...................................................... 89 49
Minority interest...................................................................... -- --
Corporate expenses..................................................................... (9) (8)
Interest expense....................................................................... (76) (53)
Dividends on Convertible Preferred Securities of a subsidiary trust.................... (9) --
Interest income........................................................................ 15 13
--------- --------
INCOME BEFORE INCOME TAXES............................................................. 10 1
Provision for income taxes............................................................. (4) (3)
--------- --------
NET INCOME (LOSS)...................................................................... $ 6 $ (2)
========= ========
NET INCOME (LOSS) PER COMMON SHARE..................................................... $ .03 $ (.01)
========= ========
See Notes to Condensed Consolidated Financial Statements.
- 4 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirty-six weeks ended September 12, 1997 and September 6, 1996
(unaudited, in millions, except per common share amounts)
1997 1996
--------- --------
REVENUES
Hotels............................................................................ $ 736 $ 455
Senior living communities......................................................... 16 --
Net gains (losses) on property transactions....................................... 3 (1)
Equity in earnings of affiliates.................................................. 3 2
Other ............................................................................ 10 8
--------- --------
Total revenues.................................................................. 768 464
--------- --------
OPERATING COSTS AND EXPENSES
Hotels (including Marriott International management fees of
$111 million and $63 million in 1997 and 1996, respectively).................... 433 291
Senior living communities (including Marriott International
management fees of $3 million in 1997).......................................... 9 --
Other ............................................................................ 22 24
--------- --------
Total operating costs and expenses.............................................. 464 315
--------- --------
OPERATING PROFIT BEFORE MINORITY INTEREST,
CORPORATE EXPENSES AND INTEREST..................................................... 304 149
Minority interest..................................................................... (24) (2)
Corporate expenses.................................................................... (27) (25)
Interest expense...................................................................... (198) (152)
Dividends on Convertible Preferred Securities of a subsidiary trust................... (26) --
Interest income....................................................................... 37 29
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM.............................................................. 66 (1)
Provision for income taxes............................................................ (28) (6)
--------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............................................... 38 (7)
Extraordinary item - gain on extinguishment of debt
(net of income taxes of $3 million)................................................ 5 --
--------- --------
NET INCOME (LOSS)..................................................................... $ 43 $ (7)
========= ========
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item.............................................. $ .19 $ (.04)
Extraordinary item - gain on extinguishment of debt (net of income taxes)............ .02 --
--------- --------
NET INCOME (LOSS) PER COMMON SHARE................................................... $ .21 $ (.04)
========= ========
See Notes to Condensed Consolidated Financial Statements.
- 5 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-six weeks ended September 12, 1997 and September 6, 1996
(unaudited, in millions)
1997 1996
-------- ---------
OPERATING ACTIVITIES
Income (loss) before extraordinary items............................................... $ 38 $ (7)
Adjustments to reconcile to cash from continuing operations:
Depreciation and amortization...................................................... 158 108
Income taxes....................................................................... -- (36)
Equity in (earnings) losses of affiliates.......................................... (3) (2)
Changes in operating accounts...................................................... 78 19
Other.............................................................................. 42 30
-------- ---------
Cash from continuing operations.................................................... 313 112
Cash used in discontinued operations............................................... -- (4)
-------- ---------
Cash from operations............................................................... 313 108
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales of assets.......................................................... 35 362
Less noncash proceeds.............................................................. -- (33)
-------- ---------
Cash received from sales of assets .................................................... 35 329
Acquisitions........................................................................... (441) (283)
Capital expenditures:
Renewals and replacements.......................................................... (86) (55)
Other.............................................................................. (22) (46)
Note receivable collections............................................................ 5 7
Affiliate collections, net............................................................. -- 6
Other ................................................................................. 12 (37)
-------- ---------
Cash used in investing activities.................................................. (497) (79)
-------- ---------
FINANCING ACTIVITIES
Issuances of debt...................................................................... 682 37
Issuances of common stock.............................................................. 4 407
Scheduled principal repayments......................................................... (77) (18)
Debt prepayments ...................................................................... (241) (37)
Other ................................................................................. 23 28
-------- ---------
Cash from financing activities..................................................... 391 417
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS.................................................. $ 207 $ 446
======== =========
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of
certain hotel properties......................................................... $ 585 $ 449
======== =========
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 September 12,
1997 and the results of operations for the twelve and thirty-six weeks
ended September 12, 1997 and September 6, 1996 and cash flows for the
thirty-six weeks ended September 12, 1997 and September 6, 1996. Interim
results are not necessarily indicative of fiscal year performance because
of the impact of seasonal and short-term variations.
2. 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 third quarter 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 and senior living communities, 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 and senior living communities' 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 Thirty-six Weeks Ended
-------------------------- ---------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
--------- --------- --------- ---------
(in millions)
Sales
Rooms.............................................. $ 415 $ 309 $ 1,246 $ 839
Food & Beverage.................................... 154 107 500 316
Other.............................................. 40 29 120 81
--------- --------- --------- ---------
Total Hotel Sales............................... 609 445 1,866 1,236
--------- --------- --------- ---------
Department Costs
Rooms................................................ 98 74 285 202
Food & Beverage...................................... 126 90 381 252
Other................................................ 23 13 63 41
--------- --------- --------- ---------
Total Department Costs.......................... 247 177 729 495
--------- --------- --------- ---------
Department Profit.................................... 362 268 1,137 741
Other Deductions..................................... 138 104 401 286
--------- --------- --------- ---------
House Profit.................................... $ 224 $ 164 $ 736 $ 455
========= ========= ========= =========
- 7 -
House profit generated by the Company's senior living communities for 1997
consists of (in millions):
Senior Living Communities Sales.................................. $ 47
Department Costs................................................. 31
--------
House Profit................................................. $ 16
========
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 thirty-six weeks ended September 12, 1997
and September 6, 1996. The weighted average shares were 203.1 million and
194.8 million for the twelve weeks ended September 12, 1997 and September
6, 1996, respectively, and 202.8 million and 183.1 million for the
thirty-six weeks ended, respectively.
5. As of September 12, 1997, the Company had minority interests in 23
affiliates that own an aggregate of 244 properties, 24 of which are
full-service properties, managed by Marriott International, Inc. The
Company's equity in earnings of affiliates was $3 million and $2 million
for the thirty-six weeks ended, respectively. For the twelve weeks ended
September 12, 1997 and September 6, 1996, the Company's equity in earnings
of affiliates was not significant.
Combined summarized operating results reported by affiliates follows:
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------- ---------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
--------- --------- --------- ---------
(in millions)
Revenues.............................................. $ 144 $ 170 $ 447 $ 541
Operating expenses:
Cash charges (including interest).................. (93) (112) (278) (335)
Depreciation and other non-cash charges............ (45) (55) (140) (171)
--------- --------- --------- ---------
Income before extraordinary items..................... 6 3 29 35
Extraordinary items................................... -- -- 12 --
--------- --------- --------- ---------
Net income......................................... $ 6 $ 3 $ 41 $ 35
========= ========= ========= =========
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.
On September 10, 1997 the Company acquired a controlling interest in the
Chesapeake Hotel Limited Partnership ("CHLP") for approximately $35
million, including the assumption of $4 million in mortgage and other debt.
CHLP owns six hotels: the 588-room Key Bridge Marriott, the 681-room
Chicago Marriott O'Hare, the 430-room Boston Marriott Newton, the 595-room
Denver Marriott Southeast, the 479-room Minnesota Airport Marriott and the
281-room Saddle Brook Marriott. Combined with its general partner and
existing limited partnership positions, the Company now owns, through
affiliates, 99.9% of this partnership. Prior to the purchase of CHLP, the
Company held, through a wholly-owned subsidiary, non-recourse mortgages
- 8 -
secured by the properties with a principal balance of approximately $137
million at September 10, 1997. The notes receivable have been eliminated in
the consolidation of CHLP as of September 12, 1997.
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. The Company also acquired a
controlling interest in a newly-formed partnership that acquired the
380-room Manhattan Beach Radisson Plaza in Manhattan Beach, California for
approximately $38 million. The hotel was immediately converted to the
Marriott brand. In addition, the Company acquired the remaining 17%
interest in the 250-suite Newport Beach Marriott Suites in Newport Beach,
California for approximately $4 million. The Company purchased the initial
83% interest in the hotel for approximately $18 million in August 1996.
Also, during the third quarter, the Company sold the Sheraton Elk Grove
Suites for net cash proceeds of approximately $16 million.
During the fourth quarter of 1997, the Company acquired a controlling
interest in a partnership which acquired the 299-room Ontario Airport
Marriott Hotel in Ontario, California for approximately $24 million.
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. The $270 million of debt is comprised
of secured debt of approximately $198 million and unsecured debt of
approximately $72 million ($60 million of which was provided by Marriott
International). The properties will continue to be managed by Marriott
International. In addition, the Company plans to add approximately 1,060
units to these communities for approximately $107 million through an
expansion plan which will be completed by January 1999. Through the third
quarter of 1997, approximately $44 million of the expansion plan had been
completed (including $33 million of debt financing provided 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
- 9 -
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 was originally secured by six hotel properties contributed
to Capital Resources, with a carrying value of approximately $453 million
as of September 12, 1997, and is guaranteed by the Company. As a result of
this transaction, the Company terminated its line of credit with Marriott
International. As of September 12, 1997, there were no outstanding
borrowings on the Line of Credit.
During the fourth quarter of 1997, the Company borrowed approximately $22
million under the Line of Credit for the acquisition of the Ontario Airport
Marriott, as discussed in Note 6.
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. In October 1997, the Company reached a settlement in a lawsuit against
Trinity Industries and others for claims related to construction on the New
York Marriott Marquis Hotel. In settlement of the lawsuit, the Company and
its affiliate are expected to receive a cash settlement of approximately
$70 million before the end of the fourth quarter of 1997.
13. 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,
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 thirty-six
weeks ended September 12, 1997 and September 6, 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 primarily represent house profit from the Company's hotel properties
and senior living communities, net gains (losses) on property transactions and
equity in earnings (losses) of affiliates. Revenues increased $79 million, or
47%, to $246 million for the third quarter of 1997 from $167 million for the
third quarter of 1996. Year-to-date revenues rose $304 million, or 66%, to $768
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 15
full-service hotel properties through the third quarter of 1997 (six of
which were added at the end of the 1997 third quarter);
* the acquisition of 29 senior living communities at the beginning of the
1997 third quarter; and
* the 1996 sale and leaseback of 16 of the Company's Courtyard properties and
18 of the Company's Residence Inns.
Revenues. Hotel revenues increased $60 million, or 37%, to $224 million in the
third quarter of 1997 and $281 million, or 62%, to $736 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 acquisition of, or purchase of controlling interests in, 38
full-service properties added in 1996 and through the third quarter of 1997 (six
of which were added at the end of the 1997 third quarter).
Hotel sales (gross hotel sales, including room sales, food and beverage sales,
and other ancillary sales such as telephone sales) increased $164 million, or
37%, to $609 million in the third quarter of 1997 and $630 million, or 51%, to
nearly $1.9 billion year-to-date, reflecting the REVPAR increases for comparable
units and revenues from properties added in 1996 and 1997. Improved results for
the Company's full-service hotels were driven by an increase in REVPAR for
comparable units of 9% to $105.03 for the 1997 third quarter and 13% to $106.35
year-to-date. On a comparable basis for the Company's full-service properties,
average room rates increased 7% for the 1997 third quarter and 10% year-to-date,
while average occupancy increased one percentage point for the 1997 third
quarter and two percentage points year-to-date. The Company's year-to-date 1997
- 11 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
results were positively impacted by year-end and the milder winter weather in
1997. Results were further enhanced by a one percentage point increase in the
house profit margin for the 1997 third quarter and a two percentage point
increase in the house profit margin year-to-date because the Company's hotels
are obtaining better operating leverage at the hotel department operating level
as a result of increases in room rates. Comparisons of the Company's 1997 third
quarter to the 1996 third quarter were impacted by the effect of the 1996 Summer
Olympics in Atlanta. Excluding the comparable Atlanta properties, REVPAR
increased 10% for the 1997 third quarter.
The Company continues its strategy of focusing on the full-service segment of
the lodging industry. As such, the Company's leased limited-service properties
represented 14% of total revenues through the third quarter of 1997 as compared
to 20% through the third quarter of 1996. The limited-service properties
contributed $12 million, or 4%, of total year-to-date operating profit in 1997
and $18 million, or 12%, in 1996. The Company does not expect the leased
limited-service properties to contribute a significant portion of operating
profit in the future.
Revenues generated from the Company's 1997 third quarter acquisition of 29
senior living communities totalled $16 million for the 1997 third quarter
resulting in a 34% house profit margin. The combined senior living communities'
third quarter 1997 revenue per available unit was $76.24. Third quarter revenues
were favorably impacted by a 4% increase in total available units due to third
quarter expansion units. Total senior living communities' sales totalled $47
million for the third quarter of 1997.
Operating Costs and Expenses. Operating costs and expenses principally consist
of depreciation and amortization, management fees, real and personal property
taxes, ground, building and equipment rent, insurance and certain other costs.
Operating costs and expenses increased $39 million to $157 million in the third
quarter of 1997 from $118 million in the third quarter of 1996, primarily
representing increased hotel operating costs, including depreciation and
management fees, and the senior living communities' operating costs.
Year-to-date operating costs and expenses increased $149 million to $464
million.
Hotel operating costs and expenses increased $32 million to $142 million for the
third quarter of 1997 and $142 million to $433 million year-to-date, primarily
due to the addition of 38 full-service properties during 1996 and through the
third 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
63% and 59% of hotel revenues in the third quarter of 1997 and year-to- date
1997, respectively, from 67% and 64% of hotel revenues in the third 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.
The Company's senior living communities' operating cost and expenses were $9
million for the third quarter of 1997. Senior living communities' operating
expenses, as a percentage of the communities' revenues, were 56% for the third
quarter of 1997.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $40 million,
or 82%, to $89 million for the third quarter of 1997 and $155 million, or 104%,
to $304 million year-to-date.
- 12 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Hotel operating profit increased $28 million, or 52%, to $82 million, or 37% of
hotel revenues, for the third quarter of 1997 from $54 million, or 33% of hotel
revenues, for the third quarter of 1996. Year-to- date hotel operating profit
increased $139 million, or 85%, to $303 million, or 41% of hotel revenues, for
1997 compared to $164 million, or 36% 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 in the Northeast, Mid-Atlantic and
Pacific coast regions benefitted from the upscale full-service room supply and
demand imbalance. Hotels in New York City and Philadelphia performed
particularly well, along with properties in San Francisco/Silicon Valley and in
Southern California. For the quarter, the Company's suburban Atlanta properties
(four properties totalling 1,393 rooms) generally reported decreased results due
to higher activity in 1996 related to the Summer Olympics. In addition, the San
Diego Marriott Hotel and Marina reported decreased results due to the Republican
National Convention in August 1996.
The Company's senior living communities generated $7 million of operating
profit, which represents 44% of senior living communities' revenues for the 1997
third quarter.
Corporate Expenses. Corporate expenses increased $1 million to $9 million for
the 1997 third quarter and $2 million to $27 million year-to-date. As a
percentage of revenues, corporate expenses decreased to 4% of revenues in the
third quarter of 1997 and year-to-date from 5% in the third quarter of 1996 and
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 43% to $76 million in the third
quarter of 1997 and 30% to $198 million year-to-date, primarily due to
additional debt of approximately $980 million incurred in connection with the
1996 and 1997 full-service hotel additions, approximately $300 million incurred
in connection with the acquisition of the Forum Group, Inc. in the third quarter
of 1997, as well as the issuance of $600 million of 8 7/8% senior notes (the
"New Senior Notes") in July 1997.
Dividends on Convertible Preferred Securities of Subsidiary Trust. The Dividends
on Convertible Preferred Securities reflect the dividends through the third
quarter 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 increased $2 million to $15 million for the
third quarter of 1997. On a year-to-date basis, interest income increased $8
million to $37 million, primarily reflecting the interest income on the
available proceeds generated by the December 1996 offering of Convertible
Preferred Securities and the proceeds generated by the issuance of the New
Senior Notes.
Income (Loss) before Extraordinary Item. Income before extraordinary item for
the third quarter of 1997 was $6 million, compared to a $2 million loss for the
third quarter of 1996. The 1997 year-to-date income before extraordinary items
was $38 million compared to a $7 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.
- 13 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net Income (Loss). The Company's net income for the third quarter of 1997 was $6
million ($.03 per share), compared to a $2 million ($.01 per share) net loss for
the third quarter of 1996. Net income for year-to-date 1997 was $43 million
($.21 per share) compared to a $7 million ($.04 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 $50
million, or 50%, to $151 million in the 1997 third quarter and $196 million, or
69%, to $479 million year-to-date. Hotel EBITDA increased $44 million, or 46%,
to $139 million in the third quarter of 1997 and $189 million, or 68%, to $466
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 12% and 19%, respectively, on a
REVPAR increase of 9% and 13%, respectively, for the 1997 third quarter and
year-to-date. Comparisons of the Company's 1997 third quarter to the 1996 third
quarter were substantially impacted by the effect of the 1996 Summer Olympics in
Atlanta. Excluding results from the comparable Atlanta properties, comparable
full-service hotel EBITDA increased 16% on a REVPAR increase of 10% for the 1997
third quarter. The Company's senior living communities contributed $11 million
of EBITDA for both the 1997 third quarter and year-to-date.
The following is a reconciliation of EBITDA to the Company's income (loss)
before extraordinary item:
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------- ---------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
------------ ----------- ------------ -----------
(in millions)
EBITDA...................................................... $ 151 $ 101 $ 479 $ 283
Interest expense............................................ (76) (53) (198) (152)
Dividends on Convertible Preferred Securities............... (9) -- (26) --
Depreciation and amortization............................... (56) (41) (158) (108)
Income taxes................................................ (4) (3) (28) (6)
Loss on dispositions of assets and other non-cash
charges, net............................................... -- (6) (31) (24)
---------- --------- --------- --------
Income (loss) before extraordinary item................. $ 6 $ (2) $ 38 $ (7)
========== ========= ========= ========
The Company's interest coverage, defined as EBITDA divided by cash interest
expense, improved to 2.1 times for the 1997 third quarter from 2.0 times for the
1996 third quarter and 2.6 times for year-to-date 1997 compared to 1.9 times for
year-to-date 1996.
The Company also believes that 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) is a
meaningful disclosure that will help the investment community to better
understand the financial performance of the Company, including enabling its
shareholders and analysts to more easily compare the Company's performance to
Real Estate Investment Trusts ("REITs"). Comparative FFO increased $19 million,
or 50%, to $57 million in the third quarter of 1997 and $94 million, or 87%, to
$202 million year-to-date. The following is a reconciliation of the Company's
income (loss) before extraordinary item to Comparative FFO:
- 14 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------- ---------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
------------ ----------- ------------ -----------
(in millions)
Income (loss) before extraordinary item..................... $ 6 $ (2) $ 38 $ (7)
Depreciation and amortization............................... 57 41 158 108
Other real estate activities................................ (1) 1 1 6
Partnership adjustments..................................... (6) (2) (6) --
Deferred taxes.............................................. 1 -- 11 1
--------- -------- --------- --------
Comparative Funds From Operations.......................... $ 57 $ 38 $ 202 $ 108
========= ======== ========= ========
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 and Comparable FFO presentation.
Cash Flows and Financial Condition
- ----------------------------------
The Company reported an increase in cash and cash equivalents of $207 million
during the thirty-six weeks ended September 12, 1997. This increase is primarily
due to the issuance of the $600 million of 8 7/8% senior notes (the "New Senior
Notes") in July 1997. The Company received net proceeds of approximately $570
million. In addition, new mortgage financing of $90 million was obtained on the
Philadelphia Marriott Hotel. This increase is offset by the $219 million
prepayment of the bonds secured by the San Francisco Marriott Hotel and the
acquisition of 15 full-service hotel properties and 29 senior living communities
through the third quarter of 1997. In addition, cash from operations through the
third quarter of 1997 increased $205 million to $313 million due to improved
lodging results and the addition of the lodging properties and senior living
communities.
Cash used in investing activities was $497 million through the third quarter of
1997, while cash used in investing activities was $79 million through the third
quarter of 1996. Cash used in investing activities through the third quarter of
1997 includes capital expenditures of $108 million, primarily related to
renewals and replacements on existing properties, and $441 million for 15
full-service hotel acquisitions and 29 senior living communities. Cash used in
investing activities through the third quarter of 1996 includes net sales
proceeds of $329 million principally from the sale of 34 of the Company's
Courtyard and Residence Inn properties.
During the 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
- 15 -
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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. The Company also acquired a controlling interest in a
newly-formed partnership that acquired the 380-room Manhattan Beach Radisson
Plaza in Manhattan Beach, California for approximately $38 million. The hotel
was immediately converted to the Marriott brand. The Company acquired the
remaining 17% interest in the 250-suite Newport Beach Marriott Suites in Newport
Beach, California for approximately $4 million after purchasing the initial 83%
interest in the hotel for approximately $18 million in August 1996. In addition,
the Company acquired a controlling interest in the Chesapeake Hotel Limited
Partnership ("CHLP") for approximately $35 million, including the assumption of
$4 million in mortgage and other debt. CHLP owns six hotels, the 588-room Key
Bridge Marriott, the 681-room Chicago Marriott O'Hare, the 430-room Boston
Marriott Newton, the 595-room Denver Marriott Southeast, the 479-room Minnesota
Airport Marriott, and the 281-room Saddle Brook Marriott. Combined with its
general partner and existing limited partnership positions, the Company now
owns, through affiliates, 99.9% of this partnership. Prior to the purchase of
CHLP, the Company held, through a wholly-owned subsidiary, non-recourse
mortgages secured by the properties with a principal balance of approximately
$137 million at September 10, 1997. The notes receivable have been eliminated in
the consolidation of CHLP as of September 12, 1997.
Also during the third quarter, 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. The $270 million of debt is comprised of secured debt of approximately
$198 million and unsecured debt of approximately $72 million ($60 million of
which was provided by Marriott International). The properties will continue to
be managed by Marriott International. In addition, the Company plans to add
approximately 1,060 units to these communities for approximately $107 million
through an expansion plan which will be completed by January 1999. Through the
third quarter of 1997, approximately $44 million of the expansion plan had been
completed (including $33 million of debt financing provided by Marriott
International).
During the fourth quarter of 1997, the Company acquired a controlling interest
in a partnership which acquired the 299-room Ontario Airport Marriott Hotel in
Ontario, California for approximately $24 million.
- 16 -
Cash used in financing activities was $391 million through the third quarter of
1997, while cash from financing activities was $417 million through the third
quarter of 1996. Cash used in financing activities through the third quarter of
1997 includes the $219 million prepayment of the outstanding bonds secured by
the San Francisco Marriott Hotel, partially offset by the issuance of $600
million in New Senior Notes and the $90 million in mortgage financing obtained
on the Philadelphia Marriott Hotel. The Company also incurred financing fees of
$38 million primarily related to the New Senior Notes and Consent Solicitation
and the Line of Credit as discussed below. Cash from financing activities
through the third quarter of 1996 includes the issuance of 31.6 million shares
of common stock for net proceeds of nearly $400 million.
During the second quarter of 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 $453 million at September 12, 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. As of
September 12, 1997, there were no outstanding borrowings on the Line of Credit.
During the fourth quarter of 1997, the Company borrowed approximately $22
million under the Line of Credit for the acquisition of the Ontario Airport
Marriott Hotel.
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.
In October 1997, the Company reached a settlement in a lawsuit against Trinity
Industries and others for claims related to construction on the New York
Marriott Marquis Hotel. In settlement of the lawsuit, the Company and its
affiliate are expected to receive a cash settlement of approximately $70 million
before the end of the fourth quarter of 1997.
- 17 -
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:
o 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.
o September 2, 1997 -- Report of the announcement that the Company
acquired a controlling interest in the Manhattan Beach Radisson Plaza
in Manhattan Beach, California through a joint venture with Interstate
Hotels Company.
o September 4, 1997 -- Amendment to Current Report on Form 8-K/A dated
June 21, 1997 by filing financial statements of the Forum Group, Inc.
as partitioned for sale to Host Marriott Corporation and certain pro
forma financial information for Host Marriott Corporation.
o September 25, 1997 -- Report of the announcement that the Company
successfully completed the purchase of a majority of the limited
partnership units in the Chesapeake Hotel Limited Partnership which
owns six full-service hotel properties.
- 18 -
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
October 23, 1997 /s/ Donald D. Olinger
- ---------------- ---------------------
Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
- 19 -
EXHIBIT 11
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF EARNINGS (LOSS) PER COMMON SHARE
(in millions, except per share amounts)
Twelve Weeks Ended Thirty-six Weeks Ended
-------------------------- ---------------------------
September 12, September 6, September 12, September 6,
1997 1996 1997 1996
------------ ----------- ------------ -----------
(in millions)
Net income (loss)........................................... $ 6 $ (2) $ 43 $ (7)
========== ========= ========== =========
Primary Earnings (Loss) Per Common Share
Shares:
Weighted average number of common shares outstanding........ 203.1 194.8 202.8 183.1
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at average market *....................................... -- -- -- --
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at average market *......... -- -- -- --
---------- --------- ---------- ---------
203.1 194.8 202.8 183.1
========== ========= ========== =========
Primary Earnings (Loss) Per Common Share.................... $ .03 $ (.01) $ .21 $ (.04)
========== ========= ========== =========
Fully Diluted Earnings (Loss) Per Common Share
Shares:
Weighted average number of common shares outstanding........ 203.1 194.8 202.8 183.1
Assuming distribution of common shares granted under
comprehensive stock plan, less shares assumed purchased
at higher of average or ending market *................... -- -- -- --
Assuming distribution of common shares issuable for warrants,
less shares assumed purchased at higher of average or
ending market *........................................... -- -- -- --
---------- --------- --------- --------
203.1 194.8 202.8 183.1
========== ========= ========= ========
Fully Diluted Earnings (Loss) Per Common Share.............. $ .03 $ (.01) $ .21 $ (.04)
========== ========= ========= ========
____________
* Common equivalent shares and other potentially dilutive securities were not
material, or were antidilutive, for the twelve and thirty-six weeks ended
September 12, 1997 and September 6, 1996.