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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 15, 2001 Commission File No. 001-14625
HOST MARRIOTT CORPORATION
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Maryland 53-0085950
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(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 27, 2001
---------------------- -----------------
Common Stock, $0.01 par value 262,445,910
Purchase share rights for Series A Junior Participating Preferred Stock, $0.01 par value --
Class A Cumulative Redeemable Preferred Stock, $0.01 par value 4,160,000
Class B Cumulative Redeemable Preferred Stock, $0.01 par value 4,000,000
Class C Cumulative Redeemable Preferred Stock, $0.01 par value 5,980,000
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INDEX
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Page No.
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Part I. FINANCIAL INFORMATION (Unaudited):
Condensed Consolidated Balance Sheets-
June 15, 2001 and December 31, 2000...........................3
Condensed Consolidated Statements of Operations-
Twelve Weeks and Twenty-four Weeks Ended
June 15, 2001 and June 16, 2000...............................4
Condensed Consolidated Statements of Cash Flows-
Twenty-four Weeks Ended June 15, 2001 and June 16, 2000.......6
Notes to Condensed Consolidated Financial Statements.............7
Management's Discussion and Analysis of Results of
Operations and Financial Condition...........................14
Quantitative and Qualitative Disclosures about Market Risk......24
PART II. OTHER INFORMATION AND SIGNATURE.................................25
-2-
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 15, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
------
Property and equipment, net ....................................................... $ 7,206 $ 7,110
Notes and other receivables (including amounts due from affiliates of
$9 million and $164 million, respectively) ..................................... 56 211
Due from Manager .................................................................. 171 --
Rent receivable ................................................................... 8 65
Investments in affiliates ......................................................... 145 128
Other assets ...................................................................... 437 444
Restricted cash ................................................................... 130 125
Cash and cash equivalents ......................................................... 217 313
------- -------
$ 8,370 $ 8,396
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes ................................................................... $ 2,790 $ 2,790
Mortgage debt .................................................................. 2,313 2,275
Other .......................................................................... 257 257
------- -------
5,360 5,322
Accounts payable and accrued expenses ............................................. 181 381
Other liabilities ................................................................. 370 312
------- -------
Total liabilities ............................................................ 5,911 6,015
------- -------
Minority interest ................................................................. 254 485
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary whose sole assets are the convertible
subordinated debentures due 2026 ("Convertible Preferred Securities") .......... 475 475
Shareholders' equity
Cumulative redeemable preferred stock (liquidation preference $354 million),
50 million shares authorized; 14.2 million shares issued and outstanding ....... 339 196
Common stock, 750 million shares authorized; 262.3 million shares and
221.3 million shares issued and outstanding, respectively ...................... 3 2
Additional paid-in capital ........................................................ 2,057 1,824
Accumulated other comprehensive loss .............................................. 1 (1)
Retained deficit .................................................................. (670) (600)
------- -------
Total shareholders' equity ................................................... 1,730 1,421
------- -------
$ 8,370 $ 8,396
======= =======
See Notes to Condensed Consolidated Statements
-3-
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended June 15, 2001 and June 16, 2000
(unaudited, in millions, except per share amounts)
2001 2000
------ ------
REVENUES
Hotel sales
Rooms .......................................... $ 589 $ --
Food and beverage .............................. 295 --
Other .......................................... 73 --
----- ------
Total hotel sales ........................... 957 --
Rental income .................................... 31 186
----- ------
Total revenues .............................. 988 186
----- ------
OPERATING COSTS AND EXPENSES
Hotel operating expenses
Rooms .......................................... 135 --
Food and beverage .............................. 208 --
Hotel departmental costs and deductions ........ 232 --
Management fees and other ...................... 54 --
Other property-level expenses .................. 67 63
Depreciation and amortization .................. 102 75
----- ------
Total hotel operating costs and expenses .... 798 138
Corporate expenses ............................. 9 10
Lease repurchase expense ....................... 5 --
Other expenses ................................. 6 6
----- ------
OPERATING PROFIT ..................................... 170 32
Minority interest (expense) benefit .............. (11) 11
Interest income .................................. 12 8
Interest expense ................................. (104) (97)
Net gains on property transactions ............... -- 2
Equity in earnings of affiliates ................. 2 3
Dividends on Convertible Preferred Securities .... (8) (7)
----- ------
INCOME (LOSS) BEFORE INCOME TAXES .................... 61 (48)
Provision for income taxes ........................... (12) (2)
----- ------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM .............. 49 (50)
Extraordinary loss ................................... -- (3)
----- ------
NET INCOME (LOSS) .................................... $ 49 $ (53)
===== ======
Less: Dividends on Preferred Stock ................... (9) (5)
----- ------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ... $ 40 $ (58)
===== ======
BASIC EARNINGS (LOSS) PER COMMON SHARE ............... $ .17 $(0.26)
===== ======
DILUTED EARNINGS (LOSS) PER COMMON SHARE ............. $ .16 $(0.26)
===== ======
See Notes to Condensed Consolidated Statements
-4-
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twenty-four Weeks Ended June 15, 2001 and June 16, 2000
(unaudited, in millions, except per share amounts)
2001 2000
------- --------
REVENUES
Hotel sales
Rooms ........................................................................ $ 1,110 $ --
Food and beverage ............................................................ 548 --
Other ........................................................................ 137 --
------- -------
Total hotel sales ......................................................... 1,795 --
Rental income .................................................................. 62 361
------- -------
Total revenues ............................................................ 1,857 361
------- -------
OPERATING COSTS AND EXPENSES
Hotel operating expenses
Rooms ........................................................................ 256 --
Food and beverage ............................................................ 399 --
Hotel departmental costs and deductions ...................................... 440 --
Management fees and other .................................................... 106 --
Other property-level expenses ................................................ 128 122
Depreciation and amortization ................................................ 179 149
------- -------
Total hotel operating costs and expenses .................................. 1,508 271
Corporate expenses ........................................................... 17 20
Lease repurchase expense ..................................................... 5 --
Other expenses ............................................................... 8 12
------- -------
OPERATING PROFIT ................................................................... 319 58
Minority interest (expense) benefit ............................................ (26) 22
Interest income ................................................................ 20 17
Interest expense ............................................................... (207) (193)
Net gains on property transactions ............................................. 1 3
Equity in earnings of affiliates ............................................... 4 3
Dividends on Convertible Preferred Securities .................................. (15) (14)
------- -------
INCOME (LOSS) BEFORE INCOME TAXES .................................................. 96 (104)
Provision for income taxes ......................................................... (15) (3)
------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............................................ 81 (107)
Extraordinary loss ................................................................. -- (3)
------- -------
$ 81 $ (110)
======= =======
Less: Dividends on Preferred Stock ................................................. (14) (10)
Add: Gain on repurchase of Convertible Preferred Securities, net of income tax
expense of $1 million ....................................................... -- 4
------- -------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS ................................. $ 67 $ (116)
======= =======
BASIC EARNINGS (LOSS) PER COMMON SHARE ............................................. $ .28 $ (0.53)
======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE ........................................... $ .28 $ (0.53)
======= =======
See Notes to Condensed Consolidated Statements
-5-
HOST MARRIOTT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty-four Weeks Ended June 15, 2001 and June 16, 2000
(unaudited, in millions)
2001 2000
------ ------
OPERATING ACTIVITIES
Net income (loss) from operations before extraordinary item ........... $ 81 $(107)
Adjustments to reconcile to cash from operations:
Depreciation and amortization ..................................... 179 149
Income taxes ...................................................... (11) (20)
Deferred contingent rental income ................................. 15 291
Net gains on property transactions ................................ (1) (3)
Equity in earnings of affiliates .................................. (4) (3)
Purchase of Crestline leases ...................................... (204) --
Changes in other operating accounts ............................... 9 (40)
Other ............................................................. (15) (46)
----- -----
Cash provided by operations .................................. 49 221
----- -----
INVESTING ACTIVITIES
Acquisitions .......................................................... (2) (40)
Capital expenditures:
Capital expenditures for renewals and replacements ................ (102) (106)
New investment capital expenditures ............................... (30) (59)
Other investments ................................................. (12) (20)
Note receivable collections, net ...................................... 10 3
----- -----
Cash used in investing activities ............................ (136) (222)
----- -----
FINANCING ACTIVITIES
Issuances of debt, net ................................................ 121 290
Scheduled principal repayments ........................................ (23) (18)
Debt prepayments ...................................................... (115) (245)
Issuances of common stock ............................................. 2 2
Issuances of cumulative redeemable preferred stock, net ............... 144 --
Repurchases of common stock ........................................... -- (44)
Dividends ............................................................. (130) (102)
Repurchases of Convertible Preferred Securities ....................... -- (15)
Repurchases and redemptions of OP Units ............................... -- (3)
Other ................................................................. (8) 14
----- -----
Cash used in financing activities ............................ (9) (121)
----- -----
DECREASE IN CASH AND CASH EQUIVALENTS ................................. $ (96) $(122)
===== =====
Supplemental schedule of noncash investing and financing activities:
During the twenty-four weeks ended June 15, 2001 and June 16, 2000,
respectively, approximately 41,433,000 shares and 264,000 shares of common stock
were issued upon the conversion of outside OP Units valued at $540.8 million and
$2.5 million, respectively.
See Notes to Condensed Consolidated Statements
-6-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization
Host Marriott Corporation ("Host REIT" or the "Company"), a Maryland
corporation operating through an umbrella partnership structure, is
primarily the owner of hotel properties. Host REIT operates as a
self-managed and self-administered real estate investment trust ("REIT")
with its operations conducted through an operating partnership, Host
Marriott, L.P. (the "Operating Partnership" or "Host LP"), and its
subsidiaries. Host REIT has elected, effective January 1, 1999, to be
treated as a REIT for federal income tax purposes, and is the sole general
partner of the Operating Partnership. As of June 15, 2001, Host REIT owned
approximately 92% of the Operating Partnership.
The Work Incentives Improvement Act of 1999 ("REIT Modernization Act")
amended the tax laws to permit REITs, effective January 1, 2001, to lease
hotels to a subsidiary that qualifies as a taxable REIT subsidiary ("TRS").
Accordingly, a wholly owned subsidiary of Host LP, which has elected to be
treated as a TRS for federal income tax purposes, acquired certain
subsidiaries (the "Crestline Lessee Entities") of Crestline Capital
Corporation ("Crestline") owning the leasehold interests with respect to
116 of the Company's full-service hotels effective January 1, 2001. As a
result of the acquisition, the TRS replaced Crestline as the lessee under
the applicable leases, and the Company's operating results reflect
property-level revenues and expenses rather than rental income from lessees
with respect to those 116 full-service properties.
2. Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of
the Company and its subsidiaries have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements presented in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information
presented not misleading. However, the unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 2000.
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 15, 2001,
the results of its operations for the twelve and twenty-four weeks ended
June 15, 2001, and June 16, 2000, and cash flows for the twenty-four weeks
ended June 15, 2001, and June 16, 2000. Interim results are not necessarily
indicative of fiscal year performance because of the impact of seasonal and
short-term variations.
Certain reclassifications were made to the prior year financial statements
to conform to the current presentation.
The Company consolidates entities in which it owns a controlling financial
interest (generally when it owns over 50% of the voting shares of another
company) and consolidates partnership investments when it owns a general
partnership interest unless minority shareholders or other partners
participate in or have the right to block management decisions.
As previously discussed, the Company, through its wholly owned TRS,
acquired the Crestline Lessee Entities with respect to 116 of the Company's
full-service properties effective January 1,
-7-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2001. As a result of this transaction, the Company no longer leases the
properties to a third party, and therefore, will not have any rental income
with respect to the 116 properties. Therefore, the Company's consolidated
results of operations with respect to those 116 properties reflect, from
the effective date of the transaction, property-level revenues and expenses
rather than rental income from lessees and, therefore, are not comparable
to 2000 results.
Subsequent to the end of the quarter, the Company will begin recording the
property level results for four additional properties whose reults were
previously included in rental income. The Company acquired the lessees
owning the leasehold interest in four hotels, effectively terminating the
leases for financial reporting purposes for these properties. Rental income
for these four hotels was $12 million and $23 million for the twelve and
twenty-four weeks ended June 15, 2001. See footnote 12 for a detailed
discussion of the acquisitions. As a result, beginning with the third
quarter the Company will report property level results for a total of 123
properties, which includes properties acquired in the acquisition of the
non-controlled subsidiaries discussed in footnote 6.
The rent due under the remaining leases is the greater of base rent or
percentage rent, as defined. Percentage rent applicable to room, food and
beverage and other types of hotel revenue varies by lease and is calculated
by multiplying fixed percentages by the total amounts of such revenues over
specified threshold amounts. The Company recognizes percentage rent when
all contingencies have been met, that is, when annual thresholds for
percentage rent have been met or exceeded. Percentage rent received
pursuant to the leases but not recognized is included on the balance sheet
as deferred rent. Contingent rental revenue of $8 million and $168 million,
respectively, for the twelve weeks ended June 15, 2001 and June 16, 2000,
and $15 million and $291 million, respectively, for the twenty-four weeks
ended June 15, 2001 and June 16, 2000, have been deferred. Revenue from
operations of the Company's hotels not leased to third parties is
recognized when the services are provided.
3. Earnings Per Share
Basic earnings per common share is computed by dividing net income
available to common shareholders by the weighted average number of shares
of common stock outstanding. Diluted earnings per share is computed by
dividing net income available to common shareholders as adjusted for
potentially dilutive securities, by the weighted average number of shares
of common stock outstanding plus other potentially dilutive securities.
Dilutive securities may include shares granted under comprehensive stock
plans and the Convertible Preferred Securities. Dilutive securities may
also include those common and preferred Operating Partnership Units ("OP
Units") issuable or outstanding that are held by minority partners which
are assumed to be converted. No effect is shown for securities if they are
anti-dilutive.
-8-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Twelve Weeks Ended
------------------------------------------------------------------------------
June 15, 2001 June 16, 2000
--------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- --------------------------------------
Net income (loss) ................................. $ 49 241.0 $ .20 $ (53) 220.1 $ (.24)
Dividends on preferred stock ..................... (9) -- (.03) (5) -- (.02)
----- ------ ------- ----- ------ ------
Basic income (loss) available to common
shareholders per share ........................... 40 241.0 .17 (58) 220.1 (.26)
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price ........................... -- 3.8 -- -- -- --
Assuming conversion of minority OP Units
outstanding .................................... 7 43.4 -- (16) 63.5 --
Assuming conversion of minority OP Units
issuable ....................................... 1 9.3 (.01) -- -- --
Assuming conversion of preferred
OP Units ....................................... -- -- -- -- .6 --
----- ------ ------- ----- ------ ------
Diluted income (loss) per share ................... $ 48 297.5 $ .16 $ (74) 284.2 $ (.26)
===== ====== ======= ===== ====== ======
Twenty-four Weeks Ended
------------------------------------------------------------------------------
June 15, 2001 June 16, 2000
--------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- --------------------------------------
Net income (loss) ................................. $ 81 235.1 $ .34 $(110) 220.7 $ (.50)
Dividends on preferred stock ..................... (14) -- (.06) (10) -- (.05)
Gain on repurchase of Convertible
Preferred Securities ........................... -- -- -- 4 -- .02
----- ------ ------- ----- ------ ------
Basic income (loss) available to common
shareholders per share ........................... 67 235.1 .28 (116) 220.7 (.53)
Assuming distribution of common shares
granted under the comprehensive stock
plan, less shares assumed purchased at
average market price ........................... -- 4.2 -- -- -- --
Assuming conversion of minority OP Units
outstanding .................................... 14 49.5 -- (34) 63.7 --
Assuming conversion of preferred
OP Units ....................................... -- -- -- -- .6 --
----- ------ ------- ----- ------ ------
Diluted income (loss) per share ................... $ 81 288.8 $ .28 $(150) 285.0 $ (.53)
===== ====== ======= ===== ====== ======
4. OP Unit Conversions
On May 29, May 7 and February 7, 2001, Blackstone and affiliates
("Blackstone") converted 18.2 million, 10.0 million and 12.5 million OP
Units, respectively, to common shares and immediately sold them to an
underwriter for sale on the open market. These units were obtained in
connection with the purchase of the Blackstone luxury hotel portfolio in
1998. As a result of this transaction, Blackstone now owns approximately 1%
of the outstanding OP Units of the Operating Partnership, and the Company
increased its ownership in the Operating Partnership to approximately 92%
of the outstanding OP Units. The Company received no proceeds as a result
of these transactions.
-9-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Debt and Equity Issuances and Refinancing
During the first quarter of 2001, the Company borrowed $115 million under
the revolver portion of the Bank Credit Facility to partially fund the
acquisition of the Crestline Lessee Entities and for general corporate
purposes. The Company repaid the $115 million outstanding balance under the
revolver portion of the Bank Credit Facility during the second quarter of
2001.
On March 27, 2001, we sold approximately 6.0 million shares of 10% Class C
preferred stock ("Class C Preferred Stock") with a $0.01 par value for net
proceeds of $144 million. Holders of the Class C Preferred Stock are
entitled to receive cumulative cash dividends at a rate of 10% per annum of
the $25 per share liquidation preference. Dividends are payable quarterly
in arrears commencing April 15, 2001, on which date a pro rata dividend of
$0.03 per share was distributed. Beginning March 27, 2006, we have the
option to redeem the Class C Preferred Stock for $25.00 per share, plus
accrued and unpaid dividends to the date of redemption.
During the third quarter of 2001, the Company borrowed $60 million under
the revolver portion of the term loan to fund the purchase of minority
interests in seven hotels. As of June 28, 2001, $150 million is outstanding
under the term loan portion of the Bank Credit Facility, and the available
capacity under the revolver is $565 million.
6. Acquisitions and Developments
Effective March 24, 2001, the Company purchased the 5% voting interests in
each of Rockledge Hotel Properties, Inc. ("Rockledge") and Fernwood Hotel
Assets, Inc. ("Fernwood") that were previously held by the Host Marriott
Statutory Employee/Charitable Trust for approximately $2 million. Prior to
this acquisition, the Company held a 95% non-voting interest. As a result
of this acquisition, the Company holds 100% of the voting and non-voting
interests in Rockledge and Fernwood, and its consolidated results of
operations will reflect the revenues and expenses generated by the two
taxable corporations, and its consolidated balance sheets will include the
various assets. The assets consist of three additional full service hotels;
the St. Louis Marriott Pavilion Downtown in St. Louis, Missouri, and the JW
Marriott Hotel Mexico City and Mexico City Airport Marriott Hotel, both
located in Mexico City, Mexico. The Company's acquisition, including
certain joint venture interests, held by the two taxable corporations,
totaled approximately $356 million in assets and $262 million in
liabilities, including $54 million of third party debt ($26 million of
which matures in 2001) as of March 24, 2001.
On April 1, 2001, a 50,000 square foot spa at The Ritz-Carlton, Naples was
placed in service at an approximate development cost of $23 million.
During the second quarter, the carrying value of three properties was
adjusted to reflect a change of status from held for use to held for sale
assets and is recorded in property and equipment. Accordingly, the Company
recorded a $13 million charge to depreciation based on a signed purchase
and sale agreement to reflect the net realizable value of the assets. For
these assets, the related revenue for the twenty-four weeks ended June 15,
2001, and June 16, 2000 was $19.9 million and $2.2 million, respectively
and the related expense was $30.7 million and $3.5 million, respectively.
The carrying value of the assets was $53.8 million as of June 15, 2001.
7. Dividends and Distributions Payable
On June 18, 2001, the Board of Directors declared quarterly cash dividends
of $.26 and $.625 per share of common stock and preferred stock,
respectively. The second quarter dividends were paid on July 13, 2001 to
shareholders of record on June 29, 2001.
8. Geographic Information
As of June 15, 2001, the Company's foreign operations consisted of four
hotel properties located in Canada and two properties located in Mexico.
There were no intercompany sales between the properties and the Company.
The following table presents revenues for each of the geographical
-10-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
areas in which the Company owns hotels (in millions). As a result of the
acquisition of the Crestline Lessee Entities, effective January 1, 2001 the
Company's consolidated results of operations for the twelve and twenty-
four weeks ended June 15, 2001 primarily represent property level revenues
and expenses, whereas the results for the twelve and twenty-four weeks
ended June 16, 2000 primarily represent rental income.
Twelve Weeks Ended Twenty-four Weeks Ended
-------------------------------- --------------------------------
June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
------------- ------------- ------------- -------------
United States........................ $ 956 $ 184 $ 1,810 $ 356
International........................ 32 2 47 5
------------- ------------- ------------- -------------
Total............................ $ 988 $ 186 $ 1,857 $ 361
============= ============= ============= =============
9. Comprehensive Income
The Company's other comprehensive income consists of unrealized gains and
losses on foreign currency translation adjustments and the right to receive
cash from Host Marriott Services Corporation subsequent to the exercise of
the options held by certain former and current employees of Marriott
International, pursuant to the distribution agreement between the Company
and Host Marriott Services Corporation. For the twelve weeks and
twenty-four weeks ended June 15, 2001, the comprehensive income totaled $54
million and $83 million, respectively. The comprehensive loss was $51
million and $109 million for the twelve and twenty-four weeks ended June
16, 2000, respectively. As of June 15, 2001, the Company's accumulated
other comprehensive income was $1 million compared to an accumulated other
comprehensive loss of $1 million as of December 31, 2000.
10. Summarized Lease Pool Financial Statements
During 2000, almost all the properties of the Company and its subsidiaries
were leased to subsidiaries of Crestline. In conjunction with these leases,
Crestline and certain of its subsidiaries entered into limited guarantees
of the lease obligations of each lessee. The full-service hotel leases were
grouped into four lease pools, with Crestline's guarantee limited to the
greater of 10% of the aggregate rent payable for the preceding year or 10%
of the aggregate rent payable under all leases in the respective pool.
Additionally, the lessee's obligation under each lease agreement was
guaranteed by all other lessees in the respective lease pool. As a result,
the Company believed that the operating results of each full-service lease
pool may have been material to the Company's financial statements for the
year ended December 31, 2000.
Effective January 1, 2001, a wholly owned TRS of Host LP replaced Crestline
as the lessee with respect to 116 of the Company's full-service hotels, and
the third party credit concentration ceased to exist.
Financial information of Crestline may be found in its quarterly and annual
filings with the Securities and Exchange Commission. Further information
regarding these leases and Crestline's limited guarantees may be found in
the Company's annual report on Form 10-K for the fiscal year ended December
31, 2000. The results of operations and summarized balance sheet data of
the lease pools in which the Company's hotels were organized during 2000
are as follows (in millions):
-11-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Twelve Weeks Ended June 16, 2000
--------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Hotel Sales
Rooms..................................... $ 152 $ 170 $ 147 $ 159 $ 628
Food and beverage......................... 69 87 72 91 319
Other..................................... 16 17 24 22 79
------- ------- ------- ------- -------
Total hotel sales.................... 237 274 243 272 1,026
Operating Costs and Expenses
Rooms..................................... 35 39 34 34 142
Food and beverage......................... 52 61 51 62 226
Other..................................... 59 58 59 61 237
Management fees........................... 13 20 12 20 65
Lease expense............................. 75 91 83 92 341
Corporate and Interest Expenses........... -- -- -- 1 1
------- ------- ------- ------- -------
Total operating expenses............. 234 269 239 270 1,012
------- ------- ------- ------- -------
Operating Profit............................... 3 5 4 2 14
Income taxes.............................. (1) (2) (2) (1) (6)
------- ------- ------- ------- -------
Net Income........................... $ 2 $ 3 $ 2 $ 1 $ 8
======= ======= ======= ======= =======
Twenty-four Weeks Ended June 16, 2000
-------------------------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Hotel Sales
Rooms..................................... $ 281 $ 313 $ 272 $ 292 $ 1,158
Food and beverage......................... 128 153 132 166 579
Other..................................... 30 30 43 41 144
------- ------- ------- ------- -------
Total hotel sales.................... 439 496 447 499 1,881
Operating Costs and Expenses
Rooms..................................... 66 76 62 63 267
Food and beverage......................... 96 111 95 113 415
Other..................................... 111 109 109 113 442
Management fees........................... 22 35 22 38 117
Lease expense............................. 137 157 152 167 613
Corporate and Interest Expenses........... 1 1 -- 1 3
------- ------- ------- ------- -------
Total operating expenses............. 433 489 440 495 1,857
------- ------- ------- ------- -------
Operating Profit............................... 6 7 7 4 24
Income taxes.............................. (2) (3) (3) (2) (10)
------- ------- ------- ------- -------
Net Income........................... $ 4 $ 4 $ 4 $ 2 $ 14
======= ======= ======= ======= =======
As of December 31, 2000
-----------------------
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Assets......................................... $ 37 $ 37 $ 40 $ 44 $ 158
Liabilities.................................... 37 37 40 42 156
Equity......................................... -- -- -- 2 2
11. Subsequent Events
On June 16, 2001, the Company consummated an agreement with Crestline
Capital Corporation for the acquisition of their lease agreement with
respect to San Diego Marriott Hotel and Marina (the "San Diego Hotel"). The
purchase price was $4.4 million, including legal and professional fees.
Under the terms of the transaction, a wholly owned TRS of the Company
acquired the lease by purchasing the lessee entity, effectively terminating
the lease for financial reporting purposes. As a result of the acquisition,
the Company's consolidated results of operations beginning June 16, 2001
-12-
HOST MARRIOTT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
will represent property-level hotel revenues and expenses rather than
rental income from the lessee for the San Diego Hotel. This presentation
will be consistent with the 116 properties whose lease agreements were
effectively terminated for financial reporting purposes in the same manner
on January 1, 2001.
On June 28, 2001, the Company consummated an agreement to purchase
substantially all of the minority limited partnership interests held by
Wyndham International, Inc. and affiliates ("Wyndham") with respect to
seven full service hotels for $60 million. In addition, the lessee entities
were acquired by a wholly owned TRS of the Company, effectively terminating
the leases for financial reporting purposes.
-13-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Forward-looking Statements
Certain matters discussed herein are forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. We identify forward-looking statements in this quarterly
report on Form 10-Q by using words or phrases such as "believe," "expect," "may
be," "intend," "predict," "project," "plan," "objective," "will be," "should,"
"estimate," or "anticipate," or the negative thereof or other variations thereof
or comparable terminology. All forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
transactions, results, performance or achievements to be materially different
from any future transactions, results, performance or achievements expressed or
implied by such forward-looking statements. Although we believe the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, we can give no assurance that we will attain these expectations or
that any deviations will not be material. Except as otherwise required by the
federal securities laws, we disclaim any obligations or undertaking to publicly
release any updates or revisions to any forward-looking statement contained in
this quarterly report on Form 10-Q to reflect any change in our expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
Results of Operations
During 2000, our revenues primarily represented rental income from Crestline and
other third-party lessees. As a result of the previously discussed acquisition
of the Crestline lessees by our TRS, beginning in 2001, our consolidated results
of operations primarily reflect hotel-level revenues and operating costs and
expenses. In order to provide a clearer understanding and comparability of our
results of operations, in addition to our discussion of the historical results
we have also presented unaudited pro forma condensed consolidated statements of
operations for the twelve and twenty-four weeks ended June 16, 2000, adjusted to
reflect the acquisition of the Crestline lessee entities as if it occurred on
January 1, 2000, and a discussion of the results thereof compared to our
historical results for the twelve and twenty-four weeks ended June 15, 2001,
beginning on page 16.
2001 Compared to 2000 (Historical)
Revenues. Revenues increased $802 million for the twelve weeks ended June 15,
2001 when compared to the twelve weeks ended June 16, 2000, and increased $1,496
million for the twenty-four weeks ended June 15, 2001, when compared to the
twenty-four weeks ended June 15, 2000. As discussed above, our revenues and
operating profit are not comparable to 2000, due to the acquisition of the
Crestline Lessee Entities by our TRS.
The table below presents gross hotel sales for the twelve weeks ended and the
twenty-four weeks ended June 15, 2001 and June 16, 2000. For 2000, gross hotel
sales were used as the basis for calculating rental income. The data is
presented in order to facilitate an investor's understanding and comparative
analysis of the operations of our properties.
-14-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------------------- --------------------------------
June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
------------- ------------- ------------- -------------
(in millions) (in millions)
Hotel sales
Rooms............................... $ 686 $ 710 $ 1,310 $ 1,323
Food and beverage................... 314 330 590 604
Other............................... 81 82 154 153
--------------- --------------- --------------- ---------------
Total hotel sales................ $ 1,081 $ 1,122 $ 2,054 $ 2,080
=============== =============== =============== ===============
The $26 million decrease in hotel sales for the twenty-four weeks ended June 15,
2001 reflects the decrease in REVPAR for our comparable properties of 3.2% to
$120.77, partially offset by incremental revenues provided by the 500-room
expansion at Orlando Marriott, which was placed in service in June 2000, and the
inclusion of three hotels in total hotel sales as a result of the consolidation
of Rockledge and Fernwood as of March 24, 2001.
Comparable REVPAR for the second quarter of 2001 decreased by 6.1% to $121.81
compared to the same quarter in 2000 due to the recent slowdown in the economy.
The decrease is mainly attributable to a decrease in occupancy of 6.1 percentage
points during the quarter. As a result of decreased hotel sales, our hotel
managers have implemented cost cutting measures and revenue enhancement programs
at the property level in order to stabilize house profit. These measures include
increasing labor efficiency particularly at the managerial level and in the food
and beverage area at the hotels, reducing discretionary expenses in rooms, food
and beverage, and repairs and maintenance and reducing energy consumption. As a
result, operating profit margins were down only .9 and 1.5 percentage points for
the quarter and year-to-date, respectively, in spite of the significant REVPAR
decline, reflecting a significant improvement from the first quarter.
Rental income decreased $155 million, or 83%, to $31 million for the second
quarter of 2001 versus the first quarter of 2000, reflecting the purchase of 116
of the Crestline lease entities by our wholly owned TRS effective January 1,
2001. As discussed in Note 2 to the condensed consolidated financial statements,
percentage rental revenues from third-party lessees of $15 million and $291
million for the twenty-four weeks ended June 15, 2001 and June 16, 2000,
respectively, were deferred on the balance sheet as deferred rent. For the
second quarter of 2001 and 2000, $8 million and $168 million of rental income
was deferred. Percentage rent will be recognized as income only as specified
hotel sales thresholds are achieved.
Depreciation and Amortization. Depreciation and amortization increased $27
million or 36% for the second quarter of 2001 versus the second quarter of 2000
and increased $30 million, or 20% year-to-date, primarily reflecting an increase
in depreciable assets. The increase in depreciation expense reflects the
consolidation of three hotels and other equipment as a result of the purchase of
the voting interest in Rockledge and Fernwood as discussed in Note 6. The
transaction caused an increase in depreciable assets of $206 million.
Additionally, a $13 million impairment charge was recorded in depreciation
expense during the second quarter due to the reclassification of certain fixed
assets of the Company from held for use to held for sale. It is also the result
of $379 million in capital expenditures in 2000 and $144 million in capital
expenditures in the first and second quarter of 2001 including the completion of
the 500-room addition at the Orlando World Center Marriott.
Hotel Operating Costs and Expenses. As discussed above, 2001 hotel revenues and
operating costs are not comparable with 2000. During 2000, Crestline, as the
lessee, paid specified direct property-level costs including management fees,
which reduced the net rent payment to us under the terms of the leases.
-15-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During 2001, these costs are borne by us and are included in our condensed
consolidated results of operations.
Corporate Expenses. Corporate expenses decreased $1 million for the second
quarter of 2001 and $3 million year-to-date from prior year levels due
primarily to cost control efforts.
Minority Interest Expense (Benefit). For the twelve weeks and twenty-four weeks
ended June 15, 2001 and June 16, 2000, respectively, we recognized minority
interest expense (benefit) of $11 million and $26 million, and $(11) million and
$(22) million, respectively. The variance is due in part to the decrease in the
minority ownership of the Operating Partnership from 23% in the second quarter
of 2000 to 8% in the second quarter of 2001, and reflects the OP Unitholders'
share in our results of operations. Assuming the Blackstone OP units had been
converted at January 1, 2001, the year-to-date 2001 minority interest expense
would have been $20 million or a decrease of $6 million.
Interest Expense. Interest expense increased 7% to $104 million in the second
quarter of 2001 and increased 7% to $207 million year-to-date, primarily due to
the issuance in October of 2000 of $250 million of 91/4% Series F Senior Notes,
which was primarily used to fund the purchase of the Crestline lessee Entities
and for general corporate purposes.
Net Income (Loss). Our net income was $49 million for the second quarter of 2001
compared to a net loss of $53 million for the second quarter of 2000. Our
year-to-date income was $81 million compared to a net loss of $110 million in
for the same period in 2000. The increases in net income primarily reflect the
acquisition of the Crestline lease entities effective January 1, 2001, thereby
eliminating amounts paid to Crestline as lessee for 116 of our properties and
the effect of the deferral of contingent rent, which was approximately $168
million and $291 million for the second quarter and year-to-date 2000.
Net Income (Loss) Available to Common Shareholders. The net income available to
common shareholders was $40 million for the second quarter of 2001 and $67
million year-to-date, an increase of $98 million and $183 million over the same
periods in 2000, respectively. The increase primarily reflects the previously
discussed $102 million increase in quarterly results and the $191 million
increase year-to-date. These results were partially offset by the $4 million
gain on the repurchase of the Convertible Preferred Securities recorded during
the first quarter of 2000.
2001 (Historical) Compared to 2000 (Pro Forma)
Because of the significant changes to our corporate structure as a result of our
acquisition of the Crestline Lessee Entities effective January 1, 2001,
management believes that a discussion of our 2001 historical results of
operations compared to our 2000 pro forma results of operations is meaningful
and relevant to an investor's understanding of our present and future
operations. The unaudited pro forma results of operations for the twelve weeks
and twenty-four weeks ended June 16, 2000 set forth below are based on the
unaudited condensed consolidated statements of operations for the twelve weeks
and twenty-four weeks ended June 16, 2000 and are only adjusted to reflect the
acquisition of the Crestline lessee entities as if the transaction occurred at
the beginning of 2000. The following pro forma results do not include
adjustments for any transactions other than the Crestline lease repurchase and
are not presented in accordance with Article 11 of SEC Regulation S-X.
As a result of the Crestline acquisition, effective January 1, 2001, we lease
116 (subsequent to quarter end) of our full-service hotels to our TRS. Our 2001
consolidated operations primarily represent property-level revenues and expenses
rather than rental income from Crestline. In addition, the net
-16-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
income applicable to the TRS is subject to federal and state income taxes. The
pro forma adjustments to reflect the acquisition of the Crestline lessee
entities are as follows:
. record hotel-level revenues and expenses and reduce historical rental
income with respect to the 116 properties (The effect of the
additional eight leases acquired subsequent to quarter end would not
result in a material change to these amounts.);
. reduce historical interest income for amounts related to the working
capital note with Crestline;
. reduce historical equity in earnings of affiliates for interest earned
at our non-controlled subsidiary on the related FF&E loans with
Crestline;
. record interest expense related to the additional borrowings from the
9 1/4% Series F senior notes to fund the $207 million cash payment;
. record the minority interest effect related to the outside ownership
in the operating partnership; and
. record the tax provision attributable to the income of the TRS at an
effective tax rate of 39.5%.
The unaudited pro forma financial information does not purport to represent what
our results of operations or financial condition would actually have been if the
transaction had in fact occurred at the beginning of 2000, or to project our
results of operations or financial condition for any future period. The
unaudited pro forma financial information is based upon available information
and upon assumptions and estimates that we believe are reasonable under the
circumstances. The following unaudited pro forma financial information should be
read in conjunction with our audited financial statements contained in our
annual report on Form 10-K for the year ended December 31, 2000.
-17-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
UNAUDITED STATEMENTS OF OPERATIONS
For the Twelve Weeks Ended June 15, 2001 (Historical)
and June 16, 2000 (Pro Forma)
(in millions, except per share amounts)
Historical Pro Forma
------------- -------------
June 15, 2001 June 16, 2000
------------- -------------
(unaudited)
REVENUES
Hotel sales
Rooms ....................................................... $ 589 $ 605
Food and beverage ........................................... 295 308
Other ....................................................... 73 73
------- -------
Total hotel sales ................................... 957 986
Rental income ............................................... 31 30
------- -------
Total revenues ...................................... 988 1,016
------- -------
OPERATING COSTS AND EXPENSES
Hotel operating expenses
Rooms ....................................................... 135 138
Food and beverage ........................................... 208 218
Hotel departmental costs and deductions ..................... 232 229
Management fees and other ................................... 54 62
Other property-level expenses ............................... 67 63
Depreciation and amortization ............................... 102 75
------- -------
Total hotel operating costs and expenses ............ 798 785
Corporate expenses .......................................... 9 10
Lease repurchase expense .................................... 5 --
Other ....................................................... 6 6
------- -------
OPERATING PROFIT ............................................ 170 215
Minority interest expense ................................... (11) (27)
Interest income ............................................. 12 7
Interest expense ............................................ (104) (102)
Net gains on property transactions .......................... -- 2
Equity in earnings of affiliates ............................ 2 3
Dividends on Convertible Preferred Securities ............... (8) (7)
------- -------
INCOME BEFORE INCOME TAXES .................................. 61 91
Provision for income taxes .................................. (12) (10)
------- -------
INCOME BEFORE EXTRAORDINARY ITEM ............................ 49 81
------- -------
Less: Dividends on preferred stock ......................... (9) (5)
------- -------
INCOME BEFORE EXTRAORDINARY ITEM AVAILABLE TO COMMON
SHAREHOLDERS ............................................. $ 40 $ 76
======= =======
Basic income before extraordinary items per common share .... $ .17 $ .35
======= =======
-18-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
UNAUDITED STATEMENTS OF OPERATIONS
For the Twenty-four Weeks Ended June 15, 2001 (Historical)
and June 16, 2000 (Pro Forma)
(in millions, except per share amounts)
Historical Pro Forma
------------- -------------
June 15, 2001 June 16, 2000
------------- -------------
(unaudited)
REVENUES
Hotel sales
Rooms ............................................................... $ 1,110 $ 1,117
Food and beverage ................................................... 548 558
Other ............................................................... 137 137
------- -------
Total hotel sales ........................................... 1,795 1,812
Rental income ....................................................... 62 63
------- -------
Total revenues .............................................. 1,857 1,875
------- -------
OPERATING COSTS AND EXPENSES
Hotel operating expenses
Rooms ............................................................... 256 259
Food and beverage ................................................... 399 401
Hotel departmental costs and deductions ............................. 440 429
Management fees and other ........................................... 106 113
Other property-level expenses ....................................... 128 122
Depreciation and amortization ....................................... 179 149
------- -------
Total hotel operating costs and expenses .................... 1,508 1,473
Corporate expenses .................................................. 17 20
Lease repurchase expense ............................................ 5 --
Other ............................................................... 8 12
------- -------
OPERATING PROFIT .................................................... 319 370
Minority interest expense ........................................... (26) (43)
Interest income ..................................................... 20 15
Interest expense .................................................... (207) (203)
Net gains on property transactions .................................. 1 3
Equity in earnings of affiliates .................................... 4 3
Dividends on Convertible Preferred Securities ....................... (15) (14)
INCOME BEFORE INCOME TAXES .......................................... 96 131
Provision for income taxes .......................................... (15) (15)
------- -------
INCOME BEFORE EXTRAORDINARY ITEM .................................... 81 116
------- -------
Less: Dividends on preferred stock ................................. (14) (10)
Add: Gain on repurchase of Convertible Preferred Securities ........ -- 4
------- -------
INCOME BEFORE EXTRAORDINARY ITEM AVAILABLE TO COMMON
SHAREHOLDERS ..................................................... $ 67 $ 110
======= =======
Basic income before extraordinary items per common share ............ $ .28 $ .51
======= =======
-19-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues. Revenues decreased $28 million, or 3%, to $988 million for the second
quarter of 2001 from $1,016 million for the second quarter of 2000. Year-to-date
revenues decreased $18 million, or 1% to $1,857 million. Hotel sales, which
include room sales, food and beverage sales, and other ancillary sales such as
telephone sales, decreased $29 million, or 3%, to $957 million for the second
quarter of 2001 and $17 million, or 1%, to $1,795 million year-to-date,
reflecting primarily a decrease in REVPAR for our comparable properties of 6.1%
to 121.81. This decrease in REVPAR was partially offset by the incremental
revenues provided by the Tampa Waterside Marriott, which opened in February of
2000, the 500-room expansion at the Orlando World Center Marriott, which was
placed in service in June 2000, and the operations of the St. Louis Marriott
Pavilion Downtown, JW Marriott Hotel, Mexico City, and the Mexico City Airport
Marriott Hotel which were consolidated as of March 24, 2001.
Hotel Operating Costs and Expenses. Hotel operating costs and expenses
principally consist of property-level operating costs, management fees, real and
personal property taxes, ground, building and equipment rent, insurance,
depreciation, and certain other costs. Hotel operating costs and expenses
increased $13 million, or 2% to $798 million for the second quarter of 2001
compared to second quarter 2000 and year-to-date 2001 costs increased $35
million or 2% to $1,508 million from the same period in 2000, primarily due to a
$27 million and $30 million increase in depreciation expense for second quarter
and year-to-date 2001. The increase in depreciation expense was partially offset
by a decrease in property-level costs and management fees and other of $14
million for the second quarter of 2001 in part reflecting cost-cutting measures
implemented at the property level by our managers during the second quarter.
Rooms, food and beverage, and hotel departmental costs and deductions were 60%
and 59% of hotel sales for the second quarters of 2001 and 2000, respectively,
and 61% and 60% for the second quarter year-to-date for 2001 and 2000,
respectively, reflecting the decrease in hotel sales and the corresponding
decrease in property-level expenses in the second quarter.
Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, our operating profit decreased $45 million, or 21%, to
$170 million in the second quarter of 2001. Year-to-date 2001, the operating
profit decreased $51 million, or 14% to $319 million compared to 2000. Operating
profit was approximately 17% and 21% of total revenues for the second quarters
of 2001 and 2000, respectively, and 17% and 20% for the second quarter
year-to-date for 2001 and 2000, respectively.
Minority Interest. Minority interest expense decreased $16 million and $17
million to $11 million and $26 million for the second quarter and year-to-date
of 2001, respectively, due to the decrease in the minority ownership of the
Operating Partnership from 27% as of June 16, 2000 to 8% as of June 16, 2001,
and the $43 million decrease in net income available to common shareholders year
to date.
Income Tax Provision. In addition to state and foreign taxes applicable to the
Operating Partnership and us, the TRS is subject to federal and state income
taxes. The income tax provision increased $2 million to $12 million for the
second quarter of 2001, due to increased income earned by the TRS during the
second quarter of 2001. The income tax provision was $15 million for both 2001
and 2000 year-to-date.
Income Before Extraordinary Item Available to Common Shareholders. Income Before
Extraordinary Item Available to Common Shareholders decreased $36 million to $40
million for the second quarter of 2001 and decreased $43 million to $67 million
year-to-date. Basic income per common share was $.17 and $.35 for the second
quarters of 2001 and 2000, respectively, and $.28 and $.51 for the second
quarters year-to-date of 2001 and 2000, respectively.
-20-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FFO and EBITDA
--------------
We consider Comparative Funds From Operations ("Comparative FFO"), which
consists of Funds From Operations, as defined by the National Association of
Real Estate Investment Trusts, adjusted for significant non-recurring items
detailed in the chart below, and our consolidated earnings before interest
expense, income taxes, depreciation, amortization and other non-cash items
(including contingent rent) ("EBITDA") to be indicative measures of our
operating performance due to the significance of our long-lived assets.
Comparative FFO and EBITDA are also useful in measuring our ability to service
debt, fund capital expenditures and expand our business. Furthermore, management
believes that Comparative FFO and EBITDA are meaningful disclosures that will
help shareholders and the investment community to better understand our
financial performance, including comparing our performance to other real estate
investment trusts. However, Comparative FFO and EBITDA as presented may not be
comparable to amounts calculated by other companies. This 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 accounting principles generally accepted in the United States. Cash
expenditures for various long-term assets, interest expense (for EBITDA purposes
only) and income taxes have been, and will be incurred which are not reflected
in the EBITDA and Comparative FFO presentations.
Comparative FFO available to common shareholders increased $9 million, or 6.8%,
to $142 million for the second quarter of 2001 over the second quarter of 2000,
and increased $18 million or 8%, to $243 million year-to-date. The following is
a reconciliation of the income (loss) from operations before extraordinary items
to Comparative FFO (in millions):
Twelve Weeks Ended Twenty-four Weeks Ended
-------------------------- -----------------------
June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
------------- ------------- ------------- -------------
Funds from Operations
Income (loss) from operations before extraordinary
items................................................ $ 49 $ (50) $ 81 $ (107)
Depreciation and amortization........................... 100 74 176 146
Other real estate activities............................ 1 (1) 1 (1)
Partnership adjustments................................. 16 (14) 32 (28)
------------ ------------ ------------ ------------
Funds from operations of Host LP........................... 166 9 290 10
Effect on funds from operations of SAB 101.............. 8 168 15 291
Loss on repurchase of leases............................ 5 -- 5 --
Taxes on lease repurchase............................... (2) -- (2) --
------------ ------------ ------------ ------------
Comparative funds from operations of Host LP............... 177 177 308 301
Dividends on preferred stock............................ (9) (5) (14) (10)
------------ ------------ ------------ ------------
Comparative funds from operations of Host LP
available to common unitholders......................... 168 172 294 291
Comparative funds from operations of minority partners
of Host LP........................................... (26) (39) (51) (66)
------------ ------------ ------------ ------------
Comparative funds from operations available to
common shareholders of Host REIT........................ $ 142 $ 133 $ 243 $ 225
============ ============ ============ ============
We are the sole general partner in the Operating Partnership and as of June 15,
2001 and June 16, 2000 held approximately 92% and 77%, respectively, of the
outstanding OP Units. The $26 million and $39 million, and $51 million and $66
million, deducted for the twelve weeks and twenty-four weeks ended June 15, 2001
and June 16, 2000, respectively, represent the Comparative FFO attributable to
the interests in the Operating Partnership held by those minority partners. OP
Units owned by holders other than us are redeemable at the option of the holder,
generally commencing one year after the issuance of
-21-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
their OP Units. Upon redemption of an OP Unit, the holder would receive from the
Operating Partnership cash in an amount equal to the market value of one share
of our common stock, or at our option, a share of our common stock.
EBITDA increased $23 million, or 9%, to $291 million in the second quarter of
2001, and increased $26 million, or 5%, to $512 million, year-to-date over the
comparable periods in 2000. Hotel EBITDA was $291 million and $120 million for
the second quarters of 2001 and 2000, which does not include deferred rental
income of $8 million and $168 million, respectively, and $526 million and $233
million year-to-date, which does not include deferred rental income of $15
million and $291 million, respectively. As previously discussed, 2001 Hotel
EBITDA primarily reflects the revenues and expenses generated by the hotels
whereas 2000 Hotel EBITDA primarily reflects rental income from lessees.
The following schedule presents our EBITDA as well as a reconciliation of EBITDA
to the income (loss) from operations before extraordinary items (in millions):
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------------- --------------------------
June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
------------- ------------- ------------- -------------
EBITDA
Hotels................................................ $ 291 $ 120 $ 526 $ 233
Office buildings and other investments................ 9 2 9 3
Interest income....................................... 12 8 20 17
Corporate and other expenses.......................... (16) (16) (28) (31)
Effect on revenue of SAB 101.......................... 8 168 15 291
------------ ------------ ------------ ------------
EBITDA of Host LP......................................... 304 282 542 513
Distributions to minority interest partners of Host LP (13) (14) (30) (27)
------------ ------------ ------------ ------------
EBITDA of Host REIT....................................... $ 291 $ 268 $ 512 $ 486
============ ============ ============ ============
Twelve Weeks Ended Twenty-four Weeks Ended
--------------------------- -----------------------
June 15, 2001 June 16, 2000 June 15, 2001 June 16, 2000
------------- ------------- ------------- -------------
EBITDA of Host REIT....................................... $ 291 $ 268 $ 512 $ 486
Effect on revenue of SAB 101.............................. (8) (168) (15) (291)
Interest expense.......................................... (104) (97) (207) (193)
Dividends on Convertible Preferred Securities............. (8) (7) (15) (14)
Depreciation and amortization............................. (102) (75) (179) (149)
Minority interest (expense) benefit....................... (11) 11 (26) 22
Income taxes.............................................. (12) (2) (15) (3)
Distributions to minority interest partners of Host LP.... 13 14 30 27
Lease repurchase expense.................................. (5) -- (5) --
Other non-cash charges, net............................... (5) 6 1 8
------------ ------------ ------------ ------------
Income (loss) from operations before extraordinary
items............................................... $ 49 $ (50) $ 81 $ (107)
============ ============ ============ ============
Distributions to minority holders of OP Units were $13 million and $14 million,
respectively, for the twelve weeks ended June 15, 2001 and June 16, 2000, and
$30 million and $27 million for the twenty-four weeks ended June 15, 2001 and
June 16, 2000. These OP Units are convertible into cash or our common stock at
our option. First quarter distributions of $0.26 and $0.21 per common unit,
respectively, were paid on April 13, 2001 and April 14, 2000, respectively.
Second quarter distributions of $.26 and $.21 were declared on June 18, 2001 and
June 21, 2000, and subsequently paid July 13, 2001 and July 14, 2000.
-22-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our interest coverage, defined as EBITDA divided by cash interest expense, was
2.7 times for both the 2001 and 2000 twenty-four week periods, respectively, and
2.6 times for full year 2000. The ratio of earnings to fixed charges was 1.5 to
1.0 in the second quarter of 2001 versus a deficiency of earnings to fixed
charges of $123 million for the second quarter of 2000, which was primarily due
to the deferral of contingent rental revenue of $291 million. We reported a
ratio of earnings to fixed charges of 1.2 to 1.0 for the full year 2000.
Cash Flows and Financial Condition
We reported a decrease in cash and cash equivalents of $96 million during the
twenty-four weeks ended June 15, 2001 compared to a decrease of $122 million
during the twenty-four weeks ended June 16, 2000. Cash from operations was $49
million through the second quarter of 2001 and $221 million through the second
quarter of 2000. The $172 million decrease in cash from operations primarily
relates to the cash used to purchase the Crestline Lessee Entities. Excluding
the lease purchases, operating cash flow from operations would have been $253
million, or an increase of 14% over 2000.
Cash used in investing activities was $136 million and $222 million for the
second quarter of 2001 and 2000, respectively. Cash used in investing activities
for the second quarter includes capital expenditures and other investments of
$144 million and $185 million for 2001 and 2000, respectively, mostly related to
renewal and replacements on existing properties and new development projects.
Property and equipment balances include $115 million and $135 million for
construction in progress as of June 15, 2001 and December 31, 2000,
respectively. The balance as of June 15, 2001 primarily relates to the
development of the Ritz-Carlton, Naples Golf Resort and various other expansion
and development projects. On April 1, 2001, the 50,000 square foot world-class
spa at The Ritz-Carlton, Naples was placed in service at an approximate
development cost of $23 million.
Cash used in financing activities was $9 million through the second quarter of
2001 and $121 million through the second quarter of 2000. 2001 Cash from
financing activities through the second quarter of 2001 includes $121 million of
debt issuances and $144 million from the issuance of cumulative redeemable
preferred stock. Cash was used in financing primarily for the payment of $130
million in dividends and the repayment and prepayment of $138 million in debt.
During the first quarter of 2001, the Company borrowed $115 million under the
revolver portion of the Bank Credit Facility to partially fund the acquisition
of the Crestline Lessee Entities as well as for general corporate purposes,
which was fully repaid in the second quarter of 2001. During the third quarter,
we borrowed an additional $60 million to purchase minority interests in various
hotels from Wyndham. As of July 25, 2001, $150 million and $60 million are
outstanding under the term and revolving loan portions of the Bank Credit
Facility, respectively, and the available capacity under the revolver is $565
million.
On June 18, 2001, the Board of Directors declared cash dividends of $.26 per
common share and $.625 per share of Preferred Stock, which were paid on July 13,
2001 to shareholders of record on June 29, 2001.
On March 27, 2001, we sold approximately 6.0 million shares of 10% Class C
preferred stock ("Class C Preferred Stock") with a $0.01 par value for net
proceeds of $144 million. Holders of the Class C Preferred Stock are entitled to
receive cumulative cash dividends at a rate of 10% per annum of the $25 per
share liquidation preference. Dividends are payable quarterly in arrears
commencing April 15, 2001, on which date a pro rata dividend of $0.03 per share
was distributed. Beginning March 27, 2006, we have the option to redeem the
Class C Preferred Stock for $25.00 per share, plus accrued and unpaid dividends
to the date of redemption.
-23-
HOST MARRIOTT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Effective January 1, 2001, each of Rockledge Hotel Properties, Inc. and Fernwood
Hotel Assets, Inc. (the "Non-Controlled Subsidiaries") elected to be a TRS and
in April 2001, the Operating Partnership acquired the voting interests in the
Non-Controlled Subsidiaries held by the Host Marriott Statutory
Employee/Charitable Trust for approximately $2 million, which is also permitted
as a result of the REIT Modernization Act. Subsequent to the acquisition, on a
consolidated basis our results of operations will reflect the revenues and
expenses generated by the two taxable corporations, and our consolidated balance
sheets include the various assets, consisting of three additional full- service
properties, one located in St. Louis, Missouri, and two located in Mexico City,
Mexico, as well as certain joint venture interests, held by the two taxable
corporations, which were approximately $356 million of assets and $262 million
of liabilities, including $54 million of third party debt ($26 million of which
matures in 2001), respectively, as of March 23, 2001.
On February 7, 2001, May 7, 2001 and May 29, 2001, Blackstone and affiliates
("Blackstone") converted 12.5 million, 10.0 million and 18.2 million OP Units,
respectively, to common shares and immediately sold them to an underwriter for
sale on the open market. As a result of the transactions, Blackstone now owns
approximately 1% of the outstanding OP Units of the Operating Partnership and we
increased our ownership in the Operating Partnership to 92%. We received no
proceeds as a result of the transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our borrowings under the bank credit facility as well as the mortgage on The
Ritz-Carlton, Amelia Island are sensitive to changes in interest rates. The
interest rates on these debt obligations, which were $238 million and $239
million, respectively, at June 15, 2001 and December 31, 2000 are based on
various LIBOR terms plus 200 basis points. The weighted average interest rate
for these financial instruments are 6.7% for the twenty-four weeks ended June
15, 2001 and 8.9% for the year ended December 31, 2000.
-24-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine litigation and administrative proceedings
arising in the ordinary course of business, some of which are expected to be
covered by liability insurance and which collectively are not expected to have a
material adverse effect on the business, financial condition or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders on May 17, 2001
(b) not applicable
(c)(i) Votes regarding the election of three Directors for a term expiring in
2004 were as follows:
Term expiring in 2004 FOR WITHHELD
--------------------- --- --------
Richard E. Marriot [X] 208,882,241 [_] 1,576,780
R. Theodore Ammon [X] 209,102,471 [_] 1,356,550
Christopher J. Nassetta [X] 209,187,896 [_] 1,271,125
(ii) Votes on a shareholder proposal that the Board of Directors take
the necessary steps to reinstate the election of all directors annually, instead
of the election of staggered classes were as follows:
FOR AGAINST ABSTENTIONS AND
BROKER NONVOTES
63,261,564 121,787,984 1,148,195
(iii) Votes regarding ratification of the appointment of Arthur
Andersen LLP as independent auditors of the Company to serve for the 2001 fiscal
year were as follows:
FOR AGAINST ABSTENTIONS AND
BROKER NONVOTES
209,855,576 270,301 333,144
Item 6. Exhibits and Reports on Form 8-K
(a) the exhibits listed on the accompanying Exhibit Index are filed as part of
this report and such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K.
. May 3, 2001--Amendment to Exhibit 23.1, the Consent of the Independent
Public Accountants, to Form 10-K filed April 2, 2001.
-25-
. May 8, 2001--Report of the announcement that Host Marriott Corporation
agreed to issue to the Blackstone Entities 10,000,000 shares of its
common stock upon redemption of 10,000,000 units of limited
partnership interest in Host LP, which will in turn be sold to an
Underwriter for delivery on May 8 2001 to be sold to the public.
. June 4, 2001--Report of the announcement that Host Marriott
Corporation agreed to issue to the Blackstone Entities 18,200,000
shares of its common stock upon redemption of 18,200,000 units of
limited partnership interest in Host LP, which will in turn be sold to
an Underwriter for delivery on June 4, 2001 to sold to the public.
-26-
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 27, 2001 /s/ Donald D. Olinger
------------- ---------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)
-27-
EXHIBIT INDEX
Pursuant to Item 601 of Regulations S-K
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Exhibit No. Description of Exhibit
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3 Bylaws, amended effective April 25, 2001
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