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 MARCH 26, 1999 COMMISSION FILE NO. 0-25087
HOST MARRIOTT, L.P.
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
(301) 380-9000
Delaware 52-2095412
- ----------------------- -----------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No ___
-
UNITS OUTSTANDING
CLASS AT MAY 5, 1999
- --------------------- --------------
Units of limited partnership interest
292,541,480
INDEX
-----
PART I. FINANCIAL INFORMATION (Unaudited): PAGE NO.
-------
Condensed Consolidated Balance Sheets - 3
March 26, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations - 4
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Condensed Consolidated Statements of Cash Flows - 6
Twelve Weeks Ended March 26, 1999 and
March 27, 1998
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of 18
Operations and Financial Condition
Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION AND SIGNATURE 25
-2-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
March 26, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
------
Property and equipment, net............................................................ $ 7,173 $ 7,201
Notes and other receivables (including amounts due from
affiliates of $133 million and $134 million, respectively).......................... 201 203
Rent receivable........................................................................ 78 --
Due from managers...................................................................... -- 19
Investments in affiliates.............................................................. 44 33
Other assets........................................................................... 391 370
Cash and cash equivalents.............................................................. 284 436
-------- --------
$ 8,171 $ 8,262
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Debt
Senior notes........................................................................ $ 2,545 $ 2,246
Mortgage debt....................................................................... 2,111 2,438
Convertible debt obligation to Host Marriott........................................ 567 567
Other............................................................................... 457 447
-------- --------
5,680 5,698
Accounts payable and accrued expenses.................................................. 161 204
Deferred income taxes.................................................................. 97 97
Other liabilities...................................................................... 439 460
-------- --------
Total liabilities................................................................. 6,377 6,459
-------- --------
Minority interest...................................................................... 150 147
Limited Partnership interests of third parties at redemption value
(representing 64.6 million units at March 26, 1999
and December 31, 1998).............................................................. 718 892
Partners' Capital
General partner..................................................................... 1 1
Limited partner..................................................................... 930 767
Accumulated other comprehensive loss................................................ (5) (4)
-------- --------
Total shareholders' equity........................................................ 926 764
-------- --------
$ 8,171 $ 8,262
======== ========
See Notes to Condensed Consolidated Financial Statements
-3-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
TWELVE WEEKS ENDED MARCH 26, 1999 AND MARCH 27, 1998
(UNAUDITED, IN MILLIONS)
1999 1998
------- -------
REVENUES
Rental income (Note 2)............................................................. $ 286 $ --
Hotel sales
Rooms............................................................................ -- 509
Food and beverage................................................................ -- 222
Other............................................................................ -- 56
Interest income.................................................................... 8 14
Net gains on property transactions................................................. 12 1
Equity in earnings of affiliates................................................... 1 1
Other.............................................................................. -- 2
------ ------
Total revenues................................................................... 307 805
------ ------
EXPENSES
Depreciation....................................................................... 66 53
Property-level expenses............................................................ 58 62
Hotel operating expenses
Rooms............................................................................ -- 114
Food and beverage................................................................ -- 163
Other department costs and deductions............................................ -- 189
Management fees (including Marriott International
management fees of $55 million in 1998)....................................... -- 58
Minority interest.................................................................. 5 16
Interest expense................................................................... 108 76
Dividends on Host Marriott-obligated mandatorily
redeemable convertible preferred securities of a subsidiary
trust whose sole assets are the convertible subordinated
debentures due 2026 ("Convertible Preferred Securities")......................... -- 9
Corporate expenses................................................................. 8 12
Other expenses..................................................................... 4 5
------ ------
249 757
------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES......................................................................... 58 48
Provision for income taxes............................................................. -- (20)
------ ------
INCOME FROM CONTINUING OPERATIONS...................................................... 58 28
Income from discontinued operations.................................................... -- 2
------ ------
NET INCOME............................................................................. $ 58 $ 30
====== ======
See Notes to Condensed Consolidated Financial Statements
-4-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONT.)
TWELVE WEEKS ENDED MARCH 26, 1999 AND MARCH 27, 1998
(UNAUDITED)
BASIC EARNINGS PER UNIT:
CONTINUING OPERATIONS.................................................................. $ .20 $ .13
Discontinued operations (net of income taxes).......................................... -- .01
--------- --------
BASIC EARNINGS PER UNIT:............................................................... $ .20 $ .14
========= ========
DILUTED EARNINGS PER UNIT:
CONTINUING OPERATIONS.................................................................. $ .19 $ .13
Discontinued operations (net of income taxes).......................................... -- .01
--------- --------
DILUTED EARNINGS PER UNIT.............................................................. $ .19 $ .14
========= ========
See Notes to Condensed Consolidated Financial Statements
-5-
HOST MARRIOTT, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWELVE WEEKS ENDED MARCH 26, 1999 AND MARCH 27, 1998
(UNAUDITED, IN MILLIONS)
1999 1998
------- -------
OPERATING ACTIVITIES
Income from continuing operations...................................................... $ 58 $ 28
Adjustments to reconcile to income from continuing operations:
Depreciation and amortization....................................................... 68 54
Income taxes........................................................................ (4) 18
Gain on sale of hotel properties.................................................... (12) (1)
Equity in earnings of affiliates....................................................... (1) (1)
Changes in operating accounts.......................................................... (123) (20)
Other ................................................................................. 18 19
------- -------
Cash from continuing operations..................................................... 4 97
Cash from discontinued operations................................................... -- 2
------ -------
Cash from operations................................................................ 4 99
------ -------
INVESTING ACTIVITIES
Proceeds from sales of assets.......................................................... 36 1
Acquisitions........................................................................... (4) (118)
Capital expenditures:
Renewals and replacements........................................................... (50) (40)
New development projects............................................................ (20) (12)
New investment capital expenditures................................................. (6) (9)
Purchases of short-term marketable securities.......................................... -- (53)
Sales of short-term marketable securities.............................................. -- 246
Note receivable collections............................................................ 2 --
Affiliate collections, net............................................................. -- 14
Other ................................................................................. -- (6)
------ -------
Cash (used in) from investing activities from continuing operations................. (42) 23
Cash used in investing activities from discontinued operations...................... -- (28)
------ -------
Cash used in investing activities................................................... (42) (5)
------ -------
FINANCING ACTIVITIES
Issuances of debt, net................................................................. 299 1
Repurchase of units.................................................................... (4) --
Distribution........................................................................... (69) --
Scheduled principal repayments......................................................... (12) (6)
Debt prepayments ...................................................................... (323) (1)
Other ................................................................................. (5) (16)
------ -------
Cash used in financing activities from continuing operations........................ (114) (22)
Cash used in financing activities from discontinued operations...................... -- (27)
------ -------
Cash used in financing activities................................................... (114) (49)
------ -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... $ (152) $ 45
====== ======
Non-cash financing activities:
Assumption of mortgage debt for the acquisition of, or purchase of
controlling interests in, certain hotel properties............................... $ -- $ 164
====== ======
See Notes to Condensed Consolidated Financial Statements
-6-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Host Marriott Corporation ("Host Marriott"), operating through an umbrella
partnership REIT structure, is the owner of full-service hotel properties.
Host Marriott operates as a self-managed and self-administered real estate
investment trust ("REIT") and its operations are conducted solely through
an operating partnership and its subsidiaries. As REITs are not permitted
to derive revenues directly from the operation of hotels, Host Marriott
leases substantially all of its hotels to subsidiaries of Crestline Capital
Corporation ("Crestline" or the "Lessee") and certain other lessees.
In these condensed consolidated interim financial statements, the "Company"
or "Host Marriott" refers to Host Marriott Corporation before, and Host
Marriott, L.P. (the "Operating Partnership"), after Host Marriott
Corporation's conversion to a REIT (the "REIT Conversion"). Host Marriott
Corporation is presented as the predecessor to the Operating Partnership
since the Operating Partnership and its subsidiaries received substantially
all of the continuing operations, assets and liabilities of Host Marriott
Corporation and its subsidiaries.
On December 15, 1998, shareholders of Host Marriott approved a plan to
reorganize Host Marriott's business operations through the spin-off of Host
Marriott's senior living business as part of Crestline and the contribution
of Host Marriott's hotels and certain other assets and liabilities to a
newly formed Delaware limited partnership, Host Marriott, L.P. Host
Marriott merged into HMC Merger Corporation (the "Merger"), a newly formed
Maryland corporation (renamed Host Marriott Corporation) which intends to
qualify, effective January 1, 1999 as a REIT and is the sole general
partner of the Operating Partnership. On December 29, 1998, Host Marriott
completed the previously announced spin-off of Crestline through a taxable
stock dividend to its shareholders. Each Host Marriott shareholder of
record on December 28, 1998 received one share of Crestline for every ten
shares of Host Marriott Corporation owned. In connection with the REIT
Conversion, Host Marriott contributed its hotels and substantially all of
its other assets and liabilities to the Operating Partnership and
subsidiaries (the "Contribution") in exchange for units of partnership
interest in the Operating Partnership. The Contribution was accounted for
at Host Marriott's historical basis. As of March 26, 1999, Host Marriott
owned approximately 78% of the Operating Partnership.
As a result of the spin-off noted above, the Company's financial statements
have been restated to present the senior living communities business
results of operations and cash flows as discontinued operations. All
historical financial statements presented have been restated to conform to
this presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated interim financial
statements of the Company and its subsidiaries have been prepared without
audit. Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. The Company believes
the disclosures made are adequate to make the information presented not
misleading. However, the unaudited condensed consolidated interim financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's annual report on
Form 10-K for the fiscal year ended December 31, 1998.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to
present fairly the financial position of the Company as of March 26, 1999
and December 31, 1998, and the results of operations and cash flows for
the twelve weeks ended March 26, 1999 and March 27, 1998. The statements of
operations and cash flows for the twelve weeks ended March 27, 1998 reflect
the historical results of Host Marriott Corporation as discussed in Note
-7-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Interim results are not necessarily indicative of fiscal year
performance because of the impact of seasonal and short-term variations.
The Company's leases have remaining terms ranging from 2 to 10 years,
subject to earlier termination upon the occurrence of certain
contingencies, as defined. The rent due under each lease is the greater of
base rent or percentage rent, as defined. Percentage rent applicable to
room, food and beverage and other types of hotel revenue varies by lease
and is calculated by multiplying fixed percentages by the total amounts of
such revenues over specified threshold amounts. Both the minimum rent and
the revenue thresholds used in computing percentage rents are subject to
annual adjustments based on increases in the United States Consumer Price
Index and the Labor Index, as defined. Certain amounts of the percentage
rent recognized are considered contingent until such time as the revenue
recognized exceeds annual thresholds, which are determined individually by
property. For the twelve weeks ended March 26, 1999, $115 million of
contingent rent is included in the statement of operations.
3. RENTAL REVENUE
The Company's 1999 rental revenue represents earnings from its leased
hotels and is not comparable to 1998 hotel revenues which reflect gross
sales generated by the properties. Also, in December 1998 the Company
retroactively adopted Emerging Issues Task Force Issue No. 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Management Entities and Certain Other Entities with Contractual Management
Arrangements." The impact of the adoption of Issue 97-2 on the condensed
consolidated financial statements for the twelve weeks ended March 27, 1998
was to increase both revenues and operating expenses by approximately $466
million with no impact on net income or earnings per share.
The comparison of the 1999 quarterly results with 1998 is also affected by
a change in the reporting period for the Company's hotels not managed by
Marriott International, which resulted in the inclusion of only two months
of results in the 1999 first quarter versus three months in 1998 for the 24
such hotels (8,524 rooms) that the Company owned as of the beginning of
1998. The change in reporting was required as part of the REIT Conversion.
The 1998 hotel revenues include approximately $54 million representing the
incremental month of operations.
The table below represents hotel sales for both periods for comparative
purposes.
Twelve Weeks Ended
---------------------
March 26, March 27,
1999 1998
--------- ---------
(in millions)
Hotel Sales
Rooms........................................................................ $ 600 $ 509
Food and beverage............................................................ 268 222
Other........................................................................ 63 56
--------- ---------
Total hotel sales....................................................... $ 931 $ 787
========= =========
-8-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. EARNINGS PER UNIT
Basic earnings per unit is computed by dividing net income by the weighted
average number of units. Diluted earnings per unit is computed by dividing
net income as adjusted for potentially dilutive securities, by the weighted
average number of units outstanding plus other potentially dilutive
securities. For 1998 diluted earnings per unit was not adjusted for the
impact of the Convertible Preferred Securities as they were anti-dilutive.
A reconciliation of the number of units utilized for the calculation of
diluted earnings per unit follows:
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
--------- ---------
(in millions)
Weighted average number of units outstanding...................................... 291.5 215.7
Assuming distribution of units to Host Marriott Corporation for Host
Marriott Corporation common shares granted under the comprehensive stock plan,
less shares assumed purchased at average market price......................... 5.9 4.4
Assuming distribution of common shares issuable for warrants, less shares
assumed purchased at average market price..................................... -- 0.3
Assuming conversion of minority operating partnership units
outstanding or issuable....................................................... 9.8 --
Assuming conversion of Convertible Preferred Securities........................... -- --
--------- ---------
Units utilized for the calculation of diluted earnings per unit............... 307.2 20.4
========= =========
A reconciliation of net income to earnings used for the calculation of
diluted earnings per unit follows:
Twelve Weeks Ended
----------------------
March 26, March 27,
1999 1998
--------- ---------
(in millions)
Net income........................................................................ $ 58 $ 30
Dividends of Convertible Preferred Securities..................................... -- --
Minority interest expense, assuming conversion of OP units........................ 1 --
--------- ---------
Earnings used for the calculation of diluted earnings per unit.................... $ 59 $ 30
========= =========
5. DIVIDENDS AND DISTRIBUTIONS PAYABLE
On March 15, 1999, the Board of Directors of Host Marriott declared a cash
dividend of $0.21 per share of Host Marriott Corporation common stock and a
corresponding distribution of $0.21 per unit of limited partnership
interest ("OP Unit"). The dividend and distribution was paid on April 14,
1999 to shareholders and unitholders of record on March 31, 1999.
On December 18, 1998, in conjunction with the REIT Conversion, the Company
declared a special dividend which entitled shareholders of record on
December 28, 1998 to elect to receive either $1.00 in cash or .087 of a
share of common stock of the Company for each outstanding share of the
Company's common stock owned by such shareholder on the record date (the
"Special Dividend"). Cash totaling $69 million and 11.9 million shares of
common stock that were elected in the Special Dividend were paid
-9-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and/or issued on February 10, 1999. The 1998 earnings per share has been
restated to reflect the impact of the stock portion of the Special
Dividend.
6. DISPOSITION
In February 1999, the Company sold the 479-room Minneapolis/Bloomington
Marriott for $35 million and recorded a pre-tax gain of $11 million.
7. DEBT ISSUANCES
In February 1999, the Company issued $300 million of 83/8% Series D senior
notes due in 2006. The senior notes were used to refinance, or purchase,
debt which had been acquired through the merger of certain partnerships or
the purchase of hotel properties in connection with the REIT Conversion in
December 1998.
8. GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION
The Company operates one business segment, hotel ownership. The Company's
hotels are primarily operated under the Marriott or Ritz-Carlton brands.
Substantially all of the Company's revenues are earned through leases with
Crestline. The allocation of taxes is not evaluated at the segment level or
reflected in the following information because the Company does not believe
the information is material to the consolidated financial statements.
The Company's segmented revenues and income (loss) from continuing
operations before income taxes are as follows (in millions):
Twelve Weeks Ended March 26, 1999
-------------------------------------------------------
Hotels Corporate & Other Consolidated
------ ----------------- ------------
Revenues..................................... $ 304 $ 3 $ 307
Income (loss) from continuing operations
before income taxes........................ 75 (17) 58
Twelve Weeks Ended March 27, 1998
-------------------------------------------------------
Hotels Corporate & Other Consolidated
------- ----------------- ------------
Revenues................................... $ 801 $ 4 $ 805
Income (loss) from continuing operations
before income taxes...................... 71 (23) 48
As of March 26, 1999, the Company's foreign operations consisted of four
hotel properties located in Canada. There were no intercompany sales
between the properties and the Company. The following table presents
rental revenues in 1999 and hotel revenues in 1998 for each of the
geographical areas in which the Company owns hotels (in millions):
Twelve Weeks Ended
------------------------
March 26, March 27,
1999 1998
----------- -----------
United States.................................................................. $ 303 $ 779
International.................................................................. 4 26
----------- -----------
Total................................................................. $ 307 $ 805
=========== ===========
9. COMPREHENSIVE INCOME
-10-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company's other comprehensive income consists of foreign currency
translation adjustments and the right to receive up to 1.4 million shares
of Host Marriott Services Corporation's common stock or an equivalent cash
value subsequent to the exercise of the options held by certain former and
current employees of Marriott International. For the twelve weeks ended
March 26, 1999, comprehensive income totaled $57 million. Comprehensive
income was equivalent to net income for the twelve weeks ended March 27,
1998. As of March 26, 1999 and December 31, 1998 the Company's accumulated
other comprehensive loss was approximately $5 million and $4 million,
respectively.
10. SUBSEQUENT EVENTS
In April 1999, a subsidiary of the Company completed the refinancing of the
mortgage on the New York Marriott Marquis. The mortgage is for $245 million
maturing in June 2000 and bears interest at a rate of LIBOR plus 2.125% for
the period from March 31, 1999 through December 31, 1999 and LIBOR plus
2.5% until maturity. The Company is required to make principal payments of
$1.25 million on June 30, 1999 and September 30, 1999 in addition to $10
million and $5 million on December 31, 1999 and March 31, 2000,
respectively, as well as pay an extension fee of 0.5% of the principal
balance of the loan outstanding at December 31, 1999.
On December 30, 1998, the Operating Partnership acquired a portfolio of
twelve luxury hotels and other assets from the Blackstone Group, a Delaware
limited partnership, and a series of funds controlled by affiliates of
Blackstone Real Estate Partners. The Operating Partnership issued
approximately 43.9 million OP Units and assumed debt and made cash payments
of approximately $920 million and distributed 1.4 million of the shares of
Crestline common stock to the Blackstone Real Estate Partners. An
additional 3.8 million OP Units were issued in April 1999 in accordance
with the purchase agreement based on certain adjustments determined on
March 31, 1999.
The Company also completed a 210-room extension of the Philadelphia
Marriott Convention Center in April 1999 at a cost of approximately $43
million including debt of $9 million.
11. SUMMARIZED LEASE POOL FINANCIAL STATEMENTS
-11-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As discussed in Note 2, as of March 26, 1999, almost all the properties of
the Company and its subsidiaries were leased to Crestline Capital
Corporation and managed by Marriott International, Inc. In conjunction with
these leases, Crestline and certain of its subsidiaries entered into
limited guarantees of the lease obligations of each lessee. The full-
service hotel leases are grouped into four lease pools, with Crestline's
guarantee limited to the greater of 10% of the aggregate rent payable for
the preceding year or 10% of the aggregate rent payable under all leases in
the respective pool. Additionally, the lessee's obligation under each lease
agreement is guaranteed by all other lessees in the respective lease pool.
As a result, the Company believes that the operating results of each full-
service pool may be material to the Company's financial statements.
Financial information of certain pools related to the sublease agreements
for limited service properties are not presented, as the Company believes
they are not material to the Company's financial statements. Financial
information of Crestline may be found in its quarterly and annual filings
with the Securities and Exchange Commission. Further information regarding
these leases and Crestline's limited guarantees may be found in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
1998. The results of operations for the twelve weeks ended March 26, 1999
and summarized balance sheet data of the lease pools in which the Company's
hotels are organized are as follows (in millions):
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Hotel Sales
Rooms..................................... $ 129 $ 137 $ 127 $ 128 $ 521
Food and beverage......................... 59 61 61 72 253
Other..................................... 14 13 19 15 61
----- ----- ----- ----- -----
Total hotel sales.................... 202 211 207 215 835
Operating Costs and Expenses
Rooms..................................... 31 32 29 27 119
Food and beverage......................... 46 47 44 48 185
Other..................................... 53 52 50 48 203
Management fees........................... 9 14 11 16 50
Lease expense............................. 61 64 70 74 269
----- ----- ----- ----- -----
Total operating expenses............. 200 209 204 213 826
----- ----- ----- ----- -----
Operating Profit............................... 2 2 3 2 9
Corporate and Interest Expenses................ (1) -- (1) (1) (3)
----- ----- ----- ----- -----
Income before taxes...................... 1 2 2 1 6
Income taxes............................. -- (1) (1) (1) (3)
----- ----- ----- ----- -----
Net Income........................... $ 1 $ 1 $ 1 $ -- $ 3
===== ===== ===== ===== =====
Pool 1 Pool 2 Pool 3 Pool 4 Combined
------ ------ ------ ------ --------
Assets......................................... $ 47 $ 37 $ 46 $ 47 $ 177
Liabilities.................................... $ 46 $ 36 $ 45 $ 46 $ 173
Equity......................................... $ 1 $ 1 $ 1 $ 1 $ 4
12. SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION
-12-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All subsidiaries of the operating partnership guarantee the Company's
senior notes except those among the twenty full service hotels listed below
and HMH HPT Residence Inn, LLC and HMH HPT Courtyard, LLC, the lessees of
the Residence Inn and Courtyard properties, respectively. The separate
financial statements of each guaranteeing subsidiary (each, a "Guarantor
Subsidiary") are not presented because management has concluded that such
financial statements are not material to investors. The guarantee of each
Guarantor Subsidiary is full and unconditional and joint and several and
each Guarantor Subsidiary is a wholly owned subsidiary of the Company. The
non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") own the
following full-service hotels: the Albany Marriott; Atlanta Marriott
Marquis; Grand Hyatt, Atlanta; Harbor Beach Resort; Hartford Marriott;
Hyatt Regency, Cambridge; Hyatt Regency, Reston; Manhattan Beach Marriott;
Minneapolis Southwest Marriott; New York Marriott Marquis; Ontario Airport
Marriott; Pittsburgh City Center Marriott; The Ritz-Carlton, Amelia Island;
San Diego Marriott Hotel and Marina; San Diego Mission Valley; Swissotel,
Atlanta; Swissotel, Boston; Swissotel, Chicago; The Drake (Swissotel) New
York; and the Oklahoma City Waterford Marriott.
The following condensed combined consolidating information sets forth the
financial position as of March 26, 1999 and December 31, 1998 and results
of operations and cash flows for the twelve weeks ended March 26, 1999 and
March 27, 1998 of the parent, Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries.
SUPPLEMENTAL CONDENSED COMBINED CONSOLIDATING BALANCE SHEETS
(IN MILLIONS)
MARCH 26, 1999
-13-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
Property and equipment, net.......................... $ 1,227 $ 3,723 $ 2,223 $ -- $ 7,173
Investments in affiliate............................. 1,109 -- -- (1,065) 44
Notes and other receivables.......................... 777 51 19 (646) 201
Other assets......................................... 261 178 167 (137) 469
Cash and cash equivalents............................ 101 155 28 -- 284
------- ------- ------- ------- -------
Total assets...................................... $ 3,475 $ 4,107 $ 2,437 $(1,848) $ 8,171
======= ======= ======= ======= =======
Debt................................................. $ 1,491 $ 2,833 $ 1,113 $ (324) $ 5,113
Convertible debt obligations to Host Marriott........ 567 -- -- -- 567
Deferred income taxes................................ 51 39 7 -- 97
Other liabilities.................................... 90 576 260 (326) 600
------- ------- ------- ------- -------
Total liabilities................................. 2,199 3,448 1,380 (650) 6,377
Minority interests................................... 16 59 75 -- 150
Limited partner interest of third parties at
redemption value.................................... 718 -- -- -- 718
Owner's capital...................................... 542 600 982 (1,198) 926
------- ------- ------- ------- -------
Total liabilities and owner's capital............. $ 3,475 $ 4,107 $ 2,437 $(1,848) $ 8,171
======= ======= ======= ======= =======
DECEMBER 31, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
Property and equipment, net........................... $ 1,225 $ 3,743 $ 2,233 $ -- $ 7,201
Investments in affiliate.............................. 1,038 -- -- (1,005) 33
Notes and other receivables........................... 783 51 19 (650) 203
Other assets.......................................... 258 146 141 (156) 389
Cash and cash equivalents............................. 330 91 15 -- 436
------- ------- ------- ------- ------
Total assets....................................... $ 3,634 $ 4,031 $ 2,408 $(1,811) $ 8,262
======= ======= ======= ======= =======
Debt.................................................. $ 1,438 $ 2,837 $ 1,183 $ (327) $ 5,131
Convertible debt obligation to Host Marriott.......... 567 -- -- -- 567
Deferred income taxes................................. 51 39 7 -- 97
Other liabilities..................................... 99 598 252 (285) 664
------- ------- ------- ------- -------
Total liabilities.................................. 2,155 3,474 1,442 (612) 6,459
Minority interests.................................... 15 56 76 -- 147
Limited partner interest of third parties at
redemption value..................................... 892 -- -- -- 892
Owner's capital....................................... 572 501 890 (1,199) 764
------- ------- ------- ------- -------
Total liabilities and owner's capital................ $ 3,634 $ 4,031 $ 2,408 $(1,811) $ 8,262
======= ======= ======= ======= =======
-14-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN MILLIONS)
TWELVE WEEKS ENDED MARCH 26, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------ ------------ ------------ ------------ ------------
REVENUES.......................................... $ 62 $ 161 $ 86 $ (2) $ 307
Depreciation...................................... (13) (35) (18) -- (66)
Property-level expenses........................... (10) (22) (26) -- (58)
Hotel operating expenses.......................... -- -- -- -- --
Minority interest................................. (1) (3) (1) -- (5)
Interest expense.................................. (41) (48) (21) 2 (108)
Dividends on convertible preferred securities..... -- -- -- -- --
Corporate expenses................................ (1) (4) (3) -- (8)
Other expenses.................................... (4) -- -- -- (4)
------- ------- ------- ------- -------
NET INCOME (LOSS)................................. $ (8) $ 49 $ 17 $ -- $ 58
======== ======= ======= ======= =======
TWELVE WEEKS ENDED MARCH 27, 1998
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ -------------- ------------ ------------
REVENUES............................................ $ 249 $ 378 $ 194 $ (16) $ 805
Depreciation........................................ (14) (27) (12) -- (53)
Property-level expenses............................. (11) (20) (31) -- (62)
Hotel operating expenses............................ (152) (251) (121) -- (524)
Minority interest................................... (12) (13) (4) 13 (16)
Interest expense.................................... (19) (46) (14) 3 (76)
Dividends on convertible preferred securities....... (9) -- -- -- (9)
Corporate expenses.................................. (3) (6) (3) - (12)
Other expenses...................................... (5) -- -- -- (5)
-------- ---------- ----------- ---------- ----------
Income from continuing operations before taxes...... 24 15 9 -- 48
Provision for income taxes.......................... (10) (6) (4) -- (20)
-------- ---------- ----------- ---------- ----------
Income from continuing operations................... 14 9 5 -- 28
Income from discontinued operations................. 2 -- -- -- 2
-------- ---------- ----------- ---------- ----------
NET INCOME.......................................... $ 16 $ 9 $ 5 $ - $ 30
======== ========== =========== ========== ==========
-15-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUPPLEMENTAL CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
TWELVE WEEKS ENDED MARCH 26, 1999
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash (used in) from operations.......................... $ (10) $ 21 $ (7) $ 4
-------- -------- -------- --------
INVESTING ACTIVITIES
Cash received from sales of assets...................... 2 34 -- 36
Capital expenditures.................................... (21) (46) (9) (76)
Acquisitions............................................ -- -- (4) (4)
Other................................................... 2 -- -- 2
-------- -------- -------- --------
Cash used in investing activities ...................... (17) (12) (13) (42)
-------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of debt....................................... (1) (267) (67) (335)
Issuances of debt....................................... 40 259 -- 299
Transfers to/from Parent................................ (162) 62 100 --
Dividends............................................... (69) -- -- (69)
Repurchase of common stock.............................. (4) -- -- (4)
Other................................................... (5) -- -- (5)
-------- -------- -------- --------
Cash (used in) from financing activities................ (201) 54 33 (114)
-------- -------- -------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ (228) $ 63 $ 13 $ (152)
======== ========= ======== =========
-16-
HOST MARRIOTT, L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TWELVE WEEKS ENDED MARCH 27, 1998
NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash from continuing operations......................... $ 45 $ 36 $ 16 $ 97
Cash from discontinued operations....................... 2 -- -- 2
-------- ------- ------- -------
Cash from operations.................................... 47 36 16 99
-------- ------- ------- -------
INVESTING ACTIVITIES
Cash received from sales of assets...................... 1 -- -- 1
Capital expenditures.................................... (18) (34) (9) (61)
Acquisitions............................................ -- -- (118) (118)
Sales of short-term marketable securities............... 193 -- -- 193
Other................................................... (4) 2 10 8
-------- ------- ------- -------
Cash from (used in) investing activities from
continuing operations................................ 172 (32) (117) 23
Cash used in investing activities from discontinued
operations........................................... (28) -- -- (28)
-------- ------- ------- -------
Cash from (used in) investing activities ............... 144 (32) (117) (5)
-------- ------- ------- -------
FINANCING ACTIVITIES
Repayment of debt....................................... (2) (3) (2) (7)
Issuances of debt....................................... -- -- 1 1
Transfers to/from Parent................................ (119) 4 115 --
Other................................................... (16) -- -- (16)
-------- ------- ------- -------
Cash (used in) from financing activities from
continuing operations................................ (137) 1 114 (22)
Cash used in financing activities from discontinued
operations........................................... (27) -- -- (27)
-------- ------- ------- -------
Cash (used in) from financing activities................ (164) 1 114 (49)
-------- ------- ------- --------
INCREASE IN CASH AND CASH EQUIVALENTS................... $ 27 $ 5 $ 13 $ 45
======== ======= ======= =======
-17-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
--------------------------
Certain matters discussed herein are forward-looking statements. Certain,
but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "estimates," or "anticipates," or the
negative thereof or other variations thereof or comparable terminology.
All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual transactions,
results, performance or achievements to be materially different from any
future transactions, results, performance or achievements expressed or
implied by such forward-looking statements. Although we believe the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our expectations
will be attained or that any deviations will not be material. We undertake
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events
or circumstances.
RESULTS OF OPERATIONS
---------------------
REVENUES. Our historical revenues have primarily represented gross
property-level sales from hotels, net gains on property transactions,
interest income and equity in earnings of affiliates. As of January 1,
1999, we lease substantially all of our hotels to subsidiaries of
Crestline Capital Corporation. As a result of these leases, we no longer
record property-level revenues and expenses, rather we recognize rental
income on the leases. Thus, 1999 revenues and expenses are not comparable
with prior periods. Note 3 to the financial statements presents a table
comparing gross hotel sales for all periods presented to facilitate an
investor's understanding of the operation of our properties. The
comparison of the 1999 quarterly results with 1998 is also affected by a
change in the reporting period for the Company's hotels not managed by
Marriott International, which resulted in the inclusion of only two months
of results in the 1999 first quarter versus three months in 1998 for the
24 of such hotels (8,524 rooms) the Company owned as of the beginning of
1998. The change in reporting period was required as part of the REIT
Conversion. Results in the first quarter of 1999 were driven by the
addition of 36 properties in 1998. The increase in hotel sales reflects
growth in room revenues generated per available room or REVPAR. For
comparable properties, REVPAR increased 4.4% to $120.37 for the first
quarter of 1999. On a comparable basis, average room rates increased
approximately 3%, while average occupancy increased one percentage point.
Interest income decreased as the result of a lower level of cash and
marketable securities held in the first quarter of 1999 compared to the
first quarter of 1998.
The net gain on property transactions for 1999 resulted from the $11
million pre-tax gain on the sale of the 479-room Minneapolis/Bloomington
Marriott for approximately $35 million.
EXPENSES. As discussed above, hotel revenues and hotel operating costs are
not comparable with the prior year. The lessee pays certain property-level
costs including management fees and we receive a rent payment, which is
net of those costs. Property-level costs which are comparable, including
depreciation, property taxes, insurance, ground and equipment rent
increased $9 million or 8% to $124 million, primarily reflecting the
depreciation from the 36 properties added in 1998.
MINORITY INTEREST. Minority interest expense decreased $11 million to $5
million for the first quarter of 1999, primarily reflecting the impact of
the consolidation of partnerships which occurred in connection with the
REIT Conversion.
-18-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTEREST EXPENSE. Interest expense increased 42% to $108 million in the
first quarter of 1999, primarily due to the issuance of senior notes,
establishment of a new credit facility, interest expense on the convertible
debt obligation to Host Marriott and additional mortgage debt on properties
acquired in connection with the REIT Conversion.
DIVIDENDS ON CONVERTIBLE PREFERRED SECURITIES. The dividends on Convertible
Preferred Securities reflect the accrual for the first twelve weeks of
fiscal year 1998 on the $550 million in 63/4% Convertible Preferred
Securities. The Convertible Preferred Securities are held by the REIT. The
dividends paid by the REIT are supported by the $567 million debt
obligation to Host Marriott on the balance sheet. The Operating Partnership
incurs interest expense on the debt obligation, and, therefore, no
dividends are included in the current period statement of operations.
CORPORATE EXPENSES. Corporate expenses decreased $4 million to $8 million
for the first quarter of 1999 resulting primarily from the timing of
certain project costs not incurred in 1999.
INCOME FROM DISCONTINUED OPERATIONS. Income from discontinued operations
represents the senior living communities business' results of operations
for the first quarter of 1998 as restated for the spin-off of Crestline.
NET INCOME. Our net income for the first quarter of 1999 was $58 million
compared to $30 million for the first quarter of 1998. Basic earnings per
unit were $0.20 and $0.14 for the first quarter of 1999 and 1998,
respectively. Diluted earnings per unit was $0.19 and $0.14 for the first
quarter of 1999 and 1998, respectively.
EBITDA AND FFO
--------------
Our consolidated earnings before interest expense, taxes, depreciation,
amortization and other non-cash items ("EBITDA") increased $23 million, or
11%, to $226 million in the first quarter of 1999. Hotel EBITDA increased
$26 million, or 13%, to $230 million in the first quarter of 1999,
reflecting comparable full-service hotel EBITDA growth, as well as
incremental EBITDA from 1997 and 1998 acquisitions offset by amounts
representing approximately 1% to 1.5% of hotel sales which are retained by
Crestline.
The following is a reconciliation of EBITDA to the Company's income from
continuing operations (in millions):
Twelve Weeks Ended
---------------------------
March 26, March 27,
1999 1998
------------ ------------
EBITDA................................................ $ 226 $ 203
Interest expense...................................... (108) (76)
Dividends on Convertible Preferred Securities......... -- (9)
Depreciation and amortization......................... (68) (54)
Minority interest expense............................. (5) (16)
Income taxes.......................................... -- (20)
Other non-cash charges, net........................... 13 --
--------- ---------
Income from continuing operations................... $ 58 $ 28
========= =========
-19-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.4 times for the 1999 first quarter, 2.8 times for the 1998 first
quarter and 2.5 times for full year 1998. The ratio of earnings to fixed
charges was 1.6 to 1.0 for the first quarter of 1999 and 1.7 to 1.0 for
the first quarter of 1998.
We also believe that Funds From Operations or FFO as defined by the
National Association of Real Estate Investment Trusts 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 other Real Estate Investment Trusts ("REITs"). FFO increased $32
million, or 38%, to $117 million in the first quarter of 1999. For periods
prior to 1999, the FFO disclosed represents comparative FFO (FFO plus
deferred tax expense). The following is a reconciliation of the Company's
income from continuing operations to FFO (in millions):
Twelve Weeks Ended
------------------------------
March 26, March 27,
1999 1998
------------ ------------
Income from continuing operations........... $ 58 $ 28
Depreciation and amortization............... 68 54
Other real estate activities................ (11) (1)
Partnership adjustments..................... 2 (6)
Deferred taxes.............................. -- 10
--------- ---------
Funds From Operations.................... $ 117 $ 85
========= =========
On a pro forma basis adjusted for the December 1997 operations discussed
above FFO increased $39 million or 50% in the first quarter of 1999.
The Company considers EBITDA and 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 (for EBITDA purposes only)
and income taxes have been, and will be incurred which are not reflected
in the EBITDA and FFO presentation.
CASH FLOWS AND FINANCIAL CONDITION
The Company reported a decrease in cash and cash equivalents of $152
million during the twelve weeks ended March 26, 1999. Cash from continuing
operations was $4 million for the first quarter of 1999 and $97 million
for the first quarter of 1998. The $93 million decrease in cash from
continuing operations resulted principally due to an increase in rent
receivable resulting from the timing of the receipt of cash payments under
the leases versus management agreements. There was no cash from (used in)
discontinued operations for the first quarter of 1999; however, cash from
discontinued operations totaled $2 million for the first quarter of 1998.
Cash used in investing activities from continuing operations was $42
million for the first quarter of 1999 and cash from investing activities
from continuing operations was $23 million for the first quarter of 1998.
Cash used in investing activities for the first quarter of 1999 includes
capital expenditures of $76 million, mostly related to renewals and
replacements on existing properties. In addition, the Company generated
$36 million of cash from the net sale of assets, primarily the
Minneapolis/Bloomington
-20-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
property. There was no cash from (used in) investing activities from
discontinued operations for the first quarter of 1999; however, cash used
in investing activities of discontinued operations totaled $28 million for
the first quarter of 1998.
Cash used in financing activities from continuing operations was $114
million for the first quarter of 1999 and $22 million for the first
quarter of 1998. Cash used in financing activities for the first quarter
of 1999 includes $323 million in prepayment of debt, offset by $299
million in debt issuances. Both financing activities were related to the
Company's February 1999 issuance of $300 million of 83/8% Series D Senior
notes due in 2006. The Series D Senior notes were used to refinance, or
purchase, debt which had been assumed through the merger of certain
partnerships or the purchase of hotel properties in connection with the
REIT Conversion in December 1998. There was no cash from (used in)
financing activities from discontinued operations in the first quarter of
1999; however, cash used in financing activities of discontinued
operations totaled $27 million in the first quarter of 1998.
Cash used in financing activities for the first quarter of 1999 also
includes a dividend distribution related to the REIT Conversion of $69
million.
On March 15, 1999, the Board of Directors of Host Marriott declared a
regular cash dividend of $0.21 per share of common stock and a
corresponding distribution of $0.21 per unit of limited partnership
interest ("OP Unit"). The dividend and distribution was paid on April 14,
1999 to shareholders and unitholders of record on March 31, 1999.
In April 1999, a subsidiary of the Company completed the refinancing of
the mortgage on the New York Marriott Marquis. The mortgage is for $245
million maturing June 2000 and bears interest at a rate of LIBOR plus
2.125% for the period from March 31, 1999 through December 31, 1999 and
LIBOR plus 2.5% until maturity. The Company is required to make principal
payments of $10 million and $5 million on December 31, 1999 and March 31,
2000, respectively, as well as pay an extension fee of 0.5% of the
principal balance of the loan outstanding at December 31, 1999.
On December 30, 1998, the Operating Partnership acquired a portfolio of
twelve luxury hotels and other assets from the Blackstone Group, a
Delaware limited partnership, and a series of funds controlled by
affiliates of Blackstone Real Estate Partners. The Operating Partnership
issued approximately 43.9 million OP Units and assumed debt and made cash
payments of approximately $920 million and distributed 1.4 million of the
shares of Crestline common stock to the Blackstone Real Estate Partners.
An additional 3.8 million OP Units were issued in April 1999 in accordance
with the purchase agreement based on certain adjustments determined on
March 31, 1999.
The Company also completed a 210-room extension of the Philadelphia
Marriott Convention Center in April 1999 at a cost of approximately $43
million including debt of $9 million.
YEAR 2000 ISSUE
---------------
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that
begins with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or create erroneous results. The
following disclosure provides information regarding the current status of
our Year 2000 compliance program.
We have adopted the compliance program because we recognize the importance
of minimizing the number and seriousness of any disruptions that may occur
as a result of the Year 2000 issue. Our compliance program includes an
assessment of our hardware and software computer systems and embedded
systems, as well as an assessment of the Year 2000 issues relating to
third parties with which
-21-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
we have a material relationship or whose systems are material to the
operations of our hotel properties. Our efforts to ensure that our
computer systems are Year 2000 compliant have been segregated into two
separate phases: in-house systems and third-party systems. Following the
REIT Conversion, Crestline, as the lessee of most of our hotels, will deal
directly with Year 2000 matters material to the operation of the hotels,
and Crestline has agreed to adopt and implement the program outlined below
with respect to third-party systems for all hotels for which it is lessee.
In-House Systems. Since the distribution of Marriott International on
October 8, 1993, we have invested in the implementation and maintenance of
accounting and reporting systems and equipment that are intended to enable
us to provide adequately for our information and reporting needs and which
are also Year 2000 compliant. Substantially all of our in-house systems
have already been certified as Year 2000 compliant through testing and
other mechanisms and we have not delayed any systems projects due to the
Year 2000 issue. We engaged a third party to review our Year 2000 in-house
readiness and found no problems with any mission critical systems.
Management believes that future costs associated with Year 2000 issues for
our in-house systems will be insignificant and therefore not impact our
business, financial condition and results of operations. We have not
developed, and do not plan to develop, a separate contingency plan for our
in-house systems due to their current Year 2000 compliance. We do,
however, have the normal disaster recovery procedures in place should we
have a systems failure.
Third-Party Systems. We rely upon operational and financial systems
provided by third parties, primarily the managers and operators of our
hotel properties, to provide the appropriate property-specific operating
systems, including reservation, phone, elevator, security, HVAC and other
systems, and to provide us with financial information. Based on discussion
with the third parties that are critical to our business, including the
managers and operators of our hotels, we believe that these parties are in
the process of studying their systems and the systems of their respective
vendors and service providers and, in many cases, have begun to implement
changes, to ensure that they are Year 2000 compliant. We have started to
receive written assurances that these third parties will be Year 2000
compliant on time. To the extent these changes impact property-level
systems, we may be required to fund capital expenditures for upgraded
equipment and software. We do not expect these charges to be material, but
we are committed to making these investments as required. To the extent
that these changes relate to a third party manager's centralized systems,
including reservations, accounting, purchasing, inventory, personnel and
other systems, management agreements generally provide for these costs to
be charged to our properties subject to annual limitations, which costs
will be borne by Crestline under the leases. We expect that the third
party managers will incur Year 2000 costs in lieu of costs for their
centralized systems related to system projects that otherwise would have
been pursued and, therefore, the overall level of centralized systems
charges allocated to the properties will not materially increase as a
result of the Year 2000 compliance effort. We believe that this deferral
of certain system projects will not have a material impact on our future
results of operations, although it may delay certain productivity
enhancements at our properties. We and Crestline will continue to monitor
the efforts of these third parties to become Year 2000 compliant and will
take appropriate steps to address any non-compliance issues. We believe
that, in the event of material Year 2000 non-compliance, we will have the
right to seek recourse against the manager under our third party
management agreements. The management agreements, however, generally do
not specifically address the Year 2000 compliance issue. Therefore, the
amount of any recovery in the event of Year 2000 non-compliance at a
property, if any, is not determinable at this time, and only a portion of
such recovery would accrue to us through increased lease rental payments
from Crestline.
-22-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We and Crestline will work with the third parties to ensure that
appropriate contingency plans will be developed to address the most
reasonably likely worst case Year 2000 scenarios, which may not have been
identified fully. In particular, we and Crestline have had extensive
discussions regarding the Year 2000 problem with Marriott International,
the manager of a substantial majority of our hotel properties. Due to the
significance of Marriott International to our business, a detailed
description of Marriott International's state of readiness follows.
Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following: (i) Awareness: fostering
understanding of, and commitment to, the problem and its potential risks;
(ii) Inventory: identifying and locating systems and technology components
that may be affected; (iii) Assessment: reviewing these components for
Year 2000 compliance, and assessing the scope of Year 2000 issues; (iv)
Planning: defining the technical solutions and labor and work plans
necessary for each affected system; (v) Remediation/Replacement:
completing the programming to renovate or replace the problem software or
hardware; (vi) Testing and Compliance Validation: conducting testing,
followed by independent validation by a separate internal verification
team; (vii) Implementation: placing the corrected systems and technology
back into the business environment; and (viii) Quality Assurance:
utilizing an internal audit team to review significant projects for
adherence to quality standards and program methodology.
Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance: (i) information resource
applications and technology (IT Applications)--enterprise-wide systems
supported by Marriott International's centralized information technology
organization ("IR"); (ii) Business-initiated Systems ("BIS")--systems that
have been initiated by an individual business unit, and that are not
supported by Marriott International's IR organization; and (iii) Building
Systems--non-IT equipment at properties that use embedded computer chips,
such as elevators, automated room key systems and HVAC equipment. Marriott
International is prioritizing its efforts based on how severe an effect
noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
(System Criticality).
Marriott International measures the completion of each phase based on
documented and quantified results, weighted for System Criticality. As of
March 26, 1999, the Awareness and Inventory phases were complete for IT
Applications, BIS, and Building Systems. For IT Applications, the
Assessment and Planning phases were complete and Remediation/Replacement
and Testing phases were 95 percent complete. Compliance Validation had
been completed for approximately 75 percent of key systems, with most of
the remaining work in its final stage. For BIS and Building Systems,
Assessment and Planning are substantially complete. For BIS,
Remediation/Replacement is substantially complete and Testing is in
progress. Marriott International is on track for completion of
Remediation/Replacement and Testing of Building Systems for September of
1999. Compliance Validation is in progress for both BIS and Building
Systems. Implementation and Quality Assurance is in progress for IT
Applications, BIS and Building Systems.
Year 2000 compliance communications with Marriott International's
significant third party suppliers, vendors and business partners,
including its franchisees are ongoing. Marriott International's efforts
are focused on the connections most critical to customer service, core
business processes and revenues, including those third parties that
support the most critical enterprise-wide IT Applications, franchisees
generating the most revenues, suppliers of the most widely used Building
Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT
products, and financial institutions providing the most critical payment
processing functions. Responses have been received from a majority of the
firms in this group. A majority of these respondents have either given
assurances of timely Year 2000 compliance or have
-23-
HOST MARRIOTT, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
identified the necessary actions to be taken by them or Marriott
International to achieve timely Year 2000 compliance for their products.
Marriott International has established a common approach for testing and
addressing Year 2000 compliance issues for its managed and franchised
properties. This includes a guidance protocol for operated properties, and
a Year 2000 "Toolkit" for franchisees containing relevant Year 2000
compliance information. Marriott International is also utilizing a Year
2000 best-practices sharing system.
RISKS.There can be no assurances that Year 2000 remediation by us or third
parties will be properly and timely completed, and failure to do so could
have a material adverse effect on us, our business and our financial
condition. We cannot predict the actual effects to us of the Year 2000
problem, which depends on numerous uncertainties such as: whether
significant third parties properly and timely address the Year 2000 issue
and whether broad-based or systemic economic failures may occur. Moreover,
we are reliant upon Crestline to interface with third parties in
addressing the Year 2000 issue at the hotels leased by Crestline. We are
also unable to predict the severity and duration of any such failures,
which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or
telecommunications services, the loss or disruption of hotel reservations
made on centralized reservation systems and errors or failures in
financial transactions or payment processing systems such as credit cards.
Due to the general uncertainty inherent in the Year 2000 problem and our
dependence on third parties, including Crestline following the REIT
Conversion, we are unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on us. Our
Year 2000 compliance program, and Crestline's adoption thereof are
expected to significantly reduce the level of uncertainty about the Year
2000 problem and management believes that the possibility of significant
interruptions of normal operations should be reduced.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has certain derivative and other financial instruments that
are sensitive to changes in interest rates, including interest rate swaps
and debt obligations. The interest recognized on these instruments is
based on various LIBOR terms, which was 5.0% at March 26, 1999 and 5.1% at
December 31, 1998 for the swaps and was approximately 5.8% for both
periods for the various debt obligations. The interest rates, fair values
and future maturities associated with these financial instruments have not
changed materially from the amounts reported in the Company's annual
report on Form 10-K except for the refinancing and termination discussed
below.
The Company repaid a $40 million variable rate mortgage with proceeds from
the $300 million senior notes offering discussed in Note 7 to the
financial statements. Additionally, the Company terminated the associated
swap agreement incurring a termination fee of approximately $1 million in
February 1999.
-24-
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
On April 15, 1999, Host Marriott Corporation announced the Annual Meeting
of Shareholders to be held on May 20, 1999 to elect members of the Board
of Directors, among other matters.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
. January 14, 1999--Report that Host Marriott Corporation, through its
subsidiary Host Marriott L.P., acquired ownership of, or controlling
interests in, twelve upscale and luxury full-service hotels and
certain other assets from the Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners, and financial
statements will be filed within 60 days of the filing of the report.
. January 14, 1999--Report on the December 29, 1998 Host Marriott
Corporation distribution of Crestline shares to shareholders of record
and Host Marriott belief that the fair market value of the Crestline
shares on December 29, 1998 was $15.30 per share (a distribution of
$1.53 per Host Marriott share) which is the value determined by the
Host Marriott Board of Directors.
. January 15, 1999--Report of the announcement that on December 30, 1998
Host Marriott Corporation had completed the final steps in its
conversion to a real estate investment trust ("REIT") and had
positioned itself to elect REIT status, effective January 1, 1999.
. January 22, 1999--Report that, based on its annual budget for 1999,
Host Marriott Corporation estimates that on a standalone basis its
1999 Earnings Before Interest, Expense, Taxes, Depreciation and
Amortization and other non-cash items will be in the range of
approximately $1.0 billion to $1.05 billion while its 1999 Funds From
Operations will be in the range of approximately $565 million to $595
million.
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. January 29, 1999--Report of final exchange values, note election
amounts, and number of OP Units to be received by limited partners in
connection with Host Marriott, L.P.'s acquisition of eight public
partnerships.
. March 15, 1999--Report that on December 30, 1998, Host Marriott
Corporation, through its subsidiary Host Marriott, L.P. acquired
ownership of, or controlling interests in, 12 upscale and luxury full-
service hotels and certain other assets from the Blackstone Group, and
a series of funds controlled by affiliates Blackstone Real Estate
Partners. In exchange for these assets, (1) Host Marriott, L.P. issued
approximately 43.9 million of its limited partnership units, assumed
debt and made cash payments totaling approximately $920 million and
(2) Host Marriott distributed 1.4 million shares of Crestline Capital
Corporation. The actual number of OP Units to be issued to the
Blackstone Entities will fluctuate based upon certain adjustments to
be determined on March 31, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOST MARRIOTT, L.P.
BY: HOST MARRIOTT CORPORATION
Its General Partner
May 3, 1999 /s/ Donald D. Olinger
- ----------- -----------------------------
Date Donald D. Olinger
Senior Vice President and
Corporate Controller
(Chief Accounting Officer)