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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL 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 Fiscal Year Ended December 31, 2000 Commission File No. 001-14625
HOST MARRIOTT CORPORATION
Maryland 53-0085950
(State of Incorporation) (I.R.S. Employer Identification
Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value (234,022,707
shares New York Stock Exchange
outstanding as of March 12, 2001) Chicago Stock Exchange
Purchase Share rights for Series A Junior
Participating Pacific Stock Exchange
Preferred Stock, .01 par value Philadelphia Stock Exchange
Class A Preferred Stock, $.01 par value
(4,160,000 million
shares outstanding as of March 12, 2001)
Class B Preferred Stock, $.01 par value
(4,000,000 million
shares outstanding as of March 12, 2001)
The aggregate market value of shares of common stock held by non-affiliates
at March 12, 2001 was $2,496,000,000.
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Document Incorporated by Reference
Notice of 2001 Annual Meeting and Proxy Statement
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FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K and the information incorporated by
reference herein include 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 annual report
and the information incorporated by reference herein by using words or phrases
such as "anticipate", "believe", "estimate", "expect", "intend", "may be",
"objective", "plan", "predict", "project" and "will be" and similar words or
phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance
or achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions that will affect,
among other things, demand for products and services at our hotels and
other properties, the level of room rates and occupancy that can be
achieved by such properties and the availability and terms of financing;
. our ability to maintain the properties in a first-class manner,
including meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our ability to acquire or develop additional properties and the risk
that potential acquisitions or developments may not perform in
accordance with expectations;
. our degree of leverage which may affect our ability to obtain financing
in the future or compliance with current debt covenants;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. government approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and change in
laws and regulations or the interpretation thereof;
. our ability to satisfy complex rules in order for us to qualify as a
REIT for federal income tax purposes, for the operating partnership to
qualify as a partnership for federal income tax purposes, and in order
for HMT Lessee LLC to qualify as a taxable REIT subsidiary for federal
income tax purposes, and our ability to operate effectively within the
limitations imposed by these rules; and
. other factors discussed below under the heading "Risk Factors" and in
other filings with the Securities and Exchange Commission.
Although we believe the expectations reflected in our 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 annual report on
Form 10-K and the information incorporated by reference herein 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.
Items 1 & 2. Business and Properties
We are a self-managed and self-administered real estate investment trust, or
"REIT," owning full service hotel properties. We were formed as a Maryland
corporation in 1998, under the name HMC Merger Corporation, as a wholly owned
subsidiary of Host Marriott Corporation, a Delaware corporation, in connection
with its efforts to reorganize its business operations to qualify as a REIT
for federal income tax purposes. As part of this reorganization, which we
refer to as the REIT conversion, and which is described below in more detail,
on December 29, 1998, we merged with Host Marriott and changed our name to
Host Marriott Corporation, or
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"Host REIT". As a result, we have succeeded to the hotel ownership business
formerly conducted by Host Marriott. We conduct our business as an umbrella
partnership REIT, or UPREIT, through Host Marriott, L.P., or "Host LP" or the
"operating partnership", a Delaware limited partnership, of which we are the
sole general partner and in which we held approximately 78% of the outstanding
partnership interests at December 31, 2000. On February 7, 2001, certain
minority partners converted 12.5 million OP Units to common shares and
immediately sold them to an underwriter for sale on the open market. As a
result, we now own approximately 82% of Host LP.
Together with the operating partnership we were formed primarily to
continue, in an UPREIT structure, the full service hotel ownership business
formerly conducted by Host Marriott and its subsidiaries. We use the name Host
Marriott to refer to Host Marriott Corporation, the Delaware corporation,
prior to the REIT conversion. Our primary business objective is to provide
superior total returns to our shareholders through a combination of dividends,
appreciation in net asset value per share, and growth in funds from operations
per share, or FFO as defined by the National Association of Real Estate
Investment Trusts (i.e., net income computed in accordance with generally
accepted accounting principles, excluding gains or losses from debt
restructuring and sales of properties, plus real estate-related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint ventures), by focusing on aggressive asset management and disciplined
capital allocation. In addition, we endeavor to:
. maximize the value of our existing portfolio through an aggressive asset
management program which focuses on selectively improving and expanding
our hotels;
. acquire additional existing and newly developed upscale and luxury full
service hotels in targeted markets primarily focusing on downtown hotels
in core business districts in major metropolitan markets and select
airport and resort/convention locations;
. complete our current development and expansion program, and selectively
develop and construct new upscale and luxury full service hotels;
. regenerate capital through opportunistic asset sales and selectively
dispose of noncore assets;
. opportunistically pursue other real estate investments.
Our operations are conducted solely through the operating partnership and
its subsidiaries. As of March 12, 2001, we own 122 hotels, containing
approximately 58,000 rooms, located throughout the United States and Canada.
The hotels are generally operated under the Marriott, Ritz-Carlton, Four
Seasons, Hilton, Hyatt and Swissotel brand names. These brand names are among
the most respected and widely recognized brand names in the lodging industry.
We are the sole general partner of the operating partnership and manage all
aspects of the business of the operating partnership. This includes decisions
with respect to:
. sales and purchases of hotels;
. the financing of the hotels;
. the leasing of the hotels; and
. capital expenditures for the hotels subject to the terms of the leases
and the management agreements.
We are managed by our Board of Directors and have no employees who are not
also employees of the operating partnership.
Due to certain tax laws restricting REITs from deriving revenues directly
from the operations of hotels, during 1999 and 2000 the hotels were leased by
the operating partnership and its subsidiaries to third party lessees,
including primarily Crestline Capital Corporation, or "Crestline", and its
subsidiaries, and managed on behalf of the lessees by nationally recognized
hotel operators such as Marriott International, Four Seasons, Hyatt,
Interstate and other companies.
2
The REIT Modernization Act, which was enacted in December 1999, amended the
tax laws to permit REITs, effective January 1, 2001, (i) to lease hotels to a
subsidiary that qualifies as a taxable REIT subsidiary, or "TRS," and (ii) to
own all of the voting stock of such TRS. Effective January 1, 2001, we
completed a transaction with Crestline for the termination of the Crestline
leases through the purchase of the entities, or "Crestline Lessee Entities",
owning the leasehold interests with respect to 116 of our full-service hotels
by a wholly-owned TRS of Host LP for $207 million in cash, including
approximately $6 million of legal fees and transfer taxes. In connection
therewith, we recorded a non-recurring, pre-tax loss of $207 million during
the fourth quarter of 2000, net of an $82 million tax benefit which we have
recorded as a deferred tax asset, because for income tax purposes, the
acquisition is recorded as an asset that will be amortized over the remaining
term of the leases. In addition, the existing working capital of the
respective hotels, valued at $90 million as of December 31, 2000, including
the existing obligations under the working capital note, was transferred from
Crestline to the TRS. Crestline remains the lessee of one of our full-service
properties. The transaction simplifies our corporate structure, enables us to
better control our portfolio of hotels, and is expected to be accretive to
future earnings and cash flows, as the lessee entities have recorded
substantial earnings and cash flow in 2000 and 1999, although there can be no
guarantee that such results will continue. The TRS will pay rent to the
operating partnership, and will be obligated to the managers for the fees and
costs reimbursements under the management agreements. On a consolidated basis,
our results of operations beginning in 2001 will reflect the revenues and
expenses generated by these hotels rather than rental income.
The economic trends affecting the hotel industry and the overall economy
will be a major factor in generating growth in hotel revenues, and the
abilities of the managers will also have a material impact on future hotel
level sales and operating profit growth. Our hotel properties may be impacted
by inflation through its effect on increasing costs, as well as recent
increases in energy costs. Unlike other real estate, hotels have the ability
to change room rates on a daily basis, so the impact of higher inflation often
can be passed on to customers, particularly in the transient segment. However,
an economic downturn may affect the managers' ability to increase room rates.
Through our strategic restructuring of our balance sheet, nearly 95% of our
debt bears interest at fixed rates, which mitigates the impact of rising
interest rates.
We endeavor to selectively acquire upscale and luxury full service hotel
lodging properties that complement our existing portfolio of high-end hotels.
Based upon data provided by Smith Travel Research, we believe that our full
service hotels outperform the industry's average occupancy rate by a
significant margin, averaging 77.5% and 77.7% occupancy for fiscal years 2000
and 1999 compared to a 70.5% and 68.8% average occupancy for our competitive
set for 2000 and 1999, respectively. "Our competitive set" refers to hotels in
the upscale and luxury full service segment of the lodging industry, the
segment which is most representative of our full service hotels, and consists
of Crowne Plaza; Doubletree; Hyatt; Hilton; Radisson; Renaissance; Sheraton;
Westin; and Wyndham.
The relatively high occupancy rates of our hotels, along with increased
demand for full-service hotel rooms, have allowed the managers of our hotels
to increase average daily room rates by selectively raising room rates for
certain types of bookings and by minimizing, in specified cases, discounted
group business, replacing it with higher-rate group and transient business.
For the year ended December 31, 2000, as a percentage of total rooms sold,
transient business comprised 59%, group business comprised 38%, and contract
business comprised less than 3%. As a result, on a comparable basis, room
revenue per available room ("REVPAR") for our full-service properties
increased approximately 6.6% in 2000.
In addition to external growth generated by new acquisitions, we intend to
aggressively manage our existing assets by carefully and periodically
reviewing our portfolio to identify opportunities to selectively enhance
operating performance through major capital improvements.
3
Business Strategy
Our primary business objective is to provide superior total returns to our
shareholders through a combination of dividends, appreciation in net asset
value per share, and growth in FFO per share. In order to achieve this
objective we employ the following strategies:
. acquire existing upscale and luxury full-service hotels as market
conditions permit, including Marriott and Ritz-Carlton hotels and other
hotels operated by leading management companies such as Four Seasons,
Hyatt, and Hilton which satisfy our investment criteria, which
acquisitions may be completed through various means including
transactions where we are already a partner, public and private
portfolio transactions, and by entering into joint ventures when we
believe our return on investment will be maximized by doing so;
. complete the development of our existing pipeline, including the 295-
room Ritz-Carlton, Naples, Golf Resort, the 50,000 square-foot spa also
at the Ritz-Carlton, Naples, and the 200-room expansion of the Memphis
Marriott, as well as selectively expand existing properties and develop
new upscale and luxury full-service hotels, operated by leading
management companies, which satisfy our investment criteria and employ
transaction structures which mitigate our risk;
. maximize the value of our existing portfolio through aggressive asset
management, including completing selective capital improvements and
expansions that are designed to increase gross hotel sales or improve
operations; and
. regenerate capital through opportunistic asset sales and selectively
dispose of noncore assets, including older assets with significant
capital needs, assets that are at risk given potential new supply, or
assets in slower-growth markets.
The availability of suitable acquisition candidates that complement our
portfolio of high-end hotels has been limited recently due to market
conditions. Most products in the market consist of smaller, suburban hotels,
and as many luxury hotel owners are choosing to hold on to their assets at
this time, competition for the limited number of available properties in the
top markets has caused them to be generally not price competitive. However, we
believe that acquisitions that meet our stringent criteria will provide the
highest and best use of our capital as they become available.
Our acquisition strategy focuses on the upscale and luxury full-service
segments of the market, which we believe will continue to offer opportunities
over time to acquire assets at attractive multiples of cash flow and at
discounts to replacement value. Our acquisition criteria continues to focus
on:
. properties in difficult to duplicate locations with high costs to
prospective competitors, such as hotels located in urban, airport and
resort/convention locations;
. premium brand names, such as Marriott, Ritz-Carlton, Four Seasons,
Hilton, and Hyatt;
. underperforming hotels which can be improved by conversion to high
quality brands; and
. properties which are operated by leading management companies such as
Marriott, Ritz-Carlton, Four Seasons, Hilton, and Hyatt.
In recent years, we have increased our pool of potential acquisition
candidates to include select non-Marriott and non-Ritz-Carlton branded hotels
which offer long-term growth potential, have high quality managers and are
consistent with the overall quality of our portfolio. For example, in December
1998 we acquired a portfolio of hotels consisting of two Ritz-Carlton, two
Four Seasons, one Grand Hyatt, three Hyatt Regency and four Swissotel
properties.
Our current portfolio of hotels are operated under the Marriott, Ritz-
Carlton, Four Seasons, Hilton, Hyatt and Swissotel brand names. In general,
based upon data provided by Smith Travel Research, we believe that these
premium brands have consistently outperformed the industry. Demonstrating the
strength of our portfolio, our comparable properties, consisting of 118
hotels, owned directly or indirectly by us for the entire 2000 and 1999 fiscal
years, respectively (excluding one property that sustained substantial fire
damage during 2000, two
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properties where significant expansion at the hotels affected operations, and
the Tampa Waterside Marriott, which opened in February 2000), generated a 32%
and 33% REVPAR premium over our competitive set for fiscal years 2000 and
1999, respectively.
Based on the strength of our portfolio of premium hotels, management
anticipates that any additional full service properties acquired in the future
and converted from other brands to one of our premium brands should achieve
increases in occupancy rates and average room rates as the properties begin to
benefit from brand name recognition, and national reservation systems and
group sales organizations. Since the beginning of fiscal year 1994, we have
acquired 15 hotels that we have converted to premium brands.
We believe we are well qualified to pursue our acquisition and development
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets.
Our asset management team, which is comprised of professionals with
exceptional industry knowledge and relationships, focuses on maximizing the
value of our existing portfolio through (i) monitoring property and brand
performance; (ii) pursuing expansion and repositioning opportunities; (iii)
overseeing capital expenditure budgets and forecasts; (iv) assessing return on
investment expenditure opportunities; and (v) analyzing competitive supply
conditions in each market.
In September 1999, our board of directors approved the repurchase, from time
to time on the open market and/or in privately negotiated transactions, of up
to 22 million of the outstanding shares of our common stock, operating
partnership units, or Convertible Preferred Securities convertible into a like
number of shares of common stock. Through March 2000, we spent, in the
aggregate, approximately $150 million, $62 million in 2000, on repurchases for
a total reduction of 16.2 million equivalent shares on a fully diluted basis.
We have not made any repurchases since that time, but will continue to
evaluate the stock repurchase program based on changes in market conditions
and the stock price.
The REIT Conversion
During 1998, Host Marriott and its subsidiaries and affiliates consummated a
series of transactions intended to enable us to qualify as a REIT for federal
income tax purposes. As a result of these transactions, the hotels formerly
owned by Host Marriott and its subsidiaries and other affiliates are now owned
by the operating partnership and its subsidiaries, the operating partnership
and its subsidiaries leased substantially all of these hotels to Crestline
Capital Corporation, and Marriott International and other hotel operators
conducted the day to day management of the hotels pursuant to management
agreements with Crestline. We have elected to be treated as a REIT for federal
income tax purposes effective January 1, 1999. The important transactions
comprising the REIT conversion are summarized below.
During 1998, Host Marriott reorganized its hotels and certain other assets
so that they were owned by the operating partnership and its subsidiaries.
Host Marriott and its subsidiaries received a number of OP Units equal to the
number of then outstanding shares of Host Marriott common stock, and the
operating partnership and its subsidiaries assumed substantially all of the
liabilities of Host Marriott and its subsidiaries. As a result of this
reorganization and the related transactions described below, we are the sole
general partner in the operating partnership and as of December 31, 2000 held
approximately 78% of the outstanding OP Units. The operating partnership and
its subsidiaries conduct our hotel ownership business. OP Units owned by
holders other than us are redeemable at the option of the holder, generally
commencing one year after the issuance of 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. However, in
lieu of a cash redemption by the operating partnership, we have the right to
acquire any OP Unit offered for redemption directly from the holder thereof in
exchange for either one share of our common stock or cash in an amount equal
to the market value of one share of our common stock. On February 7, 2001,
certain minority partners converted 12.5 million OP Units
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to common shares and immediately sold them to an underwriter for sale on the
open market. As a result, we now own approximately 82% of Host LP.
In connection with the REIT conversion, two taxable corporations were formed
in which the operating partnership owns approximately 95% of the economic
interest but none of the voting interest. We refer to these two subsidiaries
as the non-controlled subsidiaries. The non-controlled subsidiaries hold
various assets and related liabilities totaling $354 million and $245 million,
respectively, at December 31, 2000, which were originally contributed by Host
Marriott and its subsidiaries to the operating partnership, but whose direct
ownership by the operating partnership or its other subsidiaries generally
would jeopardize our status as a REIT and the operating partnership's status
as a partnership for federal income tax purposes. These assets primarily
consist of controlling interests in partnerships or other interests in three
full-service hotels which are not leased, and specified furniture, fixtures
and equipment--also known as FF&E--used in the hotels. The operating
partnership has no control over the operation or management of the hotels or
other assets owned by the non-controlled subsidiaries. The Host Marriott
Statutory Employee/Charitable Trust acquired all of the voting common stock of
each non-controlled subsidiary, representing, in each case, the remaining
approximately 5% of the total economic interests in each non-controlled
subsidiary. The beneficiaries of the Employee/Charitable Trust are a trust
formed for the benefit of specified employees of the operating partnership and
the J. Willard and Alice S. Marriott Foundation. During February 2001, our
Board of Directors approved the acquisition by our TRS of the interests in the
non-controlled subsidiaries held by the Host Marriott Statutory
Employee/Charitable Trust for approximately $2 million in cash. If the
transaction is consummated, and there can be no assurance that it will be
consummated, on a consolidated basis our results of operations will reflect
the revenues and expenses generated by the two taxable corporations, our
consolidated balance sheets will include the various assets and related
liabilities held by the two taxable corporations. Approximately $26 million of
the subsidiaries' debt principal matures during 2001. In addition, we will
consolidate three additional full-service properties, one located in Missouri,
and two located in Mexico City, Mexico.
Under the terms of the leases, the lessees pay rent to the operating
partnership and its subsidiaries generally equal to the greater of (1) a
specified minimum rent or (2) rent based on specified percentages of different
categories of aggregate sales at the relevant hotels. Generally, there is a
separate lessee for each hotel property or there is a separate lessee for each
group of hotel properties that has separate mortgage financing or has owners
in addition to the operating partnership and its wholly owned subsidiaries.
The lessees for all but four of our hotels are limited liability companies,
formerly wholly-owned subsidiaries of Crestline, each of whose purpose is
limited to acting as lessee under an applicable lease. The limited liability
company agreements provide that the lessee has full control over the
management of the business of the lessee, except with respect to certain
decisions for which the consent of other members or the hotel manager is
required. In addition, Marriott International or its appropriate subsidiary
has a non-economic voting interest on specific matters pertaining to hotels
managed by Marriott International or its subsidiaries.
The leases, through the sales percentage rent provisions, are designed to
allow us and our subsidiaries that own our properties to participate in any
growth above specified levels in room sales at the hotels, which management
expects can be achieved through increases in room rates and occupancy levels.
Although the economic trends affecting the hotel industry will be the major
factor in generating growth in revenues, the abilities of the lessees and the
managers will also have a material impact on future sales growth. In 2001,
with 116 of our full-service hotels leased to our wholly-owned TRS, any
increases in future earnings and cash flows at the hotels will have a direct,
positive effect on our consolidated earnings and cash flows. Our leases have
terms ranging from seven to ten years.
In December 1999, the REIT Modernization Act was enacted, with most
provisions effective for taxable years beginning after December 31, 2000,
which significantly amends the REIT laws applicable to us. Under the
applicable sections of the Internal Revenue Code, as amended by the REIT
Modernization Act, and the pcorresponding regulations that govern the federal
income tax treatment of REITs and their shareholders, a REIT must meet certain
tests regarding the nature of its income and assets, as follows.
Qualification of an entity as a taxable REIT subsidiary. Beginning January
1, 2001, a REIT is permitted to own up to 100% of the voting stock of one or
more taxable REIT subsidiaries subject to limitations on the
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value of those subsidiaries. The rents received from such subsidiaries will
not be disqualified from being "rents from real property" by reason of the
operating partnership's ownership interest in the subsidiary so long as the
property is operated on behalf of the taxable REIT subsidiary by an "eligible
independent contractor." This enables the operating partnership to lease its
hotels to wholly-owned taxable subsidiaries if the hotels are operated and
managed on behalf of such subsidiaries by an independent third party. Under
the REIT Modernization Act, taxable REIT subsidiaries are subject to federal
income tax.
Income tests applicable to REITs. In order to maintain qualification as a
REIT, two gross income requirements must be satisfied on an annual basis.
. At least 75% of gross income, excluding gross income from prohibited
transactions, must be derived directly or indirectly from investments
relating to real property, including "rents from real property", gains
on the disposition of real estate, dividends paid by another REIT and
interest on obligations secured by mortgages on real property or on
interests in real property, or from some types of temporary investments.
. At least 95% of gross income, excluding gross income from prohibited
transactions, must be derived from any combination of income qualifying
under the 75% test, dividends, interest, some payments under hedging
instruments, and gain from the sale or disposition of stock or
securities, including some hedging instruments.
Rents received from a TRS will qualify as "rents from real property" as long
as the leases are true leases and the property is a qualified lodging facility
operated by an eligible independent contractor. If rent attributable to
personal property leased in connection with a lease of real property is
greater than 15% of the total rent received under the lease (based on relative
fair market values), then the portion of rent attributable to such personal
property will not qualify as "rents from real property."
Asset tests applicable to REITs. At the close of each quarter of its taxable
year, a REIT must satisfy four tests relating to the nature of its assets.
. At least 75% of the value of total assets must be represented by real
estate assets. Our real estate assets include, for this purpose, our
allocable share of real estate assets held by the operating partnership
and its non-corporate subsidiaries, as well as stock or debt instruments
held for less than one year purchased with the proceeds of a stock or
long-term debt offering, cash and government securities.
. No more than 25% of total assets may be represented by securities other
than those in the 75% asset class.
. Of the investments included in the 25% asset class, the value of any one
issuer's securities may not exceed 5% of total assets, and a REIT may
not own more than 10% of either the outstanding voting securities or the
value of the outstanding securities of any one issuer. Beginning in
2001, this limit does not apply to securities of a TRS.
.Not more than 20% of total assets may be represented by securities of
taxable REIT subsidiaries.
Recent Acquisitions, Developments and Dispositions
The pace of acquisitions changed significantly in 2000 and 1999 from the
previous years. After three years of acquisitions numbering 36, 17, and 24
full service hotels for 1998, 1997 and 1996, respectively, our recent
acquisitions were limited due to the availability of suitable acquisition
candidates that complement our portfolio of high-end hotels, increased price
competition and capital limitations due to weak equity markets for REIT
stocks. We believe that acquisitions that meet our stringent criteria will
provide the highest and best use of our capital. Future acquisitions are
likely to be either public or private portfolio transactions, and transactions
where we already hold minority partnership interests. In addition, we believe
we can successfully add properties to our portfolio through partnership
arrangements with either the seller of the property or the incoming managers.
During 2000, we acquired a non-controlling partnership interest in the 772-
room J.W. Marriott Hotel in Washington, D.C. in which we already held a 17%
limited partner interest for $40 million and have the option to
7
purchase an additional 44% limited partnership interest. During 1999, our
acquisitions were limited to the acquisition of minority interests in two
hotels, where we had previously acquired the controlling interests, for a
total consideration of approximately $14 million. We have the financial
flexibility and, due to our existing private partnership investment portfolio,
the administrative infrastructure in place to accommodate such arrangements.
We view this ability as a competitive advantage and expect to enter into
similar arrangements to acquire additional properties in the future.
Also during 2000, we, through our affiliates, formed a joint venture with
Marriott International, the "Courtyard Joint Venture", to acquire the
partnership interests in Courtyard by Marriott Limited Partnership and
Courtyard by Marriott II Limited Partnership for an aggregate payment of
approximately $372 million plus interest and legal fees, of which we paid
approximately $79 million. The Courtyard Joint Venture acquired 120 Courtyard
by Marriott properties totaling 17,554 rooms. The joint venture financed the
acquisition with mezzanine indebtedness borrowed from Marriott International
and with cash and other assets contributed by our affiliates and Marriott
International. The investment was consummated pursuant to a litigation
settlement involving the two limited partnerships, in which we, through our
affiliates, served as general partner, rather than as a strategic initiative.
During 2000, we focused our energies on increasing the value of our current
portfolio with selective investments, expansions and new developments. We plan
to complete our current pipeline of development activity, and selectively
expand existing properties and develop new upscale and luxury full-service
hotels that complement our quality portfolio in the future. We intend to
target only development projects that show promise of providing financial
returns that represent a premium to returns from acquisitions. The largest of
our recent development projects has been the construction of a 717-room full
service Marriott hotel adjacent to the convention center in downtown Tampa,
Florida. The hotel, which was completed and opened for business on February
19, 2000, includes 45,000 square feet of meeting space, three restaurants and
a 30 slip marina as well as many other amenities. The total development cost
of the property was approximately $104 million, excluding a $16 million tax
subsidy provided by the City of Tampa.
At the Orlando Marriott, the addition of a 500-room tower and 15,000 square
feet of meeting space was placed in service in June 2000 at an approximate
development cost of $88 million, making it the largest hotel in the Marriott
system with 2000 rooms. We also have renovated the golf course, added a multi-
level parking deck, and upgraded and expanded several restaurants.
Also under development is a 50,000 square-foot world-class spa at the Ritz-
Carlton, Naples, at an estimated development cost of $23 million, scheduled
for completion in March 2001. A 295-room Ritz-Carlton Golf Resort in Naples is
in process approximately 2 miles from the Ritz-Carlton, Naples, at an
estimated development cost of $75 million, with expected completion during the
fourth quarter of 2001. The golf resort will also host 15,000 square-feet of
meeting space, four food and beverage outlets, and full access to 36 holes of
a Greg Norman designed golf course surrounding the hotel. The newly created
golf resort, as well as the new spa facility will operate in concert with the
463-room Ritz-Carlton, Naples and on a combined basis will offer travelers an
unmatched resort experience. Further, given the close proximity of the
properties to each other, we will benefit from cost efficiencies and the
ability to capture larger groups.
We expect to begin a 200-room expansion of the Memphis Marriott, which is
located adjacent to a newly-renovated convention center. The property was
converted to the Marriott brand upon acquisition in 1998 to capitalize on
Marriott's brand name recognition. The project is expected to be completed in
2002 at a total development cost of approximately $16 million.
Also during 2000, we focused on aggressively managing our existing assets,
including completing approximately $21 million in projects that are expected
to provide internal rates of return in excess of 24%. Major projects completed
during the year include a renovation of the guest rooms and public space at
the Boston Marriott Newton, a conversion of a rooftop ballroom to high-end
catering and meeting space at the Marina Beach Marriott, and a conversion of
lounge space to flexible meeting space at the Ft. Lauderdale Marina Marriott.
8
We also accomplished various projects to enhance revenues, control expenses,
and enhance technology at the hotels. During 2000, we added approximately
36,000 square feet of meeting space and 200 premium-priced rooms to the
portfolio, and approved new parking contracts at four of our properties. We
authorized utility conservation efforts including energy management strategies
at five properties, the closing of several unprofitable food and beverage
outlets, and the development of a program to review labor models. We also
approved internet connectivity solutions and in-room portal and entertainment
options to better meet the technology needs of our customers.
Through subsidiaries we currently own four Canadian properties, with 1,636
rooms. International acquisitions are limited due to the difficulty in meeting
our stringent return criteria. However, we intend to continue to evaluate
acquisition opportunities in Canada and other international locations. The
overbuilding and economic stress experienced in some European and Pacific Rim
countries may eventually lead to additional international acquisition
opportunities. We will acquire international properties only when we believe
such acquisitions achieve satisfactory returns after adjustments for currency
and country risks.
We will also consider from time to time selling hotels that do not fit our
long-term strategy, or otherwise meet our ongoing investment criteria,
including for example, hotels in some suburban locations, hotels that require
significant future capital improvement and other underperforming assets. The
net proceeds from any such sales will be reinvested in upscale and luxury
hotels more consistent with our strategy or otherwise applied in a manner
consistent with our investment strategy (which may include the purchase of
securities) at the time of sale. We did not dispose of any hotels during 2000.
The following table summarizes our 1999 dispositions (in millions, except in
number of rooms):
Pre-tax
Total Gain (Loss)
Property Location Rooms Consideration on Disposal
- -------- ---------------- ----- ------------- -----------
Minneapolis/Bloomington
Marriott.................... Bloomington, MN 479 $ 35 $ 10
Saddle Brook Marriott........ Saddle Brook, NJ 221 15 3
Marriott's Grand Hotel Resort
and Golf Club............... Point Clear, AL 306 28 (2)
The Ritz-Carlton, Boston..... Boston, MA 275 119 15
El Paso Marriott............. El Paso, TX 296 1 (2)
Hotel Lodging Industry
The lodging industry posted moderate gains in 2000 and 1999 as higher
average daily rates drove strong increases in REVPAR, which measures daily
room revenues generated on a per room basis. This does not include food and
beverage or other ancillary revenues generated by the property. REVPAR
represents the product of the average daily room rate charged and the average
daily occupancy achieved. Previously, the upper upscale sector of the lodging
industry benefited from a favorable supply/demand imbalance, driven in part by
low construction levels combined with high gross domestic product, or GDP,
growth. However, during 1998 through 2000, supply moderately outpaced demand,
causing slight declines in occupancy rates in the sector in which we operate.
According to Smith Travel Research, occupancy in our brands' competitive set
consisting of Crowne Plaza; Doubletree; Hyatt; Hilton; Radisson; Renaissance;
Sheraton; Westin; and Wyndham increased 2.5% for the year ended December 31,
2000. Within our competitive set, the slight increase in occupancy during 2000
was reinforced by a 5.0% increase in average daily rate which generated a 7.4%
increase in REVPAR.
The current amount of excess supply growth in the upper-upscale and luxury
portions of the full-service segment of the lodging industry is beginning to
moderate and has been much less severe than that experienced in the lodging
industry in other economic downturns, in part because of the greater financial
discipline and lending practices imposed by financial institutions and public
markets today relative to those during the late 1980's.
The occupancy rates and average daily rates commanded by our properties have
exceeded both the industry as a whole and the upper-upscale and luxury full
service segment. The attractive locations of our hotels, the
9
limited availability of new building sites for new construction of competing
full service hotels, and the lack of availability of financing for new full
service hotels has allowed us to maintain REVPAR and average daily rate
premiums over our competitors in these service segments. For our comparable
hotels, average daily rates increased 6.3% in 2000. The increase in average
daily rate helped generate a strong increase in comparable hotel REVPAR of
6.6% for the same period. Furthermore, because our lodging operations have a
high fixed-cost component, increases in REVPAR generally yield greater
percentage increases in our earnings and cash flows. As a result of our
acquisition of the Crestline Lessee Entities with respect to 116 of our full-
service hotels, effective January 1, 2001 any change in earnings and cash flow
levels at those properties (which formerly were leased to Crestline) will have
a direct effect on our consolidated earnings and cash flows.
The relative balance between supply and demand growth may be influenced by a
number of factors including growth of the economy, interest rates, unique
local considerations and the relatively long lead time to develop urban,
convention and resort hotels. We believe that growth in room supply in upper-
upscale sector in which we operate will continue to exceed room demand growth
through 2001. However, we believe that during 2001 and 2002, supply growth
will begin to decrease, as the lack of availability of development financing
slows new construction. We further believe that demand growth will begin to
increase during 2001 and 2002. However, some economists are predicting an
economic slowdown in 2001, which could lead to substantial decreases in
demand. There can be no assurance that growth in supply will decrease, or that
REVPAR and EBITDA will continue to improve.
Hotel Lodging Properties
Our lodging portfolio, as of March 12, 2001, consists of 122 upscale and
luxury full service hotels containing approximately 58,000 rooms. Our hotel
lodging properties represent quality upscale and luxury assets in the full
service segment. Our hotel properties are currently operated under various
premium brands including Marriott, Ritz-Carlton, Four Seasons, Hilton, Hyatt,
and Swissotel brand names.
Our hotels average approximately 478 rooms. Thirteen of our hotels have more
than 750 rooms. Hotel facilities typically include meeting and banquet
facilities, a variety of restaurants and lounges, swimming pools, gift shops
and parking facilities. Our hotels primarily serve business and pleasure
travelers and group meetings at locations in urban, airport, resort convention
and suburban locations throughout the United States. The properties are
generally well situated in locations where there are significant barriers to
entry by competitors including downtown areas of major metropolitan cities, at
airports and resort/convention locations where there are limited or no
development sites. The average age of the properties is 17 years, although
many of the properties have had substantial renovations or major additions.
To maintain the overall quality of our lodging properties, each property
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each property. For fiscal years
2000, 1999 and 1998 we spent $230 million, $197 million and $165 million,
respectively, on capital improvements to existing properties. As a result of
these expenditures, we expect to maintain high quality rooms, restaurants and
meeting facilities at our properties.
In addition to acquiring and maintaining superior assets, a key part of our
strategy is to have the hotels managed by leading management companies. As of
March 12, 2001, 100 of our 122 hotel properties were managed by subsidiaries
of Marriott International as Marriott or Ritz-Carlton brand hotels and an
additional nine hotels are part of Marriott International's full-service hotel
system through franchise agreements. The remaining hotels are managed by
leading management companies including Four Seasons, Hilton, and Hyatt. Our
properties have reported annual increases in REVPAR since 1993. Based upon
data provided by Smith Travel Research, our comparable properties, as
previously defined, have an approximate 5 and 6 percentage point occupancy
premium and an approximate 32% and 33% REVPAR premium over the competitive set
for fiscal years 2000 and 1999, respectively.
10
The chart below sets forth performance information for our comparable
properties:
2000 1999
------- -------
Comparable Full-Service Hotels(1)
Number of properties........................................ 118 118
Number of rooms............................................. 53,899 53,899
Average daily rate.......................................... $157.96 $148.61
Occupancy percentage........................................ 78.2% 77.9%
REVPAR...................................................... $123.50 $115.82
REVPAR % change............................................. 6.6% --
- --------
(1) Consists of 118 properties owned, directly or indirectly, by us for the
entire 2000 and 1999 fiscal years, respectively, excluding one property
that sustained substantial fire damage during 2000, two properties where
significant expansion at the hotels affected operations, and the Tampa
Waterside Marriott, which opened in February 2000. These properties, for
the respective periods, represent the "comparable properties."
The chart below presents some performance information for our entire
portfolio of full-service hotels:
1999 1998
2000 (1) (2)
------- ------- -------
Number of properties................................. 122 121 126
Number of rooms...................................... 58,373 57,086 58,445
Average daily rate................................... $157.93 $149.51 $140.36
Occupancy percentage................................. 77.5% 77.7% 77.7%
REVPAR............................................... $122.43 $116.13 $109.06
- --------
(1) The property statistics and operating results include operations for the
Minneapolis/Bloomington Marriott, the Saddle Brook Marriott, Marriott's
Grand Hotel Resort and Golf Club, The Ritz-Carlton, Boston, and the El
Paso Marriott, which were sold at various times throughout 1999, through
the date of sale.
(2) The property statistics are as of December 31, 1998 and include 25
properties (9,965 rooms) acquired during that month.
The following table presents performance information for our comparable
properties by geographic region for 2000 and 1999:
As of December 31, 2000 Year Ended December 31, 2000 Year Ended December 31, 1999
------------------------ ----------------------------- -----------------------------
Number Average Number Average Average Average Average
Geographic Region of Hotels of Guest Rooms Occupancy Daily Rate REVPAR Occupancy Daily Rate REVPAR
----------------- --------- -------------- --------- ---------- -------- --------- ---------- --------
Atlanta................ 11 486 72.4% $ 158.54 $ 114.75 74.7% $ 148.78 $ 111.12
Florida................ 11 443 77.1 155.04 119.53 77.5 147.10 113.95
Mid-Atlantic........... 17 364 75.9 145.42 110.33 75.8 132.80 100.69
Midwest................ 14 358 75.2 141.00 106.03 76.6 132.75 101.71
New York............... 9 642 87.5 228.99 200.39 87.0 212.25 184.70
Northeast.............. 11 390 76.8 138.28 106.15 77.2 129.93 100.32
South Central.......... 18 506 78.1 125.55 98.01 76.5 123.44 94.45
Western................ 27 492 79.6 164.43 130.94 78.2 154.26 120.60
Average--All regions... 118 456 78.2 157.96 123.50 77.9 148.61 115.82
During 2000 and 1999, our foreign operations consisted of four full-service
hotel properties located in Canada. During 1998, our foreign operations
consisted of the four full-service properties in Canada as well as two full-
service properties in Mexico. During 2000, 1999, and 1998, respectively, 98%,
98%, and 97% of total revenues were attributed to sales within the United
States, and 2%, 2%, and 3% of total revenues were attributed to foreign
countries.
Prior to 1997, we divested certain limited-service hotel properties through
the sale and leaseback of 53 Courtyard properties and 18 Residence Inn
properties. The Courtyard and Residence Inn properties are subleased to
subsidiaries of Crestline under sublease agreements and are managed by
Marriott International under long-term management agreements. During 2000,
limited-service properties represented less than 1% of our EBITDA from hotel
properties. Lease revenues for the 71 properties that we sub-lease are
reflected in our revenues in 2000 and 1999, while gross property-level sales
were reflected previous to that.
11
During 2000, the Courtyard Joint Venture, which was formed by us (through
our non-controlled subsidiary) and Marriott International, acquired the
partnership interests in Courtyard by Marriott Limited Partnership and
Courtyard by Marriott II Limited Partnership, which collectively own 120
Courtyard by Marriott properties totaling 17,554 rooms. We own, through our
affiliates, a 50% non-controlling interest in the joint venture.
The following table sets forth the location and number of rooms of our 122
hotels as of March 1, 2001. All of the properties are currently leased to our
wholly-owned taxable REIT subsidiaries, unless otherwise indicated.
Location Rooms
- -------- -----
Arizona
Mountain Shadows Resort.......... 337
Scottsdale Suites................ 251
The Ritz-Carlton, Phoenix........ 281
California
Coronado Island Resort(1)........ 300
Costa Mesa Suites................ 253
Desert Springs Resort and Spa.... 884
Fullerton(1)..................... 224
Hyatt Regency, Burlingame........ 793
Manhattan Beach(1)(2)............ 380
Marina Beach(1).................. 370
Newport Beach.................... 586
Newport Beach Suites............. 250
Ontario Airport(2)............... 299
Sacramento Airport(3)............ 85
San Diego Marriott Hotel and
Marina(1)(2)(3)................. 1,355
San Diego Mission Valley(2)(3)... 350
San Francisco Airport............ 684
San Francisco Fisherman's Wharf.. 285
San Francisco Moscone Center(1).. 1,498
San Ramon(1)..................... 368
Santa Clara(1)................... 755
The Ritz-Carlton, Marina del
Rey(1).......................... 306
The Ritz-Carlton, San Francisco.. 336
Torrance......................... 487
Colorado
Denver Southeast(1).............. 590
Denver Tech Center............... 625
Denver West(1)................... 305
Marriott's Mountain Resort at
Vail............................ 349
Connecticut
Hartford/Farmington.............. 380
Hartford/Rocky Hill(1)........... 251
Florida
Fort Lauderdale Marina........... 580
Harbor Beach Resort(1)(2)(3)..... 637
Jacksonville(1).................. 256
Miami Airport(1)................. 782
Miami Biscayne Bay(1)............ 605
Orlando World Center............. 2,000
Palm Beach Gardens............... 279
Singer Island Hilton............. 223
Tampa Airport(1)................. 295
Tampa Waterside.................. 717
Tampa Westshore(1)............... 309
The Ritz-Carlton, Amelia Island.. 449
The Ritz-Carlton, Naples......... 463
Georgia
Atlanta Marriott Marquis......... 1,671
Atlanta Midtown Suites(1)........ 254
Atlanta Norcross................. 222
Location Rooms
- -------- -----
Georgia (continued)
Atlanta Northwest............... 401
Atlanta Perimeter(1)............ 400
Four Seasons, Atlanta........... 246
Grand Hyatt, Atlanta............ 438
JW Marriott Hotel at Lenox(1)... 371
Swissotel, Atlanta.............. 348
The Ritz-Carlton, Atlanta....... 447
The Ritz-Carlton, Buckhead...... 553
Illinois
Chicago/Deerfield Suites........ 248
Chicago/Downers Grove Suites.... 254
Chicago/Downtown Courtyard...... 334
Chicago O'Hare.................. 681
Chicago O'Hare Suites(1)........ 256
Swissotel, Chicago.............. 630
Indiana
South Bend(1)................... 300
Louisiana
New Orleans..................... 1,290
Maryland
Bethesda(1)..................... 407
Gaithersburg/Washingtonian
Center......................... 284
Massachusetts
Boston/Newton................... 430
Hyatt Regency, Cambridge........ 469
Swissotel, Boston............... 498
Michigan
The Ritz-Carlton, Dearborn...... 308
Detroit Livonia................. 224
Detroit Romulus................. 245
Detroit Southfield.............. 226
Minnesota
Minneapolis City Center......... 583
Minneapolis Southwest(2)(3)..... 320
Missouri
Kansas City Airport(1).......... 382
New Hampshire
Nashua.......................... 251
New Jersey
Hanover......................... 353
Newark Airport(1)............... 591
Park Ridge(1)................... 289
New Mexico
Albuquerque(1).................. 411
New York
Albany(2)(3).................... 359
New York Marriott Financial
Center......................... 504
New York Marriott Marquis(1).... 1,944
Marriott World Trade Center(1).. 820
Swissotel, The Drake............ 494
12
Location Rooms
- -------- -----
North Carolina
Charlotte Executive Park...... 298
Greensboro/Highpoint(1)....... 299
Raleigh Crabtree Valley....... 375
Research Triangle Park........ 224
Ohio
Dayton........................ 399
Oklahoma
Oklahoma City................. 354
Oklahoma City Waterford(2).... 197
Oregon
Portland...................... 503
Pennsylvania
Four Seasons, Philadelphia.... 364
Philadelphia Convention
Center(1)(2)................. 1,408
Philadelphia Airport(1)....... 419
Pittsburgh City Center(1)(2).. 400
Tennessee
Memphis....................... 403
Texas
Dallas/Fort Worth Airport..... 492
Dallas Quorum(1).............. 547
Houston Airport(1)............ 565
Houston Medical Center(1)..... 386
JW Marriott Houston........... 514
Plaza San Antonio(1).......... 252
Location Rooms
- -------- ------
Texas (continued)
San Antonio Rivercenter(1)... 1,001
San Antonio Riverwalk(1)..... 513
Utah
Salt Lake City(1)............ 510
Virginia
Dulles Airport(1)............ 368
Fairview Park................ 395
Hyatt Regency, Reston........ 514
Key Bridge(1)................ 588
Norfolk Waterside(1)......... 404
Pentagon City Residence Inn.. 300
The Ritz-Carlton, Tysons
Corner(1)................... 398
Washington Dulles Suites..... 254
Westfields................... 335
Williamsburg................. 295
Washington
Seattle SeaTac Airport....... 459
Washington, DC
Washington Metro Center...... 456
Canada
Calgary...................... 380
Toronto Airport(2)........... 423
Toronto Eaton Center(1)...... 459
Toronto Delta Meadowvale..... 374
------
TOTAL......................... 58,373
======
- --------
(1) The land on which this hotel is built is leased under one or more long-
term lease agreements.
(2) This property is not wholly owned by the operating partnership.
(3) This property is not leased to our TRS.
Investments in Affiliated Partnerships
We also maintain investments in several partnerships that own hotel
properties. Typically, the operating partnership and certain of its
subsidiaries manage our partnership investments and through a combination of
general and limited partnership interests, conduct the partnership services
business. As previously discussed, during 2000 we acquired a non-controlling
interest in the partnership that owns the J.W. Marriott Hotel in Washington,
D.C. In connection with the REIT conversion, Rockledge Hotel Properties and
Fernwood Hotel Assets were formed as non-controlled subsidiaries to hold
various assets, the direct ownership of which by us or the operating
partnership could jeopardize our status as a REIT or the operating
partnership's treatment as a partnership for federal income tax purposes. As
of December 31, 2000, substantially all of our general and limited partner
interests in partnerships owning 208 limited-service properties (including
nearly all of our interests in the Courtyard Joint Venture) and four full-
service hotels were held by our two non-controlled subsidiaries.
The partnership hotels are currently operated under management agreements
with Marriott International or its subsidiaries. As the general partner, we
oversee and monitor Marriott International and its subsidiaries' performance
pursuant to these agreements. Additionally, we are responsible for the payment
of partnership obligations from partnership funds, preparation of financial
reports and tax returns and communications with lenders, limited partners and
regulatory bodies. As the general partner, we are reimbursed for the cost of
providing these services subject to limitations in certain cases. Cash
distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt.
Distributions from these partnerships to us were $1.3 million in 2000 and $2
million in 1998. There were no distributions in 1999. All debt of these
partnerships is nonrecourse to us and our subsidiaries, except that we are
contingently liable under various guarantees of debt obligations of certain of
the limited-service partnerships.
13
Marketing
As of March 1, 2001, 100 of our 122 hotel properties are managed by
subsidiaries of Marriott International as Marriott or Ritz-Carlton brand
hotels and an additional nine hotels are part of Marriott International's
full-service hotel system through franchise agreements. The remaining hotels
are managed primarily by Four Seasons, Hilton, Hyatt, and Swissotel.
We believe that our properties will continue to enjoy competitive advantages
arising from their participation in the Marriott, Ritz-Carlton, Four Seasons,
Hilton, Hyatt and Swissotel hotel systems. The national marketing programs and
reservation systems of each of these managers, as well as the advantages of
strong customer preference for these upper-upscale and luxury brands should
also help these properties to maintain or increase their premium over
competitors in both occupancy and room rates. Repeat guest business is
enhanced by guest rewards programs offered by Marriott, Ritz-Carlton, Hilton,
Hyatt, and Swissotel. Each of the managers maintains national reservation
systems that provide reservation agents with complete descriptions of the
rooms available and up-to-date rate information from the properties. Our
website (www.hostmarriott.com) currently permits users to connect to the
Marriott, Ritz-Carlton, Four Seasons, Hilton, Hyatt, and Swissotel reservation
systems to reserve rooms in our hotels.
Competition
Our hotels compete with several other major lodging brands in each segment
in which they operate. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience of locations and room
rates. Although the competitive position of each of our hotel properties
differs from market to market, we believe that our properties compare
favorably to their competitive set in the markets in which they operate on the
basis of these factors. The following table presents key participants in
segments of the lodging industry in which we compete:
Segment Representative Participants
------- ---------------------------
Luxury Full-Service Ritz-Carlton; Four Seasons
Upscale Full-Service Crown Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels,
Resort and Suites; Radisson; Renaissance; Sheraton;
Swissotel; Westin; Wyndham
Seasonality
Our hotel revenues have traditionally experienced significant seasonality.
Additionally, hotel revenues in the fourth quarter reflect sixteen weeks of
results compared to twelve weeks for the first three quarters of the fiscal
year. Average hotel sales by quarter over the years 1998 through 2000 for our
lodging properties are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
22% 24% 22% 32%
Other Real Estate Investments
We have lease and sublease activity relating primarily to Host Marriott's
former restaurant operations. Additionally, we have lease activity related to
certain office space that we own in Atlanta, Chicago, and San Francisco which
is included in other revenues in our statements of operations.
Employees
We are managed by our Board of Directors and we have no employees who are
not employees of the operating partnership.
Currently, the operating partnership has approximately 201 management
employees, and approximately 14 other employees who are covered by a
collective bargaining agreement that is subject to review and renewal on a
regular basis. We believe that we and our managers have good relations with
labor unions and have not experienced any material business interruptions as a
result of labor disputes.
14
Environmental and Regulatory Matters
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials, and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released asbestos-containing materials.
Environmental laws also may impose restrictions on the manner in which
property may be used or business may be operated, and these restrictions may
require expenditures. In connection with our current or prior ownership or
operation of hotels, we may be potentially liable for any such costs or
liabilities. Although we are currently not aware of any material environmental
claims pending or threatened against us, we can offer no assurance that a
material environmental claim will not be asserted against us.
The Management Agreements
All of our hotels are subject to management agreements for the operation of
the properties. The original terms of the management agreements are generally
15 to 20 years in length with multiple optional renewal terms. The following
is a brief summary of the general terms of the management agreements a form of
which has been filed with the Commission.
The lessees lease the hotels from the operating partnership or its
subsidiaries. Upon leasing the hotels, the lessees assumed substantially all
of the obligations of such subsidiaries under the management agreements
between those entities and other companies that currently manage the hotels.
As a result of their assumptions of obligations under the management
agreements, the lessees have substantially all of the rights and obligations
of the "owners" of the hotels under the management agreements for the period
during which the leases are in effect (including the obligation to pay the
management fees and other fees thereunder) and hold the lessor harmless with
respect thereto. The lessors remain liable for all obligations under the
management agreements. As previously discussed, effective January 1, 2001, the
lessor leases 116 of our full-service hotels to subsidiaries of a wholly-owned
TRS. Therefore, through our wholly-owned subsidiary, we have assumed the
rights and obligations of the "owners" under the management agreements with
respect to the 116 hotels.
. General. Under each management agreement the manager provides complete
management services to the applicable lessees in connection with its
management of such lessee's hotels.
. Operational services. The managers are responsible for the activities
necessary for the day-to-day operation of the hotels, including
establishment of all room rates, the processing of reservations,
procurement of inventories, supplies and services, periodic inspection
and consultation visits to the hotels by the managers' technical and
operational experts and promotion and publicity of the hotels. The
manager receives compensation from the lessee in the form of a base
management fee and an incentive management fee, which are normally
calculated as percentages of gross revenues and operating profits,
respectively.
. Executive supervision and management services. The managers provide all
managerial and other employees for the hotels; review the operation and
maintenance of the hotels; prepare reports, budgets and projections;
provide other administrative and accounting support services, such as
planning and policy services, financial planning, divisional financial
services, risk planning services, product planning and development,
employee planning, corporate executive management, legislative and
governmental representation and certain in-house legal services; and
protect trademarks, trade-names and service marks. The manager also
provides a national reservations system.
. Chain services. The management agreements require the manager to furnish
chain services that are furnished generally on a central or regional
basis. Such services include: (1) the development and operation of
computer systems and reservation services, (2) administrative services,
marketing and sales services, training services, manpower development
and relocation costs of personnel and (3) such
15
additional central services as may from time to time be more efficiently
performed on a group level. Costs and expenses incurred in providing
such services are required to be allocated among all hotels managed by
the manager or its affiliates and each applicable lessee is required to
reimburse the manager for its allocable share of such costs and
expenses.
. Working capital and fixed asset supplies. The lessee is required to
maintain working capital for each hotel and fund the cost of fixed asset
supplies, which principally consist of linen and similar items. The
applicable lessee also is responsible for providing funds to meet the
cash needs for the operations of the hotels if at any time the funds
available from operations are insufficient to meet the financial
requirements of the hotels.
. Use of affiliates. The manager employs the services of its affiliates to
provide certain services under the management agreements.
FF&E replacements. The management agreements generally provide that once
each year the manager will prepare a list of FF&E to be acquired and certain
routine repairs that are normally capitalized to be performed in the next year
and an estimate of the funds necessary therefor. Under the terms of the
leases, the lessor is required to provide to the applicable lessee all
necessary FF&E for the operation of the hotels (including funding any required
FF&E replacements). For purposes of funding the FF&E replacements, a specified
percentage (generally 5%) of the gross revenues of the hotel is deposited by
the manager into a book entry account. These amounts are treated under the
leases as paid by the lessees to the lessor and will be credited against their
rental obligations.
Under each lease, the lessor is responsible for the costs of FF&E
replacements and for decisions with respect thereto (subject to its
obligations to the lessee under the lease).
. Building alterations, improvements and renewals. The management
agreements require the manager to prepare an annual estimate of the
expenditures necessary for major repairs, alterations, improvements,
renewals and replacements to the structural, mechanical, electrical,
heating, ventilating, air conditioning, plumbing and vertical
transportation elements of each hotel. Such estimate must be submitted
to the lessor and the lessee for their approval. In addition to the
foregoing, the management agreements generally provide that the manager
may propose such changes, alterations and improvements to the hotel as
are required, in the manager's reasonable judgment, to keep the hotel in
a competitive, efficient and economical operating condition or in
accordance with Marriott standards. The cost of the foregoing is paid
from the FF&E reserve account; to the extent that there are insufficient
funds in such account, the lessor is required to pay any shortfall.
. Service marks. During the term of the management agreements, the service
mark, symbols and logos currently used by the manager and its
affiliates, may be used in the operation of the hotels. Marriott
International, Four Seasons, Hilton, Hyatt, and Swissotel intend to
retain their legal ownership of these marks. Any right to use the
service marks, logo and symbols and related trademarks at a hotel will
terminate with respect to that hotel upon termination of the management
agreement with respect to such hotel.
. Termination fee. Certain of the management agreements provide that if
the management agreement is terminated prior to its full term due to
casualty, condemnation or the sale of the hotel, the manager would
receive a termination fee as specified in the specific management
agreement. Under the leases, the responsibility for the payment of any
such termination fee as between the lessee and the lessor depends upon
the cause for such termination.
. Termination for failure to perform. Most of the management agreements
may be terminated based upon a failure to meet certain financial
performance criteria, subject to the manager's right to prevent such
termination by making specified payments to the lessee based upon the
shortfall in such criteria.
. Assignment of management agreements. The management agreements
applicable to each hotel have been assigned to the applicable lessee for
the term of the lease of such hotel. As previously discussed, virtually
all of our full-service hotels were leased to Crestline during 1999 and
2000, and are now leased to subsidiaries of our wholly-owned TRS as a
result of our acquisition of the Crestline Lessee
16
Entities during January 2001. The lessee is obligated to perform all of
the obligations of the lessor under the management agreement during the
term of its lease, other than specified retained obligations including,
without limitation, payment of real property taxes, property casualty
insurance and ground rent, and maintaining a reserve fund for FF&E
replacements and capital expenditures, for which the lessor retains
responsibility. Although the lessee has assumed obligations of the
lessor under the management agreement, the lessor is not released from
its obligations and, if the lessee fails to perform any obligations, the
manager will be entitled to seek performance by or damages from the
lessor. If the lease is terminated for any reason, any new or successor
lessee must meet certain requirements for an approved lessee or
otherwise be acceptable to the manager.
Non-competition agreements
We agreed with Crestline that until December 31, 2003, we would not
purchase, finance or otherwise invest in senior living communities, or act as
an agent or consultant with respect to any of the foregoing activities, except
for acquisitions of communities which represent an immaterial portion of a
merger or similar transaction or for minimal portfolio investments in other
entities. In connection with the acquisition of the Crestline Lessee Entities,
the non-competition agreement was terminated effective January 1, 2001 and
thereafter.
We agreed with Marriott International that until June 21, 2007, we would not
operate, manage or franchise (as franchisor) senior living facilities or
invest, finance or act as an agent or consultant with respect to any of the
foregoing activities, except for acquisitions of entities engaged in such
operating, management or franchising activities if such activities are
terminated or divested within 12 months of such acquisition or for minimal
portfolio investments in such entities and except for operating or managing
senior living facilities for a transitional period or up to 12 months in
connection with a change in the operator or manager of such facility.
Risk Factors
The following risk factors should be carefully considered by prospective
investors.
Risks of ownership of our common stock
There are limitations on the acquisition of our common stock and changes in
control. Our charter and bylaws, the partnership agreement of the operating
partnership, our shareholder rights plan and the Maryland General Corporation
Law contain a number of provisions that could delay, defer or prevent a
transaction or a change in control of us that might involve a premium price
for our shareholders or otherwise be in their best interests, including the
following:
Ownership limit. The 9.8% ownership limit described under "--There are
possible adverse consequences of limits on ownership of our common stock"
below may have the effect of precluding a change in control of us by a
third party without the consent of our Board of Directors, even if such
change in control would be in the interest of our shareholders, and even if
such change in control would not reasonably jeopardize our REIT status.
Staggered board. Our charter provides that our Board of Directors will
consist of nine members and can be increased or decreased after that
according to our bylaws, provided that the total number of directors is not
less than three nor more than 13. Pursuant to our bylaws, the number of
directors will be fixed by our Board of Directors within the limits in our
charter. Our Board of Directors is divided into three classes of directors.
Directors for each class are chosen for a three-year term when the term of
the current class expires. The staggered terms for directors may affect
shareholders' ability to effect a change in control of us, even if a change
in control would be in the interest of our shareholders. Currently, there
are nine directors.
Removal of board of directors. Our charter provides that, except for any
directors who may be elected by holders of a class or series of shares of
capital stock other than our common stock, directors may be removed only
for cause and only by the affirmative vote of shareholders holding at least
two-thirds of our outstanding shares entitled to be cast for the election
of directors. Vacancies on the Board of Directors may be filled by the
concurring vote of a majority of the remaining directors and, in the case
of a vacancy resulting from the removal of a director by the shareholders,
by at least two-thirds of all the votes entitled to be cast in the election
of directors.
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Preferred shares; classification or reclassification of unissued shares
of capital stock without shareholder approval. Our charter provides that
the total number of shares of stock of all classes which we have authority
to issue is 800,000,000, initially consisting of 750,000,000 shares of
common stock and 50,000,000 shares of preferred stock, of which 8,160,000
have been issued. Our Board of Directors has the authority, without a vote
of shareholders, to classify or reclassify any unissued shares of stock,
including common stock into preferred stock or vice versa, and to establish
the preferences and rights of any preferred or other class or series of
shares to be issued. The issuance of preferred shares or other shares
having special preferences or rights could delay or prevent a change in
control even if a change in control would be in the interests of our
shareholders. Because our Board of Directors has the power to establish the
preferences and rights of additional classes or series of shares without a
shareholder vote, our Board of Directors may give the holders of any class
or series preferences, powers and rights, including voting rights, senior
to the rights of holders of our common stock.
Consent rights of the limited partners. Under the partnership agreement
of the operating partnership, we generally will be able to merge or
consolidate with another entity with the consent of partners holding
percentage interests that are more than 50% of the aggregate percentage
interests of the outstanding limited partnership interests entitled to vote
on the merger or consolidation, including any limited partnership interests
held by us, as long as the holders of limited partnership interests either
receive or have the right to receive the same consideration as our
shareholders. We, as holder of a majority of the limited partnership
interests, would be able to control the vote. Under our charter, holders of
at least two-thirds of our outstanding shares of common stock generally
must approve the merger or consolidation.
Maryland business combination law. Under the Maryland General Corporation
Law, specified "business combinations," including specified issuances of
equity securities, between a Maryland corporation and any person who owns
10% or more of the voting power of the corporation's then outstanding
shares, or an "interested shareholder," or an affiliate of the interested
shareholder are prohibited for five years after the most recent date in
which the interested shareholder becomes an interested shareholder.
Thereafter, any such business combination must be approved by 80% of
outstanding voting shares, and by two-thirds of voting shares other than
voting shares held by an interested shareholder unless, among other
conditions, the corporation's common shareholders receive a minimum price,
as defined in the Maryland General Corporation Law, for their shares and
the consideration is received in cash or in the same form as previously
paid by the interested shareholder. We are subject to the Maryland business
combination statute.
Maryland control share acquisition law. Under the Maryland General
Corporation Law, "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds
of the votes entitled to be cast on the matter, excluding shares owned by
the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which, if aggregated with
all other such shares previously acquired by the acquiror or in respect of
which the acquiror is able to exercise or direct the exercise of voting
power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (1) one-fifth or more but less than one-
third, (2) one-third or more but less than a majority or (3) a majority or
more of the voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to specified exceptions. We are
subject to these control share provisions of Maryland law, subject to an
exemption for Marriott International pursuant to its purchase right. See
"Risks of ownership of our common stock--Marriott International purchase
right."
Merger, consolidation, share exchange and transfer of our
assets. Pursuant to our charter, subject to the terms of any outstanding
class or series of capital stock, we can merge with or into another entity,
consolidate with one or more other entities, participate in a share
exchange or transfer our assets within the meaning of the Maryland General
Corporation Law if approved (1) by our Board of Directors in the manner
provided in the Maryland General Corporation Law and (2) by our
shareholders holding two-thirds of all the votes entitled to be cast on the
matter, except that any merger of us with or into a trust organized for the
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purpose of changing our form of organization from a corporation to a trust
requires only the approval of our shareholders holding a majority of all
votes entitled to be cast on the merger. Under the Maryland General
Corporation Law, specified mergers may be approved without a vote of
shareholders and a share exchange is only required to be approved by a
Maryland corporation by its Board of Directors. Our voluntary dissolution
also would require approval of shareholders holding two-thirds of all the
votes entitled to be cast on the matter.
Amendments to our charter and bylaws. Our charter contains provisions
relating to restrictions on transferability of our common stock, the
classified Board of Directors, fixing the size of our Board of Directors
within the range set forth in our charter, removal of directors and the
filling of vacancies, all of which may be amended only by a resolution
adopted by the Board of Directors and approved by our shareholders holding
two-thirds of the votes entitled to be cast on the matter. As permitted
under the Maryland General Corporation Law, our charter and bylaws provide
that directors have the exclusive right to amend our bylaws. Amendments of
this provision of our charter also would require action of our Board of
Directors and approval by shareholders holding two-thirds of all the votes
entitled to be cast on the matter.
Marriott International purchase right. As a result of our spin-off of
Marriott International in 1993, Marriott International has the right to
purchase up to 20% of each class of our outstanding voting shares at the
then fair market value when specific change of control events involving us
occur, subject to specified limitations to protect our REIT status. The
Marriott International purchase right may have the effect of discouraging a
takeover of us, because any person considering acquiring a substantial or
controlling block of our common stock will face the possibility that its
ability to obtain or exercise control would be impaired or made more
expensive by the exercise of the Marriott International purchase right.
Shareholder rights plan. We adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from us a newly created series of
junior preferred shares, subject to our ownership limit described below.
The preferred share purchase rights are triggered by the earlier to occur
of (1) ten days after the date of a public announcement that a person or
group acting in concert has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of our outstanding shares of common
stock or (2) ten business days after the commencement of or announcement of
an intention to make a tender offer or exchange offer, the consummation of
which would result in the acquiring person becoming the beneficial owner of
20% or more of our outstanding common stock. The preferred share purchase
rights would cause substantial dilution to a person or group that attempts
to acquire us on terms not approved by our Board of Directors.
There are possible adverse consequences of limits on ownership of our common
stock. To maintain our qualification as a REIT for federal income tax
purposes, not more than 50% in value of our outstanding shares of capital
stock may be owned, directly or indirectly, by five or fewer individuals, as
defined in the Internal Revenue Code to include some entities. In addition, a
person who owns, directly or by attribution, 10% or more of an interest in a
tenant of ours, or a tenant of any partnership in which we are a partner,
cannot own, directly or by attribution, 10% or more of our shares without
jeopardizing our qualification as a REIT. Primarily to facilitate maintenance
of our qualification as a REIT for federal income tax purposes, the ownership
limit under our charter prohibits ownership, directly or by virtue of the
attribution provisions of the Internal Revenue Code, by any person or persons
acting as a group, of more than 9.8% of the issued and outstanding shares of
our common stock, subject to an exception for shares of our common stock held
prior to the REIT conversion so long as the holder would not own more than
9.9% in value of our outstanding shares after the REIT conversion, and
prohibits ownership, directly or by virtue of the attribution provisions of
the Internal Revenue Code, by any person, or persons acting as a group, of
more than 9.8% of the issued and outstanding shares of any class or series of
our preferred shares. Together, these limitations are referred to as the
"ownership limit." Our Board of Directors, in its sole and absolute
discretion, may waive or modify the ownership limit with respect to one or
more persons who would not be treated as "individuals" for purposes of the
Internal Revenue Code if it is satisfied, based upon information required to
be provided by the party seeking the waiver and upon an opinion of counsel
satisfactory to our Board of Directors, that ownership in excess of this limit
will not cause a person
19
who is an individual to be treated as owning shares in excess of the ownership
limit, applying the applicable constructive ownership rules, and will not
otherwise jeopardize our status as a REIT for federal income tax purposes (for
example, by causing any of our tenants to be considered a "related party
tenant" for purposes of the REIT qualification rules). Common stock acquired
or held in violation of the ownership limit will be transferred automatically
to a trust for the benefit of a designated charitable beneficiary, and the
person who acquired such common stock in violation of the ownership limit will
not be entitled to any distributions thereon, to vote such shares of common
stock or to receive any proceeds from the subsequent sale thereof in excess of
the lesser of the price paid therefor or the amount realized from such sale. A
transfer of shares of our common stock to a person who, as a result of the
transfer, violates the ownership limit may be void under certain
circumstances, and, in any event, would deny that person any of the economic
benefits of owning shares of our common stock in excess of the ownership
limit. The ownership limit may have the effect of delaying, deferring or
preventing a change in control and, therefore, could adversely affect the
shareholders' ability to realize a premium over the then-prevailing market
price for our common stock in connection with such transaction.
We depend on external sources of capital for future growth. As with other
REITs, but unlike corporations generally, our ability to reduce our debt and
finance our growth largely must be funded by external sources of capital
because we generally will have to distribute to our shareholders 90% of our
taxable income in order to qualify as a REIT, including taxable income where
we do not receive corresponding cash. For taxable years prior to January 1,
2001, we were required to distribute 95% of our taxable income to qualify as a
REIT. Our access to external capital will depend upon a number of factors,
including general market conditions, the market's perception of our growth
potential, our current and potential future earnings, cash distributions and
the market price of our common stock. Currently, our access to external
capital has been limited to the extent that our common stock is trading at
what we believe is a discount to our estimated net asset value.
Shares of our common stock that are or become available for sale could
affect the price for shares of our common stock. Sales of a substantial number
of shares of our common stock, or the perception that sales could occur, could
adversely affect prevailing market prices for our common stock. In addition,
holders of units of limited partnership interest in the operating partnership
(referred to as "OP Units"), who redeem their OP Units and receive common
stock will be able to sell such shares freely, unless the person is our
affiliate and resale of such affiliate's shares is not covered by an effective
registration statement. There are currently approximately 51 million OP Units
outstanding, all of which are currently redeemable. Further, a substantial
number of shares of our common stock have been and will be issued or reserved
for issuance from time to time under our employee benefit plans, including
shares of our common stock reserved for options, and these shares of common
stock would be available for sale in the public markets from time to time
pursuant to exemptions from registration or upon registration. Moreover, the
issuance of additional shares of our common stock by us in the future would be
available for sale in the public markets. We can make no prediction about the
effect that future sales of our common stock would have on the market price of
our common stock.
Our earnings and cash distributions will affect the market price of shares
of our common stock. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's
growth potential and its current and potential future cash distributions,
whether from operations, sales, acquisitions, development or refinancings, and
is secondarily based upon the value of the underlying assets. For that reason,
shares of our common stock may trade at prices that are higher or lower than
the net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes rather than
distributing such cash flow to shareholders, these retained funds, while
increasing the value of our underlying assets, may not correspondingly
increase the market price of our common stock. Our failure to meet the
market's expectation with regard to future earnings and cash distributions
would likely adversely affect the market price of our common stock.
Market interest rates may affect the price of shares of our common
stock. One of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rate on such
shares, considered as a percentage of the price of such shares, relative to
market interest rates. If market interest
20
rates increase, prospective purchasers of REIT shares may expect a higher
distribution rate. Thus, higher market interest rates could cause the market
price of our shares to go down.
Risks of operation
We do not control our hotel operations, and we are dependent on the managers
of our hotels. Because federal income tax laws currently restrict REITs and
"publicly traded" partnerships from deriving revenues directly from operating
a hotel, we do not manage our hotels. Instead, we retain managers to manage
our hotels pursuant to management agreements. Our income from the hotels may
be adversely affected if the managers fail to provide quality services and
amenities and competitive room rates at our hotels or fail to maintain the
quality of the hotel brand names. While we employ very aggressive asset
management techniques to oversee the managers' performance, we have limited
specific recourse if we believe that the hotel managers do not maximize the
revenues from our hotels or control expenses, which in turn will maximize our
results of operations and EBITDA on a consolidated basis.
Our relationship with Marriott International may result in conflicts of
interest. Marriott International, a public hotel management company, manages a
significant number of our hotels. In addition, Marriott International manages
and in some cases may own or be invested in hotels that compete with our
hotels. As a result, Marriott International may make decisions regarding
competing lodging facilities which it manages that would not necessarily be in
our best interests. J.W. Marriott, Jr. is a member of our Board of Directors
and his brother, Richard E. Marriott, is our Chairman of the Board. Both J.W.
Marriott, Jr. and Richard E. Marriott serve as directors, and J.W. Marriott,
Jr. also serves as an officer, of Marriott International. J.W. Marriott, Jr.
and Richard E. Marriott beneficially own, as determined for securities law
purposes, as of January 31, 2001, approximately 12.6% and 12.2%, respectively,
of the outstanding shares of common stock of Marriott International. As a
result, J.W. Marriott, Jr. and Richard E. Marriott have potential conflicts of
interest as our directors when making decisions regarding Marriott
International, including decisions relating to the management agreements
involving the hotels and Marriott International's management of competing
lodging properties.
Both our Board of Directors and the Board of Directors of Marriott
International follow appropriate policies and procedures to limit the
involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as directors of
either us or Marriott International or our or their subsidiaries on matters
which present a conflict between the companies. If appropriate, these policies
and procedures will apply to other directors and officers.
We have substantial indebtedness. Our degree of leverage could affect our
ability to:
. obtain financing in the future for working capital, capital
expenditures, acquisitions, development or other general business
purposes;
. undertake financings on terms and conditions acceptable to us;
. pursue our acquisition strategy; or
. compete effectively or operate successfully under adverse economic
conditions.
If our cash flow and working capital are not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of equity;
. the refinancing of all or part of our indebtedness;
. the incurrence of additional permitted indebtedness; or
. the sale of assets.
We cannot assure you that any of these sources of funds would be available
in amounts sufficient for us to meet our obligations or fulfill our business
plans. Additionally, our debt contains performance related covenants
21
that, if not achieved, could require immediate repayment of our debt or
significantly increase the rate of interest on our debt.
There is no limitation on the amount of debt we may incur. There are no
limitations in our organizational documents or the operating partnership's
organizational documents that limit the amount of indebtedness that we may
incur. However, our existing debt instruments contain restrictions on the
amount of indebtedness that we may incur. Accordingly, we could incur
indebtedness to the extent permitted by our debt agreements. If we became more
highly leveraged, our debt service payments would increase and our cash flow
and our ability to service our debt and make distributions to our shareholders
would be adversely affected.
Our management agreements could impair the sale or other disposition of our
hotels. Under the terms of the management agreements, we generally may not
sell, lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets specified other conditions. Our
ability to finance, refinance or sell any of the properties may, depending
upon the structure of such transactions, require the manager's consent. If the
manager did not consent, we would be prohibited from financing, refinancing or
selling the property without breaching the management agreement.
The acquisition contracts relating to some hotels limit our ability to sell
or refinance those hotels. For reasons relating to federal income tax
considerations of the former owners of some of our hotels, we agreed to
restrictions on selling some hotels or repaying or refinancing the mortgage
debt on those hotels for varying periods depending on the hotel. We anticipate
that, in specified circumstances, we may agree to similar restrictions in
connection with future hotel acquisitions. As a result, even if it were in our
best interests to sell or refinance the mortgage debt on these hotels, it may
be difficult or impossible to do so during their respective lock-out periods.
Our ground lease payments may increase faster than the revenues we receive
on the hotels. As of January 31, 2001, we leased 46 of our hotels pursuant to
ground leases. These ground leases generally require increases in ground rent
payments every five years. Our ability to make distributions to shareholders
could be adversely affected to the extent that our revenues do not increase at
the same or a greater rate as the increases under the ground leases. In
addition, if we were to sell a hotel encumbered by a ground lease, the buyer
would have to assume the ground lease, which could result in a lower sales
price. Moreover, to the extent that such ground leases are not renewed at
their expiration, our revenues could be adversely affected.
New acquisitions may fail to perform as expected or we may be unable to make
acquisitions on favorable terms. We intend to acquire additional full-service
hotels. Newly acquired properties may fail to perform as expected, which could
adversely affect our financial condition. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. We expect to acquire hotels with cash from secured
or unsecured financings and proceeds from offerings of equity or debt, to the
extent available. We may not be in a position or have the opportunity in the
future to make suitable property acquisitions on favorable terms. Competition
for attractive investment opportunities may increase prices for hotel
properties, thereby decreasing the potential return on our investment.
We may be unable to sell properties when appropriate because real estate
investments are illiquid. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. The inability to respond promptly to changes in
the performance of our investments could adversely affect our financial
condition, and ability to service debt and make distributions to shareholders.
In addition, there are limitations under the federal tax laws applicable to
REITs and agreements that we have entered into when we acquired some of our
properties that may limit our ability to recognize the full economic benefit
from a sale of our assets.
Our revenues and the value of our properties are subject to conditions
affecting the lodging industry. If our assets do not generate income
sufficient to pay our expenses, service our debt and maintain our properties,
we will be unable to make distributions to our shareholders. Our revenues and
the value of our properties are subject to conditions affecting the lodging
industry. These include:
22
. changes in the national, regional and local economic climate;
. local conditions such as an oversupply of hotel properties or a
reduction in demand for hotel rooms;
. the attractiveness of our hotels to consumers and competition from
comparable hotels;
. the quality, philosophy and performance of the managers of our hotels;
. changes in room rates and increases in operating costs due to inflation
and other factors; and
. the need to periodically repair and renovate our hotels.
. Adverse changes in these conditions could adversely affect our financial
performance.
Our expenses may remain constant even if our revenue drops. The expenses of
owning property are not necessarily reduced when circumstances like market
factors and competition cause a reduction in income from the property. If a
property is mortgaged and we are unable to meet the mortgage payments, the
lender could foreclose and take the property. Our financial condition could be
adversely affected by:
. interest rate levels;
. the availability of financing;
. the cost of compliance with government regulation, including zoning and
tax laws; and
. changes in governmental regulations, including those governing usage,
zoning and taxes.
We depend on our key personnel. We depend on the efforts of our executive
officers and other key personnel. While we believe that we could find
replacements for these key personnel, the loss of their services could have a
significant adverse effect on our operations. We do not intend to obtain key-
man life insurance with respect to any of our personnel.
Partnership and other litigation judgments or settlements could have a
material adverse effect on our financial condition. We and the operating
partnership are parties to various lawsuits relating to previous partnership
transactions, including the REIT conversion. While we and the other defendants
to such lawsuits believe all of the lawsuits in which we are a defendant are
without merit and we are vigorously defending against such claims, we can give
no assurance as to the outcome of any of the lawsuits. In connection with the
REIT conversion, the operating partnership has assumed all liability arising
under legal proceedings filed against us and will indemnify us as to all such
matters. If any of the lawsuits were to be determined adversely to us or
settlement involving a payment of a material sum of money were to occur, there
could be a material adverse effect on our financial condition.
We may acquire hotel properties through joint ventures with third parties
that could result in conflicts. Instead of purchasing hotel properties
directly, we may invest as a co-venturer. Joint venturers often share control
over the operation of the joint venture assets. Actions by a co-venturer could
subject the assets to additional risk, including:
. our co-venturer in an investment might have economic or business
interests or goals that are inconsistent with our interests or goals;
. our co-venturers may be in a position to take action contrary to our
instructions or requests or contrary to our policies or objectives; or
. a joint venture partner could go bankrupt, leaving us liable for its
share of joint venture liabilities.
Although we generally will seek to maintain sufficient control of any joint
venture to permit our objectives to be achieved, we might not be able to take
action without the approval of our joint venture partners. Also, our joint
venture partners could take actions binding on the joint venture without our
consent.
Environmental problems are possible and can be costly. We believe that our
properties are in compliance in all material respects with applicable
environmental laws. Unidentified environmental liabilities could arise,
however, and could have a material adverse effect on our financial condition
and performance.
23
Federal, state and local laws and regulations relating to the protection of
the environment may require a current or previous owner or operator of real
estate to investigate and clean up hazardous or toxic substances or petroleum
product releases at the property. The owner or operator may have to pay a
governmental entity or third parties for property damage and for investigation
and clean-up costs incurred by the parties in connection with the
contamination. These laws typically impose clean-up responsibility and
liability without regard to whether the owner or operator knew of or caused
the presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental
laws may be held responsible for all of the clean-up costs incurred. In
addition, third parties may sue the owner or operator of a site for damages
and costs resulting from environmental contamination emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, they notify and train
those who may come into contact with asbestos and they undertake special
precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. These laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Compliance with other government regulations can also be costly. Our hotels
are subject to various forms of regulation, including Title III of the
Americans with Disabilities Act, building codes and regulations pertaining to
fire safety. Compliance with those laws and regulations could require
substantial capital expenditures. These regulations may be changed from time
to time, or new regulations adopted, resulting in additional or unexpected
costs of compliance. Any increased costs could reduce the cash available for
servicing debt and making distributions to our shareholders.
Some potential losses are not covered by insurance. We carry comprehensive
liability, fire, flood, extended coverage and rental loss, for rental losses
extending up to 12 months, insurance with respect to all of our hotels. We
believe the policy specifications and insured limits of these policies are of
the type customarily carried for similar hotels. Some types of losses, such as
from earthquakes and environmental hazards, however, may be either uninsurable
or too expensive to justify insuring against. Should an uninsured loss or a
loss in excess of insured limits occur, we could lose all or a portion of the
capital we have invested in a hotel, as well as the anticipated future revenue
from the hotel. In that event, we might nevertheless remain obligated for any
mortgage debt or other financial obligations related to the property.
Federal income tax risks
General. We believe that we have been organized and have operated in such a
manner so as to qualify as a REIT under the Internal Revenue Code, commencing
with our taxable year beginning January 1, 1999. A REIT generally is not taxed
at the corporate level on income it currently distributes to its shareholders
as long as it distributes at least 90% of its taxable income, excluding net
capital gain. No assurance can be provided, however, that we qualify as a REIT
or that new legislation, Treasury Regulations, administrative interpretations
or court decisions will not significantly change the tax laws with respect to
our qualification as a REIT or the federal income tax consequences of such
qualification.
Required distributions and payments. To continue to qualify as a REIT, we
currently are required each year to distribute to our shareholders at least
90% of our taxable income, excluding net capital gain (for our taxable years
that ended prior to January 1, 2001, we were required to distribute at least
95% of this amount to so qualify). Due to some transactions entered into in
years prior to the REIT conversion, we expect to recognize substantial amounts
of "phantom" income, which is taxable income that is not matched by cash flow
or EBITDA to us. In addition, we will be subject to a 4% nondeductible excise
tax on the amount, if any, by which distributions made by us with respect to
the calendar year are less than the sum of 85% of our ordinary income and 95%
of our capital gain net income for that year and any undistributed taxable
income from prior periods. We intend to make distributions to our shareholders
to comply with the distribution requirement and to avoid the nondeductible
excise tax and will rely for this purpose on distributions from the operating
partnership. However,
24
differences in timing between taxable income and cash available for
distribution due to, among other things, the seasonality of the lodging
industry and the fact that some taxable income will be "phantom" income could
require us to borrow funds or to issue additional equity to enable us to meet
the distribution requirement and, therefore, to maintain our REIT status, and
to avoid the nondeductible excise tax. The operating partnership is required
to pay, or reimburse us, as its general partner, for some taxes and other
liabilities and expenses that we incur, including all taxes and liabilities
attributable to periods and events prior to the REIT conversion. In addition,
because the REIT distribution requirements prevent us from retaining earnings,
we will generally be required to refinance debt that matures with additional
debt or equity. We cannot assure you that any of these sources of funds, if
available at all, would be sufficient to meet our distribution and tax
obligations.
Adverse consequences of our failure to qualify as a REIT. If we fail to
qualify as a REIT, we will be subject to federal income tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. In addition, unless entitled to statutory relief, we will not qualify
as a REIT for the four taxable years following the year during which REIT
qualification is lost. The additional tax burden on us would significantly
reduce the cash available for distribution by us to our shareholders and we
would no longer be required to make any distributions to shareholders. Our
failure to qualify as a REIT could reduce materially the value of our common
stock and would cause any distributions to shareholders that otherwise would
have been subject to tax as capital gain dividends to be taxable as ordinary
income to the extent of our current and accumulated earnings and profits, or
E&P. However, subject to limitations under the Internal Revenue Code,
corporate distributees may be eligible for the dividends received deduction
with respect to our distributions. Our failure to qualify as a REIT also would
result in a default under our senior notes and our credit facility.
Our earnings and profits attributable to our non-REIT taxable years. In
order to qualify as a REIT, we cannot have at the end of any taxable year any
undistributed E&P that is attributable to one of our non-REIT taxable years. A
REIT has until the close of its first taxable year as a REIT in which it has
non-REIT E&P to distribute such accumulated E&P. We were required to have
distributed this E&P prior to the end of 1999, the first taxable year for
which our REIT election was effective. If we failed to do this, we will be
disqualified as a REIT at least for taxable year 1999. We believe that
distributions of non-REIT E&P that we made were sufficient to distribute all
of the non-REIT E&P as of December 31, 1999, but there could be uncertainties
relating to the estimate of our non-REIT E&P and the value of the Crestline
stock that we distributed to our shareholders. Therefore, we cannot guarantee
that we met this requirement.
Treatment of leases. To qualify as a REIT, we must satisfy two gross income
tests, under which specified percentages of our gross income must be passive
income, like rent. For the rent paid pursuant to the leases, which constitutes
substantially all of our gross income, to qualify for purposes of the gross
income tests, the leases must be respected as true leases for federal income
tax purposes and not be treated as service contracts, joint ventures or some
other type of arrangement. In addition, the lessees must not be regarded as
"related party tenants," as defined in the Internal Revenue Code. We believe,
taking into account both the terms of the leases and the expectations that we
and the lessees have with respect to the leases, that the leases will be
respected as true leases for federal income tax purposes. There can be no
assurance, however, that the IRS will agree with this view. If the leases were
not respected as true leases for federal income tax purposes or if the lessees
were regarded as "related party tenants," we would not be able to satisfy
either of the two gross income tests applicable to REITs and we would lose our
REIT status. See "--Adverse consequences of our failure to qualify as a REIT"
above.
For our taxable years beginning on and after January 1, 2001, as a result of
the REIT Modernization Act, we are permitted to lease our hotels to a
subsidiary of the operating partnership that is taxable as a corporation and
that elects to be treated as a "taxable REIT subsidiary." Accordingly,
effective January 1, 2001, HMT Lessee, a newly created, wholly owned
subsidiary of the operating partnership, directly or indirectly acquired all
but one of the full-service hotel leasehold interests formerly held by
Crestline. So long as HMT Lessee and other affiliated lessees qualify as
taxable REIT subsidiaries of ours, they will not be treated as "related party
tenants." We believe that HMT Lessee qualifies to be treated as a taxable REIT
subsidiary for federal income tax purposes. We cannot assure you, however,
that the IRS will not challenge its status as a taxable REIT subsidiary for
federal
25
income tax purposes, or that a court would not sustain such a challenge. If
the IRS were successful in disqualifying HMT Lessee from treatment as a
taxable REIT subsidiary, we would fail to meet the asset tests applicable to
REITs and substantially all of our income would fail to qualify for the gross
income tests and, accordingly, we would cease to qualify as a REIT. See "--
Adverse consequences of our failure to qualify as a REIT" above.
Other tax liabilities; our substantial deferred and contingent tax
liabilities. Notwithstanding our status as a REIT, we are subject, through our
ownership interest in the operating partnership, to certain federal, state and
local taxes on our income and property. In addition, we will be required to
pay federal tax at the highest regular corporate rate, currently 35%, upon our
share of any "built-in gain" recognized as a result of any sale before January
1, 2009, by the operating partnership of assets, including the hotels, in
which interests were acquired by the operating partnership from our
predecessor and its subsidiaries as part of the REIT conversion. Built-in gain
is the amount by which an asset's fair market value exceeded our adjusted
basis in the asset on January 1, 1999, the first day of our first taxable year
as a REIT. At the time of the REIT conversion, we expected that we or a non-
controlled subsidiary likely would recognize substantial built-in gain and
deferred tax liabilities in the next ten years without any corresponding
receipt of cash by us or the operating partnership. We recognized a
substantial amount of these built-in gains and deferred tax liabilities in
1999 and paid tax thereon at the applicable corporate rates. Accordingly, our
potential tax exposure on these gains and deferred liabilities for the future
is significantly less than it was at the time of our REIT conversion. In
addition, because not all states treat REITs the same as they are treated for
federal income tax purposes, we may have to pay certain state income taxes,
notwithstanding our status as a REIT. The operating partnership is obligated
under its partnership agreement to pay all such taxes incurred by us, as well
as any liabilities that the IRS may assert against us for corporate income
taxes for taxable years prior to the time we qualified as a REIT. The non-
controlled subsidiaries and any of our taxable REIT subsidiaries, including
HMT Lessee, are taxable as corporations and will pay federal and state income
tax on their net income at the applicable corporate rates.
The operating partnership's failure to qualify as a partnership. We believe
that the operating partnership qualifies to be treated as a partnership for
federal income tax purposes. No assurance can be provided, however, that the
IRS will not challenge its status as a partnership for federal income tax
purposes, or that a court would not sustain such a challenge. If the IRS were
successful in treating the operating partnership as a corporation for tax
purposes, we would fail to meet two of the asset tests applicable to REITs
and, accordingly, cease to qualify as a REIT. See "--Adverse consequences of
our failure to qualify as a REIT" above. Also, the imposition of a corporate
tax on the operating partnership would reduce significantly the amount of cash
available for distribution to its limited partners, including us. Finally, the
classification of the operating partnership as a corporation would cause us to
recognize gain at least equal to our "negative capital accounts," and possibly
more, depending upon the circumstances.
REIT Modernization Act changes to the REIT asset tests. Subject to the
exceptions discussed in this paragraph, a REIT is prohibited from owning
securities in any one issuer if the value of those securities exceeds 5% of
the value of the REIT's total assets or the securities owned by the REIT
represent more than 10% of the issuer's outstanding voting securities or, for
taxable years beginning on or after January 1, 2001, more than 10% of the
value of the issuer's outstanding securities. For taxable years beginning on
or after January 1, 2001, as a result of the REIT Modernization Act, a REIT is
permitted to own securities of a subsidiary that exceed the 5% value test and
the 10% vote or value test if the subsidiary elects to be a "taxable REIT
subsidiary," which is taxable as a corporation. However, a REIT may not own
securities of taxable REIT subsidiaries that represent in the aggregate more
than 20% of the value of the REIT's total assets. Effective January 1, 2001,
each of the non-controlled subsidiaries and HMT Lessee has elected to be
treated as a taxable REIT subsidiary.
Several provisions of the REIT Modernization Act ensure that a taxable REIT
subsidiary is subject to an appropriate level of federal income taxation. For
example, a taxable REIT subsidiary is limited in its ability to deduct
interest payments made to an affiliated REIT. In addition, the REIT has to pay
a 100% penalty tax on some payments that it receives if the economic
arrangements between the REIT and the taxable REIT subsidiary are not
comparable to similar arrangements between unrelated parties.
26
We may be required to pay a penalty tax upon the sale of a hotel. The
federal income tax provisions applicable to REITs provide that any gain
realized by a REIT on the sale of property held as inventory or other property
held primarily for sale to customers in the ordinary course of business is
treated as income from a "prohibited transaction" that is subject to a 100%
penalty tax. Under existing law, whether property, including hotels, is held
as inventory or primarily for sale to customers in the ordinary course of
business is a question of fact that depends upon all of the facts and
circumstances with respect to the particular transaction. The operating
partnership intends that it and its subsidiaries will hold the hotels for
investment with a view to long-term appreciation, to engage in the business of
acquiring and owning hotels and to make occasional sales of hotels as are
consistent with the operating partnership's investment objectives. We cannot
assure you, however, that the IRS might not contend that one or more of these
sales is subject to the 100% penalty tax, particularly if the hotels that are
sold have been held for a relatively short period of time.
Item 3. Legal Proceedings
In connection with the REIT Conversion, the operating partnership assumed
all liability arising under legal proceedings filed against us and will
indemnify us as to all such matters. We believe all of the lawsuits in which
we are a defendant, including the following lawsuits, are without merit and we
intend to defend vigorously against such claims; however, no assurance can be
given as to the outcome of any of the lawsuits.
Marriott Hotel Properties II Limited Partnership (MHP). Limited partners of
MHP II have filed putative class action lawsuits in Palm Beach County Circuit
Court on May 10, 1996, Leonard Rosenblum, as Trustee of the Sylvia Bernice
Rosenblum Trust, et. al. v. Marriott MHP Two Corporation, et. al., Case No.
CL-96-4087-AD, and, in the Delaware Court of Chancery on April 24, 1996, Cary
W. Salter, Jr., et. al. v. MHP II Acquisition Corp., et. al., respectively,
against Host REIT and certain of its affiliates alleging that the defendants
violated their fiduciary duties and engaged in fraud and coercion in
connection with the 1996 tender offer for MHP II units and with our
acquisition of MHP II in connection with the 1998 REIT conversion. The
plaintiffs in these actions are seeking unspecified damages.
In the Florida case, the defendants removed the case to the United States
District Court for the Southern District of Florida and, after hearings on
various procedural motions, the District Court remanded the case to state
court on July 25, 1998. In light of the court's decision in the Delaware case,
detailed below, the defendants in the Florida action filed a supplemental
memorandum in support of their motions to dismiss, and attached a copy of the
Delaware opinion to the memorandum. The Florida court has not yet ruled on the
motions.
In the Delaware case, the Delaware Court of Chancery initially granted the
plaintiffs' motion to voluntarily dismiss the case with the proviso that the
plaintiffs could refile in the aforementioned action in federal court in
Florida. After the District Court's remand of the Florida action back to
Florida state court, two of the three original Delaware plaintiffs asked the
Court of Chancery to reconsider its order granting their voluntary dismissal.
The Court of Chancery refused to allow the plaintiffs to join the Florida
action and, instead, reinstated the Delaware case, now styled In Re Marriott
Hotel Properties II Limited Partnership Unitholders Litigation, Consolidated
Civil Action No. 14961. On January 29, 1999, Cary W. Salter, one of the
original plaintiffs, alone filed an Amended Consolidated Class Action
Complaint in the Delaware action. On January 24, 2000, the Delaware Court of
Chancery issued a memorandum opinion in which the court dismissed all but one
of the plaintiff's claims, which remaining claim concerns the adequacy of
disclosure during the initial tender offer. This claim remains pending.
A subsequent lawsuit, Accelerated High Yield Growth Fund, Ltd., et al. v.
HMC Hotel Properties II Limited Partnership, et. al., C.A. No. 18254NC, was
filed on August 23, 2000 in the Delaware Court of Chancery by the MacKenzie
Patterson group of funds, one of the three original Delaware plaintiffs,
against Host REIT and certain of its affiliates alleging breach of contract,
fraud and coercion in connection with the acquisition of MHP II during the
1998 REIT conversion. The plaintiffs allege that our acquisition of MHP II by
merger in connection with the REIT conversion violated the partnership
agreement and that our subsidiary acting as the general partner of MHP II
breached its fiduciary duties by allowing it to occur. The plaintiffs in this
action are seeking unspecified damages.
27
Marriott Suites Limited Partnership (MSLP). On December 10, 1999, KSK Hawaii
Co., Ltd. ("KSK"), a limited partner in MSLP, filed a lawsuit, KSK Hawaii Co.,
Ltd. V. Marriott SBM One Corporation, et al., Civil Action No. 17657-NC, in
the Delaware Court of Chancery. KSK alleges that we and our subsidiary, the
general partner of MSLP, breached fiduciary duties to KSK through a
recapitalization of the partnership in 1996 and through a merger of the
partnership in 1998. KSK contends that it was coerced into selling 19 of its
20 partnership units in 1996 and that it was further harmed by the 1998
merger, in which its remaining interest in the partnership was eliminated.
KSK's complaint also alleges that the recapitalization and merger involved
fraud and breaches of the partnership agreement. This matter was recently
settled in a manner which will have no material impact on our financial
statements and the lawsuit will be dismissed.
Mutual Benefit Chicago Marriott Suite Hotel Partners, L.P. ("O'Hare
Suites"). On October 5, 2000, Joseph S. Roth and Robert M. Niedelman, limited
partners in O'Hare Suites, filed a putative class action lawsuit, Joseph S.
Roth, et al., v. MOHS Corporation, et al., Case No. 00CH14500, in the Circuit
Court of Cook County, Illinois, Chancery Division, against Host REIT, Host LP,
Marriott International, and MOHS Corporation, a subsidiary of Host LP and a
former general partner of O'Hare Suites. The plaintiffs allege that an
improper calculation of the hotel manager's incentive management fees resulted
in inappropriate payments in 1997 and 1998, and, consequently, in an
inadequate appraised value for their limited partner units in connection with
the acquisition of O'Hare Suites during the 1998 REIT conversion. The
plaintiffs are seeking damages of approximately $13 million. The defendants
have filed motions to dismiss this case and are awaiting rulings on these
motions.
Tampa Waterside Hotel. On January 23, 2001, Tampa Convention Hotel
Associates, Inc. ("TCHA") filed a lawsuit, Tampa Convention Hotel Associates,
Inc. v. The City of Tampa, Florida, et al., Case No. 01000668, Division G, in
the Circuit Court for Hillsborough County, Florida against the City of Tampa
(the "City"), Faison & Associates 2000, L.L.C. ("Faison"), Sodexho Marriott
Services, Inc., f/k/a Marriott International, Inc. ("Marriott International"),
Host REIT, and HMC Hotel Development LLC ("HMC Development"). TCHA was one of
several groups who had submitted development proposals in response to the
City's 1995 request for a proposal ("RFP") to develop a convention center
hotel in downtown Tampa. Each of the proposals submitted was ranked under the
terms of the RFP. The City's Hotel Review Committee ranked the TCHA proposal
second, and commenced negotiations with the top-ranked bidder
("Faison/Sheraton"). Faison/Sheraton failed to fulfill certain contingencies
by a May 27, 1997 deadline and the parties terminated their negotiations.
TCHA alleges that it relied on the May 27, 1997 deadline, and that the City
engaged in negotiations with other bidders prior to its expiration to the
detriment of TCHA. On May 29, 1997, the City cancelled the RFP. HMC
Development subsequently entered into development agreements with the City to
develop the convention center hotel in October of 1997, and closed on the
Tampa hotel site in January of 1998.
TCHA is suing the City on promissory estoppel grounds for failing to comply
with the Florida Sunshine Law by conducting private negotiations with the
other defendants. TCHA alleges that the other defendants tortiously interfered
with its business relationship with the City. TCHA is seeking unspecified
actual, compensatory, and special damages. The City, Host REIT, and HMC
Development have filed motions to dismiss this lawsuit. A hearing on these
motions has not yet been set.
Item 4. Submission of matters to a vote of security holders
None
28
PART II
Item 5. Market for our common stock and related shareholder matters
Our common stock is listed on the New York Stock Exchange, the Chicago Stock
Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange and
is traded under the symbol "HMT." The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share of our
common stock as reported on the New York Stock Exchange Composite Tape.
High Low
--------- ---------
1999
1st Quarter............................................ $14 3/4 $10 11/16
2nd Quarter............................................ 13 5/16 11 1/16
3rd Quarter............................................ 12 3/16 9 3/16
4th Quarter............................................ 9 1/2 7 13/16
2000
1st Quarter............................................ 9 9/16 8 1/16
2nd Quarter............................................ 10 15/16 8 11/16
3rd Quarter............................................ 11 1/2 9 5/16
4th Quarter............................................ 12 15/16 10
During 2000, quarterly cash dividends of $0.21, $0.21, $0.23, and $0.26 per
share of common stock were declared on March 23, June 21, September 19, and
December 18, 2000, respectively. The quarterly dividends were subsequently
paid on April 14, July 14, and October 16, 2000, and January 12, 2001. During
1999, quarterly cash dividends of $0.21 per share of common stock were
declared on March 15, June 15, September 23, and December 20, 1999. The
quarterly dividends were subsequently paid on April 14, July 14, and October
15, 1999, and January 17, 2000.
As of March 12, 2001, there were approximately 106,209 individual
participants in security position listings and approximately 2,729 holders of
OP Units, each of which is convertible into common stock on a one-for-one
basis or the cash equivalent thereof, at our option.
For several technical reasons relating to the federal income tax law, our
ability to qualify as a REIT under the Internal Revenue Code is facilitated by
limiting the number of shares of our stock that a person may own. Primarily
because the Board of Directors believes it is desirable for us to qualify as a
REIT, our Articles of Incorporation provide that, subject to limited
exceptions, no person or persons acting as a group may own, or be deemed to
own by virtue of the attribution provisions of the Internal Revenue Code, more
than 9.8% of the lesser of the number or value of shares of common stock
outstanding; or 9.8% of the lesser of the number or value of the issued and
outstanding preferred or other shares of any class or series of our stock.
The Board of Directors has the authority to increase the ownership limit
from time to time, but does not have the authority to do so to the extent that
after giving effect to such increase, five beneficial owners of capital stock
could beneficially own in the aggregate more than 49.5% of the outstanding
capital stock. These limitations on the ownership of our stock could delay,
defer or prevent a takeover or other transaction in which holders of some, or
a majority, of our common stock might receive a premium for their common stock
over the then prevailing market price or which our shareholders might believe
to be otherwise in their best interest.
29
Item 6. Selected Financial Data
The following table presents certain selected historical financial data of
us and Host Marriott, the predecessor to Host REIT, which has been derived
from Host Marriott's audited consolidated financial statements for fiscal
years 1996, 1997, and 1998, and our audited consolidated financial statements
for the fiscal years ended December 31, 2000 and 1999.
The information contained in the following table for years prior to 1999 is
not comparable to our 2000 and 1999 operations because the historical
information for those years relates to an operating entity which owned and
operated its hotels, while during 1999 and 2000 we owned the hotels but leased
them to third-party lessees, receiving rental payments in connection
therewith. As a result of the acquisition by our wholly-owned taxable REIT
subsidiary of the Crestline entities owning the leasehold interests with
respect to 116 of our full-service hotels, our consolidated operations
beginning January 1, 2001 will present property-level revenues and expenses
rather than rental income from lessees.
Fiscal Year (1)(2)
--------------------------------------
2000 1999 1998 (3) 1997 (3) 1996
------ ------ -------- -------- ------
(in millions, except per share data)
Income Statement Data:
Revenues (4)......................... $1,473 $1,376 $3,564 $2,875 $2,005
Income (loss) from continuing
operations.......................... 159 196 194 47 (13)
Income (loss) before extraordinary
items (5)........................... 159 196 195 47 (13)
Net income (loss).................... 156 211 47 50 (13)
Net income (loss) available to common
shareholders........................ 141 216 47 50 (13)
Basic earnings (loss) per common
share: (6)
Income (loss) from continuing
operations........................ .65 .89 .90 .22 (.06)
Income (loss) before extraordinary
items............................. .65 .89 .91 .22 (.06)
Net income (loss).................. .64 .95 .22 .23 (.06)
Diluted earnings (loss) per common
share: (6)
Income (loss) from continuing
operations........................ .64 .87 .84 .22 (.06)
Income (loss) before extraordinary
items............................. .64 .87 .85 .22 (.06)
Net income (loss).................. .63 .92 .27 .23 (.06)
Cash dividends per common share (7).. .91 .84 1.00 -- --
Balance Sheet Data:
Total assets (8)..................... $8,396 $8,202 $8,268 $6,141 $5,152
Debt (9)............................. 5,322 5,069 5,131 3,466 2,647
Convertible Preferred Securities..... 475 497 550 550 550
Other Data:
Ratio of earnings to fixed charges
and preferred stock dividends (see
computation at Exhibit 12.1)........ 1.2x 1.5x 1.5x 1.3x 1.0x
- --------
(1) The Internal Revenue Code requires REITs to file their income tax return
on a calendar year basis. Accordingly, in 1998 we changed our fiscal year
end to December 31 for both financial and tax reporting requirements.
Previously, our fiscal year ended on the Friday nearest to December 31. As
a result of this change, the results of operations for 15 hotels not
managed by Marriott International were adjusted in 1998 to include 13
months of operations (December 1997 through December 1998) and therefore
are not comparable to fiscal years 1997 and 1996, each of which included
12 months of operations. The additional month of operations in 1998
increased our revenues by $44 million.
(2) Fiscal year 1996 includes 53 weeks. Fiscal years 1997, 1998, 1999 and 2000
include 52 weeks.
(3) The historical financial data for fiscal years 1998 and 1997 reflect as
discontinued operations our senior living business that we formerly
conducted but disposed of in the spin-off of Crestline as part of the REIT
conversion. We recorded income from the discontinued operations, net of
taxes, of $6 million in fiscal year 1998.
(4) Historical revenues for 2000 and 1999 primarily represent lease income
generated by our leases, primarily with Crestline. Periods prior to 1999
represent gross hotel sales as our leases were not in effect until January
1, 1999. Revenues for fiscal years 1998, 1997 and 1996 have also been
adjusted to reclassify interest income as revenue (previously classified
as other income from operations) in order to be consistent with our 2000
and 1999 statement of operations presentation.
30
(5) During the fiscal year 2000, we recorded an extraordinary loss of $2
million in connection with the renegotiation of the bank credit facility
and an extraordinary loss of $1 million representing the write-off of
deferred financing fees in connection with the repurchase of 0.4 million
shares of the Convertible Preferred Securities. In 1999, we recognized a
$14 million extraordinary gain on the renegotiation of the management
agreement for the New York Marriott Marquis, a net extraordinary gain of
$5 million related to the refinancing of the mortgage debt for eight
properties, a $2 million extraordinary loss related to prepayments on the
bank credit facility, and an extraordinary loss of $2 million representing
the write-off of deferred financing fees in connection with the repurchase
of 1.1 million shares of Convertible Preferred Securities. In 1998, we
recognized a $148 million extraordinary loss, net of taxes, on the early
extinguishment of debt. In 1997, we recognized a $3 million extraordinary
gain, net of taxes, on the early extinguishment of debt.
(6) Basic earnings (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding.
Diluted earnings (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding
plus other dilutive securities. Diluted earnings (loss) per share has not
been adjusted for the impact of the Convertible Preferred Securities for
2000, 1999, 1997 and 1996 and for the comprehensive stock plan for 1996,
as they are anti-dilutive.
(7) 2000 cash dividends per common share reflect quarterly cash dividends of
$0.21, $0.21, $0.23,and $0.26 per common share paid on April 14, July 14,
and October 16, 2000, and January 12, 2001, respectively. 1999 cash
dividends per common share reflect a quarterly cash dividend of $0.21 per
common share paid on April 14, July 14 and October 15, 1999 and January
17, 2000. 1998 cash dividends per common share reflect the cash portion of
a special dividend paid on February 10, 1999. This special dividend
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 for each
outstanding share of our common stock owned by such shareholder on the
record date. Cash totaling approximately $73 million and approximately
11.5 million shares were subsequently issued during 1999.
(8) Total assets for fiscal year 1997 include $236 million related to net
investment in discontinued operations.
(9) Long-term obligations consist of long term debt (which includes senior
notes, secured senior notes, mortgage debt, other notes, capital lease
obligations, and a revolving bank credit facility).
31
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Overview
Host Marriott Corporation, a Maryland corporation formerly named HMC Merger
Corporation operating through an umbrella partnership structure, is the owner
of hotel properties. We operate as a self-managed and self-administered REIT
with our operations conducted solely through the Operating Partnership and its
subsidiaries. As of December 31, 2000, we owned approximately 78% of the
Operating Partnership. On February 7, 2001, certain minority partners
converted 12.5 million OP Units to common shares and immediately sold them to
an underwriter for sale on the open market. As a result, we now own
approximately 82% of the Operating Partnership.
As of December 31, 2000, we owned, or had controlling interests in, 122
upscale and luxury, full-service hotel lodging properties generally located
throughout the United States and operated primarily under the Marriott, Ritz-
Carlton, Four Seasons, Hilton, Hyatt and Swissotel brand names.
In December 1999, the REIT Modernization Act was passed, effective for
taxable years beginning after December 31, 2000, which significantly amends
the REIT laws applicable to us. Prior to that time, REITs were restricted from
deriving revenues directly from the operations of hotels. Thus, during 1999
and 2000 we leased substantially all of our hotels to subsidiaries of
Crestline and other third-party lessees.
Under the REIT Modernization Act, beginning January 1, 2001, (i) we are now
permitted to lease our hotels to a subsidiary that is a taxable corporation
and that elects to be treated as a "taxable REIT subsidiary" rather than to a
third party such as Crestline and (ii) we may own all of the voting stock of
such TRS. Consequently, on November 13, 2000, we executed a definitive
agreement with Crestline to terminate our lease arrangements through the
purchase of the Crestline Lessee Entities that own the leasehold interests
with respect to 116 of our full-service hotels. In connection therewith,
during the fourth quarter of 2000 we recorded a non-recurring, pre-tax loss of
$207 million net of a tax benefit of $82 million which we have recognized as a
deferred tax asset because, for income tax purposes, the acquisition is
recognized as an asset that will be amortized over the remaining term of the
leases. We consummated the transaction effective January 1, 2001. Under the
terms of the transaction, our wholly-owned subsidiary, which will elect to be
treated as a TRS, acquired the Crestline Lessee Entities. Beginning in 2001,
we will recognize the revenues and expenses generated by the hotels subject to
the leases rather than rental income. The transaction simplifies our corporate
structure, enables us to better control our portfolio of hotels, and is
expected to be accretive to our future earnings and cash flows.
During February 2001, our Board of Directors approved the acquisition by our
TRS of the interests in our 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. If the
transaction is consummated, and there can be no assurance that it will be
consummated, 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 will include the various assets and related
liabilities held by the two taxable corporations, which were $354 million and
$245 million as of December 31, 2000. Approximately $26 million of the
subsidiaries' debt principal matures during 2001. In addition, we will
consolidate three additional full-service properties, one located in Missouri,
and two located in Mexico City, Mexico.
During the year, we focused on maintaining the strength and flexibility of
our balance sheet in order to allow us the opportunity to selectively choose
investment alternatives that will further enhance shareholder value.
. During 1999 and the first quarter of 2000, our primary use of free cash
flow and asset sales proceeds was the funding of our stock buyback
program. In the aggregate, we spent approximately $150 million for a
total reduction of 16.2 million equivalent shares on a fully diluted
basis.
. During June 2000, we modified our bank credit facility in order to
provide the company greater financial flexibility. As modified, the
total facility has been permanently reduced to $775 million, and the
original term was extended for two additional years.
32
. In October 2000, we issued $250 million 9 1/4% Series F senior notes due
in 2007, which were exchanged for Series G senior notes in March 2001.
. During March 2001, we issued 5.2 million shares of 10% Class C preferred
stock, for net proceeds of $125.8 million.
We and Marriott International closed on the settlement with plaintiffs to
resolve specific litigation involving seven limited partnerships in which we
acted as general partner. The settlement involved an acquisition during the
fourth quarter of 2000 of the limited partner interests in two partnerships by
a joint venture between one of our affiliates and a subsidiary of Marriott
International, the contribution by our non-controlled subsidiaries of their
general partnership interests in the partnerships and cash payments to
partners in the other five partnerships, in exchange for resolution of claims
against all defendants in all seven partnerships. Our total share of the cash
required to resolve the litigation, including amounts paid by our non-
controlled subsidiary, was approximately $112 million. As a result of the
settlement, we recorded a one-time non-recurring, pre-tax charge of $40
million in the fourth quarter of 1999.
Results of Operations
Our historical revenues for 2000 and 1999 represent rental income on leases,
net gains on property transactions, interest income and equity in earnings
affiliates. Expenses represent specific owner costs including real estate and
property taxes, property insurance and ground and equipment rent. For 1998, we
reported gross property level sales from our hotels and, accordingly, our
expenses included all property level costs including depreciation, management
fees, real and personal property taxes, ground building and equipment rent,
property insurance and other costs. Beginning January 1, 2001, we will again
report the gross property level results from our hotels as a result of changes
in the REIT tax laws and the subsequent acquisition by the TRS of the
Crestline Lessee Entities. As a result, our 2001 results will not be
comparable to the historical reported amounts for 2000 and 1999. In order to
provide a clearer understanding and comparability of our results of operations
we have presented unaudited pro forma statements of operations for 2000 and
1999, adjusted to reflect the acquisition of the Crestline Lessee Entities as
if it occurred on January 1, 1999, and a discussion of the results thereof
beginning on page 37 in addition to our discussion of the historical results.
2000 Compared to 1999 (Historical)
Revenues. Revenues increased $97 million, or 7%, to approximately $1.5
billion for 2000. Gross hotel sales, which is used in the determination of
rental income for 2000, increased $231 million or 5% over 1999 amounts as is
shown in the following table.
Year Ended
-------------------------
December 31, December 31,
2000 1999
------------ ------------
(in millions)
Hotel Sales(1)
Rooms............................................ $2,877 $2,725
Food and beverage................................ 1,309 1,258
Other............................................ 323 295
------ ------
Total sales.................................... $4,509 $4,278
====== ======
- --------
(1) Gross hotel sales do not represent our reported revenues for 2000 and
1999, but are used to compute our reported rental income.
Rental income increased $95 million, or 7%, to approximately $1.4 billion
for 2000, primarily driven by the growth in room revenues generated per
available room or REVPAR for comparable properties, completion of the new
Tampa Waterside Marriott in February 2000, and the opening of a 500-room
expansion at the Orlando World Center Marriott in June 2000, partially offset
by the sale of five properties (1,577 rooms) in 1999. REVPAR increased 6.6% to
$123.50 for 2000 for comparable properties, which consist of the 118
properties
33
owned, directly or indirectly, by us for the same period of time in each
period covered, excluding one property that sustained substantial fire damage
during 2000, two properties where significant expansion at the hotels affected
operations, and the Tampa Waterside Marriott, which opened in February 2000.
On a comparable basis, average room rates increased approximately 6.3%, while
average occupancy increased less than one percentage point for 2000.
Depreciation and Amortization. Depreciation and amortization increased $38
million or 13% during 2000, reflecting an increase in depreciable assets,
which is primarily the result of capital projects placed in service in 2000,
including the Tampa Waterside Marriott and expansion at the Orlando World
Center Marriott, partially offset by net asset disposals of approximately $174
million in connection with the sale of five hotels during 1999.
Property-level Owner Expenses. Property-level owner expenses primarily
consist of property taxes, insurance, and ground and equipment rent. These
expenses increased $8 million, or 3%, to $272 million for 2000, primarily due
to an increase in ground lease expense, which is commensurate with the
increase in hotel sales, and an increase in equipment rent expense due to
technology initiatives at the hotels during 2000.
Minority Interest. Minority interest expense decreased $10 million to $72
million in 2000, primarily reflecting the OP Unitholders' share of our net
income, which decreased $55 million to $156 million in 2000. On February 7,
2001, certain minority partners converted 12.5 million OP Units to common
shares which were, in turn, sold to the public. As a result of the
transaction, we now own approximately 82% of the operating partnership, which
will result in a reduction in minority interest expense beginning in the first
quarter of 2001.
Interest Expense. Interest expense increased 1% to $433 million in 2000,
primarily due to the issuance of the Series F Senior Notes in October 2000,
partially offset by the decrease in the outstanding balance of the bank credit
facility during 2000 compared to 1999.
Corporate Expenses. Corporate expenses increased $8 million to $42 million
for 2000, resulting primarily from an increase in compensation expense related
to employee stock plans.
Dividends on Convertible Preferred Securities. The dividends on the
convertible preferred securities decreased $5 million or 14% for 2000, as a
result of repurchases of 1.5 million shares of the convertible preferred
securities during the fourth quarter of 1999 and the first quarter of 2000 in
connection with our stock repurchase program.
Loss on Litigation Settlement. In connection with a proposed settlement for
litigation related to seven limited service partnerships discussed above, we
recorded a non-recurring charge of $40 million during the fourth quarter of
1999.
Lease Repurchase Expense. In connection with the execution of a definitive
agreement with Crestline in November 2000 for the termination of the Crestline
leases through the purchase and sale of the Crestline Lessee Entities by our
TRS for $207 million in cash, we recorded a non-recurring loss provision of
$207 million during the fourth quarter of 2000.
Income Tax Benefit. In connection with the lease repurchase expense
recognized during the fourth quarter of 2000, we recognized an income tax
benefit of $82 million, because for income tax purposes, the acquisition is
recognized as an asset that will be amortized over the remaining term of the
leases. In addition, during 2000 we favorably resolved certain tax
contingencies and reversed $32 million of our net tax liabilities into income
through the tax provision during the year ended December 31, 2000.
Extraordinary Gain (Loss). During 2000, we recorded an extraordinary loss of
approximately $2 million representing the write off of deferred financing
costs and certain fees paid to our lender in connection with the renegotiation
of the bank credit facility and an extraordinary loss of $1 million
representing the write-off of deferred financing costs in connection with the
repurchase of 0.4 million shares of the Convertible Preferred Securities.
34
In connection with the refinancing of the mortgage and renegotiation of the
management agreement on the New York Marriott Marquis hotel, we recognized an
extraordinary gain of $14 million on the forgiveness of debt in the form of
accrued incentive management fees during 1999.
An extraordinary loss of $3 million representing the write-off of deferred
financing fees occurred in July 1999 when the mortgage debt for eight
properties, including the New York Marriott Marquis hotel, was refinanced. In
connection with this refinancing, the interest rate swap agreements associated
with some of the original debt were terminated and an extraordinary gain of $8
million was recognized.
An extraordinary loss of $2 million representing the write-off of deferred
financing fees occurred during the fourth quarter of 1999 when prepayments
totaling $225 million were made to permanently reduce the outstanding balance
of the term loan portion of the Bank Credit Facility to $125 million.
An extraordinary loss of $2 million representing the write-off of deferred
financing fees occurred during the fourth quarter of 1999 when approximately
1.1 million shares of our Convertible Preferred Securities were repurchased
(see Note 7 to the financial statements) and subsequently retired.
Net Income (Loss). Our net income in 2000 was $156 million, compared to $211
million in 1999. Basic and diluted earnings per common share was $.64 and
$.63, respectively, for 2000, compared to $.95 and $.92, respectively, in
1999.
Net Income (Loss) Available to Common Shareholders. Our net income available
to common shareholders in 2000 was $141 million, compared to $216 million in
1999, reflecting dividends of $20 million in 2000 on the Class A and Class B
preferred stock which were issued during 1999, and gains of $5 million and $11
million on the repurchase of the Convertible Preferred Securities during 2000
and 1999, respectively.
1999 Compared to 1998 (Historical)
Revenues. Revenues decreased $2.2 billion, or 61%, to $1.4 billion for 1999.
As discussed above, our revenues and operating profit are not comparable to
prior years, primarily due to the leasing of our hotels as a result of the
REIT conversion. However, gross hotel sales, which is used in the
determination of rental income for 1999, increased $836 million or 24% over
1998 amounts as is shown in the following table. Rental income for 1999 is
computed based on gross hotel sales.
Year Ended
-------------------------
December 31, December 31,
1999 1998
------------ ------------
(in millions)
Hotel Sales(1)
Rooms............................................ $2,725 $2,220
Food and beverage................................ 1,258 984
Other............................................ 295 238
------ ------
Total sales.................................... $4,278 $3,442
====== ======
- --------
(1) 1999 gross hotel sales do not represent our reported revenues for 1999.
Rather, rental income, which is computed based on gross hotel sales,
represents our reported revenues for 1999.
Lodging results for 1999 were primarily driven by the addition of 36
properties in 1998. The increase in hotel sales also reflects the growth in
room revenues generated per available room or REVPAR. For comparable
properties, REVPAR increased 4.1%, to $115.13 for 1999. On a comparable basis,
average room rates increased approximately 3.8% for the year, while average
occupancy increased less than one percentage point for the year.
Interest income decreased $12 million or 24% as a result of a lower level of
cash and marketable securities held during 1999 compared to 1998.
35
The net gain on property transactions for 1999 primarily represents the $24
million recognized on the sale of five properties, including the sale of the
Ritz-Carlton Boston and the El Paso Marriott during the fourth quarter of
1999.
Expenses. As discussed above, hotel revenues and hotel operating costs are
not comparable with the prior year. The lessee pays specified direct property-
level costs including management fees and we receive a rent payment, which is
generally calculated as a percentage of revenue, subject to a minimum level,
net of certain property-level owner costs. All of these costs were our
expenses in 1998. Property-level owner costs which are comparable, including
depreciation, property taxes, property insurance, ground and equipment rent,
increased 8% to $557 million for 1999 versus 1998, primarily reflecting the
depreciation from 36 properties acquired during 1998.
Minority Interest. Minority interest expense increased $30 million to $82
million in 1999, primarily reflecting the impact of the issuance of operating
partnership units for the acquisition of specified hotel properties partially
offset by the consolidation of partnerships which occurred as part of the REIT
conversion.
Interest Expense. Interest expense increased 28% to $430 million in 1999,
primarily due to the issuance of senior notes, establishment of a new credit
facility and additional mortgage debt on properties acquired in 1998.
Corporate Expenses. Corporate expenses decreased $14 million to $34 million
in 1999, resulting primarily from lower staffing levels after the Crestline
spin-off, lower costs associated with reduced acquisition activity and lower
costs related to various stock compensation plans.
Loss on Litigation. In connection with a proposed settlement for litigation
related to six limited service partnerships we have recorded a one-time, non-
recurring charge of $40 million.
Dividends on Convertible Preferred Securities. The dividends on the
convertible preferred securities reflect the dividends on the $550 million in
6.75% Convertible Preferred Securities issued by a subsidiary in December
1996.
Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations for
1998.
Extraordinary Gain (Loss). In connection with the refinancing of the
mortgage and renegotiation of the management agreement on the New York
Marriott Marquis hotel, we recognized an extraordinary gain of $14 million on
the forgiveness of debt in the form of accrued incentive management fees
during 1999.
An extraordinary loss of $3 million representing the write-off of deferred
financing fees occurred in July 1999 when the mortgage debt for eight
properties was refinanced, including the New York Marriott Marquis hotel. In
connection with this refinancing, the interest rate swap agreements associated
with some of the original debt were terminated and an extraordinary gain of $8
million was recognized.
An extraordinary loss of $2 million representing the write-off of deferred
financing fees occurred during the fourth quarter of 1999 when prepayments
totaling $225 million were made to permanently reduce the outstanding balance
of the term loan portion of the Bank Credit Facility to $125 million.
An extraordinary loss of $2 million representing the write-off of deferred
financing fees occurred during the fourth quarter of 1999 when approximately
1.1 million shares of our Convertible Preferred Securities were repurchased
(see Note 7 to the financial statements) and subsequently retired.
In connection with the purchase of the old senior notes, we recognized an
extraordinary loss of $148 million in the third quarter of 1998, which
represents the bond premium and consent payments totaling approximately
36
$175 million and the write-off of deferred financing fees of approximately $52
million related to the old senior notes, net of taxes.
Net Income (Loss). Our net income in 1999 was $211 million, compared to $47
million in 1998. Basic and diluted earnings per common share was $.95 and
$.92, respectively, for 1999, compared to a basic and diluted loss per common
share of $.22 and $.27, respectively, in 1998.
Net Income (Loss) Available to Common Shareholders. Our net income available
to common shareholders in 1999 was $216 million, compared to $47 million in
1998, reflecting dividends of $6 million in 1999 on the Class A and Class B
preferred stock which were issued during 1999, and a gain of $11 million, net
of taxes, on the repurchase of the Convertible Preferred Securities.
2000 Compared to 1999 (Pro Forma)
Because of the significant changes to our corporate structure as a result of
our acquisition of the Crestline Lessee Entities during January 2001,
management believes that a discussion of our pro forma results of operations
is meaningful and relevant to an investor's understanding of our present and
future operations. The pro forma results of operations set forth below are
based on the audited consolidated statements of operations for the years ended
December 31, 2000 and 1999, and are only adjusted to reflect the January 2001
acquisition of the Crestline Lessee Entities for $207 million in cash as if
the transaction occurred at the beginning of 1999. 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 of our full-service hotels to our TRS, and therefore, our
consolidated operations with respect to those hotels will represent property-
level revenues and expenses rather than rental income from third-party
lessees. In addition, the net income applicable to the TRS will be subject to
federal and state income taxes. The non-recurring pre-tax loss of $207 million
net of the minority interest effect of $46 million related to the minority
owners' share in the lease repurchase expense and a tax benefit of $82 million
that was recorded during the fourth quarter of 2000 is excluded from the pro
forma results of operations for 2000.
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;
. 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 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 1999, 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 this annual report.
37
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
For the Fiscal Years Ended December 31, 2000 and 1999
(in millions, except per share amounts)
Pro Forma
--------------
2000 1999
------ ------
(unaudited)
REVENUE
Hotel property-level revenues
Rooms......................................................... $2,441 $2,267
Food and beverage............................................. 1,217 1,129
Other......................................................... 288 263
------ ------
Total hotel property-level revenues........................... 3,946 3,659
Rental income................................................. 178 188
Net gains on property transactions............................ 6 28
Equity in earnings of affiliates and other.................... 10 (9)
------ ------
Total revenues................................................ 4,140 3,866
------ ------
OPERATING COSTS AND EXPENSES
Depreciation and amortization................................. 331 293
Hotel property-level costs and expenses
Rooms......................................................... 578 542
Food and beverage............................................. 894 832
Other......................................................... 140 129
Management fees............................................... 236 209
Other property-level costs and expenses....................... 1,085 1,030
------ ------
Total operating costs and expenses............................ 3,264 3,035
------ ------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE EXPENSES,
INTEREST, AND OTHER.......................................... 876 831
Minority interest............................................. (122) (85)
Corporate expenses............................................ (42) (34)
Loss on litigation settlement................................. -- (40)
Interest expense.............................................. (449) (450)
Interest income............................................... 36 35
Dividends on Convertible Preferred Securities................. (32) (37)
Other......................................................... (23) (16)
------ ------
INCOME BEFORE INCOME TAXES.................................... 244 204
Benefit (provision) for income taxes.......................... 1 (1)
------ ------
INCOME BEFORE EXTRAORDINARY ITEMS............................. 245 203
Less:
Dividends on preferred stock.................................. (20) (6)
Gain on repurchase of Convertible Preferred Securities........ 5 11
------ ------
INCOME BEFORE EXTRAORDINARY ITEMS AVAILABLE TO COMMON
SHAREHOLDERS................................................. $ 230 $ 208
====== ======
Basic earnings per share before extraordinary items available
to common shareholders....................................... $ 1.04 $ .92
====== ======
Diluted earnings per share before extraordinary items
available to common shareholders............................. $ 1.02 $ .88
====== ======
38
Revenues. Revenues increased $274 million, or 7%, to $4.1 billion for 2000
from $3.9 billion for 1999. Our revenue and operating profit were impacted by
improved results for comparable full-service hotel properties, and the
addition of a full-service hotel property, the Tampa Waterside Marriott, and a
significant expansion (500 rooms) at the Orlando World Center Marriott during
2000.
Hotel sales, which include room sales, food and beverage sales, and other
ancillary sales such as telephone sales, increased $287 million, or 8%, to
over $3.9 billion in 2000. The strong hotel results reflect the 6.6% REVPAR
increase for our comparable properties and the aforementioned developments
during 2000. Rental income, which primarily represents income on third party
leases with respect to five of our full-service hotels, decreased $10 million
or 5% to $178 million.
Operating Costs and Expenses. Operating costs and expenses principally
consist of property-level operating costs, depreciation, management fees, real
and personal property taxes, ground building and equipment rent, insurance and
certain other costs. Operating costs and expenses increased $229 million to
$3.3 billion for 2000, primarily representing increased hotel operating costs.
Hotel operating costs increased $136 million, or 8% to $1.8 billion for 2000,
which is commensurate with the increase in hotel sales. As a percentage of
hotel revenues, hotel operating costs and expenses were 47% for 2000 and 1999.
The significant increases in REVPAR were offset by increases in management
fees and property-level operating costs, including higher labor costs in
certain markets.
Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, our operating profit increased $45 million, or
5%, to $876 million for 2000. Operating profit was approximately 21% of total
revenues for both 2000 and 1999.
Minority Interest. Minority interest expense increased $37 million to $122
million for 2000, primarily reflecting the minority owners' share in income
before extraordinary items, which increased $42 million.
Loss on Litigation. In connection with a proposed settlement for litigation
related to seven limited service partnerships discussed above, we recorded a
non-recurring charge of $40 million during the fourth quarter of 1999.
Income Tax Provision. Income of the TRS will be subject to federal and state
income taxes.
Income Before Extraordinary Items. Income Before Extraordinary Items for
2000 was $245 million compared to $203 million for 1999. Basic earnings before
extraordinary items per common share was $1.04 and $.92 for 2000 and 1999,
respectively. Diluted earning before extraordinary items per common share was
$1.02 and $.88 for 2000 and 1999, respectively.
Liquidity and Capital Resources
Cash and cash equivalents were $313 million and $277 million at December 31,
2000 and December 31, 1999, respectively. Cash from operations increased $164
million to $483 million in 2000, primarily reflecting improved results of
operations due to the 6.6% increase in REVPAR for our comparable properties as
previously discussed, and changes in other liabilities, which were a source of
cash of $65 million in 2000, primarily due to the $125 million accrual, net of
taxes, for the Crestline lease repurchase expense which was not paid until
January 2001, and a use of cash of $45 million in 1999, primarily reflecting
cash payments for REIT Conversion expenses which were accrued in 1998.
Cash used in investing activities was $448 million and $176 million in 2000
and 1999, respectively. Cash used in investing activities includes capital
expenditures of $379 million and $361 million and acquisitions for $40 million
and $29 million in 2000 and 1999, respectively. Significant investing
activities during 2000 and 1999 include:
. In December 2000, a joint venture formed by us (through non-controlled
subsidiaries) and Marriott International acquired the partnership
interests in Courtyard by Marriott Limited Partnership and
39
Courtyard by Marriott II Limited Partnership for an aggregate payment of
approximately $372 million plus interest and legal fees, of which we
paid approximately $79 million. The joint venture acquired the
partnerships by acquiring partnership units pursuant to a tender offer
for such units followed by a merger of each of CBM I and CBM II with and
into subsidiaries of the joint venture. The joint venture financed the
acquisition with mezzanine indebtedness borrowed from Marriott
International, cash and other assets contributed by us (through our non-
controlled subsidiaries) including Rockledge's existing general partner
and limited partner interests in the partnerships, and cash and other
assets contributed by Marriott International. We own a 50% interest in
the joint venture.
. In late June 2000, an expansion that included the additions of a 500-
room tower and 15,000 square feet of meeting space at the Orlando World
Center Marriott was placed in service at an approximate development cost
of $88 million, of which $39 million was expended during 2000.
. In May 2000, we acquired a non-controlling partnership interest in the
JWDC Limited Partnership, which owns the JW Marriott Hotel, a 772-room
hotel located on Pennsylvania Avenue in Washington, DC. We previously
held a small interest in the venture, and invested an additional $40
million in the form of a co-general partner and limited partner
interest.
. In October 1999, the Company was paid $65 million in satisfaction of the
mortgage note secured by an additional hotel that was acquired in
connection with the Blackstone Acquisition.
. Property and equipment balances include $135 million and $243 million
for construction in progress as of December 31, 2000 and December 31,
1999, respectively. The reduction in construction in progress is due to
the completion of the Tampa Waterside Marriott, which was placed in
service in February 2000 and the expansion at the Orlando World Center
Marriott, which was placed in service in late June 2000. The balance as
of December 31, 2000, primarily relates to properties in Naples,
Orlando, San Diego, and various other expansion and development
projects.
Cash provided by (used in) financing activities was $1 million and ($302)
million in 2000 and 1999, respectively.
We believe cash payments will be required for the recognition of certain
deferred tax items and the settlement of certain audits of prior years' tax
returns with the Internal Revenue Service and state tax authorities. We made
net payments to certain states and the IRS of approximately $14 million and
$27 million in 1999 and 1998, respectively, and made additional payments of
$24 million in the first quarter of 2001. We also believe cash payments will
be needed to fund specific development projects, all of which are discussed in
this annual report. The sources of future cash outflows are dependent on cash
from operations and the amount of additional debt, if any, necessary for
payment upon the final resolution of these matters.
As of December 31, 2000, our total consolidated debt was approximately $5.3
billion. Our debt is comprised of $2.8 billion in unsecured senior notes, $2.3
billion in non-recourse mortgage debt and $150 million outstanding under the
term loan portion of the $775 million bank credit facility. Based on our total
market capitalization of approximately $9.5 billion as of December 31, 2000
calculated using the fair market value of our long term debt, minority
interests, mandatorily redeemable convertible preferred securities, and
shareholder's equity less cash, consolidated debt represents 56% of our total
market capitalization, compared to 69% as of December 31, 1999.
Since August 1998, we have issued or refinanced more than $3.9 billion of
debt, as is described below, in order to reduce the risk and volatility in our
capital structure. The net effect of these transactions has been to virtually
eliminate all of our near term maturities, with only $8 million maturing
through 2001, reduce our weighted average interest rate by approximately 70
basis points, and extend our average maturity by over one year. As a result,
our weighted average rate is now approximately 8.2%, and our average maturity
is approximately seven years, with 95% of our debt having fixed interest
rates. Significant debt transactions include:
. As of December 31, 2000, $150 million was outstanding under the term
loan portion of the bank credit facility, while the available capacity
under the revolving credit portion of the bank credit facility was
40
$625 million. The bank credit facility was renegotiated in June 2000 for
$775 million. The credit facility's term was extended for two additional
years, through August 2003. Borrowings under the credit facility
generally bear interest at the Eurodollar rate plus 2.25% (9.04% at
December 31, 2000), and the interest rate and a commitment fee on the
unused portion of the facility fluctuate based on specified financial
ratios. We funded a portion of the $207 million cash payment to acquire
the Crestline Lessee Entities through increased borrowings under the
revolver portion of the bank credit facility of $40 million during
January 2001, and we borrowed an additional $50 million and $25 million
in February 2001 and March 2001, respectively, for general corporate
purposes.
. In October 2000, we issued $250 million of 9 1/4% Series F senior notes
due in 2007, under the same indenture and with the same covenants as the
Series A, Series B, Series C, and Series E senior notes. The net
proceeds to the Company were approximately $245 million, after
commissions and expenses of approximately $5 million. In March 2001, the
Series F Senior notes were exchanged on a one-for-one basis for Series G
Senior notes, which are freely transferable by the holders.
. In February 2000, we refinanced the $80 million mortgage on Marriott's
Harbor Beach Resort property in Fort Lauderdale, Florida. The new
mortgage is for $84 million, at a rate of 8.58%, and matures in March
2007.
. In February 1999, we issued $300 million of 8 3/8% Series D senior notes
due 2006 and used the proceeds to refinance, or purchase, debt which had
been assumed through the merger of some partnerships or the purchase of
hotel properties in connection with the REIT conversion in December
1998. We repaid a $40 million variable rate mortgage with a portion of
the proceeds, and terminated the associated swap agreement, incurring a
termination fee of approximately $1 million. In August 1999, the Series
D Senior notes were exchanged on a one-for-one basis for Series E Senior
notes, which are freely transferable by the holders.
. In April 1999, a subsidiary of ours completed the refinancing of the
$245 million mortgage on the New York Marriott Marquis Hotel, maturing
in June 2000. In connection with the refinancing, we renegotiated the
hotel's management agreement and recognized an extraordinary gain of $14
million on the forgiveness of accrued incentive management fees by the
manager. This mortgage was subsequently refinanced as part of the $665
million financing agreement discussed below.
. In June 1999, we refinanced the debt on the San Diego Marriott Hotel and
Marina. The mortgage is for $195 million and a term of 10 years at a
rate of 8.45%. In addition, we entered into a mortgage for the
Philadelphia Marriott expansion in July 1999 for $23 million at an
interest rate of approximately 8.6%, maturing in 2009.
. In July 1999, we entered into a financing agreement pursuant to which we
borrowed $665 million due 2009 at a fixed rate of 7.47 percent. Eight of
our hotels serve as collateral for the agreement. In connection with
this refinancing, an extraordinary loss of $3 million was recognized,
representing the write-off of deferred financing fees. The proceeds from
this financing were used to refinance existing mortgage indebtedness
maturing at various times through 2000, including approximately $590
million of outstanding variable rate mortgage debt, and to terminate the
related interest rate swap agreements, recognizing an extraordinary gain
of approximately $8 million. As a result of the refinancing we no longer
have any interest rate swap agreements outstanding.
. In August 1999, we made a prepayment of $19 million to pay down in full
the mezzanine mortgage on the Marriott Desert Springs Resort and Spa. In
September 1999, we made a prepayment of $45 million to pay down in full
the mortgage note on the Philadelphia Four Seasons Hotel.
. In addition to the capital resources provided by our debt financings, in
December 1996, one of our wholly-owned subsidiary trusts, issued 11
million shares of 6 3/4% Convertible Quarterly Income Preferred
Securities, with a liquidation preference of $50 per share for a total
liquidation amount of $550 million. During 2000, we repurchased .4
million shares of the Convertible Preferred Securities as part of the
stock repurchase plan discussed below. Since the inception of the
repurchase program in September 1999, 1.5 million shares of the
Convertible Preferred Securities have been repurchased.
41
Significant equity financings include:
. Dividends in 2000 reflect the $0.86 cash dividend per share of common
stock paid during the year. In addition, on December 18, 2000, the Board
of Directors declared a regular cash dividend of $0.26 per share of
common stock which was paid on January 12, 2001. 1999 dividends reflect
the $73 million special dividend declared in December 1998 in connection
with the REIT Conversion, as well as the $0.63 dividend per share of
common stock paid as of December 31, 1999.
. In September 1999, we announced our intention to repurchase, from time
to time, up to 22 million shares of our common stock, operating
partnership units or an amount of the Convertible Preferred Securities
which are convertible into a like number of shares of our common stock
based upon the specified conversion ratio. For the year ended December
31, 2000, we purchased approximately 4.9 million shares of common stock,
.4 million shares of the Convertible Preferred Securities, and .3
million OP Units for approximately $62 million. Since the inception of
the repurchase program, we spent, in the aggregate, approximately $150
million to repurchase 16.2 million equivalent shares.
. In August 1999, we sold 4.16 million shares of 10% Class A preferred
stock. Holders of the stock are entitled to receive cumulative cash
dividends at a rate of 10% per year of the $25.00 per share liquidation
preference. Dividends are payable quarterly in arrears beginning October
15, 1999. Dividends in 2000 reflect quarterly cash dividends of $0.625
per share paid on January 17, April 14, July 14 and October 16. In
addition, on December 18, 2000, the Board of Directors declared a cash
dividend of $0.625 per share to be paid on January 12, 2001.
. In November 1999, we sold 4.0 million shares of 10% Class B preferred
stock. Holders of the stock are entitled to receive cumulative cash
dividends at a rate of 10% per year of the $25.00 per share liquidation
preference. Dividends are payable quarterly in arrears beginning January
15, 2000. Dividends in 2000 reflect quarterly cash dividends of $0.625
per share paid on January 17, April 14, July 14 and October 16. In
addition, on December 18, 2000, the Board of Directors declared a cash
dividend of $0.625 per share to be paid on January 12, 2001.
FFO and EBITDA
We consider Comparative Funds from Operations (Comparative FFO), which
represents FFO as defined by the National Association of Real Estate
Investment Trusts adjusted for significant non-recurring items detailed in the
chart below, and our 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 REITs. 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 presentation.
42
Comparative FFO available to common shareholders increased $48 million, or
11%, to $477 million in 2000 over 1999. The following is a reconciliation of
income before extraordinary items to Comparative FFO (in millions):
Year Ended
-------------------------
December 31, December 31,
2000 1999
------------ ------------
Funds from Operations
Income before extraordinary items................... $ 159 $ 196
Depreciation and amortization..................... 322 291
Other real estate activities...................... (3) (28)
Partnership adjustments........................... 61 80
----- -----
Funds from operations of Host LP.................... 539 539
Loss on Crestline lease repurchase................ 207 --
Loss on litigation settlement..................... -- 40
Taxes on Crestline lease repurchase............... (82) --
Taxes unrelated to continuing operations.......... (30) (21)
----- -----
Comparative funds from operations of Host LP........ 634 558
Dividends on preferred stock...................... (20) (6)
----- -----
Comparative funds from operations of Host LP
available to common unitholders.................... 614 552
Comparative funds from operations of minority
partners of Host LP................................ (137) (123)
----- -----
Comparative funds from operations available to
common shareholders of Host REIT................... $ 477 $ 429
===== =====
During the REIT conversion, we received a number of units of general and
limited partnership interests in the operating partnership--which we refer to
as OP Units--equal to the number of then outstanding shares of our common
stock, and the operating partnership assumed all of our liabilities. As a
result of this reorganization we are the sole general partner in the operating
partnership and as of December 31, 2000 held approximately 78% of the
outstanding OP Units. The $137 million and $123 million deducted for 2000 and
1999, 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 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. On February 7,
2001, certain minority partners converted 12.5 million OP Units to common
shares and immediately sold them to an underwriter for sale on the open
market. As a result, we now own approximately 82% of Host LP. We received no
proceeds as a result of the transaction.
EBITDA increased $87 million, or 9%, to $1,040 million in 2000 from $953
million in 1999. Hotel EBITDA increased $90 million, or 9%, to $1,119 million
in 2000 from $1,029 million in 1999, reflecting comparable hotel EBITDA
growth.
43
The following schedule presents our EBITDA as well as a reconciliation of
EBITDA to income before extraordinary items (in millions):
Year Ended
-------------------------
December 31, December 31,
2000 1999
------------ ------------
EBITDA
Hotels......................................... $1,119 $1,029
Office buildings and other investments......... 7 4
Interest income................................ 40 39
Corporate and other expenses................... (68) (65)
------ ------
EBITDA of Host LP................................ 1,098 1,007
Distributions to minority interest partners of
Host LP......................................... (58) (54)
------ ------
EBITDA of Host REIT.............................. $1,040 $ 953
====== ======
Year Ended
-------------------------
December 31, December 31,
2000 1999
------------ ------------
EBITDA of Host REIT.............................. $1,040 $ 953
Interest expense............................... (433) (430)
Income taxes................................... 98 16
Dividends on Convertible Preferred Securities.. (32) (37)
Depreciation and amortization.................. (331) (293)
Minority interest expense...................... (72) (82)
Distributions to minority interest partners of
Host LP....................................... 58 54
Loss on litigation settlement.................. -- (40)
Lease repurchase expense....................... (207) --
Other non-cash changes, net.................... 38 55
------ ------
Income before extraordinary items............ $ 159 $ 196
====== ======
Distributions to minority interest partners of Host LP of $58 million and
$54 million in 2000 and 1999, respectively, reflects distributions on OP Units
not held by Host REIT accrued during the respective years. These OP Units are
convertible into cash or our common stock at our option.
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.4 times, 2.3 times, and 2.6 times for 2000, 1999, and 1998,
respectively. The ratio of earnings to fixed charges was 1.2 to 1.0, 1.5 to
1.0, and 1.5 to 1.0 in 2000, 1999, and 1998, respectively.
Leases. In addition to our full-service hotels, we also lease some property
and equipment under noncancelable operating leases, including the long-term
ground leases for some of our hotels, generally with multiple renewal options.
The leases related to the 53 Courtyard properties and 18 Residence Inn
properties sold during 1995 and 1996, are nonrecourse to us and contain
provisions for the payment of contingent rentals based on a percentage of
sales in excess of stipulated amounts. We remain contingently liable on some
leases related to divested non-lodging properties. Such contingent liabilities
aggregated $68 million at December 31, 2000. However, management considers the
likelihood of any substantial funding related to these divested properties'
leases to be remote.
Inflation. Our hotel lodging properties have been impacted by inflation
through its effect on increasing costs and on the managers' ability to
increase room rates. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation often
can be passed on to customers.
Approximately 95% all of our debt bears interest at fixed rates. This debt
structure largely mitigates the impact of changes in the rate of inflation on
future interest costs. We have some financial instruments that are
44
sensitive to changes in interest rates. The interest recognized on the debt
obligations is based on various LIBOR terms, which ranged from 6.6% to 6.8%
and 5.6% to 5.9% at December 31, 2000 and December 31, 1999, respectively.
In July 1999, we completed the refinancing of approximately $588 million of
outstanding variable rate mortgage debt and terminated the related interest
rate swap agreements. In June 1999, we completed the refinancing of
approximately $196 million of outstanding variable rate mortgage debt. As a
result of the refinancing we no longer have any interest rate swap agreements
outstanding. Our remaining variable debt consists of the credit facility and
the mortgage debt on the Ritz-Carlton Amelia Island property which totaled
$354 million at March 16, 2001.
New Accounting Standards. As discussed in note 1 to the consolidated
financial statements, in December 1999, we changed our method of accounting
for contingent rental revenues to conform to the Commission's Staff Accounting
Bulletin (SAB) No. 101. As a result, contingent rental revenue was deferred on
the balance sheet until certain revenue thresholds are realized. We adopted
SAB No. 101 with retroactive effect beginning January 1, 1999 to conform to
the new presentation. SAB No. 101 had no impact on full-year 2000 and 1999
revenues, net income, or earnings per share because all rental revenues
considered contingent under SAB No. 101 were earned as of December 31, 2000
and 1999. The change in accounting principle has no effect on years prior to
1999 because percentage rent relates to rental income on our leases, which
began in 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including specified derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. We determined that there will be no impact from the
implementation of SFAS No. 133.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The table below provides information as of December 31, 2000 about our
financial instruments that are sensitive to changes in interest rates. For
debt obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates.
Expected Maturity
Date
---------------------- Fair
2000 2001 2002 2003 Total Value
---- ---- ---- ---- ----- -----
($ in millions)
Liabilities
Long-term--variable rate debt:
The Ritz-Carlton, Amelia Island............ -- -- -- 89 89 87
Credit Facility (1)........................ -- -- -- 150 150 150
Average Interest Rate (2).................... 8.9% 8.9% 8.9% -- -- --
- --------
(1) The Company borrowed an additional $115 million under the revolver
portion of the bank credit facility during the first quarter of 2001 to
partially fund the acquisition of the Crestline Lessee Entities and for
general corporate purposes.
(2) Interest rates are based on various LIBOR terms plus certain basis points
which range from 200 to 225 basis points. The one-month LIBOR rate at
December 31, 2000 was 6.6%. We have assumed for purposes of this
presentation that the LIBOR rate remains unchanged. A 100 basis point
increase in LIBOR would increase our interest rate expense by
approximately $2 million per year.
45
Item 8. Financial Statements and Supplementary Data
The following financial information is included on the pages indicated:
Host Marriott Corporation
Page
----
Report of Independent Public Accountants.................................. 47
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 48
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 2000, 1999 and 1998.................................................. 49
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Fiscal Years Ended December 31, 2000, 1999 and 1998.............. 50
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 2000, 1999 and 1998.................................................. 52
Notes to Consolidated Financial Statements................................ 54
Lease Pool Financial Statements
Pool A:
Page
----
Report of Independent Public Accountants.................................. 82
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 83
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 84
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 31, 2000 and 1999............................................... 85
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 86
Notes to Consolidated Financial Statements................................ 87
Pool B:
Page
----
Report of Independent Public Accountants.................................. 93
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 94
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 95
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 31, 2000 and 1999............................................... 96
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 97
Notes to Consolidated Financial Statements................................ 98
Pool C:
Page
----
Report of Independent Public Accountants.................................. 103
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 104
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 105
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 31, 2000 and 1999............................................... 106
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 107
Notes to Consolidated Financial Statements................................ 108
Pool D:
Page
----
Report of Independent Public Accountants.................................. 113
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 114
Consolidated Statements of Operations for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 115
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended
December 31, 2000 and 1999............................................... 116
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 2000 and 1999........................................................ 117
Notes to Consolidated Financial Statements................................ 118
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation:
We have audited the accompanying consolidated balance sheets of Host
Marriott Corporation and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 31, 2000. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott Corporation and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at
Item 14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects to the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Vienna, Virginia
March 1, 2001
47
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
------ ------
(in millions)
ASSETS
Property and equipment, net................................... $7,110 $7,108
Notes and other receivables, net (including amounts due from
affiliates of $164 million and $127 million, respectively)... 211 175
Rent receivable............................................... 65 72
Investments in affiliates..................................... 128 49
Other assets.................................................. 444 351
Restricted cash............................................... 125 170
Cash and cash equivalents..................................... 313 277
------ ------
$8,396 $8,202
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior notes................................................ $2,790 $2,539
Mortgage debt............................................... 2,275 2,309
Other....................................................... 257 221
------ ------
5,322 5,069
Accounts payable and accrued expenses......................... 381 148
Other liabilities............................................. 312 475
------ ------
Total liabilities......................................... 6,015 5,692
------ ------
Minority interest............................................. 485 508
Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary whose sole assets are the
convertible subordinated debentures due 2026 ("Convertible
Preferred Securities")....................................... 475 497
Shareholders' equity
Cumulative redeemable preferred stock (liquidation
preference $25.00 per share), 50 million shares authorized;
8.2 million shares issued and outstanding.................. 196 196
Common Stock, 750 million shares authorized; 221.3 million
shares and 223.5 million shares issued and outstanding,
respectively............................................... 2 2
Additional paid-in capital.................................. 1,824 1,844
Accumulated other comprehensive income (loss)............... (1) 2
Retained deficit............................................ (600) (539)
------ ------
Total shareholders' equity................................ 1,421 1,505
------ ------
$8,396 $8,202
====== ======
See Notes to Consolidated Financial Statements.
48
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 31, 2000, 1999 and 1998
(in millions, except per common share amounts)
2000 1999 1998
------ ------ ------
REVENUES
Rental income........................................ $1,390 $1,295 $ --
Hotel sales
Rooms................................................ -- -- 2,220
Food and beverage.................................... -- -- 984
Other................................................ -- -- 238
------ ------ ------
Total hotel sales................................... -- -- 3,442
Interest income...................................... 40 39 51
Net gains on property transactions................... 6 28 57
Equity in earnings of affiliates and other........... 37 14 14
------ ------ ------
Total revenues...................................... 1,473 1,376 3,564
------ ------ ------
EXPENSES
Depreciation and amortization........................ 331 293 246
Property-level expenses.............................. 272 264 271
Hotel operating expenses
Rooms................................................ -- -- 524
Food and beverage.................................... -- -- 731
Other department costs and deductions................ -- -- 843
Management fees and other (including Marriott
International management fees of $196 million in
1998)............................................... -- -- 213
Minority interest.................................... 72 82 52
Corporate expenses................................... 42 34 48
REIT conversion expenses............................. -- -- 64
Loss on litigation settlement........................ -- 40 --
Lease repurchase expense............................. 207 -- --
Interest expense..................................... 433 430 335
Dividends on Convertible Preferred Securities of
subsidiary trust.................................... 32 37 37
Other................................................ 23 16 26
------ ------ ------
Total expenses...................................... 1,412 1,196 3,390
------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES................................................ 61 180 174
Benefit (provision) for income taxes.................. 98 16 (86)
Benefit from change in tax status..................... -- -- 106
------ ------ ------
INCOME FROM CONTINUING OPERATIONS..................... 159 196 194
DISCONTINUED OPERATIONS
Income from discontinued operations (net of income tax
expense of $4 million in 1998)....................... -- -- 6
Provision for loss on disposal (net of income tax
benefit of $3 million in 1998)....................... -- -- (5)
------ ------ ------
INCOME BEFORE EXTRAORDINARY ITEMS..................... 159 196 195
Extraordinary (loss) gain (net of income tax benefit
of $80 million in 1998).............................. (3) 15 (148)
------ ------ ------
NET INCOME............................................ $ 156 $ 211 $ 47
====== ====== ======
Less: Dividends on preferred stock................... (20) (6) --
Add: Gain on repurchase of Convertible Preferred
Securities.......................................... 5 11 --
------ ------ ------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS........... $ 141 $ 216 $ 47
====== ====== ======
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations................................ $ .65 $ .89 $ .90
Discontinued operations (net of income taxes)........ -- -- .01
Extraordinary (loss) gain............................ (.01) .06 (.69)
------ ------ ------
BASIC EARNINGS PER COMMON SHARE....................... $ .64 $ .95 $ .22
====== ====== ======
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations................................ $ .64 $ .87 $ .84
Discontinued operations (net of income taxes)........ -- -- .01
Extraordinary (loss) gain............................ (.01) .05 (.58)
------ ------ ------
DILUTED EARNINGS PER COMMON SHARE..................... $ .63 $ .92 $ .27
====== ====== ======
See Notes to Consolidated Financial Statements.
49
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Fiscal years ended December 31, 2000, 1999 and 1998
(in millions)
Shares Accumulated
Outstanding Additional Retained Other
---------------- Preferred Common Paid-in (Deficit) Comprehensive Comprehensive
Preferred Common Stock Stock Capital Earnings Income (Loss) Income (Loss)
--------- ------ --------- ------ ---------- --------- ------------- -------------
-- 203.8 Balance, January 2,
1998................... $-- $204 $ 935 $ 49 $ 12 $ --
-- -- Net income.............. -- -- -- 47 -- 47
-- -- Other comprehensive
income (loss):
-- -- Unrealized loss on HM
Services common stock.. -- -- -- -- (5) (5)
Foreign currency
translation
adjustment............. -- -- -- -- (9) (9)
Reclassification of gain
realized on HM Services
common stock--net
income................. -- -- -- -- (2) (2)
-----
-- -- Comprehensive income.... $ 31
=====
-- 1.4 Common stock issued for
the comprehensive stock
and employee stock
purchase plans......... -- -- 8 -- --
-- -- Adjustment of stock par
value from $1 to $.01
per share.............. -- (202) 202 -- --
-- 11.9 Common stock issued for
Special Dividend....... -- -- 143 (143) --
-- 8.5 Common stock issued for
the REIT roll-up of
partnerships
(Note 12).............. -- -- 113 -- --
-- -- Increase in Operating
Partnership equity due
to issuance of OP Units
for limited partner
interests (net of $368
million minority
interest of the
Operating
Partnership)........... -- -- 466 -- --
-- -- Distribution of stock of
Crestline Capital
Corporation............ -- -- -- (438)
-- -- Cash portion of Special
Dividend............... -- -- -- (69) --
- --------------------------------------------------------------------------------------------------------------
-- 225.6 Balance, December 31,
1998................... $-- $ 2 $ 1,867 $ (554) $ (4) $ --
-- -- Net income.............. -- -- -- 211 -- 211
-- -- Other comprehensive
income (loss):
Unrealized gain on HM
Services common stock.. -- -- -- -- 4 4
Foreign currency
translation
adjustment............. -- -- -- -- 3 3
Reclassification of gain
realized on HM Services
common stock--net
income................. -- -- -- -- (1) (1)
-----
-- -- Comprehensive income.... $ 217
=====
-- 3.6 Common stock issued for
the comprehensive stock
and employee stock
purchase plans......... -- -- 11 -- --
-- 0.5 Redemptions of limited
partnership interests
of third parties for
common stock........... -- -- 3 -- --
See Notes to Consolidated Financial Statements.
50
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Fiscal years ended December 31, 2000, 1999 and 1998
(in millions)
Shares Accumulated
Outstanding Additional Retained Other
---------------- Preferred Common Paid-in (Deficit) Comprehensive Comprehensive
Preferred Common Stock Stock Capital Earnings Income (Loss) Income (Loss)
--------- ------ --------- ------ ---------- --------- ------------- -------------
8.2 -- Issuance of preferred
stock.................. 196 -- -- -- --
-- -- Dividends on common
stock.................. -- -- -- (191) --
-- -- Dividends on preferred
stock.................. -- -- -- (5) --
-- (0.4) Adjustment to Special
Dividend............... -- -- (4) -- --
-- -- Redemptions of limited
partnership interests
for cash............... -- -- (1) -- --
-- -- Issuance of preferred
limited partnership
interests.............. -- -- 3 -- --
-- -- Repurchases of
Convertible Preferred
Securities............. -- -- 11 -- --
-- (5.8) Repurchases of common
stock.................. -- -- (46) -- --
- ---------------------------------------------------------------------------------------------------------------
8.2 223.5 Balance, December 31,
1999................... $196 $ 2 $1,844 $(539) $ 2
-- -- Net income.............. -- -- -- 156 -- 156
-- -- Other comprehensive
income (loss):
Foreign currency
translation adjustment
....................... -- -- -- -- (2) (2)
Reclassification of gain
realized on HM Services
common stock--net
income................. -- -- -- -- (1) (1)
----
-- -- Comprehensive income.... $153
====
-- 2.0 Common stock issued for
the comprehensive stock
and employee stock
purchase plans......... -- -- 13 -- --
-- 0.7 Redemptions of limited
partnership interests
of third parties for
common stock........... -- -- 4 -- --
-- -- Dividends on common
stock.................. -- -- -- (201) --
-- -- Dividends on preferred
stock.................. -- -- -- (16) --
-- -- Redemptions of limited
partnership interests
for cash............... -- -- (1) -- --
-- -- Repurchases of
Convertible Preferred
Securities............. -- -- 4 -- --
-- (4.9) Repurchases of common
stock.................. -- -- (40) -- --
- ---------------------------------------------------------------------------------------------------------------
8.2 221.3 Balance, December 31,
2000................... 196 $ 2 $1,824 $(600) $(1)
- ---------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
51
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal years ended December 31, 2000, 1999, and 1998
(in millions)
2000 1999 1998
----- ------ ------
OPERATING ACTIVITIES
Income from continuing operations....................... $ 159 $ 196 $ 194
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 331 293 246
Income taxes........................................... (47) (66) (103)
Amortization of deferred income........................ (4) (4) (4)
Net gains on property transactions..................... (2) (24) (50)
Equity in earnings of affiliates....................... (25) (6) (1)
Other.................................................. 4 30 39
Changes in operating accounts:
Other assets........................................... 2 (55) (59)
Other liabilities...................................... 65 (45) 50
----- ------ ------
Cash from continuing operations........................ 483 319 312
Cash from discontinued operations...................... -- -- 29
----- ------ ------
Cash from operations................................... 483 319 341
----- ------ ------
INVESTING ACTIVITIES
Proceeds from sales of assets........................... -- 195 227
Acquisitions............................................ (40) (29) (988)
Capital expenditures:
Renewals and replacements.............................. (230) (197) (165)
New investments........................................ (108) (150) (87)
Other investments...................................... (41) (14) --
Purchases of short-term marketable securities........... -- -- (134)
Sales of short-term marketable securities............... -- -- 488
Notes receivable collections, net....................... 6 19 4
Affiliate notes receivable issuances and collections,
net.................................................... (39) -- (13)
Other................................................... 4 -- 13
----- ------ ------
Cash used in investing activities from continuing
operations............................................ (448) (176) (655)
Cash used in investing activities from discontinued
operations............................................ -- -- (50)
----- ------ ------
Cash used in investing activities...................... (448) (176) (705)
----- ------ ------
FINANCING ACTIVITIES
Issuances of debt....................................... 540 1,345 2,496
Debt prepayments........................................ (278) (1,397) (1,898)
Cash contributed to Crestline at inception.............. -- -- (52)
Cash contributed to Non-Controlled Subsidiary........... -- -- (30)
Cost of extinguishment of debt.......................... -- (2) (175)
Scheduled principal repayments.......................... (39) (34) (51)
Issuances of common stock............................... 4 5 1
Issuances of cumulative redeemable preferred stock,
net.................................................... -- 196 --
Dividends on common stock............................... (190) (217) --
Dividends on preferred stock............................ (19) (2) --
Redemption of outside operating partnership interests
for cash............................................... (3) (3) --
Repurchases of common stock............................. (44) (51) --
Repurchases of Convertible Preferred Securities......... (15) (36) --
Other................................................... 45 (106) (26)
----- ------ ------
Cash from (used in) financing activities from
continuing operations................................. 1 (302) 265
Cash from financing activities from discontinued
operations............................................ -- -- 24
----- ------ ------
Cash from (used in) financing activities............... 1 (302) 289
----- ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 36 (159) (75)
CASH AND CASH EQUIVALENTS, beginning of year............ 277 436 511
----- ------ ------
CASH AND CASH EQUIVALENTS, end of year.................. $ 313 $ 277 $ 436
===== ====== ======
See Notes to Consolidated Financial Statements.
52
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (cont.)
Fiscal years ended December 31, 2000, 1999, and 1998
Supplemental schedule of noncash investing and financing activities:
Approximately 652,000 and 467,000 shares of common stock were issued during
2000 and 1999, respectively, upon the conversion of outside OP Units valued at
$6.6 million and $4.9 million, respectively.
Approximately 612,000 cumulative redeemable preferred limited partnership
units valued at $7.6 million were issued during 1999 in connection with the
acquisition of minority interests in two hotels.
The Company assumed mortgage debt of $1,215 million in 1998 for the
acquisition of, or purchase of controlling interest in, certain hotel
properties.
In 1998, the Company distributed $438 million of net assets in connection
with the discontinued operations and contributed $12 million of net assets to
the Non-Controlled Subsidiaries in connection with the REIT Conversion
See Notes Consolidated Financial Statements.
53
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Host Marriott Corporation ("Host REIT"), a Maryland corporation formerly
named HMC Merger 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 solely through an operating partnership, Host
Marriott, L.P. ("Host LP" or the "Operating Partnership") and its
subsidiaries. Due to certain tax laws restricting REITs from deriving revenues
directly from the operations of hotels, effective January 1, 1999, Host REIT
leased substantially all of the hotels to subsidiaries of Crestline Capital
Corporation ("Crestline") and certain other lessees as further discussed at
Note 10.
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 effectively terminated the
leases with Crestline by acquiring the entities owning the leasehold interests
with respect to 116 of the full-service hotels from Crestline effective
January 1, 2001 (see Note 2).
As of December 31, 2000, the Company owned, or had controlling interests in,
122 upscale and luxury, full-service hotel lodging properties generally
located throughout the United States and Canada and operated primarily under
the Marriott, Ritz-Carlton, Four Seasons, Hilton, Hyatt and Swissotel brand
names. Of these properties, 109 are managed or franchised by Marriott
International, Inc. and its subsidiaries ("Marriott International"). Host REIT
also has economic, non-voting interests in certain Non-Controlled
Subsidiaries, whose hotels are also managed by Marriott International (see
Note 5).
Basis of Presentation
On December 15, 1998, shareholders of Host Marriott Corporation, ("Host
Marriott"), a Delaware corporation and the predecessor to Host REIT, 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 LP. Host
Marriott merged into HMC Merger Corporation (the "Merger"), a newly formed
Maryland corporation (renamed Host Marriott Corporation) which has elected to
be treated, effective January 1, 1999, as a REIT and is the sole general
partner of the Operating Partnership. Host Marriott and its subsidiaries'
contribution of its hotels and certain assets and liabilities to the Operating
Partnership and its subsidiaries (the "Contribution") in exchange for units of
partnership interest in the Operating Partnership ("OP Units") was accounted
for at Host Marriott's historical basis. As of December 31, 2000, Host REIT
owned approximately 78% of the Operating Partnership.
On February 7, 2001, certain minority partners converted 12.5 million OP
Units to common shares and immediately sold them to an underwriter for sale on
the open market. As a result, the Company now owns approximately 82% of Host
LP. The Company received no proceeds as a result of the transaction.
In these consolidated financial statements, the "Company" or "Host Marriott"
refers to Host Marriott Corporation and its consolidated subsidiaries, both
before and after the Merger and its conversion to a REIT (the "REIT
Conversion").
On December 29, 1998, the Company completed the previously discussed spin-
off of Crestline (see Note 2), 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 common
stock owned (the "Distribution").
54
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the Distribution, the Company's financial statements were
restated to present the senior living communities business results of
operations and cash flows as discontinued operations. See Note 3 for further
discussion of the Distribution.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates over
which the Company has the ability to exercise significant influence, but does
not control, are accounted for using the equity method. All material
intercompany transactions and balances have been eliminated.
Fiscal Year End Change
The U.S. Internal Revenue Code of 1986, as amended, requires REITs to file
their U.S. income tax return on a calendar year basis. Accordingly in 1998,
the Company changed its fiscal year-end to December 31 for both financial and
tax reporting requirements. Previously, the Company's fiscal year ended on the
Friday nearest to December 31.
Revenues
The Company's 2000 and 1999 revenues primarily represent the rental income
from its leased hotels, net gains on property transactions, interest income
and equity in earnings of affiliates. 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. As of year end 2000 and 1999, all
annual thresholds were achieved.
The comparison of the 2000 and 1999 results with 1998 is also affected by a
change in the reporting period for the Company's hotels not managed by
Marriott International. In prior years, operations for certain of the
Company's hotels were recorded from the beginning of December of the prior
year to November of the current year due to a one-month delay in receiving
results from those hotel properties. Upon conversion to a REIT, operations are
required to be reported on a calendar year basis in accordance with Federal
income tax regulations. As a result, the Company recorded one additional
period of operations in fiscal year 1998 for these properties. The effect on
revenues and net income was to increase revenues by $44 million and net income
by $6 million and diluted earning per share by $0.02 in 1998.
As a result of the previously discussed transaction with Crestline,
effective January 1, 2001, a wholly-owned subsidiary of the Company replaced
Crestline as lessee with respect to 116 full-service properties. Beginning in
2001, the Company's consolidated results of operations will represent
property-level revenues and expenses rather than rental income from lessees
with respect to those 116 properties and, therefore, will not be comparable to
2000 and 1999 results.
Earnings (Loss) Per Common Share
Basic earnings per common share is computed by dividing net income less
dividends on preferred stock and gains on repurchases of the Convertible
Preferred Securities by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share are computed by dividing net
income less dividends on preferred stock and gains on repurchases of the
Convertible Preferred Securities as adjusted for
55
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 also include those
common and preferred OP Units issuable or outstanding that are held by
minority partners which are assumed to be converted. Diluted earnings per
common share was not adjusted for the impact of the Convertible Preferred
Securities for 2000 and 1999 as they were anti-dilutive. In December 1998, the
Company declared the Special Dividend (Note 3) and, in 1999, the Company
distributed 11.5 million shares to existing shareholders in conjunction with
the Special Dividend. The weighted average number of common shares outstanding
and the basic and diluted earnings per share computations have been restated
to reflect these shares as outstanding for all periods presented.
In February 1999, the Company issued 8.5 million shares in exchange for 8.5
million OP Units issued to certain limited partners in connection with the
Partnership Mergers (see Note 13) which are deemed outstanding at December 31,
1998.
A reconciliation of the number of shares utilized for the calculation of
diluted earnings per common share follows (in millions, except per share
amounts):
Fiscal Year Ended December 31,
----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- -------------------------------- --------------------------------
Per Per Per
Income Shares Shares Income Shares Share Income Share Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
Net income.......... $ 156 220.8 $ .71 $ 211 227.1 $ .93 $ 47 216.3 $ .22
Dividends on
preferred stock... (20) -- (.09) (6) -- (.03) -- -- --
Gain on repurchase
of Convertible
Preferred
Securities........ 5 -- .02 11 -- .05 -- -- --
----- ----- ----- ----- ----- ----- ---- ----- -----
Basic earnings
available to common
shareholders per
share.............. 141 220.8 .64 216 227.1 .95 47 216.3 .22
Assuming
distribution of
common shares
granted under the
comprehensive
stock plan, less
shares assumed
purchased at
average market
price............. -- 4.2 (.01) -- 5.3 (.02) -- 4.0 (.01)
Assuming conversion
of minority OP
Units
outstanding....... 40 63.4 -- 61 64.5 -- -- -- --
Assuming conversion
of preferred OP
Units............. -- .6 -- -- 0.3 -- -- -- --
Assuming conversion
of minority OP
Units issuable.... -- -- -- 7 10.9 (.01) -- 0.3 --
Assuming conversion
of Convertible
Preferred
Securities........ -- -- -- -- -- -- 22 35.8 .06
----- ----- ----- ----- ----- ----- ---- ----- -----
Diluted Earnings per
Share.............. $ 181 289.0 $ .63 $ 284 308.1 $ .92 $ 69 256.4 $ .27
===== ===== ===== ===== ===== ===== ==== ===== =====
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: revenues of $26 million, $24
million and $121 million, and income before income taxes of $6 million, $8
million and $7 million in 2000, 1999 and 1998, respectively.
56
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minority Interest
The percentage of the Operating Partnership equity owned by outside third
parties, which was 22% as of December 31, 2000 and 1999, is presented as
minority interest in the consolidated balance sheets and was $346 million and
$372 million as of December 31, 2000 and 1999, respectively. Minority interest
also includes minority interests in consolidated investments of the Operating
Partnership of $139 million and $136 million at December 31, 2000 and 1999,
respectively.
Property and Equipment
Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, ground rent and real estate taxes incurred during
development and construction. Replacements and improvements are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.
Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by accounting principles generally accepted in the
United States. Deferred gains are recognized as income in subsequent periods
as conditions requiring deferral are satisfied or expire without further cost
to the Company.
In cases where management is holding for sale particular hotel properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than the
net book value. A property is considered to be held for sale when the Company
has made the decision to dispose of the property. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.
Deferred Charges
Financing costs related to long-term debt are deferred and amortized over
the remaining life of the debt.
Cash, Cash Equivalents and Short-term Marketable Securities
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $0 and $5 million at December 31, 2000 and
1999, respectively, of cash related to certain consolidated partnerships, the
use of which is restricted generally for partnership purposes to the extent it
is not distributed to the partners. Short-term marketable securities include
investments with a maturity of 91 days to one year at the date of purchase.
The Company's short-term marketable securities represent investments in U.S.
government agency notes and high quality commercial paper. The short-term
marketable securities are categorized as available for sale and, as a result,
are stated at fair market value. Unrealized holding gains and losses are
included as a separate component of shareholders' equity until realized.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any one institution.
57
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, on January 1, 1999, subsidiaries of Crestline became the
lessees of virtually all the hotels and, as such, their rent payments were the
primary source of the Company's revenues during 2000 and 1999. For a more
detailed discussion of Crestline's guarantee as lessee, see Note 10. The full-
service hotel leases were grouped into four lease pools. Crestline, as lessee
during 1999 and 2000, provided a 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, Crestline's
obligation as lessee 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 for fiscal years 2000
and 1999 might have been material to the Company's consolidated financial
statements for those years. The separate financial statements of each full-
service lease pool as of and for the years ended December 31, 2000 and 1999
are included in this filing.
As a result of the acquisition of the Crestline Lessee Entities during
January 2001 (see Note 2), the third party credit concentration with Crestline
ceased to exist. Effective January 1, 2001 the Company leases substantially
all of the hotels to a wholly-owned TRS.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REIT Conversion Expenses
The Company incurred certain costs related to the REIT Conversion. These
costs consist of professional fees, printing and filing costs, consent fees
and certain other related fees, and are classified as REIT conversion expenses
on the consolidated statement of operations. The Company recognized REIT
conversion expense of $64 million in 1998.
Loss on Litigation Settlement
In connection with the settlement of litigation involving seven limited
partnerships in which the Company or its subsidiaries serve as general
partner, the Company recorded a non-recurring charge of $40 million during the
fourth quarter of 1999. The loss is classified as the loss on litigation
settlement on the consolidated statement of operations.
Interest Rate Swap Agreements
In the past, the Company entered into a limited number of interest rate swap
agreements for non-trading purposes. The Company used such agreements to fix
certain of its variable rate debt to a fixed rate basis. The interest rate
differential to be paid or received on interest rate swap agreements was
recognized as an adjustment to interest expense. The Company terminated its
interest rate swap agreements in July 1999.
Other Comprehensive Income
The components of total accumulated other comprehensive income in the
balance sheet are as follows (in millions):
2000 1999
---- ----
Net unrealized gains................................................. $ 7 $ 8
Foreign currency translation adjustment.............................. (8) (6)
---- ---
Total accumulated other comprehensive income (loss)................ $ (1) $ 2
==== ===
58
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Application of New Accounting Standards
On December 3, 1999 the Securities and Exchange Commission staff issued
Staff Accounting Bulletin (SAB) No. 101, which codified the staff's position
on revenue recognition. The Company retroactively changed its method of
accounting for contingent rental revenues to conform to SAB No. 101. As a
result, base rent is recognized as it is earned according to the applicable
lease provisions. Percentage rent is recorded as deferred revenue on the
balance sheet until the applicable hotel revenues exceed the threshold
amounts. The Company adopted SAB No. 101 with retroactive effect beginning
January 1, 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
'Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement is effective for fiscal years
beginning after June 15, 2000. The Company has determined that there will be
no impact from the implementation of SFAS No. 133.
2. Lease Repurchase
On November 13, 2000, the Company announced the execution of a definitive
agreement with Crestline for the termination of their lease arrangements
through the purchase of the entities ("Crestline Lessee Entities") owning the
leasehold interests with respect to 116 full-service hotel properties owned by
the Company for $207 million in cash, including $6 million of legal and
professional fees and transfer taxes. In connection therewith, during the
fourth quarter of 2000 the Company recorded a non-recurring, pre-tax loss of
$207 million net of a tax benefit of $82 million which the Company recognized
as a deferred tax asset because, for income tax purposes, the acquisition is
recognized as an asset that will be amortized over the next six years.
The transaction was consummated effective January 1, 2001. Under the terms
of the transaction, a wholly-owned subsidiary of the Company, which will elect
to be treated as a TRS for federal income tax purposes, acquired the Crestline
Lessee Entities. As a result of the acquisition, the Company's consolidated
results of operations beginning January 1, 2001 will represent property-level
revenues and expenses rather than rental income from lessees with respect to
those 116 full-service properties.
3. Distribution and Special Dividend
In December 1998, the Company distributed to its shareholders through a
taxable distribution the outstanding shares of common stock of Crestline (the
"Distribution"), formerly a wholly owned subsidiary of the Company, which, as
of the date of the Distribution, owned and operated the Company's senior
living communities, owned certain other assets and held leasehold interests in
substantially all of the Company's hotels. The Distribution provided Company
shareholders with one share of Crestline common stock for every ten shares of
Company common stock held by such shareholders on the record date of December
28, 1998. As a result of the Distribution, the Company's consolidated
financial statements were restated to present the senior living communities'
business results of operations and cash flows as discontinued operations.
Revenues for the Company's discontinued operations totaled $241 million in
1998. The provision for loss on disposal includes organizational and formation
costs related to Crestline.
For purposes of governing certain of the ongoing relationships between the
Company and Crestline after the Distribution and to provide for an orderly
transition, the Company and Crestline entered into various agreements,
including a Distribution Agreement, an Employee Benefits Allocation Agreement
and a Tax Sharing Agreement. Effective as of December 29, 1998, these
agreements provide, among other things, for the division between the Company
and Crestline of certain assets and liabilities.
59
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On December 18, 1998, the Board of Directors 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 $73 million and
11.5 million shares of common stock that were elected in the Special Dividend
were paid and/or issued in 1999.
4. Property and Equipment
Property and equipment consists of the following:
2000 1999
------- -------
(in millions)
Land and land improvements................................. $ 685 $ 687
Buildings and leasehold improvements....................... 6,986 6,687
Furniture and equipment.................................... 793 712
Construction in progress................................... 135 243
------- -------
8,599 8,329
Less accumulated depreciation and amortization............. (1,489) (1,221)
------- -------
$ 7,110 $ 7,108
======= =======
Interest cost capitalized in connection with the Company's development and
construction activities totaled $8 million in 2000, $7 million in 1999, and $4
million in 1998.
5. Investments in and Receivables from Affiliates
Investments in and receivables from affiliates consist of the following:
Ownership
Interests 2000 1999
--------- ---- ----
(in
millions)
Equity investments
Rockledge Hotel Properties, Inc....................... 95% $ 87 $ 47
Fernwood Hotel Assets, Inc............................ 95% 2 2
JWDC Limited Partnership.............................. 50% 39 --
Notes and other receivables from affiliates, net........ -- 164 127
---- ----
$292 $176
==== ====
On May 16, 2000, the Company acquired for $40 million in cash a non-
controlling interest in the JWDC Limited Partnership, which owns the JW
Marriott Hotel, a 772-room hotel located on Pennsylvania Avenue in Washington,
DC. The Company previously held a 17% limited partner interest in the venture
through a non-controlled subsidiary.
In connection with the REIT Conversion, Rockledge Hotel Properties, Inc.
("Rockledge") and Fernwood Hotel Assets, Inc. (together, the "Non-Controlled
Subsidiaries") were formed to own various assets of approximately $264 million
contributed by the Company to the Operating Partnership, the direct ownership
of which by the Company or the Operating Partnership could jeopardize the
Company's status as a REIT. These assets primarily consist of partnership or
other interests in hotels which are not leased and certain furniture, fixtures
and equipment ("FF&E") used in the hotels. In exchange for the contribution of
these assets to the Non-Controlled Subsidiaries, the Operating Partnership
received only non-voting common stock of the Non-
60
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Controlled Subsidiaries, representing 95% of the total economic interests
therein. The Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which are certain employees of the Company and the J.W.
Marriott Foundation concurrently acquired all of the voting common stock
representing the remaining 5% of the total economic interest. The Non-
Controlled Subsidiaries own three full-service hotels, an interest in a joint
venture discussed below, and interests in partnerships that own an additional
full-service hotel and 88 limited-service hotels. During February 2001, the
Board of Directors approved the acquisition, through a TRS, of all of the
voting common stock representing the remaining 5% of the total economic
interest of the Non-Controlled Subsidiaries from the Host Marriott Statutory
Employee/Charitable Trust. The transaction is permitted as a result of the
REIT Modernization Act.
In addition, during December 2000, a newly created joint venture, ("Joint
Venture") formed by Rockledge and Marriott International acquired the
partnership interests in two partnerships that collectively own 120 limited
service hotels for approximately $372 million plus interest and legal fees, of
which Rockledge paid approximately $79 million. Previously, both partnerships
were operated by Rockledge, as sole general partner. The Joint Venture
acquired the two partnerships by acquiring partnership units pursuant to a
tender offer for such units followed by a merger of the two partnerships with
and into subsidiaries of the Joint Venture. The Joint Venture financed the
acquisition with mezzanine indebtedness borrowed from Marriott International
and with cash and other assets contributed by Rockledge and Marriott
International, including Rockledge's existing general partner and limited
partner interests in the partnerships. Rockledge, through its subsidiaries,
owns a 50% non-controlling interest in the Joint Venture as of December 31,
2000.
In connection with the REIT Conversion, the Company completed the
Partnership Mergers and, as a result, investments in affiliates in prior years
include earnings and assets, which are now consolidated. (See Note 13 for
discussion.)
Receivables from affiliates are reported net of reserves of $7 million at
December 31, 2000 and 1999. Repayments were $3 million in 2000, $2 million in
1999 and $14 million in 1998. There were no fundings in 2000 and 1999.
The Company's pre-tax income from affiliates includes the following:
2000 1999 1998
---- ---- ----
(in millions)
Interest income............................................... $10 $11 $ 1
Equity in net income.......................................... 25 6 1
--- --- ---
$35 $17 $ 2
=== === ===
Combined summarized balance sheet information for the Company's affiliates
follows:
2000 1999
------ ------
(in millions)
Property and equipment, net................................... $1,471 $1,556
Other assets.................................................. 335 329
------ ------
Total assets................................................ $1,806 $1,885
====== ======
Debt, principally mortgages................................... $1,361 $1,533
Other liabilities............................................. 289 310
Equity........................................................ 156 42
------ ------
Total liabilities and equity................................ $1,806 $1,885
====== ======
61
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Combined summarized operating results for the Company's affiliates follow:
2000 1999 1998
----- ----- ------
(in millions)
Hotel revenues......................................... $ 872 $ 913 $1,123
Operating expenses:
Cash charges (including interest).................... (710) (728) (930)
Depreciation and other non-cash charges.............. (126) (138) (151)
----- ----- ------
Income before extraordinary items...................... 36 47 42
Extraordinary items.................................... 68 -- 4
----- ----- ------
Net income........................................... $ 104 $ 47 $ 46
===== ===== ======
6. Debt
Debt consists of the following:
2000 1999
------ ------
(in millions)
Series A senior notes, with a rate of 7 7/8% due August 2005.. $ 500 $ 500
Series B senior notes, with a rate of 7 7/8% due August 2008.. 1,194 1,193
Series C senior notes, with a rate of 8.45% due December
2008......................................................... 498 498
Series E senior notes, with a rate of 8 3/8% due February
2006......................................................... 300 300
Series F senior notes, with a rate of 9 1/4% due October
2007......................................................... 250 --
Senior secured notes, with a rate of 9 1/2% due May 2005...... 13 13
Senior notes, with an average rate of 9 3/4% maturing through
2012......................................................... 35 35
------ ------
Total senior notes.......................................... 2,790 2,539
------ ------
Mortgage debt (non-recourse) secured by $3.5 billion of real
estate assets, with an average rate of 7.98% at December 31,
2000, maturing through February 2023......................... 2,275 2,309
Line of credit, with a variable rate of Eurodollar plus 2.25%
(9.04% at December 31, 2000)................................. 150 125
Other notes, with an average rate of 7.36% at December 31,
2000, maturing through December 2017......................... 90 90
Capital lease obligations..................................... 17 6
------ ------
Total other................................................. 257 221
------ ------
$5,322 $5,069
====== ======
Public Debt. In October 2000, the Company issued $250 million of 9 1/4%
Series F senior notes due in 2007, under the same indenture and with the same
covenants as the New Senior Notes (described below). The net proceeds to the
Company were approximately $245 million, after commissions and expenses of
approximately $5 million. The proceeds were used for the $26 million repayment
of the outstanding balance on the revolver portion of the bank credit
facility, settlement of certain litigation, and to partially fund the
acquisition of the Crestline Lessee Entities. The notes will be exchanged in
the first quarter of 2001 for Series G senior notes on a one-for-one basis,
which are freely transferable by the holders.
In February 1999, the Company issued $300 million of 8 3/8% Series D notes
due in 2006 under the same indenture and with the same covenants as the New
Senior Notes (described below). The debt was used to refinance, or purchase,
approximately $299 million of debt acquired in the Partnership Mergers,
including a $40
62
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million variable rate mortgage and an associated swap agreement, which was
terminated by incurring a termination fee of $1 million. The notes were
exchanged in August 1999 for Series E Senior notes on a one-for-one basis,
which are freely transferable by the holders.
In December 1998, the Operating Partnership issued $500 million of 8.45%
Series C notes due in 2008 under the same indenture and with the same
covenants as the New Senior Notes (described below).
On August 5, 1998, the Company issued an aggregate of $1.7 billion in new
senior notes (the "New Senior Notes"). The New Senior Notes were issued in two
series, $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion of
7 7/8% Series B notes due in 2008. The indenture under which the new Senior
Notes were issued contains covenants restricting the ability of the Company
and certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
certain distributions to equity holders of the Company and the Operating
Partnership. The Company utilized the proceeds from the New Senior Notes to
purchase substantially all of its (i) $600 million in 9 1/2% senior notes due
2005; (ii) $350 million in 9% senior notes due 2007; and (iii) $600 million in
8 7/8% senior notes due 2007 (collectively, the "Old Senior Notes").
Approximately $13 million of the Old Senior Notes remain outstanding. In
connection with the purchase of substantially all of the Old Senior Notes, the
Company recorded a charge of approximately $148 million in 1998 (net of income
tax benefit of $80 million) as an extraordinary item representing the amount
paid for bond premiums and consent fees, as well as the write-off of deferred
financing fees on the Old Senior Notes.
Concurrently with each offer to purchase, we successfully solicited consents
(the "1998 Consent Solicitations") from registered holders of the Old Senior
Notes to certain amendments to eliminate or modify substantially all of the
restrictive covenants and certain other provisions contained in the indentures
pursuant to which the Old Senior Notes were issued.
Bank Credit Facility. In August 1998, the Company entered into a $1.25
billion credit facility (the "Bank Credit Facility") with a group of
commercial banks. The Bank Credit Facility had an initial three-year term with
two one-year extension options. At origination, the facility consisted of a
$350 million term loan and a $900 million revolver.
During June 2000, the Company modified its bank credit facility. As
modified, the total facility has been permanently reduced to $775 million,
consisting of a $150 million term loan and a $625 million revolver. In
addition, the original term was extended for two additional years, through
August 2003. Borrowings under the Bank Credit Facility bear interest currently
at the Eurodollar rate plus 2.25% at December 31, 2000. The interest rate and
commitment fee on the unused portion of the Bank Credit Facility fluctuate
based on certain financial ratios. As of December 31, 2000, $150 million was
outstanding under the Bank Credit Facility, and the available capacity under
the revolver portion was $625 million. During the first quarter of 2001, the
Company borrowed an additional $90 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 Bank Credit Facility contains covenants restricting the ability of the
Company and certain of its subsidiaries to incur indebtedness, grant liens on
their assets, acquire or sell assets or make investments in other entities,
and make certain distributions to equity holders of the Company and the
Operating Partnership. The Bank Credit Facility also contains certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt,
and secured debt to total debt. As of December 31, 2000, the Company was in
compliance with all covenants.
In connection with the renegotiation of the Bank Credit Facility, the
Company recognized an extraordinary loss of approximately $3 million during
the second quarter of 2000, representing the write-off of deferred financing
costs and certain fees paid to the lender.
63
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, the Company repaid $225 million of the outstanding balance on
the $350 million term loan portion of the Bank Credit Facility, permanently
reducing the term loan portion to $125 million. In connection with these
prepayments, an extraordinary loss of $2 million representing the write-off of
deferred financing costs was recognized.
Mortgage Debt. In February 2000, the Company refinanced the $80 million
mortgage on Marriott's Harbor Beach Resort property in Fort Lauderdale,
Florida. The new mortgage is for $84 million, at a rate of 8.58%, and matures
in March 2007.
In August 1999, the Company made a prepayment of $19 million to pay down in
full the mezzanine mortgage on the Marriott Desert Springs Resort and Spa. In
September 1999, the Company made a prepayment of $45 million to pay down in
full the mortgage note on the Philadelphia Four Seasons Hotel.
In July 1999, the Company entered into a financing agreement pursuant to
which it borrowed $665 million due 2009 at a fixed rate of 7.47% with eight
hotels serving as collateral. The proceeds from this financing were used to
refinance existing mortgage indebtedness maturing at various times through
2000, including approximately $590 million of outstanding variable rate
mortgage debt.
In June 1999, the Company refinanced the debt on the San Diego Marriott
Hotel and Marina. The mortgage is $195 million with a term of 10 years at a
rate of 8.45%. In addition, the Company entered into a mortgage for the
Philadelphia Marriott expansion in July 1999 for $23 million at an interest
rate of approximately 8.6%, maturing in 2009.
In April 1999, a subsidiary of the Company completed the refinancing of the
$245 million mortgage on the New York Marriott Marquis, maturing June 2000. In
connection with the refinancing, the Company renegotiated the management
agreement and recognized an extraordinary gain of $14 million on the
forgiveness of accrued incentive management fees by the manager. This mortgage
was subsequently refinanced as part of the $665 million financing agreement
discussed above.
Interest Rate SWAP Agreements. During 1999, the Company terminated its
outstanding interest rate SWAP agreements recognizing an extraordinary gain of
approximately $8 million. The Company was party to an interest rate swap
agreement with a financial institution with an aggregate notional amount of
$100 million which expired in December 1998. The Company realized a net
reduction of interest expense of $338,000 in 1999 related to interest rate
swap agreements.
Aggregate debt maturities at December 31, 2000 are (in millions):
2001............................................................... $ 54
2002............................................................... 161
2003............................................................... 283
2004............................................................... 53
2005............................................................... 570
Thereafter......................................................... 4,192
------
5,313
Discount on senior notes........................................... (8)
Capital lease obligation........................................... 17
------
$5,322
======
Cash paid for interest for continuing operations, net of amounts
capitalized, was $417 million in 2000, $413 million in 1999, and $325 million
in 1998. Deferred financing costs, which are included in other assets,
amounted
64
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to $108 million and $111 million, net of accumulated amortization, as of
December 31, 2000 and 1999, respectively. Amortization of deferred financing
costs totaled $15 million, $17 million, and $10 million in 2000, 1999, and
1998, respectively.
7. Company-obligated Mandatorily Redeemable Convertible Preferred Securities
of a Subsidiary Trust Whose Sole Assets are the Convertible Subordinated
Debentures Due 2026
In December 1996, Host Marriott Financial Trust (the "Issuer"), a wholly-
owned subsidiary trust of the Company, issued 11 million shares of 6 3/4%
convertible quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the Company to the extent the Issuer has funds
available therefor. This guarantee, when taken together with the Company's
obligations under the indenture pursuant to which the Debentures (defined
below) were issued, the Debentures, the Company's obligations under the Trust
Agreement and its obligations under the indenture to pay costs, expenses,
debts and liabilities of the Issuer (other than with respect to the
Convertible Preferred Securities) provides a full and unconditional guarantee
of amounts due on the Convertible Preferred Securities. Proceeds from the
issuance of the Convertible Preferred Securities were invested in 6 3/4%
Convertible Subordinated Debentures (the "Debentures") due December 2, 2026
issued by the Company. The Issuer exists solely to issue the Convertible
Preferred Securities and its own common securities (the "Common Securities")
and invest the proceeds therefrom in the Debentures, which is its sole asset.
Separate financial statements of the Issuer are not presented because of the
Company's guarantee described above; the Company's management has concluded
that such financial statements are not material to investors as the Issuer is
wholly-owned and essentially has no independent operations.
Each of the Convertible Preferred Securities and the related debentures are
convertible at the option of the holder into shares of Company common stock at
the rate of 3.2537 shares per Convertible Preferred Security (equivalent to a
conversion price of $15.367 per share of Company common stock). The Issuer
will only convert Debentures pursuant to a notice of conversion by a holder of
Convertible Preferred Securities. During 2000, 325 shares were converted into
common stock. During 1999 and 1998, no shares were converted into common
stock. The conversion ratio and price were adjusted to reflect the impact of
the Distribution and the Special Dividend.
Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and payable
quarterly in arrears thereafter. The distribution rate and the distribution
and other payment dates for the Convertible Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Debentures. The Company may defer interest payments on the Debentures for a
period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, the Company will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.
Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Convertible Preferred Securities are subject to mandatory redemption.
In connection with consummation of the REIT Conversion, the Operating
Partnership assumed primary liability for repayment of the Debentures of the
Company underlying the Convertible Preferred Securities. Upon
65
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
conversion by a Convertible Preferred Securities holder, the Company will
issue shares of Company common stock, which will be delivered to such holder.
Upon the issuance of such shares by the Company, the Operating Partnership
will issue to the Company a number of OP Units equal to the number of shares
of Company common stock issued in exchange for the Debentures.
The Company repurchased 1.1 million and .4 million shares of the Convertible
Preferred Securities in 1999 and 2000, respectively, as part of the share
repurchase program described below in Note 8.
8. Shareholders' Equity
Seven hundred fifty million shares of common stock, with a par value of
$0.01 per share, are authorized, of which 221.3 million and 223.5 million were
outstanding as of December 31, 2000 and 1999, respectively. Fifty million
shares of no par value preferred stock are authorized, with 8.16 million
shares outstanding as of December 31, 2000 and 1999.
Quarterly dividends of $0.21, $0.21, and $0.23 per common share were paid on
April 14, July 14, and October 16, 2000, respectively. In addition, a fourth
quarter dividend of $0.26 per common share was declared on December 18, 2000
and paid on January 12, 2001. A quarterly dividend of $0.21 per common share
was paid on April 14, July 14, and October 15 of 1999. A fourth quarter
dividend of $0.21 per common share was declared on December 20, 1999 and paid
on January 17, 2000.
In September 1999, the Board of Directors approved the repurchase, from time
to time on the open market and/or in privately negotiated transactions, of up
to 22 million of the outstanding shares of the Company's common stock,
operating partnership units, or a corresponding amount of Convertible
Preferred Securities, which are convertible into a like number of common
shares. Such repurchases will be made at management's discretion, subject to
market conditions, and may be suspended at any time at the Company's
discretion. For the year ended December 31, 2000, the Company repurchased 4.9
million common shares and .4 million shares of the Convertible Preferred
Securities and redeemed .3 million OP Units for a total investment of $62
million. Since inception of the program, the Company has spent, in the
aggregate, approximately $150 million to retire approximately 16.2 million
equivalent shares on a fully diluted basis.
In August 1999, the Company sold 4.16 million shares of 10% Class A
preferred stock ("Class A Preferred Stock"), and in November 1999, the Company
sold 4.0 million shares of 10% Class B preferred stock ("Class B Preferred
Stock"). Holders of both classes of the preferred stock are entitled to
receive cumulative cash dividends at a rate of 10% per annum of the $25.00 per
share liquidation preference. Dividends are payable quarterly in arrears
commencing October 15, 1999 and January 15, 2000 for the Class A Preferred
Stock and Class B Preferred Stock, respectively. After August 3, 2004 and
April 29, 2005, respectively, we have the option to redeem the Class A
Preferred Stock and Class B Preferred Stock for $25.00 per share, plus accrued
and unpaid dividends to the date of redemption. The preferred stocks rank
senior to the common stock and the authorized Series A Junior Participating
preferred stock, and on a parity with each other. The preferred stockholders
generally have no voting rights. Accrued dividends at December 31, 2000 were
$5 million.
In conjunction with the Merger, the Blackstone Acquisition and the
Partnership Mergers, the Operating Partnership issued approximately 73.5
million OP Units which are convertible into cash or shares of Host Marriott
common stock, at Host Marriott's option. Approximately 63.6 million and 64.0
million of the OP Units were outstanding as of December 31, 2000 and 1999,
respectively. On February 7, 2001, certain minority partners converted 12.5
million OP Units to common shares and immediately sold them to an underwriter
for sale on the open market. As a result the Company now owns approximately
82% of Host LP, and as of March 12, 2001, approximately 50.7 million OP Units
were outstanding. The Company received no proceeds as a result of this
transaction.
66
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company issued 11.5 million shares of common stock as part of the
Special Dividend and 8.5 million shares of common stock in exchange for 8.5
million OP Units issued to certain limited partners in connection with the
Partnership Mergers (Note 13). Also, as part of the REIT Conversion, the
Company changed its par value from $1 to $0.01 per share. The change in par
value did not affect the number of shares outstanding.
In November 1998, the Board of Directors adopted a shareholder rights plan
(as amended December 24, 1998) under which a dividend of one preferred stock
purchase right was distributed for each outstanding share of the Company's
common stock. Each right when exercisable entitles the holder to buy 1/1,000th
of a share of a series A junior participating preferred stock of the Company
at an exercise price of $55 per share, subject to adjustment. The rights were
exercisable 10 days after a person or group acquired beneficial ownership of
at least 20%, or began a tender or exchange offer for at least 20%, of the
Company's common stock. Shares owned by a person or group on November 3, 1998
and held continuously thereafter were exempt for purposes of determining
beneficial ownership under the rights plan. The rights are non-voting and
expire on November 22, 2008, unless exercised or previously redeemed by the
Company for $.005 each. If the Company was involved in a merger or certain
other business combinations not approved by the Board of Directors, each right
entitles its holder, other than the acquiring person or group, to purchase
common stock of either the Company or the acquiror having a value of twice the
exercise price of the right.
9. Income Taxes
In December 1998, the Company restructured itself to enable the Company to
qualify for treatment as a REIT, pursuant to the US Internal Revenue Code of
1986, as amended, effective January 1, 1999. In general, a corporation that
elects REIT status and meets certain distribution requirements of its taxable
income to its shareholders as prescribed by applicable tax laws and complies
with certain other requirements (relating primarily to the nature of its
assets and the sources of its revenues) is not subject to Federal income
taxation to the extent it distributes its taxable income. In 2000 and 1999,
the Company distributed 100% of its estimated taxable income which amounted to
$.91 and $.84, respectively, per outstanding common share. The entire 2000
distribution was taxable as an ordinary dividend and of the total 1999
distribution, $.83 per share was taxable as ordinary income with the remaining
$.01 per share taxable as a capital gain. Management believes that the Company
was organized to qualify as a REIT at the beginning of January 1, 1999 and
intends for it to qualify in subsequent years (including distribution of at
least 95% of its REIT taxable income to shareholders each year, 90% beginning
January 1, 2001). Management expects that the Company will pay taxes on
"built-in gains" on only certain of its assets. Based on these considerations,
management does not believe that the Company will be liable for current income
taxes at the federal level or in most of the states in which it operates in
future years.
In order to qualify as a REIT for federal income tax purposes, among other
things, the Company was required to distribute all of its accumulated earnings
and profits ("E&P") to its stockholders in one or more taxable dividends prior
to December 31, 1999. To accomplish the requisite distributions of accumulated
E&P, Host Marriott made distributions consisting of approximately 20.4 million
shares of Crestline valued at $297 million, $73 million in cash, and
approximately 11.5 million shares of Host Marriott stock valued at $138
million. Management believes it distributed all required E&P prior to December
31, 1999. The Company's final calculation of E&P and the distribution thereof
is subject to review by the Internal Revenue Service.
Where required, deferred income taxes are accounted for using the asset and
liability method. Under this method, deferred income taxes are recognized for
temporary differences between the financial reporting bases of assets and
liabilities and their respective tax bases and for operating loss and tax
credit carryforwards based on enacted tax rates expected to be in effect when
such amounts are realized or settled. However, deferred tax assets are
recognized only to the extent that it is more likely than not that they will
be realized based on consideration of available evidence, including tax
planning strategies and other factors. As permitted by the REIT
67
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Modernization Act, the Company purchased the Crestline Lessee Entities with
respect to 116 of its full-service hotels effective January 1, 2001. On
December 31, 2000, the Company recorded a non-recurring, pretax loss of $207
million net of a tax benefit of $82 million which the Company has recognized
as a deferred tax asset which the Company expects to realize over the
remaining initial lease term.
Total deferred tax assets and liabilities at December 31, 2000 and December
31, 1999 were as follows:
2000 1999
---- -----
(in
millions)
Deferred tax asset............................................. $ 82 $ 10
Deferred tax liabilities....................................... (54) (59)
---- -----
Net deferred income tax asset................................ $ 28 $ (49)
==== =====
The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of December 31, 2000 and December 31, 1999 follows:
2000 1999
---- -----
(in
millions)
Investment in hotel leases..................................... $ 82 $ --
Safe harbor lease investments.................................. (23) (24)
Deferred tax gain.............................................. (31) (35)
Alternative minimum tax credit carryforwards................... -- 10
---- -----
Net deferred income tax asset................................ $ 28 $ (49)
==== =====
The provision (benefit) for income taxes consists of:
2000 1999 1998
---- ---- ----
(in millions)
Current--Federal........................................... $(29) $ 26 $116
--State.................................................... 2 3 27
--Foreign.................................................. 6 3 4
---- ---- ----
(21) 32 147
---- ---- ----
Deferred--Federal.......................................... (66) (37) (49)
--State.................................................... (11) (11) (12)
---- ---- ----
(77) (48) (61)
---- ---- ----
$(98) $(16) $ 86
==== ==== ====
As of February 28, 2001, the Company had settled with the Internal Revenue
Service substantially all outstanding issues for tax years through 1998. The
Company expects to resolve any remaining issues with no material impact on the
consolidated financial statements. The Company made net payments to the IRS of
approximately $14 million in 1999 and $27 million in 1998 related to these
settlements, and an additional $24 million was paid during the first quarter
of 2001. As a result of settling these outstanding contingencies, Host REIT
reversed $32 million and $26 million of recorded liabilities in 2000 and 1999,
respectively, as a benefit to the tax provision.
68
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate follows (excluding the impact of the change in tax
status and acquisition of the Crestline Lessee Entities):
2000 1999 1998
------ ----- ----
Statutory Federal tax rate............................ 0.0% 0.0% 35.0%
Built-in-gain tax..................................... -- 2.8 --
State income taxes, net of Federal tax benefit........ 3.3 1.2 5.8
Tax credits........................................... -- -- (1.7)
Tax contingencies..................................... (41.0) (14.5) --
Tax on foreign source income.......................... 9.8 1.6 4.2
Tax benefit from termination of leases................ (134.4) -- --
Permanent non-deductible REIT Conversion expenses..... -- -- 4.6
Other permanent items................................. -- -- 1.2
Other, net............................................ 1.6 -- 0.3
------ ----- ----
Effective income tax rate........................... (160.7)% (8.9)% 49.4%
====== ===== ====
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $30 million in 2000, $50 million in 1999 and $83 million in
1998.
10. Leases
Hotel Leases. Due to federal income tax law restrictions on a REIT's ability
to derive revenues directly from the operation of a hotel, the Company leased
its hotels (the "Leases") to one or more third party lessees (the "Lessees"),
primarily subsidiaries of Crestline, effective January 1, 1999. The REIT
Modernization Act amended the tax laws to permit REITs, effective January 1,
2001, to lease hotels to a subsidiary that qualifies as a TRS. Accordingly, a
wholly-owned subsidiary of Host LP, which has elected to be treated as a TRS
for federal income tax purposes, acquired the Crestline Lessee Entities owning
the leasehold interests with respect to 116 of the Company's full-service
hotels during January 2001. As a result, effective January 1, 2001, the TRS
replaced Crestline as lessee under the applicable leases.
There generally is a separate lessee for each hotel or group of hotels that
is owned by a separate subsidiary of the Company. The operating agreements for
such Lessees provide that the Lessee has full control over the management of
the business of the Lessee, subject to blocking rights by Marriott
International, for hotel properties where it is the manager, over certain
decisions by virtue of its non-economic, limited voting interest in the lessee
subsidiaries. Each full-service hotel Lease has a fixed term generally ranging
from seven to ten years, subject to earlier termination upon the occurrence of
certain contingencies as defined in the Leases. Each Lease requires the Lessee
to pay 1) minimum rent in a fixed dollar amount per annum plus 2) to the
extent it exceeds minimum rent, percentage rent based upon specified
percentages of aggregate sales from the applicable hotel, including room
sales, food and beverage sales, and other income in excess of specified
thresholds. The amount of minimum rent and the percentage rent thresholds will
be adjusted each year based upon the average of the increases in the Consumer
Price Index and the Employment Cost Index during the previous 10 months, as
well as for certain capital expenditures and casualty occurrences.
If the Company anticipates that the average tax basis of the Company's FF&E
and other personal property that are leased by any individual lessor entity
will exceed 15% of the aggregate average tax basis of the fixed assets in that
entity, then the Lessee would be obligated either to acquire such excess FF&E
from the Company or to cause a third party to purchase such FF&E. The Lessee
has agreed to give a right of first opportunity to a Non-Controlled Subsidiary
to acquire the excess FF&E and to lease the excess FF&E to the Lessee.
69
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each Lessee is responsible for paying all of the expenses of operating the
applicable hotel(s), including all personnel costs, utility costs and general
repair and maintenance of the hotel(s). The Lessee also is responsible for all
fees payable to the applicable manager, including base and incentive
management fees, chain services payments and franchise or system fees, with
respect to periods covered by the term of the Lease. Host Marriott also
remains liable under each management agreement.
The Company is responsible for paying real estate taxes, personal property
taxes (to the extent the Company owns the personal property), casualty
insurance on the structures, ground lease rent payments, required expenditures
for FF&E (including maintaining the FF&E reserve, to the extent such is
required by the applicable management agreement) and other capital
expenditures.
Crestline Guarantees. During 1999 and 2000, Crestline and certain of its
subsidiaries, as lessees under virtually all of the hotel leases, entered into
limited guarantees of the Lease obligations of each Lessee. The full-service
hotel leases are grouped into four lease pools (determined on the basis of the
term of the particular Lease with all leases having generally the same lease
term placed in the same "pool"). For each of the four identified pools, the
cumulative limit of Crestline's guaranty obligation is the greater of 10% of
the aggregate rent payable for the immediately preceding fiscal year under all
Leases in the pool or 10% of the aggregate rent payable under all Leases in
the pool. For each pool, the subsidiary of Crestline that is the parent of the
Lessees in the pool (a "Pool Parent") also is a party to the guaranty of the
Lease obligations for that pool. Effective January 1, 2001, a wholly-owned TRS
of the Company replaced Crestline as lessee with respect to 116 of the
Company's full-service hotels. As a result, there no longer is a significant
third party credit concentration as of that date.
The obligations of the Pool Parent under each guaranty is secured by all
funds received by the applicable Pool Parent from the hotels in the pool, and
the hotels in the pool are required to distribute their excess cash flow to
the Pool Parent for each accounting period, under certain conditions as
described by the guaranty.
As a result of the limited guarantees of the lease obligations of the
Lessees, the Company believes that the operating results of each full-service
lease pool may be material to the Company's financial statements for the years
ended December 31, 2000 and 1999. Separate financial statements for the year
ended December 31, 2000 and 1999 for each of the four lease pools in which the
Company's hotels were organized are presented in Item 8 of this Annual Report
on Form 10-K. 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.
The Operating Partnership sold the existing working capital to the
applicable Lessee upon the commencement of the Lease at a price equal to the
fair market value of such assets. The purchase price is represented by a note
evidencing a loan that bears interest at a rate of 5.12%. Interest accrued on
the working capital loan is due simultaneously with each periodic rent
payment, and the amount of each payment of interest is credited against such
rent payment. The principal amount of the working capital loan is payable upon
termination of the Lease. The Lessee can return the working capital in
satisfaction of the note. As of December 31, 2000 and 1999, the note
receivable from Crestline for working capital was $91 million and $90 million,
respectively. In connection with the acquisition of the Crestline Lessee
Entities, the working capital related to the 116 hotels, which was valued at
approximately $90 million, was acquired by the Company's TRS.
In the event the Company enters into an agreement to sell or otherwise
transfer any full-service hotel free and clear of the applicable Lease, the
Lessor must pay the Lessee a termination fee equal to the lesser of (i) the
fair market value of the Lessee's leasehold interest in the remaining term of
the Lease using a discount rate of
70
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12% or (ii) the allocated purchase price for that particular lease, reduced by
any amounts reflected as deductions for federal income tax purposes.
Alternatively, the Lessor will be entitled to (i) substitute a comparable
hotel or hotels for any hotel that is sold or (ii) sell the hotel subject to
the Lease and certain conditions without being required to pay a termination
fee.
Hospitality Properties Trust Relationship. In a series of related
transactions in 1995 and 1996, the Company sold and leased back 53 of its
Courtyard properties and 18 of its Residence Inns to Hospitality Properties
Trust ("HPT"). These leases, which are accounted for as operating leases and
are included in the table below, have initial terms expiring through 2012 for
the Courtyard properties and 2010 for the Residence Inn properties, and are
renewable at the option of the Company. Minimum rent payments are $51 million
annually for the Courtyard properties and $17 million annually for the
Residence Inn properties, and additional rent based upon sales levels are
payable to the owner under the terms of the leases.
In connection with the REIT Conversion, the Operating Partnership sublet the
HPT hotels (the "Subleases") to separate indirect sublessee subsidiaries of
Crestline ("Sublessee"), subject to the terms of the applicable HPT Lease. The
term of each Sublease expires simultaneously with the expiration of the
initial term of the HPT lease to which it relates and automatically renews for
the corresponding renewal term under the HPT lease, unless either the HPT
lessee (the "Sublessor") elects not to renew the HPT lease, or the Sublessee
elects not to renew the Sublease at the expiration of the initial term
provided, however, that neither party can elect to terminate fewer than all of
the Subleases in a particular pool of HPT hotels (one for Courtyard by
Marriott hotels and one for Residence Inn hotels). Rent under the Sublease
consists of the Minimum Rent payable under the HPT lease and an additional
percentage rent payable to the Sublessor. The percentage rent is sufficient to
cover the additional rent due under the HPT lease, with any excess being
retained by the Sublessor. The rent payable under the Subleases is guaranteed
by Crestline, up to a maximum amount of $30 million which amount is allocated
between the two pools of HPT hotels.
Other Lease Information. A number of the Company's leased hotel properties
also include long-term ground leases for certain hotels, generally with
multiple renewal options. Certain leases contain provision for the payment of
contingent rentals based on a percentage of sales in excess of stipulated
amounts. Future minimum annual rental commitments for all non-cancelable
leases for which the Company is the lessee are as follows:
Capital Operating
Leases Leases
------- ---------
(in millions)
2001....................................................... $ 6 $ 105
2002....................................................... 6 102
2003....................................................... 6 97
2004....................................................... 1 94
2005....................................................... 1 92
Thereafter................................................. 1 1,231
--- ------
Total minimum lease payments............................... 21 $1,721
======
Less amount representing interest.......................... (4)
---
Present value of minimum lease payments.................. $17
===
Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals from restaurants and HPT subleases of $61 million and $789 million,
respectively, payable to the Company under non-cancellable subleases.
71
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In conjunction with the refinancing of the mortgage of the New York Marriott
Marquis in 1999, the Company also renegotiated the terms of the ground lease,
retroactive to 1998. The renegotiated ground lease provides for the payment of
a percentage of the hotel sales (3% in 1998, 4% in 1999 and 5% thereafter)
through 2017, which is to be used to amortize the then existing deferred
ground rent obligation of $116 million. The Company has the right to purchase
the land under certain circumstances. The balance of the deferred ground rent
obligation was $77 million and $86 million at December 31, 2000 and 1999,
respectively, and is included in other liabilities on the consolidated balance
sheets.
The Company remains contingently liable at December 31, 2000 on certain
leases relating to divested non-lodging properties. Such contingent
liabilities aggregated $68 million at December 31, 2000. However, management
considers the likelihood of any substantial funding related to these leases to
be remote.
Rent expense consists of:
2000 1999 1998
---- ---- ----
(in millions)
Minimum rentals on operating leases........................... $107 $106 $104
Additional rentals based on sales............................. 36 29 26
---- ---- ----
$143 $135 $130
==== ==== ====
11. Employee Stock Plans
At December 31, 2000, the Company maintained two stock-based compensation
plans, including the comprehensive stock plan (the "Comprehensive Plan"),
whereby the Company may award to participating employees (i) options to
purchase the Company's common stock, (ii) deferred shares of the Company's
common stock and (iii) restricted shares of the Company's common stock, and
the employee stock purchase plan (the "Employee Stock Purchase Plan"). Total
shares of common stock reserved and available for issuance under the
Comprehensive Plan at December 31, 2000 was 13.1 million.
Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Non-qualified options generally expire up to 15 years after the
date of grant. Most options vest ratably over each of the first four years
following the date of the grant. In connection with the Marriott International
Distribution in 1993, the Company issued an equivalent number of Marriott
International options and adjusted the exercise prices of its options then
outstanding based on the relative trading prices of shares of the common stock
of the two companies.
In connection with the Host Marriott Services ("HM Services") spin-off in
1995, outstanding options held by current and former employees of the Company
were redenominated in both Company and HM Services stock and the exercise
prices of the options were adjusted based on the relative trading prices of
shares of the common stock of the two companies. Pursuant to the distribution
agreement between the Company and HM Services, the Company originally had the
right to receive up to 1.4 million shares of HM Services' common stock or an
equivalent cash value subsequent to exercise of the options held by certain
former and current employees of Marriott International. On August 27, 1999,
Autogrill Acquisition Co., a wholly-owned subsidiary of Autogrill SpA of
Italy, acquired Host Marriott Services Corporation. Since Host Marriott
Services is no longer publicly traded, all future payments to the Company will
be made in cash, as Host Marriott Services Corporation has indicated that the
receivable will not be settled in Autogrill SpA stock. As of December 31, 2000
and 1999, the receivable balance was approximately $8.8 million and $11.9
million, respectively, which is included in other assets in the accompanying
consolidated balance sheets.
Effective December 29, 1998, the Company adjusted the number of outstanding
stock options and the related exercise prices to maintain the intrinsic value
of the options to account for the Special Dividend and the
72
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Distribution. The vesting provisions and option period of the original grant
was retained. No compensation expense was recorded by the Company as a result
of these adjustments. Employee optionholders that remained with the Company
received options only in the Company's stock and those employee optionholders
that became Crestline employees received Crestline options in exchange for the
Company's options.
The Company continues to account for expense under its plans according to
the provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Consequently, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.
For purposes of the following disclosures required by SFAS No. 123, the fair
value of each option granted has been estimated on the date of grant using an
option-pricing model with the following weighted average assumptions used for
grants in 2000 and 1999, respectively: risk-free interest rates of 5.1% and
6.4%, volatility of 32% and 32%, expected lives of 12 years and 12 years, and
dividend yield of $.91 per share and $0.84 per share. The weighted average
fair value per option granted during the year was $1.06 in 2000 and $1.15 in
1999. Pro forma compensation cost for 2000, 1999 and 1998 would have reduced
net income by approximately $811,000, $919,000 and $524,000, respectively.
Basic and diluted earnings per share on a pro forma basis were not impacted by
the pro forma compensation cost in 2000, 1999 and 1998.
The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1997 and subsequent years have been considered.
A summary of the status of the Company's stock option plan for 2000, 1999
and 1998 follows:
2000 1999 1998
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(in millions) Price (in millions) Price (in millions) Price
------------- -------- ------------- -------- ------------- --------
Balance, at beginning of
year................... 4.9 $ 4 5.6 $ 3 6.8 $ 4
Granted................. .6 10 0.6 10 -- --
Exercised............... (1.2) 3 (1.3) 3 (1.3) 5
Forfeited/Expired....... (.1) 10 -- -- (0.6) 4
Adjustment for
Distribution and
Special Dividend....... -- -- -- -- 0.7 3
---- ---- ----
Balance, at end of
year................... 4.2 $ 5 4.9 $ 4 5.6 $ 3
==== ==== ====
Options exercisable at
year-end............... 3.2 4.2 5.5
==== ==== ====
The following table summarizes information about stock options at December
31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Weighted Average
Shares Remaining Weighted Average Shares Weighted Average
Range of Exercise Prices (in millions) Contractual Life Exercise Price (in millions) Exercise Price
- ------------------------ ------------- ---------------- ---------------- ------------- ----------------
$ 1 - 3................. 2.4 6 $ 2 2.4 $ 2
4 - 6................. 0.3 8 6 0.3 6
7 - 9................. 0.7 12 9 0.4 8
10 - 12................ 0.7 15 11 0.1 12
13 - 15................ -- 12 15 -- 15
16 - 19................ 0.1 12 18 -- 18
--- ---
4.2 3.2
=== ===
73
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. The Company accrues compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures. In 2000, 1999 and 1998, 20,000, 11,000 and 12,000 shares were
granted, respectively, under this plan. The compensation cost that has been
charged against income for deferred stock was not material in 2000, 1999 and
1998. The weighted average fair value per share granted during each year was
$9.44 in 2000, $14.31 in 1999 and $19.21 in 1998.
The Company from time to time awards restricted stock plan shares under the
Comprehensive Plan to officers and key executives to be distributed over the
next three to 10 years in annual installments based on continued employment
and the attainment of certain performance criteria. The Company recognizes
compensation expense over the restriction period equal to the fair market
value of the shares on the date of issuance adjusted for forfeitures, and
where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of the Company's common stock. In 2000,
1999 and 1998, 889,000, 3,203,000, and 2,900 shares of additional restricted
stock plan shares were granted to certain key employees under these terms and
conditions. Approximately 106,000 and 747,000 shares were forfeited in 2000
and 1999, respectively. The Company recorded compensation expense of $11
million, $7.7 million and $11 million in 2000, 1999 and 1998, respectively,
related to these awards. The weighted average grant date fair value per share
granted during each year was $8.87 in 2000, $12.83 in 1999 and $18.13 in 1998.
Under these awards 3,612,000 shares were outstanding at December 31, 2000.
In 1998, 568,408 stock appreciation rights ("SARs") were issued under the
Comprehensive Plan to certain directors of the Company as a replacement for
previously issued options that were cancelled during the year. The conversion
to SARs was completed in order to comply with ownership limits applicable to
the Company upon conversion to a REIT. The SARs are fully vested and the grant
prices range from $1.20 to $5.13. In 2000, 1999 and 1998, the Company
recognized compensation (income) expense of $1.4 million, $(2.7) million and
$4.8 million, respectively, related to this grant. Additionally, in future
periods, the Company will recognize compensation expense for outstanding SARs
as a result of fluctuations in the market price of the Company's common stock.
Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at 90% of the lower of market
value at the beginning or market value at the end of the plan year.
12. Profit Sharing and Postemployment Benefit Plans
The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by the
Company is determined annually by the Board of Directors. The Company provides
medical benefits to a limited number of retired employees meeting restrictive
eligibility requirements. Amounts for these items were not material in 1998
through 2000.
13. Acquisitions and Dispositions
The Company acquired the remaining unaffiliated partnership interests in two
full-service hotels by issuing approximately 612,000 cumulative preferred OP
Units and paid cash of approximately $6.8 million. During 2000, the holders of
approximately 593,000 cumulative preferred OP Units converted to common OP
Units on a one-for-one basis.
The Company acquired or gained controlling interest in 36 hotels with 15,166
rooms in 1998. Twenty-five of the 1998 acquisitions, consisting of the
Blackstone Acquisition and the Partnership Mergers, were completed
74
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on December 30, 1998 in conjunction with the REIT Conversion. Additionally,
three full-service properties were contributed to one of the Non-Controlled
Subsidiaries (Note 5). These acquisitions are summarized below.
In December 1998, the Company completed the acquisition of, or controlling
interests in, twelve hotels and one mortgage loan secured by an additional
hotel (the "Blackstone Acquisition") from the Blackstone Group, a Delaware
limited partnership, and a series of funds controlled by affiliates of
Blackstone Real Estate Partners (together, the "Blackstone Entities"). In
addition, the Company acquired a 25% interest in Swissotel Management (USA)
L.L.C., which operates five Swissotel hotels in the United States, which the
Company transferred to Crestline in connection with the Distribution. The
Operating Partnership issued approximately 47.7 million OP Units, which OP
Units are redeemable for the Company's common stock (or cash equivalent at
Host Marriott's option), assumed debt and made cash payments totaling
approximately $920 million and distributed 1.4 million of the shares of
Crestline common stock to the Blackstone Entities. As of December 31, 2000,
the Blackstone Entities owned approximately 16% of the outstanding OP Units of
the Operating Partnership. On February 7, 2001, the Blackstone Entities
converted 12.5 million OP Units to common shares and immediately sold them to
an underwriter for sale on the open market. As a result, the Blackstone
Entities now own approximately 12% of the outstanding OP Units of the
Operating Partnership.
In December 1998, the Company announced the completion of the Partnership
Mergers which was the roll-up of eight public partnerships and four private
partnerships which own or control 28 properties, 13 of which were already
consolidated (the "Partnership Mergers"). The Operating Partnership issued
approximately 25.8 million OP Units to partners for their interests valued at
approximately $333 million. As of December 31, 2000, approximately 16.6
million OP Units remain outstanding.
As a result of these transactions, the Company increased its ownership of
most of the 28 properties to 100% while consolidating 13 additional hotels
(4,445 rooms).
During 1998, prior to the Partnership mergers, the Company acquired a
controlling interest in the Atlanta Marriott Marquis II Limited Partnership,
which owns an interest in the 1,671-room Atlanta Marriott Marquis for
approximately $239 million. The Company also acquired a controlling interest
in two partnerships that own four hotels for approximately $74 million. In
addition, the Company acquired four Ritz-Carlton hotels and two additional
hotels totaling over 2,200 rooms for approximately $465 million.
During 2000 and 1999, respectively, approximately 652,000 and 467,000 OP
Units were redeemed for common stock and an additional 360,000 and 233,000 OP
Units were redeemed for $3 million and $2 million in cash.
During 1999 and 1998, the Company disposed of seven hotels (2,430 rooms) for
a total consideration of $410 million and recognized a net gain of $74
million.
75
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Fair Value of Financial Instruments
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
2000 1999
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(in millions)
Financial assets
Receivables from affiliates.................. $ 164 $ 166 $ 127 $ 133
Notes receivable............................. 47 44 48 48
Other........................................ 9 9 12 12
Financial liabilities
Debt, net of capital leases.................. 5,305 5,299 5,063 4,790
Other financial instruments
Convertible Preferred Securities........... 475 415 497 340
Short-term marketable securities and Convertible Preferred Securities are
valued based on quoted market prices. Receivables from affiliates, notes and
other financial assets are valued based on the expected future cash flows
discounted at risk-adjusted rates. Valuations for secured debt are determined
based on the expected future payments discounted at risk-adjusted rates. The
fair values of the Bank Credit Facility and other notes are estimated to be
equal to their carrying value. Senior notes are valued based on quoted market
prices.
15. Marriott International Distribution and Relationship with Marriott
International
The Company and Marriott International (formerly a wholly owned subsidiary,
the common stock of which was distributed to the Company's shareholders on
October 8, 1993) have entered into various agreements in connection with the
Marriott International Distribution and thereafter which provide, among other
things, that (i) the majority of the Company's hotel lodging properties are
managed by Marriott International (see Note 16); (ii) nine of the Company's
full-service properties are operated under franchise agreements with Marriott
International with terms of 15 to 30 years; (iii) Marriott International and
the Company formed a joint venture and Marriott International provided the
Company with $29 million in debt financing at an average interest rate of
12.7% and $28 million in preferred equity in 1996 for the acquisition of two
full-service properties in Mexico City, Mexico; and (iv) Marriott
International provides certain limited administrative services.
Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company occur.
During December 2000, the newly created Joint Venture formed by Rockledge
and Marriott International acquired the partnership interests in two
partnerships that collectively own 120 limited service hotels for
approximately $372 million plus interest and legal fees (see Note 5). The
Joint Venture financed the acquisition with mezzanine indebtedness borrowed
from Marriott International and with cash and other assets contributed by
Rockledge and Marriott International. Rockledge and Marriott International
each own a 50% interest in the Joint Venture as of December 31, 2000.
In 1998, the Company paid to Marriott International $196 million in hotel
management fees and $9 million in franchise fees. Beginning in 1999, these
fees, totaling $240 million and $218 million in 2000 and 1999, respectively,
were paid by the lessees (see Note 10). In 2000, 1999 and 1998, the Company
paid to Marriott International $0.2 million, $0.3 million and $4 million,
respectively, in interest and commitment fees under the debt financing and
line of credit provided by Marriott International and $2 million, $3 million,
and $3 million, respectively, for limited administrative services and office
space. In connection with the discontinued senior
76
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
living communities' business, the Company paid Marriott International $13
million in management fees during 1998.
16. Hotel Management Agreements
Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages the Company's hotels,
generally for an initial term of 15 to 20 years with renewal terms at the
option of Marriott International of up to an additional 16 to 30 years. The
Agreements generally provide for payment of base management fees equal to one
to four percent of sales and incentive management fees generally equal to 20%
to 50% of Operating Profit (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit. In the event of early termination of the Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Company has the option
to terminate certain management agreements if specified performance thresholds
are not satisfied. No agreement with respect to a single lodging facility is
cross-collateralized or cross-defaulted to any other agreement and a single
agreement may be canceled under certain conditions, although such cancellation
will not trigger the cancellation of any other agreement.
As a result of the REIT Conversion, all fees payable under the Agreements
for subsequent periods are the primary obligations of the Lessees. The
obligations of the leases with Crestline were guaranteed to a limited extent
by Crestline on 116 of the leases through December 31, 2000. The Company
remained obligated to the managers in case the Lessee fails to pay these fees
(but it would be entitled to reimbursement from the lessee under the terms of
the Leases). Effective January 1, 2001, the Company effectively terminated the
Crestline leases through the purchase of the Crestline Lessee Entities by the
Company's wholly-owned TRS. The TRS will assume the obligations under the
Agreements as lessee.
Pursuant to the terms of the Agreements, Marriott International is required
to furnish the hotels with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott International hotel system. Chain Services include central training,
advertising and promotion, a national reservation system, computerized payroll
and accounting services, and such additional services as needed which may be
more efficiently performed on a centralized basis. Costs and expenses incurred
in providing such services are required to be allocated among all domestic
hotels managed, owned or leased by Marriott International or its subsidiaries.
In addition, the Company's hotels also participate in the Marriott Rewards
program. The cost of this program is charged to all hotels in the Marriott
hotel system.
The Lessees are obligated to provide the manager with sufficient funds to
cover the cost of (a) certain non-routine repairs and maintenance to the
hotels which are normally capitalized; and (b) replacements and renewals to
the hotels' property and improvements. Under certain circumstances, the lessee
will be required to establish escrow accounts for such purposes under terms
outlined in the Agreements.
The Lessees assumed franchise agreements with Marriott International for 10
hotels. Pursuant to these franchise agreements, the Lessee generally pays a
franchise fee based on a percentage of room sales and food and beverage sales
as well as certain other fees for advertising and reservations. Franchise fees
for room sales vary from four to six percent of sales, while fees for food and
beverage sales vary from two to three percent of sales. The terms of the
franchise agreements are from 15 to 30 years.
The Lessees assumed management agreements with The Ritz-Carlton Hotel
Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International, to
manage nine of the Company's hotels. These agreements have an initial term of
15 to 25 years with renewal terms at the option of Ritz-Carlton of up to an
additional 10 to 40 years. Base management fees vary from two to five percent
of sales and incentive management fees are generally equal to 20% of available
cash flow or operating profit, as defined in the agreements.
77
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Lessees also assumed management agreements with hotel management
companies other than Marriott International and Ritz-Carlton for 23 of the
Company's hotels (10 of which are franchised under the Marriott brand). These
agreements generally provide for an initial term of 10 to 20 years with
renewal terms at the option of either party or, in some cases, the hotel
management company of up to an additional one to 15 years. The agreements
generally provide for payment of base management fees equal to one to four
percent of sales. Seventeen of the 23 agreements also provide for incentive
management fees generally equal to 10 to 25 percent of available cash flow,
operating profit, or net operating income, as defined in the agreements.
17. Relationship with Crestline Capital Corporation
The Company and Crestline entered into various agreements in connection with
the Distribution as discussed in Note 3 and further outlined below.
Distribution Agreement
Crestline and the Company entered into a distribution agreement (the
"Distribution Agreement"), which provided for, among other things, (i) the
distribution of shares of Crestline in connection with the Distribution; (ii)
the division between Crestline and the Company of certain assets and
liabilities; (iii) the transfer to Crestline of the 25% interest in the
Swissotel management company acquired in the Blackstone Acquisition and (iv)
certain other agreements governing the relationship between Crestline and the
Company following the Distribution. Crestline also granted the Company a
contingent right to purchase Crestline's interest in Swissotel Management
(USA) L.L.C. at fair market value in the event the tax laws are changed so
that the Company could own such interest without jeopardizing its status as a
REIT.
Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate to Crestline, effective as of the date of the Distribution,
financial responsibilities for liabilities arising out of, or in connection
with, the business of the senior living communities.
Asset Management Agreement
The Company and the Non-Controlled Subsidiaries entered into asset
management agreements (the "Asset Management Agreements") with Crestline
whereby Crestline agreed to provide advice on the operation of the hotels and
review financial results, projections, loan documents and hotel management
agreements. Crestline also agreed to consult on market conditions and
competition, as well as monitor and negotiate with governmental agencies,
insurance companies and contractors. Crestline was entitled to a fee not to
exceed $4.5 million for each calendar year for its consulting services under
the Asset Management Agreements, which included $0.25 million related to the
Non-Controlled Subsidiaries. The Asset Management Agreements were terminated
effective January 1, 2001 in connection with the acquisition of the Crestline
Lessee Entities.
Non-Competition Agreement
Crestline and the Company entered into a non-competition agreement that
limited the respective parties' future business opportunities. Pursuant to
this non-competition agreement, Crestline agreed, among other things, that
until the earlier of December 31, 2008, or the date on which it is no longer a
Lessee of more than 25% of the number of hotels owned by the Company at the
time of the Distribution, it would not own any full service hotel, manage any
limited service or full service hotel owned by the Company, or own or operate
a full service hotel franchise system operating under a common name brand,
subject to certain exceptions. In addition, the Company agreed not to
participate in the business of leasing, operating or franchising limited
service or full service properties, subject to certain exceptions. In
connection with the acquisition of the Crestline Lessee Entities, the non-
competition agreement was terminated effective January 1, 2001.
78
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. 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,
contain an average of approximately 478 rooms as of December 31, 2000, as well
as supply other amenities such as meeting space and banquet facilities; a
variety of restaurants and lounges; gift shops and swimming pools. They are
typically located in downtown, airport, suburban and resort areas throughout
the United States. During most of 1998, the Company's foreign operations
consisted of six full-service hotel properties located in Mexico and Canada.
As of December 31, 1998, the Company's foreign operations had decreased to
four Canadian hotel properties, as the hotels in Mexico were contributed to
Rockledge Hotel Properties, Inc. There were no intercompany sales between the
properties and the Company. The following table presents revenues and long-
lived assets for each of the geographical areas in which the Company operates
(in millions):
2000 1999 1998
------------------- ------------------- -------------------
Long-lived Long-lived Long-lived
Revenues Assets Revenues Assets Revenues Assets
-------- ---------- -------- ---------- -------- ----------
United States...... $1,447 $6,991 $1,352 $6,987 $3,443 $7,112
International...... 26 119 24 121 121 89
------ ------ ------ ------ ------ ------
Total............ $1,473 $7,110 $1,376 $7,108 $3,564 $7,201
====== ====== ====== ====== ====== ======
19. Quarterly Financial Data (unaudited)
2000
--------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(in millions, except per common share
amounts)
Revenues............................... $ 185 $ 199 $ 239 $ 850 $1,473
Income (loss) before income taxes...... (56) (48) (13) 178 61
Income (loss) before extraordinary
items................................. (57) (50) (17) 283 159
Net income (loss)...................... (57) (53) (17) 283 156
Net income (loss) available to common
shareholders.......................... (58) (58) (22) 279 141
Basic earnings (loss) per common share:
Income (loss) before extraordinary
items............................... (.26) (.25) (.10) 1.26 .65
Net income (loss).................... (.26) (.26) (.10) 1.26 .64
Diluted earnings (loss) per common
share:
Income (loss) before extraordinary
items............................... (.26) (.25) (.10) 1.14 .64
Net income (loss).................... (.26) (.26) (.10) 1.14 .63
1999
--------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(in millions, except per common share
amounts)
Revenues............................... $192 $203 $203 $778 $1,376
Income (loss) before income taxes...... (43) (43) (31) 297 180
Income (loss) before extraordinary
items................................. (44) (44) (32) 316 196
Net income (loss)...................... (44) (31) (28) 314 211
Net income (loss) available to common
shareholders.......................... (44) (31) (29) 320 216
Basic earnings (loss) per common share:
Income (loss) before extraordinary
items............................... (.19) (.19) (.15) 1.43 .89
Net income (loss).................... (.19) (.14) (.13) 1.42 .95
Diluted earnings (loss) per common
share:
Income (loss) before extraordinary
items............................... (.19) (.19) (.15) 1.24 .87
Net income (loss).................... (.19) (.14) (.13) 1.24 .92
79
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Company retroactively changed its method of accounting
for contingent rental revenues to conform to the Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) No. 101. As a result, contingent
rental revenue is deferred on the balance sheet until certain revenue
thresholds are realized. SAB No. 101 has no impact on full-year 2000 and 1999
revenues, net income, or earnings per share because all rental revenues
considered contingent under SAB No. 101 were earned as of December 31, 2000
and 1999. The change in accounting principle has no effect prior to 1999
because percentage rent relates to rental income on our leases, which began in
1999.
For all years presented, the first three quarters consist of 12 weeks each
and the fourth quarter includes 16 weeks. The sum of the basic and diluted
earnings (loss) per common share for the four quarters in all years presented
differs from the annual earnings per common share due to the required method
of computing the weighted average number of shares in the respective periods.
80
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
81
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP I Corporation:
We have audited the accompanying consolidated balance sheets of CCHP I
Corporation and its subsidiaries (a Delaware corporation) as of December 29,
2000 and December 31, 1999, and the related consolidated statements of
operations, shareholder's equity and cash flows for the fiscal years ended
December 29, 2000 and December 31, 1999. These consolidated financial
statements are the responsibility of CCHP I Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP I
Corporation and its subsidiaries as of December 29, 2000 and December 31, 1999
and the results of their operations and their cash flows for the fiscal years
then ended in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Vienna, Virginia
February 23, 2001
82
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 29, 2000 AND DECEMBER 31, 1999
(in thousands, except share data)
2000 1999
------- -------
ASSETS
Current assets
Cash and cash equivalents.................................... $ 4,849 $ 9,467
Due from hotel managers...................................... 5,862 3,890
Due from Crestline........................................... 682 --
Other current assets......................................... 62 --
------- -------
11,455 13,357
Hotel working capital.......................................... 26,011 26,011
------- -------
$37,466 $39,368
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott............................... $ 5,252 $ 5,792
Due to hotel managers........................................ 4,138 3,334
Other current liabilities.................................... 500 --
------- -------
9,890 9,126
Hotel working capital notes payable to Host Marriott........... 26,011 26,011
Deferred income taxes.......................................... 1,565 1,027
------- -------
Total liabilities............................................ 37,466 36,164
------- -------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).......... -- --
Retained earnings............................................ -- 3,204
------- -------
Total shareholder's equity................................. -- 3,204
------- -------
$37,466 $39,368
======= =======
See Notes to Consolidated Financial Statements.
83
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
-------- --------
REVENUES
Rooms.................................................... $624,314 $585,381
Food and beverage........................................ 289,577 277,684
Other.................................................... 63,848 65,069
-------- --------
Total revenues......................................... 977,739 928,134
-------- --------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Rooms.................................................... 148,482 141,898
Food and beverage........................................ 218,802 211,964
Other.................................................... 254,248 241,996
Other operating costs and expenses
Lease expense to Host Marriott........................... 296,664 276,058
Management fees.......................................... 47,172 40,659
-------- --------
Total operating costs and expenses..................... 965,368 912,575
-------- --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST.... 12,371 15,559
Corporate expenses......................................... (1,224) (1,367)
Interest expense........................................... (1,332) (1,585)
Interest income............................................ 334 --
-------- --------
INCOME BEFORE INCOME TAXES................................. 10,149 12,607
Provision for income taxes................................. (4,289) (5,169)
-------- --------
NET INCOME................................................. $ 5,860 $ 7,438
======== ========
See Notes to Consolidated Financial Statements.
84
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
Common Retained
Stock Earnings Total
------ -------- -------
Balance, January 1, 1999.............................. $-- $ -- $ --
Dividend to Crestline............................... -- (4,234) (4,234)
Net income.......................................... -- 7,438 7,438
---- ------- -------
Balance, December 31, 1999............................ -- 3,204 3,204
Dividend to Crestline............................... -- (9,064) (9,064)
Net income.......................................... -- 5,860 5,860
---- ------- -------
Balance, December 29, 2000............................ $-- $ -- $ --
==== ======= =======
See Notes to Consolidated Financial Statements.
85
CCHP I CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
------- -------
OPERATING ACTIVITIES
Net income.................................................... $ 5,860 $ 7,438
Change in amounts due from hotel managers..................... (1,972) (678)
Change in lease payable to Host Marriott...................... (540) 5,792
Changes in amounts due to hotel managers...................... 804 1,149
Changes in other operating accounts........................... 294 --
------- -------
Cash from operations........................................ 4,446 13,701
------- -------
FINANCING ACTIVITIES
Dividend to Crestline......................................... (9,064) (4,234)
------- -------
Increase (decrease) in cash and cash equivalents.............. (4,618) 9,467
Cash and cash equivalents, beginning of year.................. 9,467 --
------- -------
Cash and cash equivalents, end of year........................ $ 4,849 $ 9,467
======= =======
See Notes to Consolidated Financial Statements.
86
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP I Corporation (the "Company") was incorporated in the state of Delaware
on November 23, 1998 as a wholly owned subsidiary of Crestline Capital
Corporation ("Crestline"). On December 29, 1998, Crestline became a publicly
traded company when Host Marriott Corporation ("Host Marriott") completed its
plan of reorganizing its business operations by spinning-off Crestline to the
shareholders of Host Marriott as part of a series of transactions pursuant to
which Host Marriott converted into a real estate investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 35 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 29,
2000, the Company leased 34 full-service hotels from Host Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
87
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Leases
Future minimum annual rental commitments for all non-cancelable leases as of
December 29, 2000 are as follows (in thousands):
2001............................................................... $182,432
2002............................................................... 175,108
2003............................................................... 174,099
2004............................................................... 159,082
2005............................................................... 159,082
Thereafter......................................................... 24,014
--------
Total minimum lease payments..................................... $873,817
========
Lease expense for the fiscal years 2000 and 1999 consisted of the following
(in thousands):
2000 1999
-------- --------
Base rent.................................................. $177,405 $167,996
Percentage rent............................................ 119,259 108,062
-------- --------
$296,664 $276,058
======== ========
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 35 full-service hotels. See Note 6 for a discussion of the
sale of all but one of the full-service hotel leases in 2001.
Each hotel lease had an initial term generally ranging from three to seven
years. The Tenant Subsidiaries were required to pay the greater of (i) a
minimum rent specified in each hotel lease or (ii) a percentage rent based
upon a specified percentage of aggregate revenues from the hotel, including
room revenues, food and beverage revenues, and other income, in excess of
specified thresholds. The amount of minimum rent is increased each year based
upon 50% of the increase in CPI during the previous twelve months. Percentage
rent thresholds are increased each year based on a blend of the increases in
CPI and the Employment Cost Index during the previous twelve months. The hotel
leases generally provided for a rent adjustment in the event of damage,
destruction, partial taking or certain capital expenditures.
The Tenant Subsidiaries were responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries were responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott was responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
For those hotels where Marriott International is the manager, it had a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"),
88
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally ranged from two to three years and rent under the FF&E Leases
was a fixed amount.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provided a full guarantee and Crestline
provided a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation was the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement was
reduced to zero, the Company could terminate the agreement and Host Marriott
could terminate the Company's hotel leases without penalty.
All of the Company's leases were cross-defaulted and the Company's
obligations under the guaranty were secured by all the funds received from its
Tenant Subsidiaries.
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $26,832,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
See Note 6 for a discussion of the repayment of all but one of the hotel
working notes in 2001. As of December 29, 2000, the outstanding balance of the
working capital notes was $26,011,000.
Debt maturities at December 29, 2000 are as follows (in thousands):
2001................................................................. $ 1,340
2002................................................................. --
2003................................................................. 3,005
2004................................................................. --
2005................................................................. 21,666
-------
$26,011
=======
Cash paid for interest expense in 2000 and 1999 totaled $1,351,000 and
$1,463,000, respectively.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies. The existing management agreements were assigned to the
Tenant Subsidiaries upon the execution of the hotel leases for the term of
each corresponding hotel lease. See Note 6 for a discussion of the transfer of
all of the management contracts to Host Marriott in 2001.
The Tenant Subsidiaries were obligated to perform all of the obligations of
Host Marriott under the hotel management agreements including payment of fees
due under the management agreements other than certain
89
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retained responsibility.
Marriott International manages 30 of the 34 hotels under long-term
management agreements. The remaining four hotels are managed by other hotel
management companies. The management agreements generally provide for payment
of base management fees equal to one to four percent of revenues and incentive
management fees generally equal to 20% to 50% of Operating Profit (as defined
in the management agreements) over a priority return (as defined) to the
Tenant Subsidiaries, with total incentive management fees not to exceed 20% of
cumulative Operating Profit, or 20% of current year Operating Profit.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal, state and Canadian tax expense
allocated for the period presented that is substantially equal to the expense
that would have been recognized if the Company had filed separate tax returns.
The provision for income taxes for the fiscal years 2000 and 1999 consists
of the following (in thousands):
2000 1999
------ ------
Current........................................................ $3,945 $4,142
Deferred....................................................... 344 1,027
------ ------
$4,289 $5,169
====== ======
The significant difference between the Company's effective income tax rate
and the Federal state tax rate is attributable to the state and Canadian tax
rates.
As of December 29, 2000 and December 31, 1999, the Company had no deferred
tax assets. The tax effect of the temporary difference that gives rise to the
Company's deferred tax liability is generally attributable to the hotel
working capital.
Note 6. Subsequent Event
On December 17, 1999, the Work Incentives Improvement Act was passed which
contained certain tax provisions related to REITs commonly known as the REIT
Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs
could lease hotels to a "taxable subsidiary" if the hotel is operated and
managed on behalf of such subsidiary by an independent third party. This law
enabled Host Marriott, beginning January 2001, to lease its hotels to a
taxable subsidiary. Under the terms of the Company's full-service hotel
leases, Host Marriott, at its sole discretion, could purchase the full-service
hotel leases for a price equal to the fair market value of the Company's
leasehold interest in the leases based upon an agreed upon formula in the
leases.
On November 13, 2000, Crestline, the Company and the Tenant Subsidiaries
entered into an agreement with a subsidiary of Host Marriott for the purchase
and sale of Tenant Subsidiaries' leasehold interests in the full-service
hotels. The purchase and sale transaction would generally transfer ownership
of the Tenant Subsidiaries owned by the Company to a subsidiary of Host
Marriott for a total consideration of $32.6 million in cash. On January 10,
2001, upon the receipt of all required consents, the purchase and sale
transaction was completed for $28.2 million, which reflects the deferral of
the sale of one of the leases for $4.4 million. The Company
90
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized a pre-tax gain on the transaction of approximately $28 million in
the first quarter of 2001, net of transaction costs. The effective date of the
transaction was January 1, 2001.
In connection with the sale of the Tenant Subsidiaries, the hotel working
capital notes for all but one of the full-service hotels were repaid.
Accordingly, the Company's remaining hotel working capital notes payable to
Host Marriott after the sale of the Tenant Subsidiaries on January 10, 2001
totaled $2,003,000.
91
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP II Corporation:
We have audited the accompanying consolidated balance sheets of CCHP II
Corporation and its subsidiaries (a Delaware corporation) as of December 29,
2000 and December 31, 1999, and the related consolidated statements of
operations, shareholder's equity and cash flows for the fiscal years ended
December 29, 2000 and December 31, 1999. These consolidated financial
statements are the responsibility of CCHP II Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP II
Corporation and its subsidiaries as of December 29, 2000 and December 31, 1999
and the results of their operations and their cash flows for the fiscal years
then ended in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Vienna, Virginia
February 23, 2001
93
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 29, 2000 and December 31, 1999
(in thousands, except share data)
2000 1999
------- -------
ASSETS
Current assets
Cash and cash equivalents.................................... $ 4,867 $ 8,856
Due from hotel managers...................................... 13,029 10,280
Due from Crestline........................................... 105 --
Other current assets......................................... 1,023 --
------- -------
19,024 19,136
Hotel working capital.......................................... 18,090 18,090
------- -------
$37,114 $37,226
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott............................... $15,565 $16,197
Due to hotel managers........................................ 2,085 958
Due to Crestline............................................. -- 288
------- -------
17,650 17,443
Hotel working capital notes payable to Host Marriott........... 18,090 18,090
Deferred income taxes.......................................... 1,374 996
------- -------
Total liabilities............................................ 37,114 36,529
------- -------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).......... -- --
Retained earnings............................................ -- 697
------- -------
Total shareholder's equity................................. -- 697
------- -------
$37,114 $37,226
======= =======
See Notes to Consolidated Financial Statements.
94
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
---------- ----------
REVENUES
Rooms............................................... $ 689,406 $ 646,624
Food and beverage................................... 335,607 306,320
Other............................................... 66,971 64,876
---------- ----------
Total revenues.................................... 1,091,984 1,017,820
---------- ----------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Rooms............................................... 167,839 158,279
Food and beverage................................... 249,087 230,001
Other............................................... 244,590 231,668
Other operating costs and expenses
Lease expense to Host Marriott...................... 337,643 312,112
Management fees..................................... 75,268 66,672
---------- ----------
Total operating costs and expenses................ 1,074,427 998,732
---------- ----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST............................................. 17,557 19,088
Corporate expenses.................................... (1,372) (1,499)
Interest expense...................................... (926) (928)
Interest income....................................... 536 --
---------- ----------
INCOME BEFORE INCOME TAXES............................ 15,795 16,661
Provision for income taxes............................ (6,529) (6,831)
---------- ----------
NET INCOME............................................ $ 9,266 $ 9,830
========== ==========
See Notes to Consolidated Financial Statements.
95
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
Common Retained
Stock Earnings Total
------ -------- -------
Balance, January 1, 1999.............................. $-- $ -- $ --
Dividend to Crestline............................... -- (9,133) (9,133)
Net income.......................................... -- 9,830 9,830
---- ------- -------
Balance, December 31, 1999............................ -- 697 697
Dividend to Crestline............................... -- (9,963) (9,963)
Net income.......................................... -- 9,266 9,266
---- ------- -------
Balance, December 29, 2000............................ $-- $ -- $ --
==== ======= =======
See Notes to Consolidated Financial Statements.
96
CCHP II CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
------- -------
OPERATING ACTIVITIES
Net income.................................................... $ 9,266 $ 9,830
Change in amounts due from hotel managers..................... (2,749) (9,322)
Change in lease payable to Host Marriott...................... (632) 16,197
Change in amounts due to hotel managers....................... 1,127 --
Changes in other operating accounts........................... (1,038) 1,284
------- -------
Cash from operations........................................ 5,974 17,989
------- -------
FINANCING ACTIVITIES
Dividend to Crestline......................................... (9,963) (9,133)
------- -------
Increase (decrease) in cash and cash equivalents.............. (3,989) 8,856
Cash and cash equivalents, beginning of year.................. 8,856 --
------- -------
Cash and cash equivalents, end of year........................ $ 4,867 $ 8,856
======= =======
See Notes to Consolidated Financial Statements.
97
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP II Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 28 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 29,
2000, the Company leased 28 full-service hotels from Host Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
98
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Leases
Future minimum annual rental commitments for all non-cancelable leases as of
December 29, 2000 are as follows (in thousands):
2001............................................................ $ 174,747
2002............................................................ 174,747
2003............................................................ 174,747
2004............................................................ 174,747
2005............................................................ 174,747
Thereafter...................................................... 174,746
-----------
Total minimum lease payments.................................... $ 1,048,481
===========
Lease expense for the fiscal years 2000 and 1999 consisted of the following
(in thousands):
2000 1999
--------- ---------
Base rent................................................ $ 173,247 $ 167,755
Percentage rent.......................................... 164,396 144,357
--------- ---------
$ 337,643 $ 312,112
========= =========
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 28 full-service hotels. See Note 6 for a discussion of the
sale of all of the full-service hotel leases in 2001.
Each hotel lease had an initial term of eight years. The Tenant Subsidiaries
were required to pay the greater of (i) a minimum rent specified in each hotel
lease or (ii) a percentage rent based upon a specified percentage of aggregate
revenues from the hotel, including room revenues, food and beverage revenues,
and other income, in excess of specified thresholds. The amount of minimum
rent is increased each year based upon 50% of the increase in CPI during the
previous twelve months. Percentage rent thresholds are increased each year
based on a blend of the increases in CPI and the Employment Cost Index during
the previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures.
The Tenant Subsidiaries were responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries were responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott was responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
For those hotels where Marriott International is the manager, it had a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for
99
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Excess FF&E. The terms of the FF&E Leases generally ranged from two to
three years and rent under the FF&E Leases was a fixed amount.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provided a full guarantee and Crestline
provided a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation was the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement was
reduced to zero, the Company could terminate the agreement and Host Marriott
could terminate the Company's hotel leases without penalty.
All of the Company's leases were cross-defaulted and the Company's
obligations under the guaranty were secured by all the funds received from its
Tenant Subsidiaries.
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $18,090,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
See Note 6 for a discussion of the repayment of all of the hotel working
capital notes in 2001. As of December 29, 2000, the outstanding balance of the
working capital notes was $18,090,000, which mature in 2006. Cash paid for
interest expense in 2000 and 1999 totaled $926,000 and $856,000, respectively.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies. The existing management agreements were assigned to the
Tenant Subsidiaries upon the execution of the hotel leases for the term of
each corresponding hotel lease. See Note 6 for a discussion of the transfer of
all of the management agreements to Host Marriott in 2001.
The Tenant Subsidiaries were obligated to perform all of the obligations of
Host Marriott under the hotel management agreements including payment of fees
due under the management agreements other than certain obligations including
payment of property taxes, property casualty insurance and ground rent,
maintaining a reserve fund for FF&E replacements and capital expenditures for
which Host Marriott retained responsibility.
Marriott International manages 23 of the 28 hotels under long-term
management agreements. The Company's remaining five hotels are managed by
other hotel management companies. The management agreements generally provide
for payment of base management fees equal to one to four percent of revenues
and incentive management fees generally equal to 20% to 50% of Operating
Profit (as defined in the management agreements) over a priority return (as
defined) to the Tenant Subsidiaries, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative
100
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
contribution to the Group's consolidated taxable income/loss and changes in
temporary differences. This allocation method results in Federal, state and
Canadian tax expense allocated for the period presented that is substantially
equal to the expense that would have been recognized if the Company had filed
separate tax returns.
The provision for income taxes for the fiscal years 2000 and 1999 consists
of the following (in thousands):
2000 1999
------ ------
Current........................................................ $5,904 $5,835
Deferred....................................................... 625 996
------ ------
$6,529 $6,831
====== ======
The significant difference between the Company's effective income tax rate
and the Federal statutory tax rate is attributable to the state and Canadian
tax rates.
As of December 29, 2000 and December 31, 1999, the Company had no deferred
tax assets. The tax effect of the temporary differences that gives rise to the
Company's federal deferred tax liability is generally attributable to the
hotel working capital.
Note 6. Subsequent Event
On December 17, 1999, the Work Incentives Improvement Act was passed which
contained certain tax provisions related to REITs commonly known as the REIT
Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs
could lease hotels to a "taxable subsidiary" if the hotel is operated and
managed on behalf of such subsidiary by an independent third party. This law
enabled Host Marriott, beginning January 2001, to lease its hotels to a
taxable subsidiary. Under the terms of the Company's full-service hotel
leases, Host Marriott, at its sole discretion, could purchase the full-service
hotel leases for a price equal to the fair market value of the Company's
leasehold interest in the leases based upon an agreed upon formula in the
leases.
On November 13, 2000, Crestline, the Company and the Tenant Subsidiaries
entered into an agreement with a subsidiary of Host Marriott for the purchase
and sale of the Tenant Subsidiaries' leasehold interests in the full-service
hotels. The purchase and sale transaction would generally transfer ownership
of the Tenant Subsidiaries owned by the Company to a subsidiary of Host
Marriott for a total consideration of $66.8 million in cash. On January 10,
2001, upon receipt of all required consents, the purchase and sale transaction
was completed for $66.8 million. The Company will recognize a pre-tax gain on
the transaction of approximately $66.6 million in the first quarter of 2001,
net of transaction costs. The effective date of the transaction was January 1,
2001.
In connection with the sale of the Tenant Subsidiaries, all of the hotel
working capital notes were repaid on January 10, 2001.
101
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP III Corporation:
We have audited the accompanying consolidated balance sheets of CCHP III
Corporation and its subsidiaries (a Delaware corporation) as of December 29,
2000 and December 31, 1999, and the related consolidated statements of
operations, shareholder's equity and cash flows for the fiscal years ended
December 29, 2000 and December 31, 1999. These consolidated financial
statements are the responsibility of CCHP III Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP III
Corporation and its subsidiaries as of December 29, 2000 and December 31, 1999
and the results of their operations and their cash flows for the fiscal years
then ended in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Vienna, Virginia
February 23, 2001
103
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 29, 2000 AND DECEMBER 31, 1999
(in thousands, except share data)
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents.................................. $ 3,069 $ 6,638
Due from hotel managers.................................... 11,062 8,214
Restricted cash............................................ 3,836 4,519
Due from Crestline......................................... 157 --
Other current assets....................................... 79 --
-------- --------
18,203 19,371
Hotel working capital........................................ 21,697 21,697
-------- --------
$ 39,900 $ 41,068
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott............................. $ 13,733 $ 13,706
Due to hotel managers...................................... 3,514 3,379
Other current liabilities.................................. 750 760
-------- --------
17,997 17,845
Hotel working capital notes payable to Host Marriott......... 21,697 21,697
Deferred income taxes........................................ 206 342
-------- --------
Total liabilities.......................................... 39,900 39,884
-------- --------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value)........ -- --
Retained earnings.......................................... -- 1,184
-------- --------
Total shareholder's equity............................... -- 1,184
-------- --------
$ 39,900 $ 41,068
======== ========
See Notes to Consolidated Financial Statements.
104
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
--------- ---------
REVENUES
Rooms..................... $ 598,264 $ 570,611
Food and beverage......... 283,921 274,233
Other..................... 85,909 80,149
--------- ---------
Total revenues.......... 968,094 924,993
--------- ---------
OPERATING COSTS AND EXPENSES
Property-level operating
costs and expenses
Rooms..................... 141,157 137,338
Food and beverage......... 209,791 202,181
Other..................... 242,786 236,721
Other operating costs and
expenses
Lease expense to Host
Marriott................. 313,611 295,563
Management fees........... 45,975 41,893
--------- ---------
Total operating costs
and expenses........... 953,320 913,696
--------- ---------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST................... 14,774 11,297
Corporate expenses.......... (1,230) (1,357)
Interest expense............ (1,111) (1,129)
Interest income............. 745 --
--------- ---------
INCOME BEFORE INCOME TAXES.. 13,178 8,811
Provision for income taxes.. (5,472) (3,612)
--------- ---------
NET INCOME.................. $ 7,706 $ 5,199
========= =========
See Notes to Consolidated Financial Statements.
105
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
Common Retained
Stock Earnings Total
------ -------- -------
Balance, January 1, 1999.............................. $-- $ -- $ --
Dividend to Crestline............................... -- (4,015) (4,015)
Net income.......................................... -- 5,199 5,199
---- ------- -------
Balance, December 31, 1999............................ -- 1,184 1,184
Dividend to Crestline............................... -- (8,890) (8,890)
Net income.......................................... -- 7,706 7,706
---- ------- -------
Balance, December 29, 2000............................ $-- $ -- $ --
==== ======= =======
See Notes to Consolidated Financial Statements.
106
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
------- -------
OPERATING ACTIVITIES
Net income.................................................... $ 7,706 $ 5,199
Change in amounts due from hotel managers..................... (2,848) (4,084)
Change in lease payable to Host Marriott...................... 27 13,706
Change in amounts due to hotel managers....................... 135 --
Changes in other operating accounts........................... 301 (4,168)
------- -------
Cash from operations........................................ 5,321 10,653
------- -------
FINANCING ACTIVITIES
Dividend to Crestline......................................... (8,890) (4,015)
------- -------
Increase (decrease) in cash and cash equivalents.............. (3,569) 6,638
Cash and cash equivalents, beginning of year.................. 6,638 --
------- -------
Cash and cash equivalents, end of year........................ $ 3,069 $ 6,638
======= =======
See Notes to Consolidated Financial Statements.
107
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP III Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 31 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 29,
2000, the Company leased 29 full-service hotels from Host Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Restricted Cash
In connection with the lender requirements of one of the leased hotels, the
Company is required to maintain a separate account with the lender on behalf
of the Company for the operating profit and incentive management fees of the
hotel. Following an annual audit, amounts will be distributed to the hotel's
manager and to the Company in accordance with the loan agreement.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets
108
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Note 2. Leases
Future minimum annual rental commitments for all non-cancelable leases as of
December 29, 2000 are as follows (in thousands):
2001............................................................. $ 170,318
2002............................................................. 170,318
2003............................................................. 170,318
2004............................................................. 170,318
2005............................................................. 170,318
Thereafter....................................................... 340,635
----------
Total minimum lease payments................................... $1,192,225
==========
Lease expense for fiscal years 2000 and 1999 consisted of the following (in
thousands):
2000 1999
-------- --------
Base rent.................................................. $170,318 $168,910
Percentage rent............................................ 143,293 126,653
-------- --------
$313,611 $295,563
======== ========
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 31 full-service hotels. See Note 6 for a discussion of the
sale of all of the full-service hotel leases in 2001.
Each hotel lease had an initial term of nine years. The Tenant Subsidiaries
were required to pay the greater of (i) a minimum rent specified in each hotel
lease or (ii) a percentage rent based upon a specified percentage of aggregate
revenues from the hotel, including room revenues, food and beverage revenues,
and other income, in excess of specified thresholds. The amount of minimum
rent is increased each year based upon 50% of the increase in CPI during the
previous twelve months. Percentage rent thresholds are increased each year
based on a blend of the increases in CPI and the Employment Cost Index during
the previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures.
The Tenant Subsidiaries were responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries were responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott was responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
For those hotels where Marriott International is the manager, it had a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
109
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally ranged from two to three years and rent under the FF&E Leases
was a fixed amount.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provided a full guarantee and Crestline
provided a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation was the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement was
reduced to zero, the Company could terminate the agreement and Host Marriott
could terminate the Company's hotel leases without penalty.
All of the Company's leases were cross-defaulted and the Company's
obligations under the guaranty were secured by all the funds received from its
Tenant Subsidiaries.
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $22,046,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
See Note 6 for a discussion of the repayment of all of the hotel working
capital notes in 2001. As of December 29, 2000, the outstanding balance of the
working capital notes was $21,697,000, which mature in 2007. Cash paid for
interest expense in fiscal years 2000 and 1999 totaled $1,112,000 and
$1,042,000, respectively.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies. The existing management agreements were assigned to the
Tenant Subsidiaries upon the execution of the hotel leases for the term of
each corresponding hotel lease. See Note 6 for a discussion of the transfer of
all of the management agreements to Host Marriott in 2001.
The Tenant Subsidiaries were obligated to perform all of the obligations of
Host Marriott under the hotel management agreements including payment of fees
due under the management agreements other than certain obligations including
payment of property taxes, property casualty insurance and ground rent,
maintaining a reserve fund for FF&E replacements and capital expenditures for
which Host Marriott retained responsibility.
Marriott International manages 21 of the 29 hotels under long-term
management agreements. The Company's remaining eight hotels are managed by
other hotel management companies. The management agreements generally provide
for payment of base management fees equal to one to four percent of revenues
and incentive management fees generally equal to 20% to 50% of Operating
Profit (as defined in the management
110
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreements) over a priority return (as defined) to the Tenant Subsidiaries,
with total incentive management fees not to exceed 20% of cumulative Operating
Profit, or 20% of current year Operating Profit.
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.
The provision for income taxes for the fiscal years 2000 and 1999 consists
of the following (in thousands):
2000 1999
------ ------
Current........................................................ $5,382 $3,270
Deferred....................................................... 90 342
------ ------
$5,472 $3,612
====== ======
As of December 29, 2000 and December 31, 1999, the Company had no deferred
tax assets. The tax effect of the temporary differences that gives rise to the
Company's deferred tax liability is generally attributable to the hotel
working capital.
Note 6. Subsequent Event
On December 17, 1999, the Work Incentives Improvement Act was passed which
contained certain tax provisions related to REITs commonly known as the REIT
Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs
could lease hotels to a "taxable subsidiary" if the hotel is operated and
managed on behalf of such subsidiary by an independent third party. This law
enabled Host Marriott, beginning January 2001, to lease its hotels to a
taxable subsidiary. Under the terms of the Company's full-service hotel
leases, Host Marriott, at its sole discretion, could purchase the full-service
hotel leases for a price equal to the fair market value of the Company's
leasehold interest in the leases based upon an agreed upon formula in the
leases.
On November 13, 2000, Crestline, the Company and the Tenant Subsidiaries
entered into an agreement with a subsidiary of Host Marriott for the purchase
and sale of the Tenant Subsidiaries' leasehold interests in the full-service
hotels. The purchase and sale transaction would generally transfer ownership
of the Tenant Subsidiaries owned by the Company to a subsidiary of Host
Marriott for a total consideration of $55.1 million in cash. On January 10,
2001, upon receipt of all required consents, the purchase and sale transaction
was completed for $55.1 million. The Company recognized a pre-tax gain on the
transaction of approximately $55 million in the first quarter of 2001, net of
transaction costs. The effective date of the transaction was January 1, 2001.
In connection with the sale of the Tenant Subsidiaries, all of the hotel
working capital notes were repaid on January 10, 2001.
111
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCHP IV Corporation:
We have audited the accompanying consolidated balance sheets of CCHP IV
Corporation and its subsidiaries (a Delaware corporation) as of December 29,
2000 and December 31, 1999, and the related consolidated statements of
operations, shareholder's equity and cash flows for the fiscal years ended
December 29, 2000 and December 31, 1999. These consolidated financial
statements are the responsibility of CCHP IV Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP IV
Corporation and its subsidiaries as of December 29, 2000 and December 31, 1999
and the results of their operations and their cash flows for the fiscal years
then ended in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Vienna, Virginia
February 23, 2001
113
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As Of December 29, 2000 and December 31, 1999
(in thousands, except share data)
2000 1999
------- -------
ASSETS
Current assets
Cash and cash equivalents.................................... $ 1,699 $ 3,487
Due from hotel managers...................................... 24,984 14,571
Due from Crestline........................................... -- 3,487
Other current assets......................................... 544 --
------- -------
27,227 21,545
Hotel working capital.......................................... 16,522 16,522
------- -------
$43,749 $38,067
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Lease payable to Host Marriott............................... $21,561 $20,348
Due to hotel managers........................................ 2,246 446
Other current liabilities.................................... 602 10
------- -------
24,409 20,804
Hotel working capital notes payable to Host Marriott........... 16,522 16,522
Deferred income taxes.......................................... 666 741
------- -------
Total liabilities.......................................... 41,597 38,067
------- -------
Shareholder's equity
Common stock (100 shares issued at $1.00 par value).......... -- --
Retained earnings............................................ 2,152 --
------- -------
Total shareholder's equity................................. 2,152 --
------- -------
$43,749 $38,067
======= =======
See Notes to Consolidated Financial Statements.
114
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
---------- --------
REVENUES
Rooms..................... $ 630,427 $578,321
Food and beverage......... 358,604 333,120
Other..................... 88,221 77,368
---------- --------
Total revenues.......... 1,077,252 988,809
---------- --------
OPERATING COSTS AND EXPENSES
Property-level operating
costs and expenses
Rooms..................... 140,593 129,051
Food and beverage......... 251,938 234,310
Other..................... 250,690 231,547
Other operating costs and
expenses
Lease expense to Host
Marriott................. 349,958 316,654
Management fees........... 75,832 66,514
---------- --------
Total operating costs
and expenses........... 1,069,011 978,076
---------- --------
OPERATING PROFIT BEFORE
CORPORATE EXPENSES AND
INTEREST................... 8,241 10,733
Corporate expenses.......... (1,369) (1,449)
Interest expense............ (846) (846)
Interest income............. 538 16
---------- --------
INCOME BEFORE INCOME TAXES.. 6,564 8,454
Provision for income taxes.. (2,751) (3,466)
---------- --------
NET INCOME.................. $ 3,813 $ 4,988
========== ========
See Notes to Consolidated Financial Statements.
115
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
Common Retained
Stock Earnings Total
------ -------- -------
Balance, January 1, 1999.............................. $-- $ -- $ --
Dividend to Crestline............................... -- (4,988) (4,988)
Net income.......................................... -- 4,988 4,988
---- ------- -------
Balance, December 31, 1999............................ -- -- --
Dividend to Crestline............................... -- (1,661) (1661)
Net income.......................................... -- 3,813 3,813
---- ------- -------
Balance, December 29, 2000............................ $-- $ 2,152 $ 2,152
==== ======= =======
See Notes to Consolidated Financial Statements.
116
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended December 29, 2000 and December 31, 1999
(in thousands)
2000 1999
-------- --------
OPERATING ACTIVITIES
Net income.................................................. $ 3,813 $ 4,988
Change in amounts due from hotel managers................... (10,413) (14,124)
Change in lease payable to Host Marriott.................... 1,213 20,348
Change in amounts due to hotel managers..................... 1,800 --
Changes in other operating accounts......................... 3,460 750
-------- --------
Cash provided by (used in) operations..................... (127) 11,962
-------- --------
FINANCING ACTIVITIES
Amounts advanced to Crestline............................... -- (3,487)
Dividend to Crestline....................................... (1,661) (4,988)
-------- --------
Cash used in financing activities......................... (1,661) (8,475)
-------- --------
Increase (decrease) in cash and cash equivalents............ (1,788) 3,487
Cash and cash equivalents, beginning of year................ 3,487 --
-------- --------
Cash and cash equivalents, end of year...................... $ 1,699 $ 3,487
======== ========
See Notes to Consolidated Financial Statements.
117
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
CCHP IV Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").
On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 27 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 29,
2000, the Company leased 27 full-service hotels from Host Marriott.
The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.
Fiscal Year
The Company's fiscal year ends on the Friday nearest December 31.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase as cash equivalents.
Revenues
The Company records the gross property-level revenues generated by the
hotels as revenues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
118
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Leases
Future minimum annual rental commitments for all non-cancelable leases as of
December 29, 2000 are as follows (in thousands):
2001............................................................. $ 188,116
2002............................................................. 188,116
2003............................................................. 188,116
2004............................................................. 188,116
2005............................................................. 188,116
Thereafter....................................................... 564,347
----------
Total minimum lease payments................................... $1,504,927
==========
Lease expense for the fiscal years 2000 and 1999 consisted of the following
(in thousands):
2000 1999
-------- --------
Base rent.................................................. $188,116 $183,048
Percentage rent............................................ 161,842 133,606
-------- --------
$349,958 $316,654
======== ========
Hotel Leases
The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 27 full-service hotels. See Note 6 for a discussion of the
sale of all of the full-service hotel leases in 2001.
Each hotel lease had an initial term of ten years. The Tenant Subsidiaries
were required to pay the greater of (i) a minimum rent specified in each hotel
lease or (ii) a percentage rent based upon a specified percentage of aggregate
revenues from the hotel, including room revenues, food and beverage revenues,
and other income, in excess of specified thresholds. The amount of minimum
rent is increased each year based upon 50% of the increase in CPI during the
previous twelve months. Percentage rent thresholds are increased each year
based on a blend of the increases in CPI and the Employment Cost Index during
the previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures.
The Tenant Subsidiaries were responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries were responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott was responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.
For those hotels where Marriott International is the manager, it had a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.
FF&E Leases
Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for
119
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Excess FF&E. The terms of the FF&E Leases generally ranged from two to
three years and rent under the FF&E Leases was a fixed amount.
Guaranty and Pooling Agreement
In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provided a full guarantee and Crestline
provided a limited guarantee of all of the hotel lease obligations.
The cumulative limit of Crestline's guarantee obligation was the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement was
reduced to zero, the Company could terminate the agreement and Host Marriott
could terminate the Company's hotel leases without penalty.
All of the Company's leases were cross-defaulted and the Company's
obligations under the guaranty were secured by all the funds received from its
Tenant Subsidiaries.
Note 3. Working Capital Notes
Upon the commencement of the hotel leases, the Company purchased the working
capital of the leased hotels from Host Marriott for $16,522,000 with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
See Note 6 for a discussion of the repayment of all of the hotel working
capital notes in 2001. As of December 29, 2000, the outstanding balance of the
working capital notes was $16,522,000, which mature in 2008. Cash paid for
interest expense in 2000 and 1999 totaled $846,000 and $781,000, respectively.
Note 4. Management Agreements
All of the Company's hotels are operated by hotel management companies under
long-term hotel management agreements between Host Marriott and hotel
management companies. The existing management agreements were assigned to the
Tenant Subsidiaries upon the execution of the hotel leases for the term of
each corresponding hotel lease. See Note 6 for a discussion of the transfer of
all of the management agreements to Host Marriott in 2001.
The Tenant Subsidiaries were obligated to perform all of the obligations of
Host Marriott under the hotel management agreements including payment of fees
due under the management agreements other than certain obligations including
payment of property taxes, property casualty insurance and ground rent,
maintaining a reserve fund for FF&E replacements and capital expenditures for
which Host Marriott retained responsibility.
Marriott International manages 23 of the 27 hotels under long-term
management agreements. The Company's remaining four hotels are managed by
other hotel management companies. The management agreements generally provide
for payment of base management fees equal to one to four percent of revenues
and incentive management fees generally equal to 20% to 50% of Operating
Profit (as defined in the management agreements) over a priority return (as
defined) to the Tenant Subsidiaries, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit.
120
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Income Taxes
The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.
The provision for income taxes for fiscal years 2000 and 1999 consists of
the following (in thousands):
2000 1999
------ ------
Current........................................................ $2,452 $2,725
Deferred....................................................... 299 741
------ ------
$2,751 $3,466
====== ======
As of December 29, 2000 and December 31, 1999, the Company had no deferred
tax assets. The tax effect of the temporary differences that gives rise to the
Company's deferred tax liability is generally attributable to the hotel
working capital.
Note 6. Subsequent Event
On December 17, 1999, the Work Incentives Improvement Act was passed which
contained certain tax provisions related to REITs commonly known as the REIT
Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs
could lease hotels to a "taxable subsidiary" if the hotel is operated and
managed on behalf of such subsidiary by an independent third party. This law
enabled Host Marriott, beginning January 2001, to lease its hotels to a
taxable subsidiary. Under the terms of the Company's full-service hotel
leases, Host Marriott, at its sole discretion, could purchase the full-service
hotel leases for a price equal to the fair market value of the Company's
leasehold interest in the leases based upon an agreed upon formula in the
leases.
On November 13, 2000, Crestline, the Company and the Tenant Subsidiaries
entered into an agreement with a subsidiary of Host Marriott for the purchase
and sale of the Tenant Subsidiaries' leasehold interests in the full-service
hotels. The purchase and sale transaction would generally transfer ownership
of the Lessee Entities owned by the Company to a subsidiary of Host Marriott
for a total consideration of $46.1 million in cash. On January 10, 2001, upon
receipt of all required consents, the purchase and sale transaction was
completed for $46.1 million. The Company recognized a pre-tax gain on the
transaction of approximately $46 million in the first quarter of 2001, net of
the transaction costs. The effective date of the transaction was January 1,
2001.
In connection with the sale of the Tenant Subsidiaries, all of the hotel
working capital notes were repaid on January 10, 2001.
121
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information called for by Items 10-13 is incorporated by reference from
our 2001 Annual Meeting of Shareholders Notice and Proxy Statement (to be
filed pursuant to Regulation 14A not later than 120 days after the close of
the fiscal year covered by this report).
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(i) FINANCIAL STATEMENTS
All financial statements of the registrant as set forth under Item 8 of
this Report on Form 10-K.
(ii) FINANCIAL STATEMENT SCHEDULES
The following financial information is filed herewith on the pages
indicated.
Financial Schedules:
Page
----------
III. Real Estate and Accumulated Depreciation. S-1 to S-3
All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(iii) EXHIBITS
Exhibit
No. Description
------- -----------
2.1 Agreement and Plan of Merger by and among Host Marriott Corporation,
HMC Merger Corporation and Host Marriott L.P. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
3.1* Bylaws of Host Marriott Corporation as amended effective September 1,
1999.
3.2 Articles of Amendment and Restatement of Articles of Incorporation of
Host Marriott Corporation (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
3.3 Articles Supplementary of Host Marriott Corporation Classifying and
Designating a Series of Preferred Stock as Series A Junior
Participating Preferred Stock and Fixing Distribution and Other
Preferences and Rights of Such Series (incorporated herein by
reference to Exhibit 4.2 to Host Marriott Corporation Registration
Statement on Form 8-A (Registration No. 001-14625) filed with the
Commission on December 11, 1998).
122
Exhibit
No. Description
------- -----------
3.4 Articles Supplementary of Host Marriott Corporation Classifying and
Designating Preferred Stock of the Registrant as 10% Class A
Cumulative Redeemable Preferred Stock (incorporated by reference to
Exhibit 4.1 to Host Marriott Corporation Registration Statement on
Form 8-A (Registration No. 001-14625) filed with the Commission on
July 30, 1999).
3.5 Articles Supplementary of Host Marriott Corporation Classifying and
Designating Preferred Stock of the Registrant as 10% Class B
Cumulative Redeemable Preferred Stock (incorporated by reference to
Exhibit 4.1 to Host Marriott Corporation Registration Statement on
Form 8-A (Registration No. 001-14625) filed with the Commission on
November 23, 1999).
3.6 Articles Supplementary of Host Marriott Corporation Classifying and
Designating Preferred Stock of the Registrant as 10% Class C
Cumulative Redeemable Preferred Stock (incorporated by reference to
Exhibit 4.1 to Host Marriott Corporation Registration Statement on
Form 8-A filed with the Commission on March 23, 2001).
4.1 Form of Common Stock Certificate of Host Marriott Corporation
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 333-55807).
4.2 Guarantee Agreement, dated December 2, 1996, between Host Marriott
Corporation and IBJ Schroeder Bank & Trust Company, as Guarantee
Trustee (incorporated by reference to Exhibit 4.6 of Host Marriott
Corporation Registration Statement No. 333-19923).
4.3(i) Rights Agreement between Host Marriott Corporation and The Bank of
New York as Rights Agent dated as of November 23, 1998 (incorporated
by reference to Host Marriott Corporation Current Report on Form 8-K
dated November 23, 1998).
4.3(ii) Amendment No. 1 to Rights Agreement between Host Marriott Corporation
and The Bank of New York as Rights Agent dated as of December 18,
1998 (incorporated by reference to Host Marriott Corporation Current
Report on Form 8-K dated December 18, 1998).
4.4 Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-00768).
4.5 Indenture by and among HMH Properties, Inc., as Issuer, HMH Courtyard
Properties, Inc., HMC Retirement Properties, Inc., Marriott Financial
Services, Inc., Marriott SBM Two Corporation, HMH Pentagon
Corporation and Host Airport Hotels, Inc., as Subsidiary Guarantors,
and Marine Midland Bank, as Trustee (incorporated by reference to
Host Marriott Corporation Registration Statement No. 33-95058).
4.6 Indenture by and among HMH Properties, Inc., as Issuer, and the
Subsidiary Guarantors named therein, and Marine Midland Bank, as
Trustee (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated August 6, 1998).
4.7 Indenture for the 6 3/4% Convertible Debentures, dated December 2,
1996, between Host Marriott Corporation and IBJ Schroeder Bank &
Trust Company, as Indenture Trustee (incorporated by reference to
Exhibit 4.3 of Host Marriott Corporation Registration Statement No.
333-19923).
4.8 Amended and Restated Trust Agreement, dated December 2, 1996, among
Host Marriott Corporation, IBJ Schroeder Bank & Trust Company, as
Property Trustee, Delaware Trust Capital Management, Inc., as
Delaware Trustee, and Robert E. Parsons, Jr., Bruce D. Wardinski and
Christopher G. Townsend, as Administrative Trustees (incorporated by
reference to Exhibit 4.2 of Host Marriott Corporation Registration
Statement No. 333-19923).
4.9 Amended and Restated Trust Agreement, dated as of December 29, 1998,
among HMC Merger Corporation, as Depositor, IBJ Schroder Bank & Trust
Company, as Property Trustee, Delaware Trust Capital Management,
Inc., as Delaware Trustee, and Robert E. Parsons, Jr., Ed Walter and
Christopher G. Townsend, as Administrative Trustees (incorporated by
reference to Host Marriott Corporation 1998 Annual Report of Form 10-
K filed March 26, 1999).
123
Exhibit
No. Description
------- -----------
10.1 Second Amended and Restated Agreement of Limited Partnership of Host
Marriott, L.P. (incorporated by reference to Exhibit 3.1 of Host
Marriott Corporation Registration Statement No. 333-55807).
10.2 Indenture between Host Marriott L.P., as Issuer, and Marine Midland
Bank, as Indenture Trustee, and Form of 6.56% Callable Note due
December 15, 2005 (incorporated by reference to Exhibit 4.1 of Host
Marriott Corporation Registration Statement No. 333-55807).
10.3 Amended and Restated Credit Agreement dated as of June 19, 1997 and
Amended and Restated as of August 5, 1998 among Host Marriott
Corporation, Host Marriott Hospitality, Inc., HMH Properties, Inc.,
Host Marriott, L.P., HMC Capital Resources Corp., Various Banks, Wells
Fargo Bank, National Association, The Bank of Nova Scotia and Credit
Lyonnais New York Branch, as Co-Arrangers, and Bankers Trust Company
as Arranger and Administrative Agent (incorporated by reference to
Host Marriott Corporation Current Report on Form 8-K dated September
11, 1998).
10.4 First Amendment and Waiver of Amended and Restated Credit Agreement
dated as of June 19, 1997 and Amended and Restated as of August 5,
1998, among Host Marriott Corporation, Host Marriott Hospitality Inc.,
HMH Properties, Inc., Host Marriott, L.P., HMC Capital Resources
Corp., Various Banks, Wells Fargo Bank, National Association, The Bank
of Nova Scotia and Credit Lyonnais New York Branch, as Co-Arrangers
and Bankers Trust Company as Arranger and Administrative Agent dated
as of November 25, 1998 (incorporated by reference to Exhibit 10.4 of
Host Marriott Corporation's Form 10-K for the year ended December 31,
1998).
10.5 Second Amendment and Consent to Credit Agreement of Amended and
Restated Credit Agreement dated as of June 19, 1997 and Amended and
Restated as of August 5, 1998, among Host Marriott Corporation, Host
Marriott Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P.,
HMC Capital Resources Corp., Various Banks, Wells Fargo Bank, National
Association, The Bank of Nova Scotia and Credit Lyonnais New York
Branch, as Co-Arrangers and Bankers Trust Company as Arranger and
Administrative Agent dated as of December 17, 1998 (incorporated by
reference to Exhibit 10.5 of Host Marriott Corporation's Form 10-K for
the year ended December 31, 1998).
10.6 Third Amendment and Waiver to Credit Agreement Amended and Restated
Credit Agreement dated as of June 19, 1997 and Amended and Restated as
of August 5, 1998, among Host Marriott Corporation, Host Marriott
Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P., HMC
Capital Resources Corp., Various Banks, Wells Fargo Bank, National
Association, The Bank of Nova Scotia and Credit Lyonnais New York
Branch, as Co-Arrangers and Bankers Trust Company as Arranger and
Administrative Agent dated as of March 15, 1999 (incorporated by
reference to Exhibit 10.6 of Host Marriott Corporation's Form 10-K for
the year ended December 31, 1998).
10.7 Host Marriott L.P. Executive Deferred Compensation Plan effective as
of December 29, 1998 (formerly the Marriott Corporation Executive
Deferred Compensation Plan) (incorporated by reference to Exhibit 10.7
of Host Marriott Corporation's Form 10-K for the year ended December
31, 1998).
10.8* Host Marriott Corporation and Host Marriott, L.P. 1997 Comprehensive
Incentive Stock Plan as amended and restated December 29, 1998.
10.9 Distribution Agreement dated as of September 15, 1993 between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference from Host Marriott Corporation Current Report on Form 8-K
dated October 23, 1993).
10.10 Amendment No. 1 to the Distribution Agreement dated December 29, 1995
by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K
dated January 16, 1996).
10.11 Amendment No. 2 to the Distribution Agreement dated June 21, 1997 by
and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
124
Exhibit
No. Description
------- -----------
10.12 Amendment No. 3 to the Distribution Agreement dated March 3, 1998 by
and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
10.13 Amendment No. 4 to the Distribution Agreement by and among Host
Marriott Corporation and Marriott International Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 333-
64793).
10.14 Amendment No. 5 to the Distribution Agreement dated December 18, 1998
by and among Host Marriott Corporation, Host Marriott Services
Corporation and Marriott International Inc. (incorporated by reference
to Exhibit 10.14 of Host Marriott Corporation's Form 10-K for the year
ended December 31, 1998).
10.17 Tax Sharing Agreement dated as of October 5, 1993 by and between
Marriott Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Current Report on Form 8-K
dated October 23, 1993).
10.18 License Agreement dated as of December 29, 1998 by and among Host
Marriott Corporation, Host Marriott, L.P., Marriott International,
Inc. and Marriott Worldwide Corporation (incorporated by reference to
Exhibit 10.18 of Host Marriott Corporation's Form 10-K for the year
ended December 31, 1998).
10.20 Tax Administration Agreement dated as of October 8, 1993 by and
between Marriott Corporation and Marriott International, Inc.
(incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated October 23, 1993).
10.21 Restated Noncompetition Agreement by and among Host Marriott
Corporation, Marriott International, Inc. and Sodexho Marriott
Services, Inc. (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-64793).
10.22 First Amendment to Restated Noncompetition Agreement by and among Host
Marriott Corporation, Marriott International, Inc. and Sodexho
Marriott Services, Inc. (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
10.23 Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts
and Hotels dated September 25, 1993 by and between Marriott
Corporation and Marriott International, Inc. (incorporated by
reference to Host Marriott Corporation Registration Statement No. 33-
51707).
10.26 Host Marriott, L.P. Retirement and Savings Plan and Trust
(incorporated by reference to Host Marriott Corporation 1998 Annual
Report on Form 10-K filed March 26, 1999).
10.27 Contribution Agreement dated as of April 16, 1998 among Host Marriott
Corporation, Host Marriott, L.P. and the contributors named therein,
together with Exhibit B (incorporated by reference to Exhibit 10.18 of
Host Marriott Corporation Registration Statement No. 333-55807).
10.28 Amendment No. 1 to Contribution Agreement dated May 8, 1998 among
Marriott Corporation, Host Marriott, L.P. and the contributors named
therein (incorporated by reference to Exhibit 10.19 of Host Marriott
Corporation Registration Statement No. 333-55807).
10.29 Amendment No. 2 to Contribution Agreement dated May 18, 1998 among
Host Marriott Corporation, Host Marriott, L.P. and the contributors
named therein (incorporated by reference to Exhibit 10.20 of Host
Marriott Corporation Registration Statement No. 333-55807).
#10.30* Form of Amended and Restated Lease Agreement.
#10.31 Form of Management Agreement for Full-Service Hotels (incorporated by
reference to Host Marriott Corporation Registration Statement No. 33-
51707).
#10.32 Form of Owner's Agreement (incorporated by reference to Crestline
Capital Corporation Registration Statement No. 333-64657).
#10.33* Form of Amendment No. 1 to Owner's Agreement.
125
Exhibit
No. Description
------- -----------
10.34 Employee Benefits and Other Employment Matters Allocation Agreement
between Host Marriott Corporation, Host Marriott, L.P. and Crestline
Capital Corporation (incorporated by reference to Host Marriott
Corporation Registration Statement No. 333-64793).
10.35 Amendment to the Employee Benefits and Other Employment Matters
Allocation Agreement effective as of December 29, 1998 by and between
Host Marriott Corporation, Marriott International, Sodexho Marriott
Services, Inc., Crestline Capital Corporation and Host Marriott, L.P.
(incorporated by reference to Exhibit 10.34 of Host Marriott
Corporation's Form 10-K for the year ended December 31, 1998).
10.36 Amended and Restated Communities Noncompetition Agreement
(incorporated by reference to Host Marriott Corporation Registration
Statement No. 333-64793).
10.37 Registration Rights Agreement, dated as of October 6, 2000, by and
among Host Marriott, L.P., the Guarantors named therein and the
Purchasers named therein (incorporated by reference to Exhibit 10.39
of Host Marriott, L.P.'s Registration Statement on Form S-4 No. 333-
51944).
10.38 Amended and Restated Credit Agreement, dated as of June 19, 1997 and
Amended and Restated as of August 5, 1998 and further Amended and
Restated as of May 31, 2000 among Host Marriott Corporation, Host
Marriott, L.P., Various Banks, and Bankers Trust Company, as
Administrative Agent (incorporated by reference to Exhibit 10.40 of
Host Marriott, L.P.'s Registration Statement on Form S-4 No. 333-
51944).
10.39 First Amendment to the Amended and Restated Credit Agreement dated as
of June 19, 1997 and Amended and Restated as of August 5, 1998 and
further Amended and Restated as of May 31, 2000 among Host Marriott
Corporation, Host Marriott, L.P., Various Banks, and Bankers Trust
Company, as Administrative Agent, dated as of October 6, 2000
(incorporated by reference to Exhibit 10.41 of Host Marriott, L.P.'s
Registration Statement on Form S-4 No. 333-51944).
10.40 Acquisition and Exchange Agreement dated November 13, 2000 by Host
Marriott, L.P. and Crestline Capital Corporation (incorporated by
reference to Exhibit 99.2 of Host Marriott, L.P.'s Form 8-K/A filed
December 14, 2000.
12.1* Computation of Ratios of Earnings to Fixed Charges.
21* List of Subsidiaries of Host Marriott Corporation.
23.1* Consent of Arthur Andersen LLP.
- --------
# Agreement filed is illustrative of numerous other agreements to which the
Company is a party.
* Filed herewith.
(b) REPORTS ON FORM 8-K
. November 28, 2000--Report of the announcement that Host Marriott
Corporation, through its operating partnership Host Marriott, L.P. ("Host
LP"), has agreed to purchase certain subsidiaries of Crestline Capital
Corporation ("Crestline") that own the leasehold interests with respect
to 116 hotel properties owned by Host LP. Host LP will purchase these
entities, whose primary assets are the leasehold interests, for
approximately $201 million. Host LP also agreed to execute a standard
management agreement with Crestline allowing them to operate the Plaza
San Antonio hotel. Under the REIT Modernization Act, which was passed in
December 1999 and will be effective beginning January 1, 2001, Host LP
will be able to lease its hotels to a wholly-owned subsidiary through a
taxable corporation which will elect to be treated as a taxable REIT
subsidiary ("TRS"). Under the terms of the transaction, Host LP, through
a subsidiary, will purchase the leases from Crestline on January 1, 2001.
. December 14, 2000--Report on Form 8-K/A amending the 8-K filed November
28, 2000 to include as an exhibit the Acquisition and Exchange Agreement
by and among Host Marriott, L.P. and Crestline Capital Corporation.
126
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Bethesda, State of Maryland, on March 1, 2001.
Host Marriott Corporation
/s/ Robert E. Parsons, Jr.
By: _________________________________
Robert E. Parsons, Jr.
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Christopher J. Nassetta President, Chief Executive March 1, 2001
______________________________________ Officer and Director
Christopher J. Nassetta (Principal Executive
Officer)
/s/ Robert E. Parsons, Jr. Executive Vice President March 1, 2001
______________________________________ and Chief Financial
Robert E. Parsons, Jr. Officer (Principal
Financial Officer)
/s/ Donald D. Olinger Senior Vice President and March 1, 2001
______________________________________ Corporate Controller
Donald D. Olinger (Principal Accounting
Officer)
/s/ Richard E. Marriott Chairman of the Board of March 1, 2001
______________________________________ Directors
Richard E. Marriott
/s/ R. Theodore Ammon Director March 1, 2001
______________________________________
R. Theodore Ammon
/s/ Robert M. Baylis Director March 1, 2001
______________________________________
Robert M. Baylis
/s/ Terence C. Golden Director March 1, 2001
______________________________________
Terence C. Golden
/s/ Ann McLaughlin Korologos Director March 1, 2001
______________________________________
Ann McLaughlin Korologos
/s/ J.W. Marriott, Jr. Director March 1, 2001
______________________________________
J.W. Marriott, Jr.
127
Signatures Title Date
---------- ----- ----
/s/ John G. Schreiber Director March 1, 2001
______________________________________
John G. Schreiber
/s/ Harry L. Vincent, Jr. Director March 1, 2001
______________________________________
Harry L. Vincent, Jr.
128
SCHEDULE III
Page 1 of 3
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(in millions)
Gross Amount at
Initial Costs December 31, 2000
----------------- Subsequent ------------------------ Date of
Buildings & Costs Buildings & Accumulated Completion Date
Description Debt Land Improvements Capitalized Land Improvements Total Depreciation of Construction Acquired
----------- ------ ---- ------------ ----------- ---- ------------ ------ ------------ --------------- --------
Full-service hotels:
New York Marriott
Marquis Hotel, New
York, NY.......... $ 263 $-- $ 552 $ 49 $-- $ 601 $ 601 $ (182) 1986 n/a
Other full-service
properties, each
less than 5% of
total............. $2,012 $749 $5,510 $795 $685 $6,369 $7,054 $ (869) various various
------ ---- ------ ---- ---- ------ ------ -------
Total full-
service......... 2,275 749 6,062 844 685 6,970 7,655 (1,051)
Other properties,
each less than 5%
of total.......... -- 40 27 (52) -- 16 16 (15) various n/a
------ ---- ------ ---- ---- ------ ------ -------
Total........... $2,275 $789 $6,089 $792 $685 $6,986 $7,671 $(1,066)
====== ==== ====== ==== ==== ====== ====== =======
Depreciation
Description Life
----------- ------------
Full-service hotels:
New York Marriott
Marquis Hotel, New
York, NY.......... 40
Other full-service
properties, each
less than 5% of
total............. 40
Total full-
service.........
Other properties,
each less than 5%
of total.......... various
Total...........
S-1
SCHEDULE III
Page 2 of 3
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(in millions)
Notes:
(A) The change in total cost of properties for the fiscal years ended
December 31, 2000, 1999, and 1998 is as follows:
Balance at
January 2,
1998........... 5,317
Additions:
Acquisitions.. 2,849
Capital
Expenditures
and transfers
from
construction-
in-progress.. 60
Deductions:
Dispositions
and other.... (91)
Transfers to
Non-
Controlled
Subsidiary... (139)
Transfers to
Spin-Off
(Crestline
Capital
Corporation).. (643)
------
Balance at
December 31,
1998......... 7,353
Additions:
Acquisitions.. 29
Capital
expenditures
and transfers
from
construction-
in-progress.. 147
Deductions:
Dispositions
and other.... (155)
------
Balance at
December 31,
1999......... $7,374
Additions:
Capital
expenditures
and transfers
from
construction-
in-progress.. 306
Deductions:
Dispositions
and other.... (9)
------
Balance at
December 31,
2000......... $7,671
======
S-2
SCHEDULE III
Page 3 of 3
HOST MARRIOTT CORPORATION AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2000
(in millions)
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal years ended December 31, 2000, 1999 and 1998 is as
follows:
Balance at January 2, 1998........................................... $ 506
Depreciation and amortization........................................ 132
Dispositions and other............................................... (13)
Transfers to Non-Controlled Subsidiary............................... (29)
Transfers to Spin-Off (Crestline Capital Corporation)................ (21)
------
Balance at December 31, 1998......................................... 575
Depreciation and amortization........................................ 243
Dispositions and other............................................... 35
------
Balance at December 31, 1999......................................... 853
Depreciation and amortization........................................ 215
Dispositions and other............................................... (2)
------
Balance at December 31, 2000......................................... $1,066
======
(C) The aggregate cost of properties for Federal income tax purposes is
approximately $5,413 million at December 31, 2000.
(D) The total cost of properties excludes construction-in-progress
properties.
S-3