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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, 2001 Commission File No. 0-25087
HOST MARRIOTT, L.P.
Delaware 52-2095412
(State of Incorporation) (I.R.S. Employer
Identification Number)
10400 Fernwood Road
Bethesda, Maryland 20817
(301) 380-9000
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
----------------------------------
Units of limited partnership interest (286,012,373 units outstanding as of
March 22, 2002)
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 2002 Annual Meeting and Proxy Statement of Host Marriott Corporation
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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, including the
effect of the terrorist attacks of September 11, 2001 on travel, 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 and our liquidity;
. 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;
. our degree of 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 changes in
laws and regulations or the interpretation thereof;
. the effects of tax legislative action, including specified provisions of
the Work Incentives Improvement Act of 1999 as enacted on December 17,
1999 (we refer to this as the "REIT Modernization Act");
. the ability of our sole general partner, Host Marriott Corporation, to
continue to satisfy complex rules in order for it to qualify as a REIT
for federal income tax purposes, our ability to satisfy the rules for us
to qualify as a partnership for federal income tax purposes, and the
ability of certain of our subsidiaries to qualify as taxable REIT
subsidiaries for federal income tax purposes, and our ability and the
ability of our subsidiaries 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
obligation 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.
1
Items 1 & 2. Business and Properties
Introduction
We are a limited partnership owning full-service hotel properties, whose
sole general partner is Host Marriott Corporation, a Maryland corporation
("Host REIT"). As of March 1, 2002, we own 122 hotels representing
approximately 58,000 rooms located throughout North America. Most of our hotels
are operated under brand names that are among the most respected and widely
recognized in the lodging industry--including the Marriott, Ritz-Carlton, Four
Seasons, Hilton, Hyatt and Swissotel brand names.
Our primary business objective is to provide superior total returns to our
unitholders through a combination of distributions, appreciation in net asset
value per unit, and growth in funds from operations, or FFO, by focusing on
aggressive asset management and disciplined capital allocation. FFO is defined
by the National Association of Real Estate Investment Trusts as net income
computed in accordance with GAAP, excluding gains or losses from sales of
properties, plus real estate-related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
We were formed in connection with Host REIT's efforts to convert its
business operations to qualify as a real estate investment trust, or "REIT,"
for federal income tax purposes. As part of this conversion, which we refer to
as the REIT conversion, on December 29, 1998, Host Marriott and various of its
subsidiaries contributed substantially all of their assets to us and we assumed
substantially all of their liabilities. The hotel ownership business formerly
conducted by Host Marriott and its subsidiaries is conducted by and through
Host Marriott, L.P. and our subsidiaries, and Host Marriott was merged with and
into Host REIT. Host REIT owns approximately 92% of Host Marriott, L.P.
In this report, we refer to ourselves as "Host Marriott, L.P.," the
"operating partnership," or "Host L.P.," to our sole general partner (excluding
its subsidiaries) as "Host REIT" and its predecessor, Host Marriott, a Delaware
corporation, as "Host Marriott."
The address of our principal executive office is 10400 Fernwood Road,
Bethesda, Maryland, 20817. Our phone number is 301-380-9000.
The Lodging Industry
The lodging industry in the United States consists of both private and
public entities, which operate in an extremely diversified market under a
variety of brand names. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience of locations and room
rates. In order to cater to a wide variety of tastes and needs, the lodging
industry is broadly segmented into six categories: luxury, upper-upscale,
upscale, midscale (with and without food and beverage service) and economy.
Most of our hotels operate in urban markets in either the luxury lodging
segment (represented by such brand names as Ritz-Carlton and Four Seasons) and
the upper-upscale lodging segment (represented by such brand names as Marriott,
Hilton, Hyatt, Swissotel, Crowne Plaza, Doubletree, Renaissance and Westin).
Although the competitive position of each of our hotel properties varies by
market, we believe that our properties compare favorably to their competitive
set in their respective markets.
A common measure used by the industry to evaluate the operations of a hotel
is "Revenue per available room," or "RevPAR," which is defined as the product
of the average daily room rate charged and the average daily occupancy
achieved. RevPAR does not include food and beverage or other ancillary revenues
such as parking, telephone or other guest services generated by the property.
The lodging industry experienced significant RevPAR declines in 2001 compared
to 2000 due to the sluggish economy that was intensified by the September 11,
2001 terrorist attacks. We believe that the lodging industry will continue to
experience RevPAR declines at least through the first half of 2002. From 1991
through 1997, 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, beginning
in 1998, supply has moderately outpaced demand, causing slight declines in
occupancy rates in the sector in which we operate, although room rates
continued to increase through 2000. The relative balance between
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supply and demand growth in the industry and the segments in which we operate
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. The current amount of excess
supply growth in the upper-upscale and luxury portions of the full-service
segment of the lodging industry has been much less severe than that experienced
in the lodging industry in other economic downturns. Growth in room supply in
the upper-upscale sector continued in 2001, while room demand declined during
the year. We believe that during 2002, the rate of supply growth will begin to
decrease as the lack of availability of development financing slows new
construction. However, demand decreased substantially in 2001 because of the
economic recession, and the decline was deepened by the terrorist attacks on
September 11, 2001. We believe that demand will remain below historical levels
at least during the first half of 2002, but should begin to grow toward the end
of 2002 and continue in 2003 if the economy strengthens.
According to Smith Travel Research, RevPAR for hotels operating in the
upper-upscale and luxury segments decreased 12% for the year ended December 31,
2001 when compared to the year ended December 31, 2000. This decrease resulted
from decreases in occupancy and average daily rate for this period of 10% and
2%, respectively. Our portfolio of hotels has experienced an overall decline in
RevPAR that is consistent with the results of our segment as a whole.
Business Strategy
Our primary business objective is to provide superior total returns to our
unitholders through a combination of distributions, appreciation in net asset
value per unit, and growth in FFO, a frequently used measure in the real estate
industry. In order to achieve this objective we employ the following strategies:
. we acquire existing upper-upscale and luxury full-service hotels as
market conditions permit, including hotels operated by leading
management companies which satisfy our investment criteria such as
Marriott, Ritz-Carlton, Four Seasons, Hyatt, and Hilton. Such
acquisitions may be completed through various means including
transactions involving entities in which we are already a partner,
public and private portfolio transactions, single asset transactions and
by entering into joint ventures when we believe our return on investment
will be maximized by doing so;
. we seek to maximize the value of our existing portfolio through
aggressive asset management, by working with the managers of our hotels
to reduce the operating costs of our hotels and increase revenues, as
well as by completing selective capital improvements and expansions that
are designed to improve operations;
. we selectively expand existing properties and develop new upper-upscale
and luxury full-service hotels operated by leading management companies
that we believe satisfy our investment criteria and employ transaction
structures which mitigate our risk; and
. we seek to recycle capital through opportunistic asset sales and
selective disposal of non-core assets, including older assets with
significant capital needs, assets that are at a competitive risk given
potential new supply, or assets in slower-growth markets.
Our acquisition strategy focuses on hotels operating in the upper-upscale
and luxury full-service segments of the market. We believe these market
segments 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 locations that are difficult to duplicate with high costs
for market entry by prospective competitors, such as hotels located in
urban, airport and resort/convention locations;
. properties operated under premium brand names, such as Marriott,
Ritz-Carlton, Four Seasons, Hilton, and Hyatt; and
. underperforming hotels that can be improved by conversion to high
quality brands;
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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 lodging properties, as well as improving
and maintaining the quality of the hotel assets.
Our acquisition efforts since 1998 have been limited and primarily focused
on acquiring the interests of limited or joint venture partners, consolidating
our ownership of assets already included in the portfolio and purchasing the
lessee interests that were created as part of the REIT conversion. We are
exploring acquisitions with an emphasis on transactions that can be
accomplished, at least in part, through the issuance of operating partnership
units such that our overall debt ratios are improved. Recently, our
acquisitions have been limited due to the lack of availability of suitable
candidates that complement our portfolio of upper-upscale and luxury hotels and
provide an attractive return on our investments, increased price competition
for upper-upscale and luxury hotels, and capital limitations due to weak equity
markets for REIT stocks. We expect that lack of liquidity will ultimately cause
some property owners to make some of their properties available for sale;
however, the timing of these potential sales is uncertain. We believe that
acquisitions that meet our criteria will provide the highest and best use of
our capital.
Our asset management team, which consists of professionals with extensive
industry knowledge and relationships, focuses on maximizing the value of our
existing portfolio through working with our managers to reduce operating costs
at our hotels and to provide economic incentives to individual and business
travelers in selected markets in order to increase demand; monitoring property
and brand performance; pursuing expansion and repositioning opportunities;
overseeing capital expenditure budgets and forecasts; assessing return on
investment expenditure opportunities; and analyzing competitive supply
conditions in each market.
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 1, 2002, 101 of our 122 properties were managed by subsidiaries of
Marriott International as Marriott or Ritz-Carlton brand hotels and an
additional eight 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, Hyatt and Swissotel. In
general, we believe that these premium brands have consistently outperformed
the industry. Demonstrating the strength of our portfolio, our comparable
properties, consisting of 116 hotels, owned directly or indirectly by us for
the entire 2001 and 2000 fiscal years (excluding nine hotels with
non-comparable operating environments as a result of acquisitions,
dispositions, property damage, and expansion and development projects),
generated 24% and 26% RevPAR premiums over other similar brands in the
upper-upscale and luxury segment for fiscal years 2001 and 2000, respectively,
based on information from Smith Travel Research.
Operating Structure
Host REIT, our sole general partner, manages all aspects of our business.
This includes decisions with respect to sales and purchases of hotels, our
financing, the leasing of the hotels, and capital expenditures for the hotels
subject to the terms of the leases and the management agreements. Together with
Host REIT, we continue, in an UPREIT structure, the full-service hotel
ownership business formerly conducted by Host Marriott and its subsidiaries.
We, or one or more of our subsidiaries, own all of our hotels.
Host Marriott and its subsidiaries and affiliates consummated a series of
transactions in order to qualify as a REIT for federal income tax purposes for
the fiscal year beginning January 1, 1999 (a process which we refer to as the
REIT conversion). During 1998, Host Marriott reorganized its hotels and certain
other assets so that they would be owned us and our subsidiaries. Host Marriott
and its subsidiaries received a number of operating partnership interests, or
OP Units, equal to the number of then outstanding shares of Host Marriott
common stock, and we and our subsidiaries assumed substantially all of the
liabilities of Host Marriott and its subsidiaries. As a result of this
reorganization, Host REIT is our sole general partner. OP Units owned by
holders other than Host REIT are redeemable at the option of the holders,
generally commencing one year after the issuance of their OP Units. Upon
redemption of an OP Unit, a holder would receive cash from us in an amount
equal to the market
4
value of one share of Host REIT common stock. However, in lieu of a cash
redemption by us, Host REIT has the right to acquire any OP Unit offered for
redemption directly from the holder thereof in exchange for one share of Host
REIT common stock. As of December 31, 2001, Host REIT owned approximately 92%
of our outstanding OP Units.
Due to certain tax laws restricting REITs from deriving revenues directly
from the operations of hotels, as part of the REIT conversion, the hotel
properties were leased by us and our subsidiaries to third party lessees that,
in turn, assumed or entered into agreements with Marriott International and
other hotel operators to conduct the day-to-day management of the hotels.
During 1999 and 2000, approximately 95% of our hotels were leased to Crestline
Capital Corporation and its subsidiaries.
The REIT Modernization Act, which was enacted in December 1999, amended the
tax laws to permit REITs, effective January 1, 2001, to lease hotels to a
subsidiary that qualifies as a taxable REIT subsidiary, and to own all of the
voting stock of such subsidiary. The earnings of the taxable REIT subsidiary
are subject to normal corporate level federal and state income taxes.
Effective January 1, 2001, a wholly owned taxable REIT subsidiary of ours,
HMT Lessee LLC (the "TRS") acquired from Crestline the equity interests in the
lessees of 112 of our hotels and the leasehold interests in four hotels for
$207 million in cash, including approximately $6 million of legal fees and
transfer taxes. In connection with that transaction, we recorded a
non-recurring, pre-tax loss related to the termination of the leases for
financial reporting purposes 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 transaction is recorded as an
acquisition of leasehold interests that will be amortized over the remaining
term of the leases.
During June 2001, we completed two other transactions, which resulted in the
acquisition by the TRS of our remaining four leases held by third parties.
Effective June 16, 2001, we acquired the lease for the San Diego Marriott Hotel
and Marina by purchasing the lessee equity interest from Crestline for $2.7
million net of an income tax benefit of $1.8 million. Also in June 2001, in
connection with the acquisition from Wyndham International, Inc. of the
minority limited partnership interests in five partnerships holding seven
hotels, we acquired the leases for three hotels: the San Diego Marriott Mission
Valley, the Minneapolis Marriott Southwest, and the Albany Marriott.
Prior to the effectiveness of the REIT Modernization Act, we held a 95%
non-voting interest in two taxable subsidiaries, Rockledge Hotel Properties,
Inc. ("Rockledge") and Fernwood Hotel Assets, Inc. ("Fernwood"), that held
assets in which, under REIT rules, we could not own a controlling interest. As
a result of the effectiveness of the REIT Modernization Act, we were able to
acquire the remaining 5% economic interest and 100% of the voting interest in
these subsidiaries for $2 million. The purchase was consummated in April of
2001, and, as a result, we now consolidate these subsidiaries.
The acquisition of the leases through taxable REIT subsidiaries enables us
to better control our portfolio of hotels and was accretive to our earnings and
cash flows. There can be no guarantee, however, that we will benefit from
similar favorable results in the future. Further, on a consolidated basis our
results of operations will reflect the revenues and expenses, including taxes
paid by the taxable REIT subsidiaries, generated by these hotels rather than
rental income.
We also consolidate seven entities in which we have a controlling financial
interest. At December 31, 2001, these entities own, in the aggregate, 8 hotels,
with $842 million in assets and $400 million in debt, all of which is
non-recourse to Host Marriott. Our ownership in these entities varies from
50.5% to 97.5%.
Lodging Property Portfolio
Overview. Our lodging portfolio, as of March 1, 2002, consists of 122
upper-upscale and luxury full-service hotels containing approximately 58,000
rooms. Our hotel lodging properties represent quality upper-upscale and luxury
assets in the full-service segment and are operated under various premium
brands including Marriott, Ritz-Carlton, Four Seasons, Hilton, Hyatt, and
Swissotel.
5
The following chart details our portfolio by brand:
Number
of
Brand Hotels Rooms
----- ------ ------
Marriott managed... 91 46,383
Marriott franchised 8 2,321
Ritz-Carlton....... 10 3,831
Hyatt.............. 4 2,214
Swissotel.......... 4 1,970
Four Seasons....... 2 608
Other brands....... 3 682
--- ------
122 58,009
=== ======
Our hotels average approximately 475 rooms. Twelve 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 that are generally well situated with
significant barriers to entry by competitors. These locations include downtown
areas of major metropolitan cities, airports and resort/convention locations
where there are limited or no development sites and suburban areas near
business corridors. The average age of the properties is 18 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
2001, 2000 and 1999 we spent $230 million, $271 million and $211 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. During the current economic downturn we
are conserving funds by temporarily suspending certain major capital
expenditures.
Acquisitions. Recently, our acquisitions have been limited due to the lack
of availability of suitable candidates that complement our portfolio of
upper-upscale and luxury hotels and provide an attractive return on our
investments, increased price competition for upper-upscale and luxury hotels,
and capital limitations due to weak equity markets for REIT stocks. During the
three-year period from 1996 through 1998, we acquired 77 full-service hotels,
but since 1998 our acquisitions have primarily focused on acquiring the
interests of limited or joint venture partners, consolidating our ownership of
assets already included in the portfolio and repurchasing the lessee interests
that were created as part of our REIT conversion. We believe that acquisitions
that meet our criteria will provide the highest and best use of our capital.
During 2001, we acquired outstanding minority interests in seven hotels from
Wyndham for $60 million. In addition, we acquired the voting interests
representing 5% of the equity interests in two previously non-controlled
subsidiaries for approximately $2 million. During 2000, we acquired a
non-controlling partnership interest in JWDC Limited Partnership, which owns
the 772-room J.W. Marriott Hotel in Washington, D.C., for $40 million and have
the option to purchase the outstanding interests beginning in 2002. Also during
2000, we invested with Marriott International in the Courtyard joint venture
described below in "Business and Properties--Other Real Estate Investments."
During 1999, our acquisitions were limited to the purchase of minority
interests in two hotels where we had previously acquired the controlling
interests, for a total consideration of approximately $14 million.
Through subsidiaries we currently own four Canadian and two Mexican
properties, with 2,548 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. We will acquire international properties only when we
believe such acquisitions offer satisfactory returns after adjustments for
currency and country risks.
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Dispositions. 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 smaller or slower growth
markets, hotels that require significant future capital improvements and other
underperforming assets. We typically reinvest the net proceeds from any
property sales into upper-upscale and luxury hotels more consistent with our
strategy or otherwise apply such net proceeds in a manner consistent with our
investment strategy (which has included open market purchases of Host REIT's
common stock, OP Units, Host REIT's convertible redeemable preferred securities
and other securities). Under the terms of our amended bank credit facility into
which we entered into in late 2001, we are required to use the net proceeds
from any sale of hotel properties to repay amounts due, if any, under our bank
credit facility. As of March 1, 2002, we have no borrowings under our credit
facility. The following table summarizes our dispositions from January 1, 1999
through March 1, 2002 (in millions, except number of rooms):
Pre-tax
Gain
(Loss)
Total on
Property Location Rooms Consideration Disposal
- -------- ---------------- ----- ------------- --------
1999 Dispositions
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)
2001 Dispositions
Vail Marriott Mountain Resort.............. Vail, CO 349 50 15
Pittsburgh City Center Marriott............ Pittsburgh, PA 402 15 (3)
During January 2002, we transferred one of our non-core properties, the St.
Louis Marriott Pavilion hotel, to the mortgage lender. Due to the original
management agreement and debt structure of this partnership, we had not been
receiving any cash flow after payments of debt service from this property. In
the first quarter, we will write off the remaining $13 million of property and
equipment, eliminate $37 million of mortgage debt and related liabilities and
record a non-cash gain of approximately $22 million.
Development Projects. During 2000 and 2001, we focused our energies on
increasing the value of our current portfolio with selective investments,
expansions at existing hotels and a limited amount of new development projects.
Concurrent with the slowdown in the economy, we had evaluated the timing and
size of many of our capital projects. For 2001, we had anticipated spending
approximately $350 million in total capital expenditures, including $225
million in replacement and renewal expenditures. Subsequent to September 11,
however, we temporarily suspended certain major capital expenditures. As a
result of the actions taken, our capital expenditures for 2001, not including
new investments such as the Ritz-Carlton, Naples Golf Resort, were $230
million. Based on expected business conditions, we anticipate that our capital
spending will be approximately $185 million in 2002. Over the past three years,
our capital spending has focused on properly maintaining and enhancing the
values of our existing hotels. As a result of the regular attention we have
paid to maintaining our assets at a high standard and the high quality of our
assets, we believe that these capital reductions are achievable during this
period without materially affecting the long-term value of our portfolio. For
the four-year period beginning in 1998, we have spent $1.3 billion on capital
expenditures, including $798 million in replacement and renewal expenditures.
As the industry recovers, we plan to continue our strategy of pursuing capital
expenditure projects designed to enhance the value of our hotels.
In January 2002, we opened the 295-room Ritz-Carlton, Naples Golf Resort,
which is approximately 2 miles from our existing Ritz-Carlton, Naples hotel, at
a development cost of approximately $75 million. The golf resort has 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 50,000 square-foot world-class
beachfront spa facility, which opened in April 2001 at a cost of $26 million,
will operate in
7
concert with the 463-room Ritz-Carlton, Naples and will offer travelers an
unmatched resort experience. Further, given the close proximity of the
properties to each other, we hope to benefit from cost efficiencies and the
ability to capture larger groups.
Also, during June 2001, we completed the addition of a 20,000 square foot
oceanfront spa to the Marriott Harbor Beach Resort at a development cost of $8
million.
During 2000, we completed construction of a 717-room full-service Marriott
hotel adjacent to the convention center in downtown Tampa, Florida. The hotel
(completed at a development cost of approximately $104 million, excluding a $16
million tax subsidy by the City of Tampa, Florida) opened for business on
February 19, 2000 and includes 45,000 square feet of meeting space, three
restaurants and a 30-slip marina as well as many other amenities.
At the Orlando World Center Marriott Resort, 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 this hotel the
largest in the Marriott system with 2,000 rooms and over 200,000 square feet of
meeting space. We have also renovated the property's golf course, added a
multi-level parking deck, and upgraded and expanded several restaurants.
We also accomplished various projects to enhance revenues, control expenses
and enhance technology at the hotels. In 2001, we reached an agreement with a
national parking management company to act as an advisor to us regarding
methods to maximize revenues from the parking facilities throughout our entire
portfolio. During 2000, we added approximately 36,000 square feet of new
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 and implemented internet
connectivity solutions and in-room portal and entertainment options to better
meet the technology needs of our customers.
Portfolio Performance. The chart below sets forth performance information
for our comparable properties as of December 31, 2001:
2001 2000
------- -------
Comparable Full-Service Hotels(1)
Number of properties............. 116 116
Number of rooms.................. 53,580 53,580
Average daily rate............... $151.02 $156.50
Occupancy percentage............. 70.0 % 77.7 %
RevPAR........................... $105.71 $121.55
RevPAR % change.................. (13.0)%
- --------
(1) Consists of 116 properties owned, directly or indirectly, by us for the
entire 2001 and 2000 fiscal years, respectively, excluding nine properties
with non-comparable operating environments as a result of acquisitions,
dispositions, substantial property damage, or major expansion and
development projects.
The chart below presents some performance information for our entire
portfolio of full-service hotels as of December 31, 2001:
2001(1) 2000 1999(2)
------- ------- -------
Portfolio of Full-Service Hotels
Number of properties............ 122 122 121
Number of rooms................. 58,385 58,370 57,086
Average daily rate.............. $151.68 $158.24 $149.51
Occupancy percentage............ 69.9% 77.6% 77.7%
RevPAR.......................... $105.96 $122.72 $116.13
- --------
(1) Includes the operating results of the New York World Trade Center Marriott
which was destroyed on September 11, 2001, the Vail Marriott Mountain
Resort and Pittsburgh City Center Marriott which were sold in December 2001
and the St Louis Pavilion Marriott which was transferred to the lender
during January of 2002.
(2) Includes the operating results for five properties, which were sold at
various times throughout 1999, through the date of sale.
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The following table presents performance information for our comparable
properties by geographic region for 2001 and 2000:
As of Year Ended Year Ended
December 31, 2001 December 31, 2001 December 31, 2000
----------------- --------------------------- ---------------------------
Average Average Average Average
No. of No. of Daily Occupancy Daily Occupancy
Properties Rooms Rate Percentages RevPAR Rate Percentages RevPAR
---------- ------ ------- ----------- ------- ------- ----------- -------
Comparable Full-Service
Hotels (1)
Atlanta................ 15 6,542 $150.80 65.0% $ 98.02 $151.11 72.7% $109.82
DC Metro............... 13 4,995 150.67 67.9 102.26 152.54 76.5 116.68
Florida................ 11 4,878 160.52 71.7 115.15 157.33 77.1 121.28
International.......... 4 1,636 102.04 71.8 73.28 108.26 74.8 80.94
Mid-Atlantic........... 9 6,221 189.43 77.5 146.77 209.40 81.8 171.23
Mountain............... 8 3,310 110.02 66.2 72.79 114.25 74.1 84.64
New England............ 6 2,279 144.62 66.2 95.78 158.21 77.8 123.11
North Central.......... 15 5,394 131.20 66.9 87.80 136.98 75.6 103.53
Pacific................ 23 11,812 163.96 68.9 112.98 169.60 80.7 136.83
South Central.......... 12 6,513 132.32 75.5 99.91 133.97 78.9 105.71
--- ------ ------- ---- ------- ------- ---- -------
All regions....... 116 53,580 $151.02 70.0% $105.71 $156.50 77.7% $121.55
=== ====== ======= ==== ======= ======= ==== =======
- --------
(1) Consists of 116 properties owned, directly or indirectly, by us for the
entire 2001 and 2000 fiscal years, respectively, excluding nine properties
with non-comparable operating environments as a result of acquisitions,
dispositions, substantial property damage, or major expansion and
development projects.
Our properties have reported annual increases in RevPAR in every year since
1993 except the year just ended. Based upon data provided by Smith Travel
Research, our comparable properties have an approximate 6 and 7 percentage
point occupancy premium for fiscal years 2001 and 2000, respectively, and an
approximate 24% and 26% RevPAR premium over similar brands in the upper-upscale
and luxury segments for fiscal years 2001 and 2000, respectively. We believe
the hotel brands in the upper-upscale and luxury full-service segment that are
most representative of our overall portfolio of full-service hotels are Ritz
Carlton; Marriott; Four Seasons; Crowne Plaza; Doubletree; Hyatt; Hilton;
Radisson; Renaissance; Sheraton; Westin; and Wyndham.
Historically, our hotels have experienced relatively high occupancy rates,
which along with strong 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. For the year ended December 31,
2001, as a percentage of total rooms sold, transient business comprised 58%,
and group business, including contract business, comprised 42%.
The occupancy rates and average daily rates commanded by our properties in
2001 and 2000 exceeded both the industry as a whole and the upper-upscale and
luxury full-service segment. The attractive locations of our hotels, the
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. However, for 2001, operations for our comparable
properties declined with average occupancy and RevPAR decreasing 7.7 percentage
points and 13.0%, respectively. Furthermore, because our lodging operations
have a high fixed-cost component, increases/decreases in RevPAR generally yield
greater percentage increases/decreases in our earnings and cash flows. As a
result of the decline in operations in 2001, we have been working with our
managers to achieve cost reductions at the properties that have slowed the
decrease in operating margins. These cost reduction efforts have been
accelerated since the events of September 11. The efforts were successful based
on the ratio of RevPAR to EBITDA calculated for both the year and the fourth
quarter. While RevPAR declined 28% for the fourth quarter, margins were only
9
down 5.0 percentage points, resulting in a ratio of RevPAR to EBITDA decline of
only 1.4 times. Similarly, while RevPAR declined 13% for the full year, margins
were only down 2.9 percentage points, resulting in a ratio of RevPAR to EBITDA
decline of only 1.5 times. Although some of these savings will not be
permanent, we do believe that we have achieved meaningful long-term
efficiencies. Also, as a result of our acquisition in 2001 of the lessee
entities and/or leasehold interests, changes in earnings and cash flow at those
properties now have a direct effect on our consolidated earnings and cash
flows. See "Business and Properties--Operating Structure."
The economic trends affecting the hotel industry and the overall economy
will be a major factor in the operating partnership's ability to generate
growth in hotel revenues. Additionally, the abilities of the managers to curb
operating costs while continuing to maintain high quality hotels will have a
material impact on future hotel level sales and operating profit growth. If the
current economic conditions continue, operations may decline further in 2002.
Foreign Operations. During 2000 and 1999, our foreign operations consisted
of four full-service hotel properties located in Canada. Effective in the
second quarter of 2001, with the acquisition of a controlling voting interest
in Rockledge, we own a controlling interest in a partnership that owns two
full-service hotel properties in Mexico and, as a result, began consolidating
the operations of those hotel properties. During 2001, 2000, and 1999,
respectively, 98% of total revenues were attributed to sales within the United
States, and the remaining 2% of total revenues were attributed to foreign
countries.
Competition. We compete with other hotel owners through the ownership of
premium branded hotels in downtown/urban, airport, and resort locations. Our
competitors include Starwood Hotels and Resorts, Hilton Hotel Corporation,
Wyndham International, FelCor Lodging Trust, and MeriStar Hospitality
Corporation.
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 brand 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, 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 and Hyatt reservation systems to reserve
rooms in our hotels.
Seasonality. Our hotel sales have traditionally experienced moderate
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. As a result of the events of September 11, 2001 and the subsequent
decline in the economy, the fourth quarter 2001 dispersion rate was 6
percentage points below that of 1999 and 2000. During 1999 and 2000, the hotel
sales were not recorded in our revenues, as most of our hotels were leased to
third parties. However, hotel sales were used to calculate rental income.
Average hotel sales by quarter for the years 1999 through 2001 for our lodging
properties are as follows:
First Second Third Fourth
Year Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
1999................................... 22% 24% 21% 33%
2000................................... 21 25 21 33
2001................................... 24 27 22 27
-- -- -- --
Average................................ 22% 25% 22% 31%
== == == ==
10
Hotel Properties. The following table sets forth the location and number of
rooms of our 122 hotels as of March 1, 2002. All of the properties are
currently leased to our wholly owned taxable REIT subsidiaries, unless
otherwise indicated. Each hotel is operated as a Marriott brand hotel unless
otherwise indicated by its name.
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)................... 380
Marina Beach(1)...................... 370
Newport Beach........................ 586
Newport Beach Suites................. 254
Ontario Airport...................... 299
Sacramento Airport(3)................ 85
San Diego Hotel and Marina(1)(2)..... 1,356
San Diego Mission Valley(2).......... 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).. 304
The Ritz-Carlton, San Francisco...... 336
Torrance............................. 487
Colorado
Denver Southeast(1).................. 590
Denver Tech Center................... 625
Denver West(1)....................... 305
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 Resort.......... 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
The Ritz-Carlton, Naples Golf Resort. 295
Georgia
Atlanta Marriott Marquis............. 1,671
Atlanta Midtown Suites(1)............ 254
Atlanta Norcross..................... 222
Atlanta Northwest.................... 401
Atlanta Perimeter(1)................. 400
Four Seasons, Atlanta................ 244
Grand Hyatt, Atlanta................. 438
Location Rooms
-------- -----
Georgia (continued)
JW Marriott Hotel at Lenox(1)..... 371
Swissotel, Atlanta................ 348
The Ritz-Carlton, Atlanta......... 444
The Ritz-Carlton, Buckhead........ 553
Illinois
Chicago/Deerfield Suites.......... 248
Chicago/Downers Grove Suites...... 254
Chicago/Downtown Courtyard........ 337
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).......... 321
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)......................... 359
New York Financial Center......... 504
New York Marquis(1)............... 1,944
Swissotel, The Drake.............. 494
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........... 197
11
Location Rooms
-------- -----
Oregon
Portland............................. 503
Pennsylvania
Four Seasons, Philadelphia........... 364
Philadelphia Convention Center(1)(2). 1,408
Philadelphia Airport(1).............. 419
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
San Antonio Rivercenter(1)........... 1,001
San Antonio Riverwalk(1)............. 512
Utah
Salt Lake City(1).................... 510
Virginia
Dulles Airport(1).................... 368
Fairview Park........................ 395
Hyatt Regency, Reston................ 514
Location Rooms
-------- ------
Virginia (continued)
Key Bridge(1)......................... 586
Norfolk Waterside(1).................. 404
Pentagon City Residence Inn........... 299
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
Mexico
JW Marriott Hotel, Mexico City (2)(3). 312
Mexico City Airport Hotel (2)(3)...... 600
------
TOTAL................................... 58,009
======
- --------
(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 the TRS.
Other Real Estate Investments
In addition to our 122 full-service hotels, we maintain investments in
general and/or limited partner interests in partnerships that in the aggregate
own 2 full-service hotels and 158 limited service hotels, as well as other real
estate investments, the operations of which we do not consolidate. During 2001,
our EBITDA from these partnership investments was less than 1% of our total
EBITDA. Typically, we and certain of our subsidiaries manage our investments
and, through a combination of general and limited partnership and limited
liability company interests, conduct the venture's or partnership's business.
As of December 31, 2001, the combined balance sheets of these investments
included approximately $1.7 billion in assets and $1.3 billion in debt,
principally mortgages. All partnership investments in which we do not own a
controlling interest are accounted for using the equity method, and,
accordingly, do not consolidate the debt or assets on our balance sheet. All of
the debt of those partnerships is non-recourse to us and our subsidiaries.
The hotels owned by the partnerships 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 $8.8 million in 2001 and $1.3
million in 2000. There were no distributions in 1999.
On March 1, 2002, we mailed a consent solicitation to the limited partners
of Marriott Residence Inn Limited Partnership, in which we own a 1% general
partnership interest, relating to the sale of the partnership to a third party.
The partnership owns 15 Residence Inn hotels. We have received sufficient votes
as of March 20, 2002 to approve the sale subject to normal and customary
closing conditions, and we anticipate the sale to close
12
during the second quarter of 2002. Additionally, we are currently in
discussions to sell the Marriott Residence Inn II Limited Partnership, which
owns 23 Residence Inn hotels, including our 1% general partnership interest.
The proceeds to us from the sale of these partnerships, if any, would not be
material.
Effective August 16, 2001, we sold our limited partnership interests in the
Fairfield Inn Limited Partnership for an immaterial amount and withdrew as
general partner, eliminating any further role in the partnership. Additionally,
Mutual Benefit/Marriott Hotel Associates-I L.P., a partnership of which Host
REIT is general partner and the owner of the Richmond Marriott Hotel, filed for
Chapter 11 bankruptcy protection in December 2001. Host REIT is currently in
discussions with the City of Richmond, other independent parties, and the
primary lender regarding restructuring the partnership.
As a result of the consolidation of Rockledge during March 2001, we own a
49% interest in the partnership that owns the 36-hole Greg Norman-designed golf
course surrounding our Ritz-Carlton, Naples Golf Resort. As previously
discussed, during 2000 we acquired a non-controlling interest in the
partnership that owns the 772-room J.W. Marriott Hotel in Washington, D.C. for
$40 million. This partnership has $95 million in debt that is non-recourse to
Host Marriott.
Courtyard Joint Venture. In March 2000, Rockledge formed a joint venture
with Marriott International to acquire and hold the partnership interests in
the Courtyard by Marriott Limited Partnership ("CBM I") and Courtyard by
Marriott II Limited Partnership ("CBM II"), which together own 120 Courtyard by
Marriott properties totaling 17,559 rooms. The formation of the joint venture
and the acquisition of the CBM I and CBM II partnership interests was effected
as part of a settlement of litigation brought against Host Marriott and
Marriott International by CBM I and CBM II limited partners. For our 50%
interest in the joint venture the operating partnership and Rockledge
contributed $90 million and the CBM I and CBM II partnership interests that we
already owned. The joint venture acquired the partnership interests in CBM I
and CBM II for an aggregate payment in cash of $372 million, which was funded
by our cash contribution together with Marriott International's cash
contribution and $200 million of non-recourse mezzanine debt provided by
Marriott International to the joint venture. Additionally, the joint venture
has approximately $735 million of debt, all of which is non-recourse to and not
guaranteed by Host Marriott, that consists of the following: 1) The $287
million mortgage maturing April 2012 requiring monthly payments of principal
and interest at a fixed interest rate of 7.865% which is secured by the 50
hotels owned by CBM I. 2) The $127 million senior notes maturing February 2008
requiring semiannual interest payments at a fixed interest rate of 10.75%. The
notes are secured by a first priority pledge of CBM II of its general and
limited partnership interests. 3) The $321 million multi-class commercial
mortgage pass-through certificates maturing January 2013 requiring monthly
payments of principal and interest at weighted average interest rate of 7.8%,
which is secured by first priority mortgage liens on the 69 hotels owned by CBM
II. Each of the joint venture's 120 hotels is operated by Marriott
International pursuant to long-term management agreements. Since we do not
control the Courtyard joint venture, we record our investment using the equity
method of accounting.
HPT Leases. Prior to 1997, we divested certain limited-service hotel
properties through the sale and leaseback of 53 Courtyard properties and 18
Residence Inn properties to Hospitality Properties Trust ("HPT"). 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. Revenues for these 71 properties of $77 million, $83
million and $80 million for 2001, 2000 and 1999, respectively, are reflected in
our rental income. Rental payments to HPT totaled $72 million, $74 million and
$71 million for 2001, 2000 and 1999, respectively.
Other Real Estate Activities. We conduct lease activity related to
approximately 249,000 square feet of office space in four buildings that we own
in Atlanta, Chicago and San Francisco which is included in rental income in our
statements of operations. Additionally, we have lease and sublease activity
relating to Host Marriott's former restaurant operations for which we remain
contingently liable. As of December 31, 2001, the expected sublease rental
income for the restaurant operations exceeded our contingent lease liability.
We also have guarantees related to certain divested restaurant properties. The
guarantees totaled $57 million and
13
$68 million as of December 31, 2001 and 2000, respectively. We consider the
likelihood of any payments under any of these lease guarantees or contingencies
to be remote.
During 2001, we recorded interest on a note relating to the 1994 sale of 26
Fairfield Inns under the cost recovery method.
For a more detailed discussion of our other real estate investments, which
includes a summary of the outstanding debt balances of our affiliates, see Note
4 to the Consolidated Financial Statements, "--Investments in and Receivables
from Affiliates."
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.
Material Agreements
Our hotels are managed and operated by third parties pursuant to management
agreements with our subsidiaries to which we have leased our hotels. The
initial term of our management agreements is generally 15 to 20 years in length
with multiple renewal terms. As of March 1, 2002, 101 of our hotels are managed
by Marriott International or its affiliates as Marriott or Ritz-Carlton hotels.
The following is a brief summary of the material terms typical to our current
management agreements, an example of which has been filed with the Securities &
Exchange Commission as an exhibit to this report.
. General. Under each management agreement, the manager provides complete
management services to the applicable lessee with respect to management of
such lessee's hotels.
. Operational services. The managers have sole responsibility and exclusive
authority for all activities necessary for the day-to-day operation of the
hotels, including establishing all room rates, processing reservations,
procuring inventories, supplies and services, providing periodic
inspection and consultation visits to the hotels by the managers'
technical and operational experts and promoting and publicizing of the
hotels. The manager receives compensation in the form of a base management
fee and an incentive management fee, typically calculated as percentages
of gross revenues and operating profits, respectively. The incentive
management fee typically is paid only after an agreed upon return has been
paid to our lessee subsidiary from the remaining profit to the hotel.
. 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 to the hotel,
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.
14
. Chain services. The management agreements require the manager to furnish
chain services that are furnished generally on a central basis. Such
services include: (1) the development and operation of computer systems
and reservation services, (2) regional management and administrative
services, regional marketing and sales services, regional training
services, manpower development and relocation costs of regional personnel
and (3) such additional central or regional services as may from time to
time be more efficiently performed on a regional or group level. Costs and
expenses incurred by the manager in providing such services are allocated
among all hotels managed by the manager or its affiliates.
. Working capital and fixed asset supplies. Our management agreements
typically require us to maintain working capital for each hotel and to
fund the cost of fixed asset supplies such as linen and other similar
items. We are also responsible for providing funds to meet the cash needs
for the hotel operations of the hotels if at any time the funds available
from hotel operations are insufficient to meet the financial requirements
of the hotels.
. FF&E replacements. The management agreements generally provide that once
each year the manager will prepare a list of furniture, fixtures and
equipment (FF&E) to be acquired and certain routine repairs to be
performed in the next year and an estimate of the funds that are necessary
therefor, subject to our review or approval. Under the agreement, we are
required to provide to the manager 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 of the
gross revenues of the hotel is deposited by the manager in an escrow
account (typically 5%). However, for 38 of our hotels, we have entered
into an agreement with Marriott International to allow us to fund such
expenditures directly as incurred from a consolidated account subject to
maintaining a balance of the greater of $15 million or 40% of the total
contributions made in the prior year to the reserve account at all times
in the account used for such expenditures.
. 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. 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.
. Sale of the hotel. Most of the management agreements limit our ability to
sell, lease or otherwise transfer the hotels unless the transferee is not
a competitor of the manager, and unless the transferee assumes the related
management agreements and meets specified other conditions.
. Service marks. During the term of the management agreements, the service
mark, symbols and logos currently used by the manager, such as Marriott
International, Ritz-Carlton, Four Seasons, Hyatt and Swissotel, may be
used in the operation of the hotel. 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. Most 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.
. 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 us based upon the shortfall in such criteria.
We are currently negotiating with Marriott International certain changes to
the management and other agreements for our Marriott-managed hotels. If made,
the changes, which remain subject to the consent of
15
various lenders to the properties and other third parties, would be effective
as of December 29, 2001. There can be no assurance that the negotiations will
be successful, that the changes will be made in substantially the form
described below or that we will receive the necessary consents to implement the
amendments. The amendments to the management agreements that are under
discussion include the following:
. Providing additional approval rights relating to the annual operating
budgets and FF&E estimates;
. Reducing certain expenses to the properties and lowering our working
capital requirements;
. Clarifying the circumstances and conditions under which Marriott
International and its affiliates may earn a profit on transactions with
the hotels, in addition to the amounts that Marriott International earns
through its base and incentive management fees;
. Enhancing territorial restrictions for certain hotels;
. Reducing the incentive management fees that we pay on our portfolio of
Marriott-managed hotels;
. Expanding the pool of hotels that are subject to an existing agreement
that allows us to sell certain assets without a Marriott International
management agreement, and revising the method for determining the number
of hotels that may be sold without a Marriott International management
agreement or a franchise agreement, and, in each case, without the payment
of a termination fee; and
. Terminating Marriott International's right to purchase up to 20% of each
class of Host REIT's outstanding voting shares upon certain changes of
control and clarifying existing provisions in the management agreements
that limit our ability to sell a hotel or our company to a competitor of
Marriott International.
Employees
We have 199 employees at March 1, 2002, including approximately 14 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 generally
have good relations with labor unions and have not experienced any material
business interruptions as a result of labor disputes.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
material risks described below.
Risks relating to redemption of OP Units
A holder who redeems OP Units may have adverse tax effects. A holder of OP
Units who redeems OP Units will be treated for tax purposes as having sold the
OP Units. The sale will be taxable and the holder will be treated as realizing
an amount equal to the sum of the value of the common stock or cash the holder
receives plus the amount of operating partnership nonrecourse liabilities
allocable to the redeemed OP Units. It is possible that the amount of gain the
holder recognizes could exceed the value of the common stock the holder
receives. It is even possible that the tax liability resulting from this gain
could exceed the value of the common stock or cash the holder receives.
If a holder of OP Units redeems OP Units, the original receipt of the OP
Units may be subject to tax. If a holder of OP Units redeems OP Units,
particularly within two years of receiving them, there is a risk that the
original receipt of the OP Units may be treated as a taxable sale under the
''disguised sale'' rules of the Internal Revenue Code. Subject to several
exceptions, the tax law generally provides that a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money or
other consideration from the partnership to the partner will be presumed to be
a taxable sale. In particular, if money or other consideration is
16
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a taxable sale of
the contributed property unless the facts and circumstances clearly establish
that the transfers are not a sale. On the other hand, if two years have passed
between the original contribution of property and the transfer of money or
other consideration, the transactions will not be presumed to be a taxable sale
unless the facts and circumstances clearly establish that they should be.
Differences between an investment in shares of common stock and OP Units may
affect redeeming holders of OP Units. If a holder of OP Units elects to redeem
OP Units, we will determine whether the holder receives cash or shares of our
common stock in exchange for the OP Units. Although an investment in shares of
Host REIT's common stock is substantially similar to an investment in OP Units,
there are some differences between ownership of OP Units and ownership of
common stock. These differences include form of organization, management
structure, voting rights, liquidity and federal income taxation, some of which
may be material to investors.
There are possible differing fiduciary duties of Host REIT, as the general
partner, and the Board of Directors of Host REIT. Host REIT, as the general
partner of the operating partnership, and the Board of Directors of Host REIT,
respectively, owe fiduciary duties to their constituent owners. Although some
courts have interpreted the fiduciary duties of the Board of Directors in the
same way as the duties of a general partner in a limited partnership, it is
unclear whether, or to what extent, there are differences in such fiduciary
duties. It is possible that the fiduciary duties of the directors of Host REIT
to the shareholders may be less than those of Host REIT, as the general partner
of the operating partnership, to the holders of OP Units.
We expect to make distributions to Host REIT even when we cannot otherwise
make restricted payments under the indenture and the bank credit
facility. Even though we expect generally to be prohibited from making
restricted payments under the indenture, based upon our estimates of taxable
income for 2002, we expect to be able to make distributions to Host REIT under
the indenture and the bank credit facility.
Under the indenture, we are only allowed to make restricted payments if, at
the time we make such a restricted payment, we are able to incur at least $1.00
of indebtedness under the "Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock" covenant. If our consolidated coverage ratio
becomes less than 2.0 to 1.0, as we currently anticipate, we will not be able
to incur $1.00 of additional indebtedness and, thus, will not be able to make
any restricted payments until we comply with the covenant.
Even when we are unable to make restricted payments during the period that
our consolidated coverage ratio is less than 2.0 to 1.0, the indenture permits
us to make permitted REIT distributions, which are any distributions (1) to
Host REIT that are necessary to maintain Host REIT's status as a REIT under the
Internal Revenue Code or to satisfy the distributions required to be made by
reason of Host REIT's making of the election provided for in Notice 88-19 (or
Treasury regulations issued pursuant thereto) if the aggregate principal amount
of all of our outstanding indebtedness (other than our convertible debt
obligations to Host REIT pertaining to its QUIPs) and that of our restricted
subsidiaries, on a consolidated basis, at such time is less than 80% of
Adjusted Total Assets (as defined in the indenture) and (2) to certain other
holders of our partnership units where such distribution is required as a
result of, or a condition to, the payment of distributions to Host REIT.
We intend, during the period that we are unable to make restricted payments
under the indenture and under similar restrictions under the bank credit
facility, to continue our practice of distributing quarterly, based on our
current estimates of taxable income for any year, an amount of our available
cash sufficient to enable Host REIT to pay quarterly dividends on its preferred
stock (and, to the extent permitted under the bank credit facility, on its
common stock) in an amount necessary to satisfy the requirements applicable to
REITs under the Internal Revenue Code. In the event that we make distributions
to Host REIT in amounts in excess of those necessary for Host REIT to maintain
its status as a REIT, we will be in default under this indenture.
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Risks of Ownership of Host REIT Common Stock
There are limitations on the acquisition of Host REIT common stock and
changes in control. The charter and bylaws of Host REIT, our partnership, Host
REIT's shareholder rights plan, the Maryland General Corporation Law and
certain contracts 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 Host REIT's shareholders or otherwise be in their best interests,
including the following:
Ownership limit. The 9.8% ownership limit described under "Risk
Factors--Risks of Ownership of Our Common Stock--There are possible adverse
consequences of limits on ownership of our common stock" may have the effect
of precluding a change in control of us by a third party without the consent
of Host REIT's Board of Directors, even if the change in control would be in
the interest of Host REIT's shareholders, and even if the change in control
would not reasonably jeopardize Host REIT's REIT status.
Staggered board. Host REIT's Board of Directors consists of eight
members, but Host REIT's charter provides that the number of directors may
be increased or decreased according to Host REIT's bylaws, provided that the
total number of directors is not less than three nor more than 13. Pursuant
to Host REIT's bylaws, the number of directors will be fixed by Host REIT's
Board of Directors within the limits in Host REIT's charter. Host REIT's
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 Host REIT
shareholders' ability to effect a change in control of Host REIT, even if a
change in control would be in the interest of Host REIT's shareholders.
Removal of board of directors. Host REIT's 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 Host REIT's common stock, directors may
be removed only for cause and only by the affirmative vote of Host REIT
shareholders holding at least two-thirds of Host REIT's 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 Host REIT's shareholders, by at least two-thirds of all the
votes entitled to be cast in the election of directors.
Preferred shares; classification or reclassification of unissued shares
of capital stock without shareholder approval. Host REIT's charter provides
that the total number of shares of stock of all classes which Host REIT has
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
14,140,000 shares of preferred stock were issued and outstanding as of March
1, 2002. Host REIT's 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 Host REIT's
shareholders. Because Host REIT's Board of Directors has the power to
establish the preferences and rights of additional classes or series of
shares without a shareholder vote, Host REIT's 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 Host REIT's common stock.
Consent rights of the limited partners. Under our partnership agreement,
Host REIT 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 Host REIT, as long as
the holders of limited partnership interests either receive or have the
right to receive the same consideration as Host REIT shareholders. Host
REIT, as holder of a majority of the limited partnership interests, would be
able to control the vote. Under Host REIT's charter, holders of at least
two-thirds of Host REIT's outstanding shares of common stock generally must
approve the merger or consolidation.
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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 of these specified business combinations 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. Host REIT is 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 voting shares previously acquired by the acquiror or over 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. Host REIT is subject to these
control share provisions of Maryland law, subject to an exemption for
Marriott International pursuant to its purchase right discussed below. See
"Risk Factors--Risks of Ownership of Our Common Stock--There are limitations
on the acquisition of our common stock and changes in control--Marriott
International purchase right."
Merger, consolidation, share exchange and transfer of our
assets. Pursuant to Host REIT's charter, subject to the terms of any
outstanding class or series of capital stock, Host REIT 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 Host REIT's Board of
Directors in the manner provided in the Maryland General Corporation Law and
(2) by Host REIT's shareholders holding two-thirds of all the votes entitled
to be cast on the matter, except that any merger of Host REIT with or into a
trust organized for the purpose of changing our form of organization from a
corporation to a trust requires only the approval of Host REIT's
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.
Host REIT's voluntary dissolution also would require approval of
shareholders holding two-thirds of all the votes entitled to be cast on the
matter.
Amendments to Host REIT's charter and bylaws. Host REIT's charter
contains provisions relating to restrictions on transferability of Host
REIT's common stock, the classified Board of Directors, fixing the size of
Host REIT's Board of Directors within the range set forth in Host REIT's
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 Host REIT's shareholders holding two-thirds of the votes
entitled to be cast on the matter. As permitted under the Maryland General
Corporation Law, Host REIT's charter and bylaws provide that directors have
the exclusive right to amend our bylaws. Amendments of this provision of
Host REIT's charter also would require action of Host REIT's 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 Host REIT's outstanding voting shares at
the then fair market value when specific change of control events involving
Host REIT occur,
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subject to specified limitations to protect Host REIT's REIT status. The
Marriott International purchase right may have the effect of discouraging a
takeover of Host REIT, because any person considering acquiring a
substantial or controlling block of Host REIT's 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. In connection with our negotiations with Marriott
International on changes to our management agreements, we are discussing
terminating this right and clarifying existing provisions in the management
agreements that currently limit our ability to sell a hotel or the company
to a competitor of Marriott International.
Shareholder rights plan. Host REIT adopted a shareholder rights plan
which provides, among other things, that when specified events occur, Host
REIT's shareholders will be entitled to purchase from Host REIT a newly
created series of junior preferred shares, subject to Host REIT's 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's becoming the
beneficial owner of 20% or more of Host REIT's outstanding common stock. The
preferred share purchase rights would cause substantial dilution to a person
or group that attempts to acquire Host REIT on terms not approved by Host
REIT's Board of Directors.
There are possible adverse consequences of limits on ownership of Host REIT
common stock. To maintain its qualification as a REIT for federal income tax
purposes, not more than 50% in value of Host REIT's 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 Host REIT, or a tenant of any partnership in which Host
REIT is a partner, cannot own, directly or by attribution, 10% or more of Host
REIT's shares without jeopardizing Host REIT's qualification as a REIT.
Primarily to facilitate maintenance of Host REIT's qualification as a REIT for
federal income tax purposes, the ownership limit under Host REIT's 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 Host REIT's common stock held prior to Host REIT's
conversion into a REIT (referred to as the "REIT conversion") so long as the
holder would not own more than 9.9% in value of Host REIT's 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 Host REIT's preferred shares. Together, these
limitations are referred to as the "ownership limit." Host REIT's 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 the Board of
Directors is satisfied, based upon information required to be provided by the
party seeking the waiver and, if it determines necessary or advisable, upon an
opinion of counsel satisfactory to Host REIT's Board of Directors, that
ownership in excess of this limit will not cause a person 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 Host
REIT's status as a REIT for federal income tax purposes (for example, by
causing any of Host REIT's 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 the common stock in violation of the ownership limit will not be
entitled to any distributions thereon, to vote those shares of common stock or
to receive any proceeds from the subsequent sale of the common stock in excess
of the lesser of the price paid for the common stock or the amount realized
from the sale. A transfer of shares of Host REIT's 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 Host REIT's common stock in excess of
the ownership limit. The
20
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 Host
REIT's 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, Host REIT's ability to reduce our
debt and finance our growth largely must be funded by external sources of
capital because Host REIT generally will have to distribute to its shareholders
at least 90% of its taxable income in order to qualify as a REIT, including
taxable income which it recognizes for tax purposes but with regard to which it
does not receive corresponding cash. 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 Host REIT common stock.
Shares of Host REIT's common stock that are or become available for sale
could affect the price for shares of Host REIT common stock. Sales of a
substantial number of shares of Host REIT's common stock, or the perception
that sales could occur, could adversely affect prevailing market prices for
Host REIT's common stock. In addition, holders of our OP Units who redeem their
OP Units and receive common stock upon redemption will be able to sell those
shares freely, unless the person is our affiliate and resale of the affiliate's
shares is not covered by an effective registration statement. As of December
31, 2001, there were approximately 21.6 million OP Units outstanding (not
including OP Units held directly or indirectly by Host REIT), all of which are
currently redeemable. Further, a substantial number of shares of Host REIT's
common stock have been and will be issued or reserved for issuance from time to
time under our employee benefit plans, including shares of Host REIT's 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 Host REIT's 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 Host REIT's common stock would have on the market price of Host REIT's
common stock.
Host REIT's earnings and cash distributions will affect the market price of
shares of Host REIT's 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 Host REIT's 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 the cash flow to Host REIT's shareholders,
these retained funds, while increasing the value of our underlying assets, may
negatively affect the market price of Host REIT's 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 Host REIT's
common stock.
Market interest rates may affect the price of shares of Host REIT's common
stock. We believe that one of the factors that investors consider important in
deciding whether to buy or sell shares of a REIT is the distribution rate on
the shares, considered as a percentage of the price of the shares, relative to
market interest rates. If market interest rates increase, prospective
purchasers of REIT shares may expect a higher distribution rate. Thus, higher
market interest rates could cause the market price of Host REIT's shares to go
down.
Risks of Operation
Our revenues and the value of our properties are subject to conditions
affecting the lodging industry. Our revenues and the value of our properties
are subject to conditions affecting the lodging industry. These include:
. changes in the national, regional and local economic climate
. changes in business and pleasure travel
21
. 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.
As a result of the effects of the economic recession and the September 11,
2001 terrorist attacks, the lodging industry has experienced a significant
decline in business caused by a reduction in travel for both business and
pleasure. We currently expect that the decline in operating levels will
continue in 2002. Additionally, as a result of the September 11 terrorist
attacks and the collapse of the World Trade Center Towers, our New York World
Trade Center Marriott hotel was destroyed. We also sustained considerable
damage to a second property, the New York Marriott Financial Center hotel.
Room revenues of our hotels decreased during 2001 as a result of the
continuing economic recession. For the year ended December 31, 2001 our
comparable RevPAR decreased 13.0% due to a decrease in occupancy of 7.7
percentage points to 70.0% combined with a decline in the average room rate of
3.5% to $151.02.
During the 4-week period subsequent to the events of September 11, 2001, our
hotels recorded average weekly occupancy rates of 38% to 63%. During that
period, we had a very high level of large group cancellations which represented
approximately $70 million in future revenue primarily affecting our luxury and
larger convention hotels. This period was not representative of the remainder
of the fourth quarter. However, our results from operations for the fourth
quarter of 2001 did reflect a 28.3% decline in RevPAR when compared to the
fourth quarter of 2000. We have been actively working with the managers of our
hotels to reduce the operating costs of our hotels, as well as to provide
economic incentives to individuals and business travelers in selected markets
to increase demand. In addition, based on our assessment of the current
operating environment and to conserve capital, we have reduced or suspended
certain capital expenditure projects.
As a result of a gradual return to more normal levels of business, we have
begun to see modest improvements in occupancy and average room rates, though
they remain below prior year levels. However, our fourth quarter results for
2001 were significantly lower than the fourth quarter of 2000. There can be no
assurance that the current economic recession will not continue for an extended
period of time and that it will not significantly affect our operations.
If, as a result of conditions such as those referenced above affecting the
lodging industry, our assets do not generate income sufficient to pay our
expenses, we will be unable to service our debt and maintain our properties.
Thirty-one of our hotels and assets related thereto are subject to mortgages
in an aggregate amount of approximately $2.3 billion. If these hotels do not
produce adequate cash flow to service the debt represented by such mortgages,
the mortgage lenders could foreclose on such assets and we would lose such
assets; however, the debt is non-recourse to us. If the cash flow on such
properties were not sufficient to provide us with an adequate return, we could
opt to allow such foreclosure rather than making necessary mortgage payments
with funds from other sources.
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. Because
of the effects of the September 11, 2001 terrorist attacks and the current
economic recession, we are working with our managers to substantially reduce
the operating costs of our hotels. In addition, based on our assessment of the
current operating environment, and in order to conserve capital, we have
22
reduced or suspended certain capital expenditure projects. Nevertheless, our
financial condition could be adversely affected by the following costs:
. interest rate levels
. debt service levels (including on loans secured by mortgages)
. 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.
If we are unable to reduce our expenses to reflect our current reduction in
revenue and the reduction that we expect in the future, our business will be
adversely affected.
We do not control our hotel operations, and we are dependent on the managers
of our hotels. Because federal income tax laws restrict REITs and their
subsidiaries from operating a hotel, we do not manage our hotels. Instead, we
retain third-party managers including, among others, Marriott International,
Hyatt, Four Seasons and Swissotel, 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 HMT Lessee LLC, a taxable REIT subsidiary of ours that is the lessee of
substantially all of our full-service properties, monitors the hotel managers'
performance, we have limited specific recourse if we believe that the hotel
managers are not performing adequately. Underperformance by our hotel managers
could adversely affect our results of operations.
Our relationships with our hotel managers are primarily contractual in
nature, although certain of our managers owe fiduciary duties to us under
applicable law. We are in discussions with various managers of our hotels
regarding their performance under management agreements for our hotels. We have
had, and continue to have, differences with the managers of our hotels over
their performance and compliance with the terms of our agreements. We generally
resolve issues with our managers through discussions and negotiations. However,
if we are unable to reach satisfactory results through discussions and
negotiations, we also occasionally may engage in litigation with our managers.
For example, we are currently engaged in litigation with Swissotel, the manager
of four of our hotels. If we fail to reach satisfactory resolution with respect
to any disputes, the operation of our hotels could be adversely affected.
Our relationship with Marriott International may result in conflicts of
interest. Marriott International, a public hotel management company, and its
affiliates, manages or franchises 110 of our 122 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 that it manages that would not
necessarily be in our best interests. Richard E. Marriott is Host REIT's
Chairman of the Board and has served as a director of Marriott International
since 1993. He has announced his intention to not stand for reelection to the
Board of Directors of Marriott International in May 2002. His brother, J.W.
Marriott, Jr. has been a member of Host REIT's Board of Directors since 1964
and has announced that he will not stand for reelection at the end of his term
in May 2002. J.W. Marriott, Jr. also serves as a director and an executive
officer of Marriott International. J.W. Marriott, Jr. and Richard E. Marriott
beneficially owned, as determined for securities law purposes, as of January
31, 2002, approximately 12.7% and 12.3%, 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 Host REIT's
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.
Host REIT's Board of Directors follows policies and procedures intended to
limit the involvement of J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as
23
directors 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 leverage. We have a significant amount of indebtedness
that could have important consequences. It currently requires us to dedicate a
substantial portion of our cash flow from operations to payments on our
indebtedness, which reduces the availability of our cash flow to fund working
capital, capital expenditures, expansion efforts, distributions to our
shareholders and other general purposes. Additionally, it could:
. limit our ability in the future to undertake refinancings of our debt or
obtain financing for expenditures, acquisitions, development or other
general business purposes on terms and conditions acceptable to us, if
at all, or
. affect adversely our ability to compete effectively or operate
successfully under adverse economic conditions.
If our cash flow and working capital were not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of our equity
. the incurrence of additional permitted indebtedness or
. the sale of our assets.
We cannot assure you that any of these sources of funds would be available
to us or, if available, would be on terms that we would find acceptable or in
amounts sufficient for us to meet our obligations or fulfill our business plan.
For example, under the terms of our bank credit facility, the proceeds from
these activities must be used to repay amounts outstanding and may not be
otherwise available for our use.
There is no charter or by-law restriction on the amount of debt we may
incur. There are no restrictions in our 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. If we became more highly leveraged, our debt service payments would
increase and our cash flow and our ability to service our debt and other
obligations might be adversely affected.
The terms of our debt place restrictions on us and our subsidiaries,
reducing operational flexibility and creating default risks. The documents
governing the terms of our senior notes and bank credit facility contain
covenants that place restrictions on us and our subsidiaries. The activities
upon which such restrictions exist include, but are not limited to:
. acquisitions, merger and consolidations
. the incurrence of additional debt
. the creation of liens
. the sale of assets
. capital expenditures
. raising capital
. the payment of dividends and
. transactions with affiliates.
In addition, certain covenants in our bank credit facility require us and
our subsidiaries to meet financial performance tests. The restrictive covenants
in the indenture, the bank credit facility and the documents governing our
other debt (including our mortgage debt) will reduce our flexibility in
conducting our operations and will limit our ability to engage in activities
that may be in our long-term best interest. Our failure to comply with these
restrictive covenants could result in an event of default that, if not cured or
waived, could result in the acceleration of all or a substantial portion of our
debt or a significant increase in the interest rates on our debt, either of
which could adversely affect our operations and ability to maintain adequate
liquidity.
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As a result of the effects on our business of the economic recession and the
events of September 11, 2001, we anticipate that in the future we may fail to
comply with certain financial covenants under the documents governing certain
of our indebtedness. As a result of the effects on our business of the economic
recession and the events of September 11, 2001, we have entered into an
amendment to our bank credit facility, effective November 19, 2001, which among
other things:
. adjusts certain financial covenants so as to require us to meet less
stringent levels in respect of (a) a minimum consolidated interest
coverage ratio and a minimum unsecured interest coverage ratio until
September 6, 2002 and (b) the maximum leverage ratio through August 15,
2002
. suspends until September 6, 2002 the minimum fixed charge coverage ratio
test that we must meet
. limits draws under the revolver portion of our bank credit facility to (a)
$50 million in the first quarter of 2002 and (b) up to $25 million in the
second quarter of 2002 (but only if draws in the second quarter of 2002 do
not cause the aggregate amount drawn in 2002 and then outstanding to
exceed $25 million) and
. increases the interest rate based on higher leverage levels.
In addition, the amendment imposes restrictions and requirements through
August 15, 2002 which include, among others:
. restricting Host REIT's ability to pay dividends on equity securities and
our convertible debt obligations unless projections indicate such payment
is necessary to maintain its REIT status and/or unless we are below
certain leverage levels
. restricting our ability to incur additional indebtedness and requiring
that we apply all net proceeds of permitted incurrences of indebtedness to
repay outstanding amounts under the bank credit facility
. requiring Host REIT to apply all net proceeds from capital contributions
to us or from sales of equity by Host REIT to repay outstanding amounts
under the bank credit facility
. requiring us to use all net proceeds from the sale of assets to repay
indebtedness under the bank credit facility
. restricting our ability to make acquisitions and investments unless the
asset to be acquired has a leverage ratio of 3.5 to 1.0 or below
. restricting our investments in subsidiaries and
. restricting our capital expenditures.
The amendment also permits us (i) to retain in escrow any casualty insurance
proceeds that we receive from insurance policies covering the New York World
Trade Center Marriott and the New York Marriott Financial Center until such
proceeds are applied toward the restoration of the New York Marriott Financial
Center and the construction of a new hotel that replaces the New York World
Trade Center Marriott, or (ii) to apply such insurance proceeds to the payment
of amounts due to certain third parties, including the New York World Trade
Center Marriott ground lessor, mortgage lender and Marriott International as
manager. Any proceeds (other than business interruption insurance proceeds) not
so used would be used to repay amounts outstanding under the bank credit
facility. The amendment also allows us to include business interruption
proceeds that we receive for the New York World Trade Center Marriott and the
New York Marriott Financial Center hotels in our calculation of consolidated
EBITDA for purposes of our financial covenants.
We intend to amend or replace the bank credit facility prior to August 15,
2002. There can be no assurance that we will be able to amend or replace the
bank credit facility on terms any more favorable than those currently in
effect, if at all. Any default under the bank credit facility or any successor
credit facility that results in an acceleration of its final stated maturity
could constitute an event of default under the indenture with respect to all
outstanding series of senior notes issued thereunder.
25
We are currently in compliance with the terms and restrictive covenants of
our bank credit facility. As a result of entering into the recent amendment,
and obtaining the relief from the financial covenants described above, we
expect to remain in compliance with our bank credit facility through at least
August 15, 2002, the date after which our maximum leverage ratio will return to
the levels that were in effect prior to this amendment. We anticipate that, if
adverse operating conditions continue at currently forecasted levels, we will
not be able to comply with the leverage ratio applicable after August 15, 2002
or other financial tests applicable at the end of our third quarter of 2002
(September 6, 2002). If we fail to comply with the leverage ratio or any other
covenant of the bank credit facility, we would be in default under the bank
credit facility to the extent we had an outstanding balance. As of December 31,
2001 we had no amounts outstanding under our bank credit facility.
Under the indenture pursuant to which nearly all of our outstanding senior
notes were issued, we and our restricted subsidiaries are generally prohibited
from incurring additional indebtedness unless, at the time of such incurrence,
we would satisfy the requirements set forth in the indenture. One of these
requirements is that, after giving effect to any such new incurrence, on a pro
forma basis, our consolidated coverage ratio cannot be less than 2.0 to 1.0. As
a result of the effects on our business of the economic recession and the
September 11, 2001 terrorist attacks, we anticipate that any consolidated
coverage ratio that is calculated under the indenture after the end of our
first quarter 2002 may be less than 2.0 to 1.0. If this occurs, then we will be
prohibited from incurring indebtedness and from issuing disqualified stock
under the indenture other than the indebtedness that we and our restricted
subsidiaries are specifically permitted to incur under certain exceptions to
this prohibition set forth in the indenture. Our failure to maintain a
consolidated coverage ratio of greater than or equal to 2.0 to 1.0 could limit
our ability to engage in activities that may be in our long-term best interest.
Our management agreements could impair the sale or financing of our
hotels. Under the terms of the management agreements, we generally may not
sell, lease or otherwise transfer the hotels unless the transferee is not a
competitor of the manager, and 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 does 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 and current owners of approximately 20 of our
full-service 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, 2002, 45 of our hotels are subject to ground
leases (including the New York World Trade Center Marriott hotel ground lease
which is still in effect). These ground leases generally require increases in
ground rent payments every five years. Our ability to service our debt 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.
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. 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.
26
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. None of our key personnel have
employment agreements. We do not have or 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 are a party to various
lawsuits relating to previous partnership transactions, including transactions
relating to our conversion into a REIT. 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. If any of the lawsuits
were to be determined adversely to us or a 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. For example, through our
subsidiary Rockledge, we entered into a joint venture with Marriott
International through which the joint venture owns two limited partnerships
holding, in the aggregate, 120 Courtyard by Marriott hotels. Subsidiaries of
Marriott International manage these Courtyard by Marriott hotels. Actions by a
co-venturer, particularly Marriott International, 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-venturer 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. For further discussion of the risks associated with entering into a
joint venture with Marriott International, see the discussion above under "Our
relationship with Marriott International may result in conflicts of interest".
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. 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, that they notify and train
those who may come into contact with asbestos and that 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.
27
Compliance with other government regulations can also be costly. Our hotels
are subject to various other 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 have a material adverse effect on our
business, financial condition or results of operations.
Some potential losses are not covered by insurance. We carry comprehensive
insurance coverage for general liability, property, business interruption and
other risks with respect to all of our hotels and other properties. These
policies offer coverage features and insured limits that we believe are
customary for similar type properties. Generally, the policies provide coverage
and limits on a blanket basis, combining the claims of our properties together
for evaluation against policy aggregate limits and sub-limits and, in the case
of our Marriott-managed hotels, with other Marriott-managed hotels of other
owners. Thus, for certain risks (e.g., earthquake), multiple claims from
several hotels or owners may exceed policy sub-limits. Certain other risks
(e.g., war and environmental hazards), however, may be uninsurable or too
expensive to justify insuring against. Furthermore, an insurance provider could
elect to deny or limit coverage under a claim. Should an uninsured loss or a
loss in excess of insured limits occur, or should an insurance carrier deny or
limit coverage under a claim, we could lose all, or a portion of, the capital
we have invested in a property, 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.
As discussed below in "Recent or future terrorist attacks could adversely
affect us", on September 11, 2001, terrorist attacks on the World Trade Center
Towers in New York City resulted in the destruction of our New York World Trade
Center Marriott hotel and caused considerable damage to our New York Marriott
Financial Center hotel. Although we have both property and business
interruption insurance for our two affected hotels with a major insurer through
our manager, Marriott International, from which we expect to receive business
interruption insurance and property damage insurance proceeds to cover all or a
substantial portion of the losses at both hotels, we cannot currently determine
the amount or timing of those payments. Under the terms of the New York World
Trade Center Marriott ground lease, any proceeds from the property portion of
the hotel claim are required to be placed in an insurance trust for the
exclusive purpose of rebuilding the hotel. As of March 1, 2002, we had received
business interruption and property advances from our insurers in an aggregate
amount of $17 million of which approximately $5 million was for property
insurance proceeds relating to the two hotels. Under the terms of our amended
bank credit facility, property insurance proceeds that we receive from
insurance coverage on the New York World Trade Center Marriott and New York
Marriott Financial Center are to be retained in escrow until applied as
described in "--There is no charter or by-law restriction on the amount of debt
we may incur." If the amount of such insurance proceeds is substantially less
than our actual losses or if the payments are substantially delayed, it could
have a material adverse effect on our business. Our insurance carrier has an
A/+ A.M. Best Rating. /
Recent or future terrorist attacks could adversely affect us. On September
11, 2001, several aircraft that were hijacked by terrorists destroyed the World
Trade Center Towers in New York City and damaged the Pentagon in northern
Virginia. As a result of the attacks and the collapse of the World Trade Center
Towers, our New York World Trade Center Marriott hotel was destroyed and we
sustained considerable damage to our New York Marriott Financial Center hotel.
Subsequent to the attacks, the Federal Aviation Administration closed United
States airspace to commercial traffic for several days. The aftermath of these
events, together with an economic recession, has adversely affected the travel
and hospitality industries, including the full-service hotel industry. The
impact which these terrorist attacks, or future events such as military or
police activities in the United States or foreign countries, future terrorist
activities or threats of such activities, biological or chemical weapons
attacks, political unrest and instability, interruptions in transportation
infrastructure, riots and protests, could have on our business in particular
and the United States economy, the global economy, and global financial markets
in general cannot presently be determined. It is possible that these factors
could have a material adverse effect on our business, our ability to finance
our business, our ability to insure our properties (see "We may not be able to
obtain new insurance for our hotels or to obtain insurance at acceptable
premium levels" below), and on our financial condition and results of
operations as a whole.
28
We may not be able to obtain new insurance for our hotels or to obtain
insurance at acceptable premium levels. Due to changes in the insurance market
arising prior to September 11, 2001 and the effects of the terrorist attacks on
September 11, 2001, it is becoming more difficult and more expensive to obtain
insurance. Our current insurance policies on our hotels generally reach the end
of their terms on April 1, 2002 and June 1, 2002. We may encounter difficulty
in obtaining or renewing property or casualty insurance on our properties at
the same levels of coverage and under similar terms. Such insurance may be more
limited and for some catastrophic risks (e.g., earthquake, flood and terrorism)
may not be generally available at current levels. Even if we are able to renew
our policies or to obtain new policies at levels and with limitations
consistent with our current policies, we cannot be sure that we will be able to
obtain such insurance at premium rates that are commercially reasonable. If we
were unable to obtain adequate insurance on our properties for certain risks,
it could cause us to be in default under specific covenants on certain of our
debt instruments or other contractual commitments we have which require us to
maintain adequate insurance on our properties to protect against the risk of
loss. If this were to occur, or if we were unable to obtain adequate insurance
and our properties experienced damages which would otherwise have been covered
by insurance, it could materially adversely affect our business and the
conditions of our properties.
Federal Income Tax Risks
To qualify as a REIT, Host REIT is required to distribute at least 90% of
its taxable income, irrespective of its available cash or outstanding
obligations. To continue to qualify as a REIT, Host REIT currently is required
to distribute to its shareholders with respect to each year at least 90% of its
taxable income, excluding net capital gain. In addition, Host REIT will be
subject to a 4% nondeductible excise tax on the amount, if any, by which
distributions made by Host REIT with respect to the calendar year are less than
the sum of 85% of our ordinary income and 95% of its capital gain net income
for that year and any undistributed taxable income from prior periods. Host
REIT intend to make distributions to its shareholders to comply with the
distribution requirement and to avoid the nondeductible excise tax and will
rely for this purpose on distributions from us. However, there are differences
in timing between Host REIT's recognition of taxable income and Host REIT's
receipt of 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, which is taxable income that is not matched by cash flow,
or EBITDA, to us. Due to some transactions entered into in years prior to the
REIT conversion, we expect to recognize substantial amounts of "phantom"
income. There is a distinct possibility that these timing differences could
require us to borrow funds or to issue additional equity to enable us to meet
the distribution requirement and, therefore, to maintain Host REIT's REIT
status, and to avoid the nondeductible excise tax. 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 would apply if we failed to qualify as a
partnership. We believe that we qualify to be treated as a partnership for
federal income tax purposes. As a partnership, we are not subject to federal
income tax on our income. Instead, each of our partners is required to pay tax
on its allocable share of our income. No assurance can be provided, however,
that the Internal Revenue Service will not challenge our 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 us as a corporation
for tax purposes, we would be subject to federal, state and local, and foreign
corporate income tax, which would reduce significantly the amount of cash
available for debt service and for distribution to our partners, including Host
REIT. In addition, our classification as a corporation would cause some of our
partners, including Host REIT, to recognize gain at least equal to such
partner's "negative capital account", and possibly more, depending upon the
circumstances. Finally, Host REIT would fail to meet the income tests and
certain of the asset tests applicable to REITs and, accordingly, would cease to
qualify as a REIT. If Host REIT fails to qualify as a REIT or we fail to
qualify as a partnership, such failure would cause an event of default under
our credit facility that could lead to an acceleration of the amounts due under
such credit facility, which in turn would constitute an event of default under
our outstanding debt securities.
29
Adverse tax consequences would apply if Host REIT failed to qualify as a
REIT. We believe that Host REIT has been organized and has operated in such a
manner so as to qualify as a REIT under the Internal Revenue Code, commencing
with the taxable year beginning January 1, 1999, and Host REIT currently
intends to continue to operate as a REIT during future years. No assurance can
be provided, however, that Host REIT qualifies as a REIT or that new
legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to Host
REIT's qualification as a REIT or the federal income tax consequences of its
REIT qualification. If Host REIT fails to qualify as a REIT, it will be subject
to federal and state income tax, including any applicable alternative minimum
tax, on its taxable income at regular corporate rates. In addition, unless
entitled to statutory relief, Host REIT would not qualify as a REIT for the
four taxable years following the year during which REIT qualification is lost.
The additional tax burden on Host REIT would significantly reduce the cash
available for distribution to its shareholders, and Host REIT would no longer
be required to make any distributions to its shareholders. Host REIT's failure
to qualify as a REIT could reduce materially the value of its common stock and
would cause any distributions to its shareholders that otherwise would have
been subject to tax as capital gain dividends to be taxable as ordinary income
to the extent of its 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 its distributions. Host REIT's failure to qualify as a REIT also would cause
an event of default under our credit facility that could lead to an
acceleration of the amounts due under the credit facility, which, in turn,
would constitute an event of default under our outstanding debt securities.
Host REIT will be disqualified as a REIT at least for taxable year 1999 if
it failed to distribute all of its E&P attributable to its non-REIT taxable
years. In order to qualify as a REIT, Host REIT cannot have at the end of any
taxable year any undistributed E&P that is attributable to one of its 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 its accumulated E&P. Host REIT was
required to have distributed this E&P prior to the end of 1999, the first
taxable year for which its REIT election was effective. If Host REIT failed to
do this, it will be disqualified as a REIT at least for taxable year 1999. We
believe that distributions of non-REIT E&P that Host REIT made were sufficient
to distribute all of the non-REIT E&P as of December 31, 1999, but we cannot
guarantee that Host REIT met this requirement.
If our leases are not respected as true leases for federal income tax
purposes, Host REIT would fail to qualify as a REIT. To qualify as a REIT,
Host REIT must satisfy two gross income tests, under which specified
percentages of its 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 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. We also believe
that Crestline Capital Corporation, the lessee of substantially all of our
full-service hotels prior to January 1, 2001, was not a "related party tenant"
and, as a result of changes in the tax laws effective January 1, 2001, HMT
Lessee will not be treated as a "related party tenant" so long as it qualifies
as a "taxable REIT subsidiary." If the leases were not respected as true leases
for federal income tax purposes or if the lessees were regarded as "related
party tenants," Host REIT would not be able to satisfy either of the two gross
income tests applicable to REITs and it would lose its REIT status. See "Risk
Factors--Federal Income Tax Risks--Adverse tax consequences would apply if Host
REIT failed to qualify as a REIT" above.
If HMT Lessee fails to qualify as a taxable REIT subsidiary, Host REIT would
fail to qualify as a REIT. For Host REIT's taxable years beginning on and
after January 1, 2001, as a result of REIT tax law changes under the specific
provisions of the Ticket to Work and Work Incentives Improvement Act of 1999
relating to REITs (we refer to those provisions as the "REIT Modernization
Act"), Host REIT is permitted to lease the hotels to our subsidiary that is
taxable as a corporation and that elects to be treated as a "taxable REIT
subsidiary." Accordingly, effective January 1, 2001, HMT Lessee directly or
indirectly acquired all but one of
30
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." As of June 16,
2001, we acquired the one remaining leasehold interest from Crestline. In
addition, as of June 28, 2001, we acquired the three remaining leasehold
interests from third parties. 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 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, Host REIT would fail to
meet the asset tests applicable to REITs and substantially all of its income
would fail to qualify for the gross income tests and, accordingly, Host REIT
would cease to qualify as a REIT. See "Risk Factors--Federal Income Tax
Risks--Adverse tax consequences would apply if Host REIT failed to qualify as a
REIT" above.
Despite Host REIT's REIT status, it remains subject to various taxes,
including substantial deferred and contingent tax liabilities. Notwithstanding
Host REIT's status as a REIT, it is subject, through its ownership interest in
us, to certain federal, state, local and foreign taxes on its income and
property. In addition, Host REIT will be required to pay federal tax at the
highest regular corporate rate upon its share of any "built-in gain" recognized
as a result of any sale before January 1, 2009, by us and our non-corporate
subsidiaries of assets, including the hotels, in which interests were acquired
by us from our predecessor and our 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 Host REIT's
first taxable year as a REIT. The total amount of gain on which Host REIT would
be subject to corporate income tax if the assets that it held at the time of
the REIT conversion were sold in a taxable transaction prior to January 1, 2009
would be material to Host REIT. In addition, at the time of the REIT
conversion, Host REIT expected that it or Rockledge Hotel Properties, Inc. or
Fernwood Hotel Assets, Inc. (each of which is a taxable corporation in which we
own a 95% nonvoting interest and in April, 2001 we purchased the remaining 5%
voting interest) likely would recognize substantial built-in gain and deferred
tax liabilities in the next ten years without any corresponding receipt of cash
by Host REIT or us. Host REIT may have to pay certain state income taxes
because not all states treat REITs the same as they are treated for federal
income tax purposes. Host REIT may also have to pay certain foreign taxes to
the extent it owns assets or conducts operations in foreign jurisdictions. We
are obligated under our partnership agreement to pay all such taxes (and any
related interest and penalties) incurred by Host REIT, as well as any
liabilities that the IRS successfully may assert against Host REIT for
corporate income taxes for taxable years prior to the time it qualified as a
REIT. Our taxable REIT subsidiaries, including Rockledge, Fernwood and HMT
Lessee, are taxable as corporations and will pay federal, state and local
income tax on their net income at the applicable corporate rates, and foreign
taxes to the extent they own assets or conduct operations in foreign
jurisdictions.
If the IRS were to challenge successfully the Operating Partnership's status
as a partnership for federal income tax purposes, Host REIT would cease to
qualify as a REIT and suffer other adverse consequences. We believe that the
Operating Partnership qualifies to be treated as a partnership for federal
income tax purposes. As a partnership, it is not subject to federal income tax
on its income. Instead, each of its partners, including us, is required to
recognize its allocable share of the Operating Partnership's income. 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 the income
tests and certain of the asset tests applicable to REITs and, accordingly,
cease to qualify as a REIT. If the Operating Partnership fails to qualify as a
partnership for federal income tax purposes or we fail to qualify as a REIT,
either failure would cause an event of default under our credit facility that,
in turn, could constitute an event of default under our outstanding debt
securities. Also, the failure of the Operating Partnership to qualify as a
partnership would cause it to become subject to federal and state corporate
income tax, which would reduce significantly the amount of cash available for
debt service and for distribution to its 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 account," if any.
31
As a REIT, Host REIT is subject to limitations on its ownership of debt and
equity securities. Subject to the exceptions discussed in this paragraph, a
REIT is prohibited from owning securities in any one issuer to the extent that
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 more than 10% of the value of the
issuer's outstanding securities. A REIT is permitted to own securities of a
subsidiary in an amount that exceeds 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 Fernwood, Rockledge
and HMT Lessee has elected to be treated as a taxable REIT subsidiary.
Our taxable REIT subsidiaries are subject to special rules that may result
in increased taxes. Several Internal Revenue Code provisions 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.
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. We intend that we and our 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 our 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.
Our obligations to Host Marriott potentially may increase our indebtedness
or cause us to liquidate investments on adverse terms. To continue to qualify
as a REIT, Host Marriott currently is required to distribute to its
shareholders with respect to each year at least 90% of its taxable income,
excluding net capital gain. In addition, Host Marriott will be subject to a 4%
nondeductible excise tax on the amount, if any, by which distributions made by
it with respect to the calendar year are less than the sum of 85% of its
ordinary income and 95% of its capital gain net income for that year and any
undistributed taxable income from prior periods. Host Marriott intends to make
distributions to its shareholders to comply with the distribution requirement
and to avoid the nondeductible excise tax and will rely for this purpose on
distributions from us. Host Marriott's sole source of cash to make these
distributions is with respect to its partnership interest in us. Our
partnership agreement requires us to distribute to our partners an amount of
our available cash sufficient to enable Host Marriott to pay shareholder
dividends that will satisfy the requirements applicable under the Internal
Revenue Code to REITs and to avoid any federal income or excise tax liability
for Host Marriott. There are differences in timing between our recognition of
taxable income and our receipt of 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 (which is taxable income that is not
matched by cash flow or EBITDA to us) attributable to our deferred tax
liabilities arising from certain transactions entered into by Host Marriott in
years prior to the conversion of Host Marriott to a REIT. There is a distinct
possibility that these differences could require us to arrange for short-term,
or possibly long-term, borrowings or to issue additional equity to enable us to
meet this distribution requirement to Host Marriott. In addition, because the
REIT distribution requirements prevent Host Marriott from retaining earnings,
we effectively are prohibited from retaining earnings, as well. Accordingly, we
will generally be required to refinance debt that matures with additional debt
or equity. We cannot assure you that any of the sources of funds described
herein, if available at all, would be sufficient to meet the distribution
obligations of Host Marriott, in which case we may be required to liquidate
investments on adverse terms in order to satisfy such obligations of Host
Marriott.
32
Notwithstanding Host Marriott's status as a REIT, it is subject to various
taxes on its income and property for which we are responsible for paying or
reimbursing Host Marriott. Among other things, Host Marriott will be required
to pay federal tax at the highest regular corporate rate upon its share of any
"built-in gain" recognized as a result of any sale before January 1, 2009, by
us of assets, including the hotels, in which interests were owned by Host
Marriott, directly or indirectly, immediately prior to January 1, 1999, the
first day of Host Marriott's first taxable year as a REIT. Built-in gain is the
amount by which an asset's fair market value exceeded the adjusted basis in the
asset on January 1, 1999. The total amount of gain on which we would be subject
to corporate income tax if the assets that we held at the time of the REIT
conversion were sold in a taxable transaction prior to January 1, 2009 would be
material to us. In addition, notwithstanding its status as a REIT, Host
Marriott may have to pay certain state income taxes because not all states
treat REITs the same as they are treated for federal income tax purposes. Host
Marriott may also have to pay certain foreign taxes to the extent we own assets
or conduct operations in foreign jurisdictions. Under the terms of the REIT
conversion and our partnership agreement, we are responsible for paying, or
reimbursing Host Marriott for the payment of, any corporate income tax imposed
on built-in gain, as well as any other taxes or other liabilities, including
contingent liabilities and liabilities attributable to litigation that Host
Marriott may incur, whether such liabilities are incurred by reason of
activities prior to the REIT conversion or activities subsequent thereto.
Accordingly, we will pay, or reimburse Host Marriott for the payment of, all
taxes incurred by Host Marriott (and any related interest and penalties),
except for taxes imposed on Host Marriott by reason of its failure to qualify
as a REIT or to distribute to its shareholders an amount equal to its "REIT
taxable income," including net capital gains. We cannot assure you that any of
the sources of funds described herein, if available at all, would be sufficient
to meet the tax obligations of Host Marriott, in which case we may be required
to liquidate investments on adverse terms in order to satisfy such obligations
of Host Marriott.
Item 3. Legal Proceedings
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 II). Limited partners
of MHP II 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
during 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 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. On
33
October 22, 2001, we entered into a settlement agreement with respect to the
two above-referenced cases. At a fairness hearing held on February 22, 2002,
the Florida court gave final approval to the settlement. The Court of Chancery
subsequently dismissed the Delaware case.
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 the merger to occur. The settlement referenced
above resolves all claims of MHP II's limited partners against Host REIT and
its affiliates with the exception of the claims of the MacKenzie Patterson
group. The MacKenzie Patterson group elected to opt out of the settlement class
with respect to its 28 limited partner units. Discovery is proceeding in this
case.
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. On August 28, 2001, the
plaintiffs filed a third amended complaint, which did not include Marriott
International as a defendant. We responded by filing a motion to dismiss based
on the plaintiffs' lack of standing to bring a derivative action under Rhode
Island law. At a hearing held on December 10, 2001, the court denied this
motion and we sought leave to file an appeal. The court granted leave to appeal
on March 15, 2002, and we are pursuing the appeal.
Swissotel. On June 22, 2001, Swissotel Management (USA) L.L.C.
("Swissotel") filed a lawsuit against Host REIT, and five of its subsidiaries,
regarding the hotel management agreements between Swissotel and BRE/ Swiss LLC,
dated August 1, 1997 (the "Management Agreements"). The Management Agreements
relate to the Swissotel hotels in Atlanta, Boston, Chicago, and New York (the
"Hotels").
On January 18, 2001, we informed Swissotel that reports received from
engineering consultants hired by us to inspect the New York hotel established
that Swissotel failed to meet its responsibilities to operate and maintain the
New York hotel in accordance with a first-class hotel standard. In response to
this notice, Swissotel filed a lawsuit seeking declaratory relief, but later
agreed to arbitrate the matter as required by the management agreement for the
New York hotel. On May 18, we informed Swissotel that a performance shortfall
existed under the Management Agreements for fiscal year 2000. A week later, on
May 25, we declared that Swissotel was in default under the Management
Agreements due to deficiencies in its accounting practices. In addition, we
informed Swissotel that we were withholding our consent to the sale of its
management business to Raffles International. Notwithstanding this latter
notice, Swissotel and Raffles closed on their proposed transaction during the
first week of June.
In response to the performance shortfall and accounting notices, Swissotel
filed a second lawsuit seeking declarations that it is not in violation of the
Management Agreements. In addition, Swissotel has demanded arbitration of those
issues which are arbitrable under the Management Agreements. Swissotel argues
that its accounting practices were, and are, in accordance with the
requirements of the Management Agreements. Swissotel also claims that the
performance of the Hotels in fiscal year 2000 exceeded the performance standard
described in the Management Agreements. Swissotel maintains that the May 18 and
25 letters have no force and effect, and that no event of default can be
declared under the Management Agreements. On July 25, 2001, the
34
defendants filed answers to the complaint and counterclaims against Swissotel
and Raffles for breach of contract and tortuous interference, respectively. In
addition, we responded to the arbitration demand by denying that any of the
issues raised by Swissotel are arbitrable under the Management Agreements.
Swissotel filed an amended complaint on August 14, 2001. We subsequently
participated in settlement discussions with Swissotel and entered into a
confidentiality agreement and a standstill agreement which, unless extended,
will expire on March 22, 2002. Absent settlement or an extension of the
standstill agreement, our response to Swissotel's amended complaint will be due
on April 10, 2002.
Item 4. Submission of matters to a vote of security holders
None
EXECUTIVE AND CORPORATE OFFICERS
In the following table we set forth certain information regarding those
persons currently serving as our executive officers.
Business Experience Prior to Becoming an
Name and Title Age Executive or Corporate Officer of the Company
-------------- --- ------------------------------------------------------------------------------
Richard E. Marriott 63 Richard E. Marriott joined Host Marriott in 1965 and has served in various
Chairman of the Board executive capacities. In 1979, Mr. Marriott was elected to the Board of
Directors. In 1984, he was elected Executive Vice President, and in 1986, he
was elected Vice Chairman of the Board of Directors. In 1993, Mr. Marriott
was elected Chairman of the Board.
Christopher J. Nassetta 39 Christopher J. Nassetta joined Host Marriott in October 1995 as Executive
President and Chief Vice President and was elected our Chief Operating Officer in 1997. In May
Executive Officer 2000, Mr. Nassetta became our President and Chief Executive Officer. Prior
to joining us, Mr. Nassetta served as President of Bailey Realty Corporation
from 1991 until 1995. He had previously served as Chief Development
Officer and in various other positions with The Oliver Carr Company from
1984 through 1991.
Robert E. Parsons, Jr. 46 Robert E. Parsons, Jr. joined Host Marriott Corporate Financial Planning
Executive Vice staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr.
President and Chief Parsons was elected our Senior Vice President and Treasurer, and in 1995,
Financial Officer he was elected Executive Vice President and Chief Financial Officer.
James F. Risoleo 46 James F. Risoleo joined Host Marriott in 1996 as Senior Vice President for
Executive Acquisitions, and he was elected Executive Vice President in 2000. He is
Vice President, responsible for our development, acquisition and disposition activities. Prior
Acquisitions and to joining our company, Mr. Risoleo served as Vice President of
Development Development for Interstate Hotels Corporation, then the nation's largest
independent hotel management company. Before joining Interstate, he was
Senior Vice President at Westinghouse Financial Services. Mr. Risoleo is a
member of the Pennsylvania Bar Association.
W. Edward Walter 46 W. Edward Walter joined Host Marriott in 1996 as Senior Vice President for
Executive Vice President Acquisitions, and he was elected Treasurer in 1998, Executive Vice
and Chief Operating President in 2000 and Chief Operating Officer in 2001. Prior to joining our
Officer company, Mr. Walter was a partner with Trammell Crow Residential
Company and the President of Bailey Capital Corporation, a real estate firm
that focused on tax-exempt real estate investments. Mr. Walter is a member
of the District of Columbia Bar Association.
35
Business Experience Prior to Becoming an
Name and Title Age Executive or Corporate Officer of the Company
-------------- --- ----------------------------------------------------------------------------
Elizabeth A. Abdoo 43 Elizabeth A. Abdoo joined Host Marriott in June 2001 as Senior Vice
Senior Vice President, President and General Counsel. She was elected Corporate Secretary in
General Counsel and August 2001. Prior to joining our company, Ms. Abdoo was an attorney in
Corporate Secretary the legal department of Orbital Sciences Corporation, serving as Senior Vice
President and Assistant General Counsel from January 2000 to May 2001
and prior to that as Vice President and Assistant General Counsel since
1996.
Richard Burton 46 Richard A. Burton joined Host Marriott in 1996 as Senior Vice President-
Senior Vice President, Taxes and General Tax Counsel. Prior to joining our company, Mr. Burton
Taxes and General Tax was Senior Tax Counsel at Mobil Oil Corporation, and prior to that was with
Counsel the law firm of Sutherland, Asbill & Brennan.
John A. Carnella 38 John A. Carnella joined Host Marriott in 1997 as Senior Vice President for
Senior Vice President Acquisitions. In 1998, he moved to our Treasury Department and was
and Treasurer elected Treasurer in 2001. Prior to joining Host Marriott, Mr. Carnella was
an investment banker with Lazard Freres & Co. and, most recently, he
served as a Senior Vice President with the investment banking division of
National Westminster Bank.
Donald D. Olinger 43 Donald D. Olinger joined Host Marriott in 1993 as Director of Corporate
Senior Vice President Accounting. Later in 1993, Mr. Olinger was promoted to Senior Director
and Corporate and Assistant Controller. He was promoted to Vice President of Corporate
Controller Accounting in 1995. In 1996, he was elected Senior Vice President and
Corporate Controller. Prior to joining us, Mr. Olinger was with the public
accounting firm of Deloitte & Touche.
36
PART II
Item 5. Market for our OP Units and related unitholder matters
There is no established public trading market for our OP Units and transfers
of OP Units are restricted by the terms of our partnership agreements. We paid
quarterly cash distributions of $0.26 per unit for the first three quarters of
2001. As a result of the declining operations, no distributions were made for
the fourth quarter of 2001. Due to liquidity concerns (see "Management's
Discussion and Analysis--Recent Events") related to the current economic
conditions and the impact of the September 11, 2001 terrorist attacks it is
uncertain at this time when distributions will resume. During 2000, we paid
quarterly cash distributions of $0.21, $0.21, $0.23, and $0.26 per OP Unit.
The number of holders of record of our OP Units on March 22, 2002 was 2,664.
The number of outstanding OP Units was 286,012,373 as of March 22, 2002, of
which 264,561,792 were owned by Host REIT.
Issuances of Unregistered Securities.
Unless stated otherwise, we acquired interests in partnerships owning hotel
properties in connection with each of the following issuances of unregistered
securities.
On December 30, 1998, we issued 25.8 million OP Units to various limited
partners in the eight public partnership mergers and the four private
partnerships in exchange for their existing partnership interests, which were
valued at approximately $333 million. The issuance of OP Units was made in
reliance on an exemption from the registration requirements of the Securities
Act pursuant to Section 4(2). The OP Units issued are redeemable for the cash
equivalent of a share of Host REIT's common stock or, at Host REIT's option,
shares of its common stock.
Also on December 30, 1998, we issued approximately 43.9 million OP Units to
the Blackstone Entities in part in exchange for the acquisition of, or
controlling interests in, twelve hotels and one mortgage loan secured by an
additional hotel. We issued approximately 3.8 million additional OP Units on
March 31, 1999 to the Blackstone Entities. The issuance of OP Units was made in
reliance on an exemption from the registration requirements of the Securities
Act pursuant to Section 4(2) thereunder. The OP Units are redeemable for the
cash equivalent of a share of Host REIT's common stock or, at Host REIT's
option, shares of its common stock. During 2001, 40.7 million of the
aforementioned OP Units were converted to common stock of Host REIT.
In December 1998, we issued approximately 205.3 million OP Units to Host
Marriott and its subsidiaries in exchange for substantially all of Host
Marriott's and its subsidiaries' assets (excluding the senior living business
transferred to Crestline) and the assumption of substantially all of their
liabilities. The number of OP Units issued to Host Marriott and its
subsidiaries equalled the number of outstanding shares of Host Marriott's
common stock. The issuance of OP Units was made in reliance on an exemption
from the registration requirements for the Securities Act pursuant to Section
4(2).
In August 1999, Host REIT issued 4,160,000 shares of Class A cumulative
redeemable preferred stock the proceeds of which were used to purchase
4,160,000 units of Class A cumulative redeemable preferred units. Dividends on
the preferred OP Units are payable quarterly in arrears at the rate of 10% per
year. The issuance of the preferred OP Units was made in reliance on an
exemption from the registration requirements for the Securities Act pursuant to
Section 4(2).
In November 1999, Host REIT issued 4,000,000 shares of Class B cumulative
redeemable preferred stock the proceeds of which were used to purchase
4,000,000 units of Class B cumulative redeemable preferred units. Dividends on
the preferred OP Units are payable quarterly in arrears at the rate of 10% per
year. The issuance of the preferred OP Units was made in reliance on an
exemption from the registration requirements for the Securities Act pursuant to
Section 4(2).
37
In December 1999, we issued approximately 26,000 Class AM cumulative
redeemable preferred OP Units to limited partners of Hopewell Group, Ltd. for
the acquisition of their limited partnership interests in Ivy Street Hotel
Limited Partnership, which indirectly owns the Atlanta Marriott Marquis Hotel.
The issuance of the preferred OP units was made in reliance on an exemption
from the registration requirements for the Securities Act pursuant to Section
4(2). The preferred OP Units are redeemable for OP Units one year from the date
of acquisition and are then immediately redeemable for cash, or at Host REIT's
option, common shares of Host REIT. During 2000, holders of approximately 7,000
of the Class AM Preferred OP Units converted to common OP Units. Host REIT may
require the holders to convert to OP Units.
In March 2001, Host REIT issued 5,980,000 shares of Class C cumulative
redeemable preferred stock, the proceeds of which were used to purchase
5,980,000 units of Class C cumulative redeemable preferred units. Dividends on
the preferred OP Units are payable quarterly in arrears at the rate of 10% per
year. The issuance of the preferred OP Units was made in reliance on an
exemption from the registration requirements for the Securities Act pursuant to
section 4(2).
38
Item 6. Selected Financial Data
The following table presents certain selected historical financial data of
us and our predecessor, which has been derived from audited consolidated
financial statements for the fiscal years 2001, 2000, 1999, 1998 and 1997.
The historical information contained in the following table for our 2001,
1998 and 1997 operations relate 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, thus receiving rental payments. As a result of the
acquisition by our wholly owned taxable REIT subsidiary of the leasehold
interests with respect to 120 of our full-service hotels, our consolidated
operations in 2001 present property-level revenues and expenses rather than
rental income from lessees. For a comparison of hotel level sales for fiscal
years 1999 through 2001, please see the tables presenting comparable periods in
our "Managements Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations."
Fiscal Year
------------------------------------------
2001 2000 1999 1998(1)(2) 1997(1)(2)
------ ------ ------ ---------- ----------
(in millions, except per share data)
Income Statement Data:
Revenues(3)................................ $3,754 $1,407 $1,303 $3,455 $2,830
Income from continuing operations.......... 59 203 256 194 47
Income before extraordinary items(4)....... 59 203 256 195 47
Net income................................. 57 207 285 47 50
Net income available to common unitholders. 25 187 279 47 50
Basic earnings per common unit:(5)
Income from continuing operations...... .10 .64 .86 .90 .22
Income before extraordinary items...... .10 .64 .86 .91 .22
Net income............................. .09 .66 .96 .22 .23
Diluted earnings per common unit:(5)
Income from continuing operations...... .10 .63 .83 .84 .22
Income before extraordinary items...... .10 .63 .83 .85 .22
Net income............................. .09 .65 .93 .27 .23
Cash dividends per common unit(6).......... .78 .91 .84 1.00 --
Balance Sheet Data:
Total assets(7)............................ $8,334 $8,391 $8,196 $8,262 $6,141
Debt(8).................................... 6,094 5,814 5,583 5,698 3,466
Convertible Preferred Securities........... -- -- -- -- 550
- --------
(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 year 1997 which included 12 months of
operations. The additional month of operations in 1998 increased our
revenues by $44 million.
(2) 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.
(3) Historical revenues for 2000 and 1999 primarily represent rental income
generated by our leases, primarily with Crestline. Periods prior to 1999
represent gross hotel sales because our leases were not in effect until
January 1, 1999. Effective January 1, 2001, we acquired ownership of the
leasehold interests in 116 of our full-service hotels from Crestline.
Accordingly, our results of operations for 2001 reflect this acquisition by
39
presenting hotel level revenues rather than rental income. Beginning with
the third quarter of 2001, hotel level revenues were recorded for an
additional four full-service hotels as a result of the acquisition of three
leasehold interests from Wyndham and the final leasehold interest from
Crestline. Revenues for fiscal years 2000, 1999, 1998 and 1997 have also
been adjusted to reclassify interest income, net gains on property
transactions, and equity in earnings of affiliates below operating profit to
be consistent with our 2001 statement of operations presentation.
(4) During 2001, we recorded an extraordinary loss of $1 million in connection
with the refinancing of the mortgage debt on our Canadian properties and an
extraordinary loss of $1 million related to the extinguishment of the
outstanding balance on the term loan component of the bank credit facility.
During 2000, we recorded an extraordinary loss of $2 million in connection
with the renegotiation of the bank credit facility, an extraordinary gain
of $7 million on the extinguishment of $22 million of the Convertible debt
obligation to Host REIT, 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 Host REIT's 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 a net extraordinary
gain of $12 million on the extinguishment of $53 million of the convertible
debt obligation to Host REIT, including 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.
(5) Basic earnings per common unit is computed by dividing net income available
to common unitholders by the weighted average number of common units
outstanding. Diluted earnings per common unit is computed by dividing net
income available to common unitholders as adjusted for potentially dilutive
securities, by the weighted average number of common units outstanding plus
other dilutive securities. Diluted earnings per unit has not been adjusted
for the impact of the Convertible Preferred Securities for 2001, 2000, 1999
and 1997, as they are anti-dilutive.
(6) 2001 cash distributions per common unit reflect quarterly cash
distributions of $0.26 per common unit paid on April 13, July 13, and
October 12, 2001. As previously discussed, Host REIT's Board of Directors
did not declare a fourth quarter 2001 distribution. 2000 cash distributions
per common unit reflect quarterly cash distributions of $0.21, $0.21,
$0.23, and $0.26 per common unit. 1999 cash distributions per common unit
reflect a quarterly cash distribution of $0.21 per common unit. 1998 cash
distributions per common unit reflect the cash portion of a special
distribution paid on February 10, 1999. This special distribution entitled
unitholders 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.
(7) Total assets for fiscal year 1997 include $236 million related to net
investment in discontinued operations.
(8) Consists of long term debt (which includes senior notes, secured senior
notes, mortgage debt, other notes, capital lease obligations, a revolving
bank credit facility and the Convertible debt obligation to Host REIT).
40
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Overview
Host Marriott, L.P. ("Host LP" or the "Operating Partnership"), a Delaware
limited partnership, operating through an umbrella partnership structure with
Host Marriott Corporation ("Host REIT") as the sole general partner, 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 us and our subsidiaries. As of December 31, 2001, Host
REIT owned approximately 92% of our outstanding OP Units.
Recent Events
On September 11, 2001, two aircraft that were hijacked by terrorists
destroyed the World Trade Center Towers in New York City, and as a result, our
New York World Trade Center Marriott hotel was destroyed. In addition, we
sustained considerable damage to a second property, the New York Marriott
Financial Center hotel. A third hijacked aircraft caused considerable damage to
the Pentagon in Northern Virginia and a fourth hijacked aircraft crashed in
western Pennsylvania. Subsequent to the attacks, the Federal Aviation
Administration closed United States airspace to commercial traffic for several
days, significantly impacting the operations of our hotels during this period.
As described below, the aftermath of these events, together with an economic
recession has adversely affected our operations.
Through our manager, Marriott International, we have both property and
business interruption insurance for our two affected hotels with a major
insurer. We have restored the New York Marriott Financial Center to operating
condition and reopened the hotel January 7, 2002. We are required under our
ground lease with The Port Authority of New York and New Jersey to rebuild the
New York World Trade Center Marriott, and our insurance provides for rebuilding
of the asset at replacement cost. Our insurer is a large insurance company with
an A+ A.M. Best Rating and has accepted responsibility for the claim. In
addition, we are obligated to make payments on behalf of the property,
including ground rent and debt service. We are also liable for severance
payments for employees of both hotels as well as other operating liabilities.
While we expect to receive sufficient insurance proceeds to cover all or a
substantial portion of these and other costs at both hotels and reimbursement
of lost profits, we cannot currently determine the total amount or timing of
those payments. We wrote off the $129 million net book value of the New York
World Trade Center Marriott hotel and recorded a corresponding receivable for
property insurance proceeds due to us under the terms of our insurance contract
and for which we believe receipt is probable . We believe the replacement cost
of the property is substantially in excess of the hotel's previously recorded
net book value. Currently, no gain or loss has been recorded. As of December
31, 2001, the Company has received $5 million in property insurance with
respect to the two hotels.
The Company also receives business interruption insurance as a result of the
discontinuation of operations of the two hotels. Income resulting from business
interruption insurance will not be recognized until all contingencies related
to the insurance recoveries are resolved. To the extent that we incur expenses
related to the hotels, principally the ground rent due for the New York World
Trade Center Marriott, for which we are still liable and for which we are
entitled to recovery under the insurance contract, we will recognize a
receivable, if we can demonstrate that the receivable is probable of
realization. As of December 31, 2001, the Company has received $12 million in
business interruption insurance with respect to the two hotels.
In the fourth quarter of 2001, RevPAR for comparable hotels showed a
significant decline of approximately 28% when compared to the 2000 fourth
quarter as a result of a decrease in occupancy of 13.4 percentage points and a
decline in room rates of 12.6% due to an economic recession and the reduction
in business travel. During the 4-week period subsequent to the events of
September 11, 2001, our hotels recorded weekly occupancy rates of 38% to 63%.
During that period, we had a very high level of large group cancellations,
which represented a loss of approximately $70 million in revenue. The results
of operations for the fourth quarter have shown steady growth from that point,
reflecting a steady return to more normal business levels; however, they still
remain below prior year levels.
41
We have been actively working with the managers of our hotels to reduce the
operating costs of our hotels as well as to provide economic incentives to
individuals and business travelers in selected markets to increase demand. This
process was accelerated after the September 11th terrorist attacks. These
initiatives include reducing labor costs, streamlining staffing and service
delivery, reducing hours of operations at hotel restaurants and consolidating
operations by closing unused or unoccupied floors in hotels.
In addition, based on our assessment of the current operating environment
and to conserve capital, we have reduced or temporarily suspended certain
capital expenditure projects. Our renewal and replacement expenditures for 2001
were $206 million versus $230 million in 2000. For 2002, we anticipate a
further reduction in spending of approximately 10% for renewal and replacement
expenditures.
Distributions. Our policy on cash distributions generally has been to
distribute the minimum amount necessary in order for Host REIT to maintain its
REIT status. As a result of September 11th and the economic downturn, our
operating results and, thus, taxable income have been greatly reduced. On
December 6, 2001, the Board of Directors of Host REIT declared a $0.625
distribution per unit of Class A, B and C preferred limited partner units, but
did not declare a distribution on our OP Units for the fourth quarter of 2001.
The preferred unit distribution was paid on January 15, 2002. Upon a review of
our operating and taxable income on a quarterly basis, we will reinstate the
distribution on our OP Units when operations have improved sufficiently so that
our taxable income supports such a payment. It is likely that when the OP Unit
distribution is reinstated, it will be meaningfully lower than the level for
the first three quarters of 2001. It is our intention to continue to pay
distributions on our preferred limited partner units. On March 19, 2002, the
Board of Directors of Host REIT declared a $0.625 distribution per unit of
Class A, B and C preferred limited partner units.
Credit Facility and Senior Notes. Our bank credit facility contains certain
financial covenants related 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 EBITDA interest coverage and
unencumbered EBITDA as a percentage of total EBITDA. Effective November 19,
2001, we amended our bank credit facility to modify these covenants through
August 15, 2002, among other things. This amendment also has resulted in
reducing the availability under the credit facility to $50 million through the
first quarter of 2002 and $25 million for the second quarter of 2002 and placed
additional restrictions on our ability to issue debt or equity, pay
distributions to certain unitholders, make acquisitions or investments, or to
use the proceeds from asset sales. As of March 1, 2002, there was no
outstanding balance for the credit facility. For a further discussion of the
modified covenants of the bank credit facility, see Risk Factors--"There is no
charter or by-law restriction to the amount of debt we may incur."
We have $3.2 billion of senior notes outstanding as of March 1, 2002. The
balance includes $450 million of Series H senior notes with a fixed interest
rate of 9 1/2% that were issued in December 2001. The proceeds from this
offering were used to repay the majority of the outstanding balance under the
bank credit facility. Under the indenture pursuant to which the senior notes
were issued there are covenants that could restrict our ability to incur
indebtedness, grant liens on our assets, acquire or sell or make investments in
other entities, and make certain distributions to our equity holders. This
restriction would take effect if, after giving effect to any new increase of
debt on a pro forma basis, our consolidated coverage ratio is less than or
equal to 2.0 to 1.0. As a result of the effects on our business of the economic
recession and the events of September 11, 2001, we anticipate that any
consolidated coverage ratio that is calculated under the indenture after the
end of our first quarter 2002 may be less than or equal to 2.0 to 1.0. If this
occurs, then we will be prohibited from incurring indebtedness and from issuing
stock (other than certain types of debt specifically permitted under the
indenture) and we would be prohibited from declaring or paying distributions to
our unitholders, other than to the extent required to have Host Marriott
maintain its status as a REIT.
Debt and Equity Registrations. In January 2002, Host REIT's shelf
registration for $1.55 billion of debt and equity was declared effective. They
completed this shelf in order to help expedite future public offerings;
however, they currently do not anticipate accessing the capital markets during
2002. Additionally, during February 2002, Host REIT filed a shelf registration
statement for 1.1 million of its common shares to be issued to
42
a minority partner in the San Diego Marina Marriott Hotel in exchange of
approximately 5% interest in the San Diego partnership. On March 15, 2002, this
minority partner sold the 1.1 million common shares of Host REIT to an
underwriter for resale on the open market. Concurrent with the issuance of
these common shares, we issued to them an equivalent number of OP Units. This
transaction did not materially impact Host REIT's ownership percentage in us.
Host REIT received no proceeds as a result of these transactions.
Subsequent to this exchange, other minority partners in the San Diego hotel
have notified us of their intent to exchange additional interests in the San
Diego partnership for approximately 6.8 million OP Units. We expect these
exchanges to close during the second quarter. After completion of these
exchanges, the minority partner will own 10% of the interest in the San Diego
hotel.
Management and Other Agreements. Host REIT currently is in the process of
negotiating changes to the management and other agreements with Marriott
International and its affiliates. If made, the changes, which remain subject to
the consent of various lenders to the properties and other third parties, would
be effective December 29, 2001. The proposed changes would result in reductions
in incentive management fees on the portfolio of Marriott-managed hotels,
reduce certain expenses to the property, lower our working capital
requirements, clarify the circumstances and conditions under which Marriott
International and its affiliates may earn a profit on transactions with the
hotels, and provide greater approval rights over budgets and capital
expenditures. The Company is also negotiating to expand the pool of hotels that
are subject to an existing agreement that allows us to sell certain assets
without a Marriott International management agreement, and to revise the method
for determining the number of hotels that may be sold without a Marriott
International management agreement or a franchise agreement, in each case,
without the payment of a termination fee. There can be no assurance that the
negotiations will be successful, that the changes will be made in substantially
the form described or that we will receive the necessary consents to implement
these changes.
Marriott International currently has the right to purchase up to 20 percent
of Host REIT's outstanding stock upon certain changes in control of Host
Marriott. In connection with Host REIT's negotiations with Marriott
International on changes to the management agreements, we are discussing
terminating this right and clarifying existing provisions in the management
agreements that currently limit Host REIT's ability to sell a hotel or the
company to a competitor of Marriott International.
Results of Operations
Our historical revenues for 2000 and 1999 represent rental income on leases
of our hotels. Expenses during 2000 and 1999 represent specific owner costs,
including real estate and property taxes, property insurance and ground and
equipment rent. Beginning January 1, 2001, we reported gross property level
sales from the majority of 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 due to changes in the REIT tax laws which enabled the
subsequent acquisition by the TRS of leases on our hotels previously leased to
third parties (see Business and Properties, "Operating Structure"). As a
result, our 2001 results are not comparable to the historical reported amounts
for 2000 and 1999.
2001 Compared to 2000
Revenues. Revenues increased $2.4 billion, or 171%, to approximately $3.8
billion for 2001. As discussed above, our revenues and operating profit are not
comparable to 2000, due to the acquisition of the lessee entities by the TRS.
Rental income decreased $1.3 billion, or 91%, to $126 million for 2001 versus
2000, reflecting the purchase of the leasehold interests from Crestline with
respect to 116 hotels by the TRS effective January 1, 2001 and the purchase of
four additional lessee entities (three of the lessee entities were purchased
from Wyndham, while the other was purchased from Crestline) effective June 16,
2001. Rental income for 2001 includes: 1) lease income from our HPT leases of
$77 million, 2) lease income earned on five full-service properties of $29
million, 3) lease income earned on certain FF&E of $14 million and 4) office
building rental income of $6 million. For 2002, rental income will include the
HPT leases income, rent from the one remaining full-service hotel and the
office building leases.
43
The table below presents gross hotel sales for the years ended December 2001
and 2000. For 2000, gross hotel sales were used as the basis for calculating
rental income. The data is presented in order to facilitate an investor's
understanding and comparative analysis of the operations of our properties.
Year Ended
-------------------------
December 31, December 31,
2001 2000
------------ ------------
(in millions)
Hotel sales
Rooms..................... $2,550 $2,877
Food and beverage......... 1,173 1,309
Other..................... 306 323
------ ------
Total hotel sales..... $4,029 $4,509
====== ======
The $480 million decrease in hotel sales for the year ended December 31,
2001 primarily reflects the decrease in REVPAR for our properties of 13.7% to
$105.96. Room sales also declined as a result of the loss of sales from the New
York Marriott World Trade Center and the New York Marriott Financial Center due
to the terrorist acts of September 11. The declines were partially offset by
incremental revenues provided by the 500-room expansion at the Orlando
Marriott, which was placed in service in June 2000, and the addition of three
hotels as a result of our consolidation of Rockledge and Fernwood as of March
24, 2001.
The aforementioned decline in REVPAR for the year ended December 31, 2001
compared to the year ended December 31, 2000, of 13.7% to $105.96, was due to
the economic recession and the effects of the September 11, 2001 terrorist
attacks. The decrease is attributable to a decrease in occupancy of 7.7
percentage points and a 4.1% decrease in room rates for the year. As a result
of decreased hotel sales, our hotel managers implemented cost cutting measures
and revenue enhancement programs at the property level during the second
quarter in order to stabilize house profit. These measures include increasing
labor efficiency particularly at the managerial level and in the food and
beverage area at the hotels, reducing discretionary expenses in rooms, food and
beverage, and repairs and maintenance and reducing energy consumption. These
cost cutting measures served to stabilize the profit margins during the second
and third quarters, however, due to continued declines in RevPAR during the
third and fourth quarters, profit margins on our entire portfolio of hotels
decreased 3.0 percentage points for the year ended December 31, 2001.
Other Property-level Expenses. Other property-level owner expenses
primarily consist of property taxes, insurance, and ground and equipment rent.
These expenses increased $6 million, or 2%, to $282 million, for the year ended
December 31, 2001. The increase was primarily due to additional expenses
required as the lessee of the properties. Included in other property-level
expenses is $72 million and $74 million for rental expense on our HPT leases
for 2001 and 2000, respectively.
Depreciation and Amortization. Depreciation and amortization increased $47
million, or 14%, to $378 million during 2001 primarily reflecting an increase
in depreciable assets. The increase in depreciation expense reflects the
consolidation of three hotels and other equipment as a result of the purchase
of the voting interests in Rockledge and Fernwood. The transaction caused an
increase in depreciable assets of $206 million. The increase in depreciation
expense is also the result of $286 million and $379 million in capital
expenditures in 2000 and 2001, respectively.
Corporate Expenses. Corporate expenses decreased by $10 million, or 24%, as
a result of our efforts to curb costs in the wake of a more difficult operating
environment during 2001 and a decrease in compensation expense related to
employee stock plans.
44
Lease Repurchase Expense. In connection with the definitive agreement with
Crestline in November 2000 for the purchase of the leasehold interests with
respect to 116 hotels, by the TRS, we recorded a nonrecurring loss provision of
$207 million. In 2001, as a result of the purchase of four additional leasehold
interests by the TRS, we recognized a loss of $5 million.
Minority Interest. Minority interest decreased by $11 million to $16
million for 2001, primarily due to allocation of the Mexico partnership's
minority interest income. The Mexico partnership was not consolidated until
second quarter of 2001.
Interest Expense. For the year ended December 31, 2001, interest expense
increased 6% to $493 million, compared to the year ended December 31, 2000,
primarily due to the issuance in October of 2000 of $250 million 9 1/4% Series
F Senior notes, which was primarily used to fund the purchase of the Crestline
lessee entities and for general corporate purposes.
Interest Income. Interest income decreased $4 million, or 10%, for the year
ended December 31, 2001, when compared to the year ended December 31, 2000. The
decrease was due to the elimination of notes receivable as a result of the
consolidation of Rockledge on March 24, 2001, the elimination of working
capital notes receivable in connection with the acquisition of the leasehold
interests in 120 hotels, as well as a decrease in the average cash balance
during the year. The decrease was partially offset by interest on a note
relating to the 1994 sale of 26 Fairfield Inns that is recorded under the cost
recovery method.
Equity in Earnings of Affiliates. For the year ended December 31, 2001,
equity in earnings of affiliates decreased $22 million, or 88%, to $3 million.
The decrease is due to the consolidation of Rockledge and Fernwood on March 24,
2001 as a result of the purchase of the 5% voting interests in both entities.
Income Tax Benefit. For the year ended December 31, 2001, we recorded an
income tax provision of $8 million, a change of $106 million, from the $98
million income tax benefit in 2000. The change is primarily due to the $82
million benefit taken during 2000 due to the recognition of the income tax
asset as a result of the purchase of the leasehold interests with respect to
120 hotels. Also, during 2001 and 2000, we favorably resolved certain tax
matters and recognized $16 million and $32 million, respectively, related
thereto as a benefit to our tax provision.
Extraordinary (Loss) Gain. We recorded an extraordinary loss of $2 million
in 2001 and an extraordinary gain of $4 million in 2000. During 2001 and 2000,
we had losses of $1 million and $2 million, respectively, representing the
write-off of deferred financing costs and certain fees paid to our lender in
connection with renegotiations of the bank credit facility.
In 2001, we recorded an extraordinary loss of $1 million, representing the
write-off of deferred financing costs in connection with the refinancing of the
mortgage debt of our Canadian properties.
During the first quarter of 2000, we extinguished approximately $22 million
of the convertible debt obligation to Host REIT through the purchase of 0.4
million shares of Host REIT's Convertible Preferred Securities on the open
market. We recorded an extraordinary gain of $7 million on this transaction,
based on the discount at which we purchased the Convertible Preferred
Securities. We also recorded an extraordinary loss of $1 million representing
the write-off of deferred financing costs in connection with the early
extinguishments.
Net Income. Our net income was $57 million in 2001 compared to net income
of $207 million in 2000. Basic and diluted earnings per common unit were $.09
and $.09, respectively, for 2001, compared to $.66 and $.65, respectively, in
2000.
Net Income Available to Common Unitholders. Our net income available to
common unitholders was $25 million in 2001, a decrease of $162 million when
compared to the same period in 2000. The decrease reflects distributions of $32
million in 2001 on the preferred limited partner units issued in March of 2000.
45
2000 Compared to 1999
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, 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 5.4% to $122.43 in 2000 for our hotels.
Average room rates increased approximately 5.6%, while average occupancy
decreased 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.
Other Property-level Expenses. Property-level 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 increased $6 million to $27
million for 2000, primarily reflecting the improved property-level results, as
previously discussed, to include those properties that are not wholly-owned by
us.
Interest Expense. Interest expense decreased less than 1% to $466 million
in 2000, primarily due to the $75 million reduction in the convertible debt
obligation to Host REIT during the fourth quarter of 1999 and first quarter of
2000, and the decrease in the outstanding balance of the bank credit facility
during 2000 compared to 1999, partially offset by the issuance of the Series F
senior notes in October 2000.
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.
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.
46
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.
During the first quarter of 2000, we extinguished approximately $22 million
of the convertible debt obligation to Host REIT through the purchase of 0.4
million shares of Host REIT's Convertible Preferred Securities on the open
market. We recorded an extraordinary gain of $7 million on this transaction,
based on the discount at which we purchased the Convertible Preferred
Securities. We also recorded an extraordinary loss of $1 million representing
the write-off of deferred financing costs in connection with the early
extinguishment.
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.
During the fourth quarter of 1999, we extinguished approximately $53 million
of the convertible debt obligation to Host REIT through the purchase of 1.1
million shares of Host REIT's Convertible Preferred Securities on the open
market. We recorded an extraordinary gain of $14 million on this transaction,
based on the discount at which we purchased the Convertible Preferred
Securities. We also recorded an extraordinary loss of $2 million representing
the write-off of deferred financing fees in connection with the extinguishment.
Net Income. Our net income in 2000 was $207 million, compared to $285
million in 1999. Basic and diluted earnings per common unit was $.66 and $.65,
respectively, for 2000, compared to $.96 and $.93, respectively, in 1999.
Net Income Available to Common Unitholders. Our net income available to
common unitholders in 2000 was $187 million, compared to $279 million in 1999,
reflecting distributions of $20 million in 2000 on the preferred limited
partner units which were issued during the second half of 1999.
Liquidity and Capital Resources
During 2000 and 2001, 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 unitholder
47
value. As a result September 11, 2001, we have focused on implementing cost
controls, limiting capital expenditures and maintaining our liquidity.
The acquisitions made in January 2001 and June 2001 of the Crestline and
Wyndham lessee entities enable us to better control our portfolio of hotels and
were accretive to our earnings and cash flow during 2001. There can be no
guarantee, however, that we will benefit from similar favorable results in the
future.
As a result of several key actions taken by us in the fourth quarter of
2001, including amending our bank credit facility, issuing $450 million of
senior notes and selling two hotels, we had $352 million of cash at year end,
no outstanding debt on our bank credit facility and no significant debt
maturities until 2005. Although we do not believe we will need to access the
bank credit facility during 2002, we are seeking to implement a new long-term
facility that will be smaller but with less restrictive covenants than our
existing agreement.
Cash from Operations. Cash and cash equivalents were $352 million and $313
million at December 31, 2001 and 2000, respectively. Cash from operations
decreased $253 million to $281 million in 2001, primarily reflecting declining
results of operations due to the 13% decrease in RevPAR for our comparable
properties as previously discussed, in addition to the $208 million paid in
2001 for the purchase of the leasehold interests with respect to 120 of our
hotels.
Cash from Investing Activities. Cash used in investing activities was $279
million and $448 million in 2001 and 2000, respectively. Cash used in investing
activities includes capital expenditures of $286 million and $379 million and
cash payments for acquisitions of $63 million and $40 million in 2001 and 2000,
respectively. Cash used in investing activities during 2001 was partially
offset by cash provided by the sale of two hotels of $60 million, discussed
below.
As a result of our efforts to conserve capital, we have budgeted a lower
level of capital expenditures for 2002 as compared to 2001. We estimate that
approximately $185 million will be required for the upcoming year for renewals
and replacements, new investments and other capital expenditure projects. We
expect to fund the anticipated capital expenditure projects from the property
improvement funds as well as from operations.
Capital expenditures include contributions to property improvement funds,
which have been established for certain of our hotels pursuant to the
management agreement in order to provide for the replacement of furniture,
fixtures and equipment as well as non-routine repairs and maintenance which are
normally capitalized. Contributions to the property improvement funds are
generally 5% of gross hotel sales. Capital expenditures also include the costs
for expansion and development projects that are funded through loans such as
the Orlando World Center Marriott that was completed during 2000.
The following table summarizes significant investing activities which were
completed during 2001 and 2000 (in millions).
Sale/
(Purchase)
Transaction Date Description of Transaction Price
- ---------------- --------------------------------------------------- ----------
2001
March............ Purchase of the 5% voting interest in Rockledge and
Fernwood (1) $ (2)
April............ Addition of a spa facility at The Ritz-Carlton,
Naples (2) (26)
June............. Purchase of Wyndham limited partner interests (3) (60)
June............. Addition of a spa facility at the Marriott Harbor
Beach Resort (8) (8)
December......... Sale of Vail Marriott Mountain Resort and the
Pittsburgh City Center Marriott 65
2000
May.............. Purchase of non-controlling partnership interest in
JWDC Limited Partnership (4) $(40)
June............. Additions to the Orlando World Center Marriott (5) (88)
October.......... Purchase of 50% interest in Courtyard by Marriott
Joint Venture (6) (90)
- --------
(1) The voting interests were previously held by the Host Marriott Statutory
Employee/Charitable Trust. Prior to the acquisition we held a 95%
non-voting interest in each company. As a result of the acquisition we now
consolidate three additional full-service hotels.
48
(2) During 2001, a total of $5 million of the development cost was expended.
(3) The limited partner interests relate to 7 full-service hotels, and as a
part of the transaction, the leases were acquired from Wyndham with respect
to three of the hotels.
(4) The partnership owns the 772-room JW Marriott Hotel located on Pennsylvania
Avenue in Washington, DC.
(5) Includes the addition of a 500-room tower and 15,000 square feet of meeting
space. During 2000, a total of $39 million of the development cost was
expended.
(6) See below for discussion.
In December 2000, a joint venture formed by us (through non-controlled
subsidiaries) and Marriott International acquired the partnership interests in
CBM I and CBM II, two partnerships owning 120 hotels for an aggregate payment
of approximately $372 million plus interest and legal fees, of which Rockledge
paid approximately $90 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 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 contributed by
Marriott International. We own a 50% interest in the joint venture and account
for it on the equity method because we do not control it.
For purposes of our investment analysis and the charge for litigation
settlements in our 1999 financial statements, we estimated the value of the
planned investment in the Courtyard joint venture based upon: (1) estimated
post-acquisition cash flows, including anticipated changes in the related hotel
management agreements to be made contemporaneously with the investment; (2) the
joint venture's new capital structure; and (3) estimates of prevailing discount
rates and capitalization rates reflected in the market at that time. The amount
of post-settlement equity of the Courtyard joint venture was considerably lower
than the pre-acquisition equity due to additional indebtedness post-acquisition
offset by the impact of changes to the management agreements made
contemporaneously with the transaction. The investment in the Courtyard joint
venture was consummated late in the fourth quarter of 2000. The Courtyard joint
venture has recorded its investment in the partnership units at $363 million,
which reflected estimated fair value based on: (1) pre-acquisition cash flows;
(2) the pre-acquisition capital structure; and (3) prevailing discount rates
and capitalization rates in December 2000. The factors giving rise to the
differences between our 1999 assessment based on post-acquisition cash flows
and the joint venture purchase accounting based on pre-acquisition cash flows
did not materially affect our previous assessment of expense related to
litigation.
Due to a number of factors, the equity values used in the purchase
accounting for the joint venture's investment were different from limited
partner unit estimates included in the CBM I and CBM II Purchase Offer and
Consent Solicitations prepared in early 2000. The solicitations reported that
the value of limited partner units based on an assumed 20 percent discount rate
would be $254 million. The difference between this and the purchase accounting
entry by the Courtyard joint venture is primarily attributed to: (1) the
investment's being consummated almost one year subsequent to the time the
original estimates were prepared ($30 million); and (2) a lower discount rate
(17 percent) and capitalization rate reflecting changes in market conditions
and capital structure versus the date at which the estimates in the
solicitations were prepared ($79 million).
Although we may from time to time sell assets for strategic reasons or to
realize unique market conditions, the factors driving the change in value for
the CBM I and CBM II properties did not have a material impact on other
properties owned by us because our strategy is to buy and hold investments in
real estate. As investments in real estate are accounted for on a historical
basis, the impact of changes in market conditions are not reflected in the
financial statements.
Property and equipment balances include $149 million and $135 million for
construction in progress as of December 31, 2001 and December 31, 2000,
respectively. The balance as of December 31, 2001, primarily relates to the
development of the Ritz-Carlton, Naples Golf Resort, which opened on January 4,
2002.
49
Cash from/used in Financing Activities. Cash provided by financing
activities was $37 million in 2001 and cash used by financing activities was
$50 million in 2000.
As of December 31, 2001, our total consolidated debt was approximately $6.1
billion. Our debt is comprised primarily of $3.2 billion in unsecured senior
notes, $2.3 billion in non-recourse mortgage debt and the $492 million
convertible debt obligation to Host REIT.
As a result of the repayment of the outstanding balance on the credit
facility with the proceeds from the Series H senior notes we have substantially
reduced all of our near term maturities, with $148 million in principal
payments due during 2002 and $294 million in principal payments due over the
next three years. The weighted average interest rate of all our debt is
approximately 8.2%, and our current average maturity is six years.
Additionally, 98% of our debt has a fixed rate of interest as of December 31,
2001. However, in order to reduce interest rate risk by taking advantage of
low, short-term interest rates and to maintain a mix of floating and fixed rate
debt, we entered into an interest rate swap agreement (described below),
effective in January 2002, to convert the fixed rate of the Series H senior
notes to a floating rate. If the swap agreement had been effective as of
December 31, 2001, the percentage of fixed rate debt would have been 90%. We do
not have a specific goal relative to our level of variable or fixed interest
rate debt. We will continue to evaluate each debt offering in regards to the
type and timing of payments, maturity date and its overall effect on earnings.
We entered into a separate cap arrangement in January 2002 to limit our
exposure to interest rate increases on this floating rate swap (described
below).
The following table summarizes significant financing activity except for the
bank credit facility and non-cash equity transactions (all of which are
discussed below) for fiscal years 2001 and 2000 (in millions):
Transaction Transaction Interest Rate at
Date Description of Transaction Amount 12/31/01
---- -------------------------- ----------- ----------------
2001
-- Payment of Class A, B and C cumulative redeemable preferred
limited partner unit distributions(1) (28) --
-- Payment of OP Unit distributions (298) --
March Issuance of Class C cumulative redeemable preferred limited
partner units(1) 143 10.00%
August The Ritz Carlton, Amelia Island mortgage loan (88) --
August Canadian mortgage loan(2) 96.6 4.82%
October San Antonio Marriott Riverwalk mortgage loan (16.5) --
December Issuance of Series H Senior Notes(3) $ 450 9.50%
2000
-- Repurchase of equity instruments(4) (62) --
-- Payment of Class A and B cumulative redeemable preferred
limited partner unit distributions (19) --
-- Payment of OP Unit distributions (241) --
February Harbor Beach Marriott Mortgage(5) 84 8.58%
February Harbor Beach Marriott Mortgage(5) (80) 9.13%
October Issuance of Series F Senior Notes(6) 250 9.25%
- --------
(1) On March 27, 2001, we sold approximately 6.0 million units of 10% Class C
cumulative redeemable preferred units ("Class C Preferred Units") with a
par value of $0.01 for net proceeds of $143 million. Holders of the Class C
Preferred Units are entitled to receive cumulative cash distributions at a
rate of 10% per year of the $25 per unit liquidation preference.
Distributions are payable quarterly in arrears commencing April 15, 2001,
on which date pro rata distributions of $0.03 per Class C Preferred Unit
were paid. We paid two other quarterly distributions of $0.625 per share in
2001, and on December 5, 2001, the Board of Directors declared the fourth
quarter distribution of $0.625, which was paid in January 2002.
(2) Proceeds from the Canadian mortgage were used to repay the mortgage debt on
the Ritz Carlton, Amelia Island and the Toronto Eaton Centre. See below for
further discussion.
50
(3) Proceeds from the Series H senior notes were used to repay the outstanding
balance on the credit facility. Additionally, we entered into an interest
rate swap agreement with regards to this principle balance, as is dicussed
below.
(4) For the year ended December 31, 2000, we purchased approximately 4.9
million shares of common stock, 0.4 million shares of the Convertible
Preferred Securities, and 0.3 million OP Units for approximately $62
million.
(5) These transactions represent the refinancing of the prior $80 million
mortgage debt on the Harbor Beach Marriott Hotel.
(6) Proceeds from the Series F senior notes were used to partially fund the
buyback of leases from Crestline and litigation dealing with our Courtyard
partnerships. During March of 2001, the Series F senior notes were
exchanged on a one-for-one basis for Series G senior notes, which are
freely transferable.
We have a bank credit facility, which we entered into in 1998 and have
subsequently modified in May 2000 and November 2001. The original facility was
for $1.25 billion and matured in three years. In May 2000 the borrowing
capacity under the facility was reduced to $775 million. As previously
discussed, the last modification to the facility was in November 2001, which
reduced the available capacity to $50 million during the first quarter of 2002
and $25 million during the second quarter of 2002, and temporarily amended
certain covenants as a result of the economic recession and the events of
September 11, 2001. Borrowings under the facility bear interest currently at
the Eurodollar rate plus 225 basis points. Additionally, the interest rate
fluctuates based on our leverage ratio. Borrowings under the facility averaged
$248 million in 2001 and $153 million in 2000 and were used for the purchase of
outside partnership interests in our hotels, to partially fund the purchase of
the leasehold interests by the TRS, as well as general corporate purposes. As
of December 31, 2001 there are no outstanding borrowings under the facility.
Historically, our debt has primarily been fixed rate including all of the
previous series of senior notes. We have increased the amount of our exposure
to variable rate instruments on the issuance of our Series H senior notes by
using derivative products. On December 20, 2001, we entered into a 5-year
interest rate swap agreement, which is effective January 15, 2002 and matures
January 2007. Under the swap, we receive fixed-rate payments at 9.5% and pay
floating-rate payments based on one-month LIBOR plus 450 basis points, on a
$450 million notional amount. The fair value of the interest rate swap
agreement was zero at inception. Under SFAS 133 we have entered into an
interest rate swap which is designated as a fair value hedge. The requirements
for hedge accounting having been met, the swap is recorded at fair value on the
balance sheet with changes in the fair value recorded to the carrying value of
the Series H debt. Additionally, the amounts paid or received under the swap
agreement will be recognized over the life of the agreement as an adjustment to
interest expense. On January 4, 2002, in a separate agreement with a different
counter party, we purchased for approximately $3.5 million an interest rate cap
with the same notional amount which caps the floating interest rate at 14%.
Under SFAS 133 the cap does not qualify for hedge accounting, and therefore,
will be marked to market and the gains and losses from changes in the market
value of the cap will be recorded in other income or expense in the current
period.
On August 30, 2001, certain Canadian subsidiaries entered into financing
agreements pursuant to which they borrowed $96.6 million due August 2006 at a
variable rate of LIBOR plus 275 basis points. The Calgary Marriott, Toronto
Airport Marriott, Toronto Marriott Eaton Centre, and Toronto Meadowvale Delta
hotels serve as collateral. Since the mortgage loan on these Canadian
properties is denominated in U.S. Dollars and the functional currency of the
Canadian subsidiary is the Canadian Dollar, we purchased derivative instruments
for hedging of the foreign currency investment. Therefore, the subsidiaries
entered into 60 separate currency forward contracts to buy U.S. dollars at a
fixed price. These forward contracts hedge the currency exposure of converting
Canadian dollars to U.S. dollars on a monthly basis to make debt service
payments. This swap has been designated as a cash flow hedge of the principal
payments, and the forward contracts are recorded at fair value on the balance
sheet with offsetting changes recorded in accumulated other comprehensive
income. The fair value of the forward contracts is recorded each period. As of
December 31, 2001, the fair value of these contracts was $1.5 million and were
recorded in other assets.
On February 7, 2001, May 7, 2001 and May 29, 2001, Blackstone and affiliates
("Blackstone") converted 12.5 million, 10.0 million and 18.2 million OP Units,
respectively, to Host REIT common shares and immediately sold them to an
underwriter for sale on the open market. As a result of the transactions,
Blackstone now owns approximately 1% of our outstanding OP Units and Host REIT
increased its OP Unit ownership to 92%. We received no proceeds as a result of
the transactions.
51
FFO and EBITDA
We consider Comparative Funds From Operations ("Comparative FFO"), which
consists of Funds From Operations, as defined by the National Association of
Real Estate Investment Trusts, adjusted for significant non-recurring items
detailed in the chart below, and our consolidated earnings before interest
expense, income taxes, depreciation, amortization and other non-cash items
(including contingent rent) ("EBITDA") to be indicative measures of our
operating performance due to the significance of our long-lived assets.
Comparative FFO and EBITDA are also useful in measuring our ability to service
debt, fund capital expenditures and expand our business. Furthermore,
management believes that Comparative FFO and EBITDA are meaningful disclosures
that will help shareholders and the investment community to better understand
our financial performance, including comparing our performance to other real
estate investment trusts. However, Comparative FFO and EBITDA as presented may
not be comparable to amounts calculated by other companies. This information
should not be considered as an alternative to net income, operating profit,
cash from operations, or any other operating or liquidity performance measure
prescribed by accounting principles generally accepted in the United States.
Cash expenditures for various long-term assets, interest expense (for EBITDA
purposes only) and income taxes have been, and will be incurred which are not
reflected in the EBITDA and Comparative FFO presentations.
Comparative FFO available to common unitholders decreased $194 million, or
32%, to $420 million in 2001 over 2000. The following is a reconciliation of
income before extraordinary items to Comparative FFO (in millions):
Year Ended
------------------------
December 31, December 31,
2001 2000
------------ ------------
Funds from Operations
Income before extraordinary items............................... $ 59 $203
Depreciation and amortization................................ 370 322
Other real estate activities................................. (2) (3)
Partnership adjustments...................................... 26 17
---- ----
Funds from operations of Host LP................................ 453 539
Effective impact of lease repurchase......................... 15 125
Tax benefit unrelated to ongoing operations.................. (16) (30)
---- ----
Comparative funds from operations of Host LP.................... 452 634
Dividends on preferred stock................................. (32) (20)
---- ----
Comparative funds from operations of Host LP available to common
unitholders................................................... $420 $614
==== ====
EBITDA decreased $149 million, or 14%, to $949 million in 2001 from $1,098
million in 2000. Hotel EBITDA decreased $160 million, or 14%, to $959 million
in 2001 from $1,119 million in 2000, reflecting the decrease in hotel operating
results during 2001. As previously discussed, 2001 hotel EBITDA primarily
reflects the revenues and expenses generated by the hotels, whereas 2000 hotel
EBITDA primarily reflects rental income from lessees.
52
The following schedule presents the components of our EBITDA as well as a
reconciliation of EBITDA to income before extraordinary items (in millions):
Year Ended
------------------------
December 31, December 31,
2001 2000
------------ ------------
EBITDA
Hotels.......................................... $ 959 $1,119
Office buildings and other investments.......... 14 13
Interest income................................. 36 40
Corporate and other expenses.................... (60) (74)
----- ------
EBITDA of Host LP.................................. $ 949 $1,098
===== ======
Year Ended
------------------------
December 31, December 31,
2001 2000
------------ ------------
EBITDA of Host L.P................................. $ 949 $1,098
Interest expense................................ (493) (466)
Income tax (expense) benefit.................... (8) 98
Depreciation and amortization................... (378) (331)
Minority interest expense....................... (16) (27)
Lease repurchase expense........................ (5) (207)
Other non-cash changes, net..................... 10 38
----- ------
Income before extraordinary items......... $ 59 $ 203
===== ======
Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.0 times, 2.4 times, and 2.2 times for 2001, 2000, and 1999, respectively.
The ratio of earnings to fixed charges was 1.2 to 1.0, 1.2 to 1.0, and 1.5 to
1.0 in 2001, 2000, and 1999, 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 $57 million at December 31, 2001. 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. However, the current weak economic environment has resulted in
a decline in demand and has restricted our managers' ability to raise room
rates to offset rising costs.
Critical Accounting Policies. Our consolidated financial statements include
accounts of the company and all majority owned subsidiaries. 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 amount of assets and liabilities at the
date of our financial statements, and the reported amounts of revenues and
expenses during the reporting period. While we do not believe the reported
amounts would be materially different, application of these policies involves
the exercise of judgment and the use of assumptions as to future uncertainties
and, as a result, actual results could differ from these estimates. All of our
significant accounting policies are disclosed in footnote 1 to the audited
financial statements. The following represent certain critical accounting
policies that require the use of business judgment or significant estimates to
be made.
53
. Revenue Recognition from the sale of real estate. Gains on the sale of
real estate are affected by exposure to continuing involvement with
properties sold and the structure of specific transactions.
. Minority Interest. The allocation of income between us and outside
investors for properties that are not wholly owned is generally based on
stated percentage of ownership by outside interests. However, judgment
can be required when structures of agreements provide for different
allocations among investors for profits, losses, certain costs,
distributions from operations and distributions on liquidations or when
changes in the allocation ratios are required at specified times or upon
the occurrence of certain events.
. Management Fees. Incentive management fees due to managers are accrued
when earned, whether or not paid, based on stated formulas in management
agreements. However, judgment can be required during interim reporting
periods as a result of the change in allocation ratios at specified
times or upon the occurrence of certain events.
. Consolidation policies. Judgment is required with respect to
consolidation of partnership and joint venture entities in the
evaluation of control including assessment of the importance of rights
and privileges of the partners. Currently, we have investments in
entities that in the aggregate own 161 hotel properties and a golf
course, which we record using the equity method of accounting. The debt
on these investments is non-recourse to the company and the effect of
the results of operations is not material. For further detail on our
unconsolidated entities see footnote 4 to the audited financial
statements.
New Accounting Standards. In October 2001, the Financial Accounting
Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" which replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The standard provides guidance beyond that previously specified in Statement
121 to determine when a long-lived asset should be classified as held for sale,
among other things. This Statement is effective for fiscal years beginning
after December 15, 2001. Additionally, in February 2002 the Financial
Accounting Standards Board resolved an implementation issue regarding SFAS No.
144 dealing with the treatment of sales of properties. Under the new
guidelines, gains and losses from the dispositions of investment properties and
the properties' historical operations for periods beginning in 2002 will be
treated as discontinued operations, and therefore, be classified separately
from income from continuing operations. Historically, we have occasionally
disposed of properties that were not consistent with the overall quality of our
portfolio or presented unique opportunities to realize the asset's value, and
we may dispose of additional assets from time to time in the future. This
statement would require us to reclassify results for any future dispositions
previously included in continuing operations to discontinued operations for all
periods presented, although net income would not be affected and periods prior
to adoption would not be affected.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 sets forth new standards on business combinations,
eliminating the pooling treatment of accounting for business combinations. SFAS
No. 142 requires additional disclosure of identifiable intangible assets, and
requires that they be segregated from goodwill. Additionally, the statement
requires that goodwill no longer be amortized over 40 years, and that it is
instead impaired as the fair value of the goodwill declines. We have not
accounted for any of our business combinations using the pooling method of
accounting and do not have a material amount of goodwill or intangible assets
at year-end 2001. These statements are effective for fiscal years beginning
after December 15, 2001. We will adopt SFAS Nos. 141 and 142 in 2002 and do not
believe implementation of the statements will have a material effect.
In February 2002, the Financial Accounting Standards Board issued an
exposure draft which would rescind SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt. The rescission, which would apply to periods subsequent
to December 31, 2001, would eliminate the requirement that all gains and losses
from the extinguishment of debt be classified as extraordinary items, unless it
can be considered unusual in nature and infrequent in occurrence. As a result
of the rescission, we would no longer classify gains and losses from the
extinguishment of debt as extraordinary items and would adjust prior years
accordingly.
54
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 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. SFAS No.
133 was implemented on January 1, 2001.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
The table below provides information about the company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For debt obligations, the table presents scheduled maturities and related
weighted average interest rates by expected maturity dates. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Weighted average interest rates are
based on implied forward rates in the yield curve as of December 31, 2001.
Notional amounts are used to calculate the contractual payments to be exchanged
under the contract. Weighted average variable rates are presented in U.S.
dollar equivalents, which is the company's reporting currency.
Expected Maturity Date
-------------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 after Total Value
---- ----- ----- ----- ----- ------ ------ ------
($ in millions)
Liabilities
Debt:
Fixed Rate.............. $148 $ 66 $ 78 $ 568 $ 565 $4,080 $5,505 $4,963
Average Interest Rate. 8.1% 8.1% 8.1% 8.1% 8.0% 7.9%
Variable Rate...........
Canadian mortgage..... $ 1 $ 2 $ 1 $ 1 $ 92 $ -- $ 97 $ 97
Average Interest Rate. 6.3% 8.4% 8.9% 9.2% 9.4% --
------
Total Debt.............. $5,602
Interest Rate Derivatives
Interest Rate Swaps(1)..
Fixed to Variable..... $ -- $ -- $ -- $ -- $ -- $ 450 $ 450
Average Pay Rate...... 8.0% 10.1% 10.7% 11.0% 11.1% 11.3%
Average Receive Rate.. 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%
- --------
(1) The swap agreement became effective on January 15, 2002.
As of December 31, 2001, approximately 98% of our debt bears interest at
fixed rates. Effective January 15, 2002, we entered an interest rate swap
agreement, and, as a result, the percentage of our debt bearing interest at a
fixed rate decreased to 90%. 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 sensitive to changes in interest rates,
including our bank credit facility. The interest rate on our bank credit
facility, which had no outstanding balance at December 31, 2001 and $150
million at December 31, 2000, is based on various LIBOR terms plus a spread.
The weighted average interest rate for the facility was 4.4% for the year ended
December 31, 2001 and 9.0% for the year ended December 31, 2000. The credit
facility was repaid in full in December 2001 with the net proceeds from the
offering of the Series H senior notes and a portion of the proceeds from the
sale of two properties.
Subsequent to the Series H senior note offering, we entered into an interest
rate swap agreement that effectively converts the $450 million notional amount
from a fixed rate to a floating rate based on 30 day LIBOR plus 450 basis
points. A change in the LIBOR rate of 100 basis points will result in an
additional $4.5 million
55
increase or decrease in interest expense. As discussed earlier, the swap has
been designated as a hedge and changes in the interest rate over the life of
the agreement are recorded as an adjustment to interest expense. Changes in the
fair value of the swap and the notes are reflected in the balance sheet as
offsetting changes and have no income statement effect.
In January 2002, in addition to the swap agreement, we have entered into a
separate interest rate cap agreement with a different counter party that has a
notional amount of $450 million and caps our floating rate interest expense at
14%. Changes in interest rates will affect the fair value of the cap. The gains
or losses from the changes in the market value of the cap will be recorded in
other income or expense in the current period.
Exchange Rate Sensitivity
The table below summarizes information on instruments and transactions that
are sensitive to foreign currency exchange rates, including foreign currency
forward exchange agreements. For foreign currency forward exchange agreements,
the table presents the notional amounts and weighted average exchange rates by
expected (contractual) maturity dates. These notional amounts generally are
used to calculate the contractual payments to be exchanged under the contract.
Expected Maturity Date
--------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 after Total Value
----- ----- ----- ----- ----- ------ ------ ------
($ in millions)
Anticipated Transactions and Related
Derivative
Foreign Currency Forward
Exchange Agreements
Contract Amount................ $ 7.1 $ 8.3 $ 8.9 $ 9.2 $97.0 $ -- $130.5 $132.0
Average Contractual
Exchange Rate.................. 1.55 1.56 1.56 1.57 1.57 --
On August 30, 2001, our Canadian subsidiaries entered into a mortgage loan
pursuant to which they borrowed $96.6 million (denominated in US dollars) at a
variable rate of LIBOR plus 275 basis points. In addition, the subsidiaries
entered into currency forward contracts to hedge the currency exposure of
converting Canadian dollars to US dollars on a monthly basis to cover debt
service payments. This swap has been designated as a cash flow hedge of the
principal payments, and the forward contracts are recorded at fair value on the
balance sheet with offsetting changes recorded in accumulated other
comprehensive income. The weighted average interest rate for this mortgage loan
was 5.5% for the year ended December 31, 2001. The fair value of the forward
contracts was $1.5 million at December 31, 2001.
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........................................................... 58
Consolidated Balance Sheets as of December 31, 2001 and 2000....................................... 59
Consolidated Statements of Operations for the Fiscal Years Ended December 31, 2001, 2000 and 1999.. 60
Consolidated Statements of Shareholders' Equity, Partners' Capital and Comprehensive Income for the
Fiscal Years Ended December 31, 2001, 2000 and 1999.............................................. 61
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2001, 2000 and 1999.. 62
Notes to Consolidated Financial Statements......................................................... 63
56
Lease Pool Financial Statements
Pool A:
Page
----
Report of Independent Public Accountants........................................................... 98
Consolidated Balance Sheets as of December 29, 2000 and December 31, 1999.......................... 99
Consolidated Statements of Operations for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 100
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 29, 2000 and
December 31, 1999................................................................................ 101
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 102
Notes to Consolidated Financial Statements......................................................... 103
Pool B:
Page
----
Report of Independent Public Accountants........................................................... 109
Consolidated Balance Sheets as of December 29, 2000 and December 31, 1999.......................... 110
Consolidated Statements of Operations for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 111
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 29, 2000 and
December 31, 1999................................................................................ 112
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 113
Notes to Consolidated Financial Statements......................................................... 114
Pool C:
Page
----
Report of Independent Public Accountants........................................................... 119
Consolidated Balance Sheets as of December 29, 2000 and December 31, 1999.......................... 120
Consolidated Statements of Operations for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 121
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 29, 2000 and
December 31, 1999................................................................................ 122
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 123
Notes to Consolidated Financial Statements......................................................... 124
Pool D:
Page
----
Report of Independent Public Accountants........................................................... 129
Consolidated Balance Sheets as of December 29, 2000 and December 31, 1999.......................... 130
Consolidated Statements of Operations for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 131
Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended December 29, 2000 and
December 31, 1999................................................................................ 132
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 29, 2000 and December 31,
1999............................................................................................. 133
Notes to Consolidated Financial Statements......................................................... 134
57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Host Marriott Corporation as General Partner to Host Marriott L.P.:
We have audited the accompanying consolidated balance sheets of Host
Marriott, L.P. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, partners' capital and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2001. 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, L.P. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, 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)(ii) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is 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, fairly states in
all material respects 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
February 25, 2002
58
HOST MARRIOTT, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001 and 2000
2001 2000
------ ------
(in millions)
A S S E T S
Property and equipment, net.................................................................. $6,999 $7,110
Notes and other receivables, net (including amounts due from affiliates of $6 million and
$164 million, respectively)................................................................ 54 211
Due from manager............................................................................. 141 --
Investments in affiliates.................................................................... 142 128
Other assets................................................................................. 532 504
Restricted cash.............................................................................. 114 125
Cash and cash equivalents.................................................................... 352 313
------ ------
$8,334 $8,391
====== ======
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
Debt
Senior notes.............................................................................. $3,235 $2,790
Mortgage debt............................................................................. 2,261 2,275
Convertible debt obligation to Host Marriott Corporation.................................. 492 492
Other..................................................................................... 106 257
------ ------
6,094 5,814
Accounts payable and accrued expenses........................................................ 121 381
Other liabilities............................................................................ 320 312
------ ------
Total liabilities..................................................................... 6,535 6,507
------ ------
Minority interest............................................................................ 108 139
Limited partnership interests of third parties at redemption value (representing 21.6 million
units and 63.6 million units at December 31, 2001 and 2000, respectively).................. 194 823
Partners' capital
General partner........................................................................... 1 1
Cumulative redeemable preferred limited partner........................................... 339 196
Limited partner........................................................................... 1,162 726
Accumulated other comprehensive income (loss)............................................. (5) (1)
------ ------
Total partners' capital............................................................... 1,497 922
------ ------
$8,334 $8,391
====== ======
See Notes to Consolidated Financial Statements.
59
HOST MARRIOTT, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
(in millions, except per common share amounts)
2001 2000 1999
------ ------ ------
REVENUES
Hotel sales
Rooms.................................................................. $2,219 $ -- $ --
Food and beverage...................................................... 1,125 -- --
Other.................................................................. 282 -- --
------ ------ ------
Total hotel sales..................................................... 3,626 -- --
Rental income........................................................... 126 1,398 1,303
Other operating income.................................................. 2 9 0
------ ------ ------
Total revenues........................................................ 3,754 1,407 1,303
------ ------ ------
OPERATING COSTS AND EXPENSES
Rooms................................................................... 541 -- --
Food and beverage....................................................... 843 -- --
Hotel department costs and deductions................................... 946 -- --
Management fees and other............................................... 177 -- --
Property-level expenses................................................. 282 276 268
Depreciation and amortization........................................... 378 331 293
Corporate expenses...................................................... 32 42 34
Loss on litigation settlement........................................... -- -- 40
Lease repurchase expense................................................ 5 207 --
Other................................................................... 19 24 11
------ ------ ------
OPERATING PROFIT.......................................................... 531 527 657
Minority interest....................................................... (16) (27) (21)
Interest income......................................................... 36 40 39
Interest expense........................................................ (493) (466) (469)
Net gains on property transactions...................................... 6 6 28
Equity in earnings of affiliates........................................ 3 25 6
------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES..................... 67 105 240
Benefit (provision) for income taxes.................................... (8) 98 (10)
Benefit from change in tax status....................................... -- -- 26
------ ------ ------
INCOME BEFORE EXTRAORDINARY ITEM.......................................... 59 203 256
Extraordinary (loss) gain on extinguishment of debt..................... (2) 4 29
------ ------ ------
NET INCOME................................................................ $ 57 $ 207 $ 285
====== ====== ======
Less: Distributions on preferred limited partner units to Host Marriott. (32) (20) (6)
------ ------ ------
NET INCOME AVAILABLE TO COMMON UNITHOLDERS................................ $ 25 $ 187 $ 279
====== ====== ======
BASIC EARNINGS PER COMMON UNIT:
Earnings before extraordinary item...................................... $ .10 $ .64 $ .86
Extraordinary (loss) gain............................................... (.01) .02 .10
------ ------ ------
BASIC EARNINGS PER COMMON UNIT............................................ $ .09 $ .66 $ .96
====== ====== ======
DILUTED EARNINGS PER COMMON UNIT:.........................................
Earnings before extraordinary item...................................... $ .10 $ .63 $ .83
Extraordinary (loss) gain............................................... (.01) .02 .10
------ ------ ------
DILUTED EARNINGS PER COMMON UNIT.......................................... $ .09 $ .65 $ .93
====== ====== ======
See Notes to Consolidated Financial Statements.
60
HOST MARRIOTT, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
AND COMPREHENSIVE INCOME
Years Ended December 31, 2001, 2000 and 1999
(in millions)
Class A, B,
and C Accumulated
Preferred Common Preferred Other
Units OP Units Limited General Limited Comprehensive Comprehensive
Outstanding Outstanding Partner Partner Partner Income (Loss) Income (Loss)
- ----------- ----------- --------- ------- ------- ------------- -------------
--...... 225.6 Balance, December 31, 1998 -- 1 767 (4) --
-- -- Net income....................................... -- -- 285 -- 285
-- -- Other comprehensive income (loss):
Unrealized loss 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............................. $291
====
-- 3.6 Units issued to Host Marriott for the
comprehensive stock and employee stock purchase
plans............................................ -- -- 8 --
-- 0.5 Redemptions of limited partnership interests of -- -- (3) --
third parties....................................
-- -- Distributions on OP Units........................ -- -- (245) --
-- -- Distributions on Preferred Limited Partner Units. -- -- (6) --
-- (0.4) Adjustment to special dividend................... -- -- (4) --
-- (5.8) Repurchases of OP Units.......................... -- -- (50) --
-- -- Market adjustment to record Preferred OP Units
and OP Units of third parties at redemption value -- -- 370 --
8.2 -- Issuance of Preferred OP Units................... 196 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
8.2 223.5 Balance, December 31, 1999....................... $196 $ 1 $1,122 $ 2
-- -- Net income....................................... -- -- 207 -- 207
-- -- 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............................. $204
====
-- 2.0 Units issued to Host Marriott for the
comprehensive stock and employee stock purchase
plans............................................ -- -- 15 --
-- 0.7 Redemptions of limited partnership interests of -- -- (3) --
third parties....................................
-- -- Distributions on OP Units........................ -- -- (259) --
-- -- Distributions on Preferred Limited Partner Units. -- -- (21) --
-- (4.9) Repurchases of OP Units.......................... -- -- (44) --
-- -- Market adjustment to record Preferred OP Units
and OP Units of third parties at redemption value -- -- (291) --
- -------------------------------------------------------------------------------------------------------------------------------
8.2 221.3 Balance, December 31, 2000....................... $196 $ 1 $ 726 $(1)
-- -- Net income....................................... -- -- 57 -- 57
-- -- Other comprehensive income (loss):
Foreign currency translation adjustment.......... -- -- -- (3) (3)
Reclassification of gain realized on HM Services
common stock--net income......................... -- -- -- (1) (1)
----
-- -- Comprehensive income............................. $ 53
====
-- 0.3 Units issued to Host Marriott for the
comprehensive stock and employee stock purchase
plans............................................ -- -- 4 --
-- (0.5) Cancellation of Units issued to Host Marriott for
shares granted to employees...................... -- -- -- --
-- 42.1 Redemptions of limited partnership interests of -- -- 547 --
third parties....................................
-- -- Distributions on OP Units........................ -- -- (222) --
-- -- Distributions on Preferred Limited Partner Units. -- -- (32) --
6.0 -- Issuance of Preferred OP Units................... 143 -- -- --
-- -- Market adjustment to record Preferred OP Units
and OP Units of third parties at redemption value -- -- 82 --
- -------------------------------------------------------------------------------------------------------------------------------
14.2 263.2 Balance, December 31, 2001....................... $339 $ 1 $1,162 $(5)
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
61
HOST MARRIOTT, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
(in millions)
2001 2000 1999
----- ----- -------
(in millions)
OPERATING ACTIVITIES
Income from continuing operations........................ $ 59 $ 203 $ 256
Adjustments to reconcile to cash from operations:
Depreciation and amortization.......................... 378 331 293
Income taxes........................................... (24) (47) (66)
Amortization of deferred income........................ (4) (4) (4)
Net gains on property transactions..................... (2) (2) (24)
Equity in earnings of affiliates....................... (3) (25) (6)
Purchase of leasehold interests........................ (208) -- --
Other.................................................. 5 14 10
Changes in operating accounts:
Other assets.......................................... 83 (3) (55)
Other liabilities..................................... (3) 67 (44)
----- ----- -------
Cash from operations................................... 281 534 360
----- ----- -------
INVESTING ACTIVITIES
Proceeds from sales of assets............................ 60 -- 195
Acquisitions............................................. (63) (40) (29)
Capital expenditures:
Capital expenditures for renewals and replacements..... (206) (230) (197)
New investment capital expenditures.................... (56) (108) (150)
Other Investments...................................... (24) (41) (14)
Notes receivable collections, net........................ 10 6 19
Affiliate notes receivable issuances and collections, net -- (39) --
Other.................................................... -- 4 --
----- ----- -------
Cash used in investing activities...................... (279) (448) (176)
----- ----- -------
FINANCING ACTIVITIES
Issuances of debt........................................ 968 540 1,345
Debt prepayments......................................... (703) (278) (1,397)
Cost of extinguishment of debt........................... -- -- (2)
Scheduled principal repayments........................... (55) (39) (34)
Issuances of OP Units.................................... 3 4 5
Issuances of preferred limited partner units............. 143 -- 196
Distributions on common OP Units......................... (298) (241) (258)
Distributions on preferred limited partner units......... (28) (19) (2)
Redemption or repurchase of OP Units for cash............ -- (47) (54)
Repurchases of Convertible Preferred Securities.......... -- (15) (36)
Other.................................................... 7 45 (106)
----- ----- -------
Cash from (used in) financing activities............... 37 (50) (343)
----- ----- -------
(INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS......... 39 36 (159)
CASH AND CASH EQUIVALENTS, beginning of year............. 313 277 436
----- ----- -------
CASH AND CASH EQUIVALENTS, end of year................... $ 352 $ 313 $ 277
===== ===== =======
Supplemental schedule of noncash investing and financing activities:
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.
See Notes to Consolidated Financial Statements.
62
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Host Marriott, L.P. ("Host LP," or the "Operating Partnership"), a Delaware
limited partnership, operating through an umbrella partnership structure with
Host Marriott Corporation ("Host REIT") as the sole general partner, 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"), and its subsidiaries.
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. Prior to
the REIT Modernization Act, certain tax laws restricted REITs from deriving
revenues directly from the operations of hotels, consequently on January 1,
1999, Host REIT leased substantially all of its hotels to subsidiaries of
Crestline Capital Corporation ("Crestline") and certain other lessees as
further discussed at Note 9. However, with the inception of the REIT
Modernization Act, a wholly owned subsidiary of Host LP, HMT Lessee LLC (the
"TRS"), which has elected to be treated as a taxable REIT subsidiary for
federal income tax purposes, acquired certain subsidiaries owning the leasehold
interests with respect to 120 of the Company's full-service hotels (the "Lessee
Entities") from Crestline and Wyndham International, Inc. and affiliates
("Wyndham"). As a result of the acquisitions, the Company's operating results
reflect property-level revenues and expenses rather than rental income from
lessees with respect to those 120 full-service properties from the effective
dates of the acquisitions. Two of the properties were sold in December of 2001.
As of December 31, 2001, the Company owned, or had controlling interests in,
122 upper-upscale and luxury, full-service hotel lodging properties generally
located throughout the United States, Canada and Mexico 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").
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
Corporation, a newly formed Maryland corporation 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 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, 2001, Host REIT owned approximately 92% of the Operating
Partnership.
In these consolidated financial statements, the "Company" or "Host Marriott"
refers to Host Marriott Corporation before, and Host LP after Host Marriott
Corporation's conversion to a REIT (the "REIT conversion"). Host Marriott
Corporation is presented as the predecessor to the Operating Partnership since
the Operating Partnership and its subsidiaries received substantially all of
the continuing operations, assets and liabilities of Host Marriott Corporation
and its subsidiaries.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. The Company consolidates
entities in which it owns a controlling financial interest (when it owns over
50% of the voting shares of another company or, in the case of partnership
investments, when the
63
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
company owns the general partnership interest). In all cases, the Company
considers the impact on the Company's financial control or the ability of
minority shareholders or other partners to participate or block management
decisions. All material intercompany transactions and balances have been
eliminated.
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.
Revenues
Revenue from operations of the Company's hotels not leased to third parties
is recognized when the services are provided. As previously discussed, the
Company, through the TRS, acquired the Lessee Entities in 2001, and as a
result, the Company no longer leases the properties to a third party, or
receives rental income with respect to those 120 properties. Therefore, the
Company's consolidated results of operations for 2001 primarily reflect
property-level revenues and expenses.
The Company's 2000 and 1999 revenues primarily represent the rental income
from its leased hotels. 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. As of year end 2000 and 1999, all annual
thresholds were achieved.
Accounting for the Impact of the September 11, 2001 Terrorist Acts
The Company is entitled to receive business interruption insurance as a
result of the discontinuation of operations of the World Trade Center Marriott
and the New York Marriott Financial Center, both of which were affected by the
terrorist attacks on September 11, 2001. Income resulting from business
interruption insurance will not be recognized until all contingencies related
to the insurance recoveries are resolved. To the extent that the Company incurs
expenses related to the hotels, principally the ground rent due for the World
Trade Center Marriott, for which the Company is still liable and for which it
is entitled to recovery under the insurance contract, a receivable will be
recognized, if it can be demonstrated that it is probable that the receivable
will be realized. The Company also has property insurance for these hotels and
while it is expected that insurance proceeds will be sufficient to cover all or
a substantial portion of the costs at both hotels, no determination has been
made as to the total amount or timing of those payments. The $129 million net
book value of the World Trade Center Marriott hotel has been written off and a
corresponding receivable recorded for the property insurance proceeds due under
the terms of the insurance contract, which the Company believes is probable of
receipt. The Company believes the replacement cost of the property is
substantially in excess of the hotel's previously recorded net book value.
Currently, no gain or loss has been recorded.
Earnings Per Unit
Basic earnings per unit is computed by dividing net income less
distributions on preferred limited partner units and preferred OP Units by the
weighted average number of common units outstanding. Diluted earnings per unit
are computed by dividing net income less distributions on preferred limited
partner interest and preferred OP Units as adjusted for potentially dilutive
securities, by the weighted average number of common units outstanding plus
other potentially dilutive securities. Dilutive securities may include units
distributed to Host REIT for Host REIT common shares granted under
comprehensive stock plans and the Convertible Preferred Securities. Dilutive
securities may also include those common and preferred OP Units issuable or
outstanding
64
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
that are held by minority partners which are assumed to be converted. Diluted
earnings per unit was not adjusted for the impact of the Convertible Preferred
Securities for 2001, 2000 and 1999 as they were anti-dilutive. In December
1998, the Company declared the Special Dividend (See discussion at Note 7--"
Equity and Partners' Capital") and, in 1999, the Company distributed 11.5
million shares to existing shareholders in conjunction with the Special
Dividend. The weighted average number of units outstanding and the basic and
diluted earnings per computations have been restated to reflect these shares as
outstanding for all periods presented.
A reconciliation of the number of units utilized for the calculation of
diluted earnings per unit follows (in millions, except per share amounts):
Year Ended
-----------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------- --------------------------------- -------------------------
Income Units Per Unit Income Units Per Unit Income Units
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator)
----------- ------------- -------- ----------- ------------- ------ ----------- -------------
Net income....................... $ 57... 284.3.... $ .20. $207... 284.2.... $ .73. $285... 291.6
Distributions on preferred
limited partner units and
preferred OP Units............ (32)... -- (.11). (20)... -- (.07). (6) --
---- ----- ----- ---- ----- ----- ---- -----
Basic earnings available to
unitholders per unit............ $ 25... 284.3.... $ .09. $187... 284.2.... $ .66. $279... 291.6
Assuming distribution of units
to Host Marriott Corporation
for Host Marriott Corporation
common shares granted under
the comprehensive stock
plan, less shares assumed
purchased at average market
price......................... --... 4.1 --. -- 4.2 (.01). -- 5.3
Assuming conversion of
Preferred OP Units............ --... -- --. -- 0.6 -- -- 0.3
Assuming issuance of minority
OP Units issuable under
certain purchase agreements... -- -- -- -- -- --. 7 10.9
Assuming conversion of
Convertible Preferred
Securities.................... -- -- -- -- -- -- -- --
---- ----- ----- ---- ----- ----- ---- -----
Diluted Earnings per Unit........ $ 25 288.4 $ .09 $187 289.0 $ .65 $286 308.1
==== ===== ===== ==== ===== ===== ==== =====
Per
Unit
Amount
------
Net income....................... $ .98
Distributions on preferred
limited partner units and
preferred OP Units............ (.02)
-----
Basic earnings available to
unitholders per unit............ $ .96
Assuming distribution of units
to Host Marriott Corporation
for Host Marriott Corporation
common shares granted under
the comprehensive stock
plan, less shares assumed
purchased at average market
price......................... (.02)
Assuming conversion of
Preferred OP Units............ --
Assuming issuance of minority
OP Units issuable under
certain purchase agreements... (.01)
Assuming conversion of
Convertible Preferred
Securities.................... --
-----
Diluted Earnings per Unit........ $ .93
=====
International Operations
The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: revenues of $62 million, $25
million and $24 million, and income before income taxes of $6 million, $6
million and $8 million in 2001, 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,
while repairs and maintenance are expensed as incurred.
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.
65
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents.
Minority Interest
Minority interest consists of limited partnership interests in consolidated
investments of $108 million and $139 million at December 31, 2001 and 2000,
respectively.
Deferred Charges
Financing costs related to long-term debt are deferred and amortized over
the remaining life of the debt.
Other Comprehensive Income
The components of total accumulated other comprehensive income in the
balance sheet are as follows (in millions):
2001 2000
---- ----
Net unrealized gains............................... $ 6 $ 7
Foreign currency translation adjustment............ (11) (8)
---- ---
Total accumulated other comprehensive income (loss) $ (5) $(1)
==== ===
Derivative Instruments
The Company attempts to maintain a reasonable balance between fixed- and
floating-rate debt, using interest rate swaps and caps, to keep financing costs
as low as possible. If the requirements for hedge accounting are met, amounts
paid or received under these agreements are recognized over the life of the
agreements as adjustments to interest expense, and the fair value of the
derivatives is recorded on the accompanying balance sheet, with offsetting
adjustments or charges recorded to the underlying debt. Otherwise the
instruments are marked to market, and the gains and losses from the changes in
the market value of the contracts are recorded in other income. Upon early
termination of an interest rate swap or cap, gains or losses are deferred and
amortized as adjustments to interest expense of the related debt over the
remaining period covered by the terminated swap or cap.
66
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is also subject to exposure from fluctuations in foreign
currencies relating to the four properties operated in Canada and two
properties in Mexico. To manage the exposure to changes in the Canadian
exchange rate, the Company uses foreign exchange forward contracts. Gains and
losses on contracts that meet the requirements for hedge accounting are
recorded on the balance sheet at fair value, with offsetting changes recorded
to accumulated other comprehensive income. Contracts that do not meet these
requirements are marked to market and included in other income each period.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
The Company maintains cash and cash equivalents 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.
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. As a result of the
acquisition of the Crestline Lessee Entities during January 2001 (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 the TRS.
Application of New Accounting Standards
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets SFAS
No. 121 to determine when a long-lived asset should be classified as held for
sale, among other things. Those criteria specify that the asset must be
available for immediate sale in its present condition, subject only to terms
that are usual and customary for sales of such assets, and the sale of the
asset must be probable, and its transfer expected to qualify for recognition as
a completed sale, within one year. This Statement is effective for fiscal years
beginning after December 15, 2001. Additionally, in February 2002 the Financial
Accounting Standards Board resolved an implementation issue regarding SFAS No.
144 dealing with the treatment of sales of properties. Under the new
guidelines, gains and losses from the dispositions of investment properties and
the properties' historical operations for periods beginning in 2002 will be
treated as discontinued operations, and therefore, be classified serparately
from income from continuing operations. Historically, the Company has
occasionally disposed of properties that were not consistent with the overall
quality of their portfolio or presented unique opportunities to realize the
asset's value, and the Company may dispose of additional assets from time to
time in the future. This statement would require reclassification of results
for any future dispositions previously included in continuing operations to
discontinued operations for all periods presented, although net income would
not be affected.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other intangible
Assets." SFAS No. 141 sets forth new standards on business combinations,
eliminating the pooling treatment of accounting for business combinations. SFAS
No. 142 requires additional disclosure of identifiable intangible assets, and
requires that they may be segregated from goodwill. Additionally, the statement
requires that goodwill no longer be amortized over 40 years, and that it is
instead impaired as the fair value of the goodwill declines. The Company has
not accounted for any of our business combinations using the pooling method of
accounting and does not have a material amount of goodwill or intangible assets
at year-end 2001. These statements are effective for fiscal years beginning
after December 15, 2001. The Company will implement SFAS Nos. 141 and 142 in
2002 and does not believe the statements will materially impact the Company.
67
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 2002, the Financial Accounting Standards Board issued an exposure draft
which would rescind SFAS No. 4, Reporting Gains and Losses from Extinguishment
of Debt. The rescission, which would apply to periods subsequent to December
31, 2001, would eliminate the requirement that gains and losses from the
extinguishment of debt be classified as extraordinary items, unless it can be
considered unusual in nature and infrequent in occurrence. As a result, the
Company would no longer classify gains and losses from the extinguishment of
debt as extraordinary items and will adjust prior years accordingly.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The standard
establishes accounting and reporting standards requiring that derivative
instruments (including specified derivative instruments embedded in other
contracts) be recorded in the balance sheet measured at fair value. The
standard requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement. The Company
implemented SFAS No. 133 in 2001.
2. Lease Repurchase
Effective January 1, 2001, the Company, through the TRS, acquired from
Crestline 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, effectively terminating the leases for
financial reporting purposes. 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.
On June 16, 2001, the Company consummated another agreement with Crestline
for the acquisition of their lease agreement with respect to San Diego Marriott
Hotel and Marina (the "San Diego Hotel"). The purchase price was $4.5 million,
including $1.8 million of legal and professional fees. The TRS acquired the
lease by purchasing the lessee entity, effectively terminating the lease for
financial reporting purposes.
On June 28, 2001, the Company consummated an agreement to purchase
substantially all the minority limited partnership interests held by Wyndham
with respect to seven full-service hotels for $60 million. As part of this
acquisition, the leases were acquired from Wyndham with respect to the San
Diego Marriott Mission Valley, the Minneapolis Marriott Southwest, and the
Albany Marriott by the TRS, effectively terminating the leases for financial
reporting purposes. For purposes of purchase accounting no amounts were
attributed to the leases themselves, as the leases had no value. The entire
purchase price was allocated to the minority limited partner interests
purchased.
As a result of these acquisitions, the Company's consolidated results of
operations, from the effective dates of the transactions, will present
property-level revenues and expenses rather than rental income from lessees
with respect to those 120 full-service properties. Two of these properties were
sold in December of 2001.
68
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consists of the following as of December 31:
2001 2000
------- -------
(in millions)
Land and land improvements.................... $ 696 $ 685
Buildings and leasehold improvements.......... 7,039 6,986
Furniture and equipment....................... 944 793
Construction in progress...................... 149 135
------- -------
8,828 8,599
Less accumulated depreciation and amortization (1,829) (1,489)
------- -------
$ 6,999 $ 7,110
======= =======
Interest cost capitalized in connection with the Company's development and
construction activities totaled $8 million in 2001, $8 million in 2000, and $7
million in 1999.
In accordance with SFAS 121, "Accounting for Long-Lived Assets and
Long-Lived Assets to be Disposed of," the Company wrote-down three properties,
one of which was sold in December 2001, considered held-for-sale to estimated
fair value, resulting in a charge of $13 million in 2001. There were no asset
writedowns in 2000.
4. Investments in and Receivables from Affiliates
Investments in and receivables from affiliates consist of the following:
As of December 31, 2001
----------------------------------------------------
Ownership
Interests Investment Debt Assets
--------- ---------- -------- -------------------
(in millions)
CBM Joint Venture LLC (a)........................ 50% $ 87.1 $ 935.9 (b) 120 Courtyard
Hotels
JWDC Limited Partnership......................... 54.6% 35.7 95.3 JW Marriott,
Washington, D.C.
Tiburon Golf Ventures, L.P (a)................... 49% 18.1 -- 36-hole golf course
Marriott Residence Inn Limited Partnership (a)... 1% 0.6 92.6 15 Residence Inns
Marriott Residence Inn II Limited Partnership (a) 1% 0.4 132.2 23 Residence Inns
$141.9 $1,256.0
====== ========
Notes and other receivables from affiliates, net. $ 6.3
======
As of December 31, 2000
-----------------------------------------------
Ownership
Interests Investment Debt Assets
--------- ---------- -------- -----------------
(in millions)
JWDC Limited Partnership........................ 50% $ 38.7 $ 95.3 JW Marriott,
Washington, D.C.
Rockledge Hotel Properties, Inc. (a)............ 95% 87.3 1,434.5
Fernwood Hotel Assets, Inc...................... 95% 2.3 -- --
$128.3 $1,529.8
====== ========
Notes and other receivables from affiliates, net $163.7
======
69
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
- --------
(a) As of December 31, 2000, CBM Joint Venture LLC, Tiburon Golf Ventures,
L.P., Marriott Residence Inn Limited Partnership and Marriott Residence Inn
II Limited Partnership were equity investments of Rockledge Hotel
Properties, Inc. See discussion below.
(b) Includes investment in 120 Courtyard hotels, 38 Residence Inns, 50
Fairfield Inns (partnership interest was sold during 2001), and the JW
Marriott, Washington, D.C
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,
D.C. In 2002, we have the option to purchase the 44.4% limited partner interest
of one of the partners for the lesser of $5.8 million or the fair value of the
interest, whichever is greater. Additionally, on or after April 1, 2003, HMC
JWDC GP, our wholly owned subsidiary, Quad-JWM LLC, the other general partner,
have the right to require the partnership to purchase the 1% general partner
interest held by Quad-JWM LLC for the lesser of $375,000 or fair value of the
interest. As of December 31, 2001, the fair value of both interests is less
than $1 million.
In connection with the REIT conversion, Rockledge Hotel Properties, Inc.
("Rockledge") and Fernwood Hotel Assets, Inc. (together, "Non-Controlled
Subsidiaries") were formed to own various assets contributed by the Company to
the Operating Partnership, the direct ownership of which by the Company could
jeopardize Host REIT's status as a REIT. In exchange for the contribution of
these assets to the Non-Controlled Subsidiaries, the Operating Partnership
received non-voting common stock of the Non-Controlled Subsidiaries,
representing 95% of the total economic interests therein. On March 24, 2001,
the Company acquired, through a taxable REIT subsidiary, 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. As a result of the acquisition, the Company began
consolidating Rockledge and Fernwood effective March 24, 2001 and therefore
they are no longer accounted for as equity investments.
During December 2000, a newly created joint venture (the "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 $90 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 $200
million of 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. Additionally, the joint venture has approximately $735
million of debt, all of which is non-recourse to and not guaranteed by Host
Marriott, that consists of the following: 1) The $287 million mortgage maturing
April 2012 requiring monthly payments of principal and interest at a fixed
interest rate of 7.865% which is secured by the 50 hotels owned by CBM I. 2)
The $127 million senior notes maturing February 2008 requiring semiannual
interest payments at a fixed interest rate of 10.75% secured by a first
priority pledge of CBM II of its general and limited partnership interests. 3)
The $321 million multi-class commercial mortgage pass-through certificates
maturing January 2013 requiring monthly payments of principal and interest at
weighted average interest rate of 7.8%, which is secured by first priority
mortgage liens on the 69 hotels owned by CBM II. Each of the joint venture's
120 hotels is operated by Marriott International pursuant to long-term
management agreements. Rockledge, currently a consolidated, wholly owned
subsidiary of the Company, through its subsidiaries, owns a 50% non-controlling
interest in the Joint Venture and records the investment under the equity
method.
70
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the consolidation of Rockledge, our investments include a 49%
interest in Tiburon Golf Ventures, L.P., which owns the 36-hole Greg
Norman-designed golf course surrounding the Ritz-Carlton, Naples Golf Resort.
Additionally, we now consolidate the operations of two hotels located in Mexico
City, Mexico, in which we own a controlling interest.
Receivables from affiliates are reported net of reserves of $7 million at
December 31, 2001 and 2000. There were no repayments in 2001, while repayments
were $3 million in 2000 and $2 million in 1999. There were no additional
fundings in 2001, 2000, and 1999.
The Company's pre-tax income from affiliates includes the following:
2001 2000 1999
---- ---- ----
(in millions)
Interest income from loans to affiliates (1) $4 $10 $11
Equity in net income........................ 3 25 6
-- --- ---
$7 $35 $17
== === ===
- --------
(1) This interest income relates to loans to Rockledge prior to their
consolidation on March 24, 2001.
Combined summarized balance sheet information for the Company's affiliates
follows as of December 31:
2001 2000
------ ------
(in millions)
Property and equipment, net..... $1,490 $1,821
Other assets.................... 196 330
------ ------
Total assets................. $1,686 $2,151
====== ======
Debt, principally mortgages..... $1,256(1) $1,530
Other liabilities............... 76 231
Equity.......................... 354 390
------ ------
Total liabilities and equity. $1,686 $2,151
====== ======
- --------
(1) The 2001 debt balances were not funded by the Company and are non-recourse
to the Company.
Combined summarized operating results for the Company's affiliates follow:
2001 2000 1999
----- ----- -----
(in millions)
Hotel revenues......................... $ 638 $ 850 $ 897
Operating expenses:
Cash charges (including interest)...... (524) (695) (711)
Depreciation and other non-cash charges (107) (127) (137)
----- ----- -----
Income before extraordinary items...... 7 28 49
Extraordinary items.................... -- 68 --
----- ----- -----
Net income............................. $ 7 $ 96 $ 49
===== ===== =====
71
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 statements of operations.
5. Debt
Debt consists of the following:
2001 2000
------ ------
(in millions)
Series A senior notes, with a rate of 77/8% due August 2005........................ $ 500 $ 500
Series B senior notes, with a rate of 77/8% due August 2008........................ 1,195 1,194
Series C senior notes, with a rate of 8.45% due December 2008...................... 499 498
Series E senior notes, with a rate of 83/8% due February 2006...................... 300 300
Series G senior notes, with a rate of 91/4% due October 2007....................... 250 250
Series H senior notes, with a rate of 91/2% due January 15, 2007................... 452 --
Senior secured notes, with a rate of 91/2% due May 2005............................ 12 13
Senior notes, with an average rate of 93/4% maturing through 2012.................. 27 35
------ ------
Total senior notes.............................................................. 3,235 2,790
------ ------
Mortgage debt (non-recourse) secured by $3.4 billion of real estate assets, with an
average rate of 7.9% at December 31, 2001, maturing through February 2023........ 2,261 2,275
Line of credit, with a variable rate of Eurodollar plus 2.25% (4.39% at
December 31, 2001)............................................................... -- 150
Other notes, with an average rate of 7.36% at December 31, 2001, maturing
through December 2017............................................................ 90 90
Capital lease obligations.......................................................... 16 17
------ ------
Total other..................................................................... 106 257
------ ------
5,602 5,322
Convertible debt obligation to Host Marriott Corporation (See Note 6).............. 492 492
------ ------
$6,094 $5,814
====== ======
Senior Notes
The Company currently has six series of Senior Notes outstanding all of
which have been issued under the same indenture. The indenture contains certain
financial covenants that, in the event of a default, would prohibit the Company
from incurring additional indebtedness. These covenants include a ratio test of
aggregate debt to total assets to be less than 65% on a pro forma basis and a
consolidated coverage ratio of EBITDA to interest expense of 2.0 to 1.0.
Failure to meet these covenants would limit the company's ability to incur
additional debt and make dividend payments except to the extent required for
Host REIT to maintain REIT status. As of December 31, 2001 the Company is in
compliance with these covenants.
In December 2001, the Company issued $450 million of 91/2% Series H senior
notes due in 2007. The proceeds were used to repay the term loan and pay down
the revolver portion of the bank credit facility. The December 31, 2001 balance
of the Series H senior notes includes an adjustment for the fair market value
of the related interest rate swap agreement as discussed below.
72
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 2000, the Company issued $250 million of 91/4% Series F senior
notes due in 2007. 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 were 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. The debt was used to refinance, or purchase, approximately $299
million of debt acquired in the partnership mergers, including a $40 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.
Bank Credit Facility. The Company has a bank credit facility, which was
entered into in 1998 and has subsequently been modified in June 2000 and
November 2001. The original facility was for $1.25 billion and matured in three
years. In June 2000, the borrowing capacity under the facility was reduced to
$775 million. The last modification to the facility was in November 2001, which
reduced the available capacity to $50 million. 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 Host REIT 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.
Borrowings under the facility bear interest currently at the Eurodollar rate
plus 225 basis points. The interest rate on the facility fluctuates based on
the company's leverage ratio. Borrowings under the facility averaged $248
million in 2001 and $153 million in 2000. As of December 31, 2001 there are no
outstanding borrowings under the facility. During 2001, 2000 and 1999, the
Company recognized extraordinary losses of approximately $1 million, $2
million, and $2 million, respectively, representing the write-off of deferred
financing costs.
As a result of the economic recession and the events of September 11, 2001
the operations of our hotels were severely impacted. Certain covenants of the
bank credit facility have been temporarily amended and currently require the
Company, among other items, to: 1) meet less stringent levels in respect to
minimum consolidated interest coverage ratio and minimum unsecured interest
coverage ratio until September 6, 2002 and a maximum leverage ratio through
August 15, 2002, 2) suspends until September 6, 2002 the minimum consolidated
fixed charge coverage ratio test, 3) limits draws under the revolver portion to
$50 million in the first quarter of 2002 and up to $25 million in the second
quarter of 2002 (but only if draws in the second quarter of 2002 do not cause
the aggregate amount drawn in 2002 and then outstanding to exceed $25 million
and 4) increases the interest rate charged for borrowing based on higher
leverage levels. The covenants also restrict our ability to: 1) make equity
distributions, 2) incur additional indebtedness, 3) acquire assets, 4) make
investments in subsidiaries and 5) make capital expenditures. The Company is
currently in compliance with all of these covenants.
Mortgage Debt
In October 2001, the Company prepaid the remaining mortgage debt of $16.5
million on the San Antonio Marriott Riverwalk which was due to mature January
1, 2002.
During January 2002, we transferred one of our non-core properties, the St.
Louis Marriott Pavilion, to the mortgage lender. In the first quarter of 2002,
we wrote off the remaining $13 million of property and equipment,
73
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
eliminated $37 million of mortgage debt and related liabilities and recorded a
non-cash gain of approximately $24 million.
In August 2001, a Canadian subsidiary of the Company entered into a
financing agreement pursuant to which it borrowed $96.6 million due August 2006
at a variable rate of LIBOR plus 275 basis points. The Calgary Marriott,
Toronto Airport Marriott, Toronto Marriott Eaton Centre, and Toronto Delta
Meadowvale hotels serve as collateral. The proceeds from this financing were
used to refinance existing indebtedness on these hotels as well as to repay the
$88 million mortgage note on The Ritz-Carlton, Amelia Island hotel. The Company
recorded an extraordinary loss of $1 million during 2001 related to this
refinancing.
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. The Company recorded an extraordinary gain of $5 million during
1999 related to this refinancing.
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.
Derivative Instruments
The mortgage loan on the Canadian properties is denominated in U.S. dollars
and the functional currency of the Canadian subsidiaries is the Canadian
dollar. The subsidiaries have entered into 60 separate currency forward
contracts to buy U.S. dollars at a fixed price. These forward contracts hedge
the currency exposure of converting Canadian dollars to U.S. dollars on a
monthly basis to cover debt service payments. The fair value of the contracts
on December 31, 2001 was $1.5 million.
On December 20, 2001, we entered into a 5-year interest rate swap agreement,
which is effective January 15, 2002 and matures January 2007. Under the swap,
we receive fixed-rate payments of 9.5% and pay floating-rate payments based on
one-month LIBOR plus 450 basis points, on a $450 million notional amount. The
fair value of the interest rate swap agreement was zero at inception. Under
SFAS 133 we have designated the interest rate swap as a fair value hedge, and
the amounts paid or received under the swap agreement will be recognized over
the life of the agreement as an adjustment to interest expense. On January 4,
2002, in a separate agreement with a different counter party, we purchased for
approximately $3.5 million an interest rate cap with the same notional amount
which caps the floating interest rate at 14%. Under SFAS 133 the cap represents
a derivative that will be marked to market and the gains and losses from
changes in the market value of the cap are to be recorded in other income or
expense in the current period.
74
During 1999, the Company terminated its then outstanding interest rate swap
agreements and recognized an extraordinary gain of approximately $8 million.
Aggregate Debt Maturities
Aggregate debt maturities at December 31, 2001 are (in millions), excluding
the convertible debt obligation to Host Marriott:
2002.................... $ 148
2003.................... 67
2004.................... 79
2005.................... 570
2006.................... 656
Thereafter.............. 4,073
------
5,593
Discount on senior notes (7)
Capital lease obligation 16
------
$5,602
======
Cash Paid for Interest
Cash paid for interest for continuing operations, net of amounts
capitalized, was $470 million in 2001, $450 million in 2000, and $451 million
in 1999. Deferred financing costs, which are included in other assets, amounted
to $99 million and $108 million, net of accumulated amortization, as of
December 31, 2001 and 2000, respectively. Amortization of deferred financing
costs totaled $22 million, $15 million, and $17 million in 2001, 2000, and
1999, respectively.
6. Convertible Debt Obligation to Host Marriott Corporation
The obligation for the $492 million of 6 3/4% Convertible Subordinated
Debentures (the "Debentures") as of December 31, 2001 and 2000 has been
included in these financial statements as debt of the Company because upon the
REIT Conversion the Operating Partnership assumed primary liability for
repayment of the Debentures of Host Marriott underlying the Convertible
Preferred Securities (defined below) of the Host Marriott Financial Trust (the
"Issuer"), a wholly-owned subsidiary trust of Host Marriott. The common
securities of Host Marriott Financial Trust were not contributed to the
Operating Partnership and therefore Host Marriott Financial Trust is not
consolidated by the Operating Partnership. Upon conversion by a Convertible
Preferred Securities holder, Host Marriott will issue shares of its common
stock which will be delivered to such holder. Upon the issuance of such shares
by Host Marriott, the Operating Partnership will issue to Host Marriott the
number of OP Units equal to the number of shares of the Host Marriott common
stock issued in exchange for the Debentures.
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
75
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2001 and 2000, 400 shares and 325
shares were converted into common stock, respectively. During 1999, 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, we assumed primary
liability for repayment of the Debentures of Host REIT underlying the
Convertible Preferred Securities. Upon conversion by a Convertible Preferred
Securities holder, Host REIT will issue shares of Host REIT common stock, which
will be delivered to
such holder. Upon the issuance of such shares by Host REIT we will issue to
Host REIT a number of OP Units equal to the number of shares of Host REIT
common stock issued in exchange for the Debentures.
The Company repurchased .4 million shares of the Convertible Preferred
Securities in 2000 as part of the share repurchase program described below in
Note 7. No shares of the Convertible Preferred Securities were repurchased in
2001.
7. Equity and Partners' Capital
284.7 million and 284.9 million common OP units were outstanding, of which
Host REIT held 263.2 million and 221.3 million, as of December 31, 2001 and
2000, respectively. In addition 14.2 million and 8.2 million preferred limited
partner units were outstanding as of December 31, 2001 and 2000.
We paid quarterly cash distributions of $0.26 for the first three quarters
of 2001. As a result of the declining operations, no distributions were made
for the fourth quarter of 2001. Due to liquidity concerns related to the
76
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
current economic conditions and the impact of the September 11, 2001 terrorist
attacks it is uncertain at this time when distributions will commence. For
2000, we paid quarterly cash distributions of $0.21, $0.21, $0.23, and $0.26.
During 1999, approximately 586,000 Class TS cumulative redeemable preferred
operating partnership units and approximately 26,000 Class AM cumulative
redeemable preferred operating partnership units (together the "Preferred OP
Units") were issued in connection with the acquisition of minority interests in
two hotels. The Preferred OP Units are convertible into OP Units on a
one-for-one basis, subject to adjustment in specified events, at any time
beginning one year after acquisition, and after conversion to OP Units are
redeemable for cash or at Host REIT's option, Host REIT common shares. The
Company has the right to convert the Preferred OP Units to OP Units two years
from the date of issuance. Preferred OP Unitholders are entitled to receive a
preferential cash distribution of $0.21 per quarter. During 2000, all of the
Class TS Preferred OP Units and approximately 7,000 of the Class AM Preferred
OP Units were converted by the holders to common OP Units. During 2000, 593,000
Preferred OP Units were converted by their respective holders to common OP
Units. Only 19,000 Preferred OP Units were outstanding as of December 31, 2001
and 2000.
In September 1999, the Board of Directors of Host Marriott Corporation
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 common stock, operating partnership units, or a corresponding
amount of the Convertible Preferred Securities, which are convertible into a
like number of shares of common stock, based on the appropriate conversion
ratio. 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, 0.4 million shares of the Convertible Preferred
Securities and 0.3 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
units on a fully diluted basis.
In August 1999, Host REIT sold 4.16 million shares of 10% Class A preferred
stock, in November 1999, Host REIT sold 4.0 million shares of 10% Class B
preferred stock and in March 2001, Host REIT sold 6.0 million shares of 10%
Class C preferred stock. The Operating Partnership, in turn, issued equivalent
securities, the Class A Preferred Units, Class B Preferred Units, and Class C
Preferred Units ("Class A, B and C Preferred Units"), to Host REIT. Holders 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, payable
quarterly in arrears commencing October 15, 1999 and January 15, 2000 and April
15, 2001 for the Class A, Class B and Class C preferred stock, respectively.
After August 3, 2004, April 29, 2005, and March 27, 2006, Host REIT has the
option to redeem the Class A Preferred Stock, Class B Preferred Stock, and
Class C Preferred Stock, respectively, for $25.00 per share, plus accrued and
unpaid dividends to the date of redemption. The Class A, B and C Preferred
Units rank senior to the OP Units and the Preferred OP Units, and on a parity
with each other. The preferred unitholders generally have no voting rights.
Accrued preferred distributions at December 31, 2001 were $8.8 million.
The Contribution and related transactions resulted in the exchange of 217.1
million OP Units for substantially all of the assets and liabilities of Host
Marriott Corporation.
In conjunction with the REIT Conversion, the Company 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 21.6 million
and 63.6 million of the OP Units were outstanding as of December 31, 2001 and
2000, respectively.
77
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On May 29, May 7 and February 7, 2001, Blackstone and affiliates converted 18.2
million, 10.0 million and 12.5 million OP Units, respectively, to Host REIT
common shares and immediately sold them to an underwriter for sale on the open
market. As a result, Host REIT now owns approximately 92% of the outstanding OP
Units. The Company received no proceeds as a result of this transaction.
Host Marriott Corporation 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, Host
Marriott Corporation changed its par value from $1 to $0.01 per share. The
change in par value did not affect the number of shares outstanding.
Special Dividend
On December 18, 1998, in connection with the Company's REIT conversion, 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 Host REIT for each outstanding share of Host REIT'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.
8. Income Taxes
The Operating Partnership is not a tax paying entity. However, the Operating
Partnership under the Operating Partnership Agreement is required to reimburse
Host REIT for any tax payments Host REIT is required to make. Accordingly, the
tax information included herein represents disclosures regarding Host REIT. As
a result of the requirement of the Company to reimburse Host REIT for these
liabilities, such liabilities and related disclosures are included in the
Company's financial statements.
In December 1998, the Company restructured itself to enable the Company to
qualify for treatment as a REIT effective January 1, 1999, pursuant to the U.S.
Internal Revenue Code of 1986, as amended. In general, a corporation that
elects REIT status and meets certain tax law requirements regarding
distribution 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 on its operating income to the extent it
distributes at least 90% (95% for tax years prior to 2001) of its taxable
income. In 2001 and 2000, the Company distributed 100% of its taxable income to
its common and preferred shareholders. Dividends to common shareholders totaled
$.78 and $.91 per outstanding share in 2001 and 2000, respectively. Of the 2001
common stock dividend, $.49 was taxable as ordinary income, $.04 was taxable as
a capital gain and the remaining $.25 was a return of capital. The entire 2000
distribution was taxable as ordinary income. Accordingly, the Company does not
believe that it will be liable for current income taxes at the Federal level or
in most of the states in which it operates. However, the Company is required to
pay taxes on "built-in gains" on sales of certain of its assets, if any.
Additionally, the Company's consolidated taxable REIT subsidiaries are subject
to Federal and state income tax. The consolidated income tax provision
includes, primarily, the tax provision related to the operations of the TRS,
Rockledge, Fernwood and international taxes at the Operating Partnership, as
well as each of their respective subsidiaries.
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, the Company 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.
78
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Total deferred tax assets and liabilities at December 31, 2001 and December
31, 2000 were as follows:
2001 2000
----- ----
(in millions)
Deferred tax assets..................... $ 77 $ 82
Deferred tax liabilities................ (110) (54)
----- ----
Net deferred income tax
(liability)/asset.................. $ (33) $ 28
===== ====
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, 2001 and December 31, 2000 were as follows:
2001 2000
---- ----
(in millions)
Investment in hotel leases.............. $ 69 $ 82
Safe harbor lease investments........... (21) (23)
Property and equipment.................. (6) --
Investments in affiliates............... (60) --
Deferred gains.......................... (23) (31)
Other................................... 6 --
Alternative minimum tax credit
carryforwards......................... 2 --
---- ----
Net deferred income tax (liability)
asset.............................. $(33) $ 28
==== ====
The provision (benefit) for income taxes consists of:
2001 2000 1999
---- ---- ----
(in millions)
Current -- Federal............................. $(11) $(29) $ 26
-- State............................... 3 2 3
-- Foreign............................. 4 6 3
---- ---- ----
(4) (21) 32
---- ---- ----
Deferred -- Federal............................. 9 (66) (37)
-- State............................... 2 (11) (11)
-- Foreign............................. 1 -- --
---- ---- ----
12 (77) (48)
---- ---- ----
$ 8 $(98) $(16)
==== ==== ====
On July 20, 2001, the United States Court of Appeals for the Fourth Circuit
affirmed a lower court ruling that allowed the Company to carryback a 1991
specified liability loss to the tax years 1984 and 1985 resulting in a net
income tax refund of $16 million. The Company recorded the refund as a benefit
to the provision in 2001. In addition, the Company settled with the Internal
Revenue Service all other outstanding issues for the tax years through 1998.
The Company made net payments to the IRS of approximately $19 million in 2001
and $14 million in 1999 related to these settlements.
79
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the statutory Federal tax expense to the Company's
income tax expense follows:
2001 2000 1999
---- ---- ----
(in millions)
Statutory Federal tax.................. 23 $ 37 $ 84
Nontaxable income of REIT.............. (9) (37) (84)
Built-in-gain tax...................... -- (1) 5
State income taxes, net of Federal tax
benefit.............................. 5 2 2
Tax benefit from acquisition of leases. -- (82) --
Tax contingencies...................... (16) (23) (26)
Tax on foreign source income........... 5 6 3
---- ---- ----
Income tax expense.................. $ 8 $(98) $(16)
==== ==== ====
Cash paid for income taxes, including IRS settlements, net of refunds
received, was $24 million, $30 million, and $50 million in 2001, 2000 and 1999,
respectively.
9. Leases
Hotel Leases. Prior to 2001, the Company leased its hotels (the ''Leases'')
to one or more third party lessees (the ''Lessees''), primarily subsidiaries of
Crestline, due to federal income tax law restrictions on a REIT's ability to
derive revenues directly from the operation of a hotel. Effective January 1,
2001, the REIT Modernization Act amended the tax laws to permit REITs to lease
hotels to a subsidiary that qualifies as a taxable REIT subsidiary.
Accordingly, the TRS acquired the Crestline Lessee Entities owning the
leasehold interests with respect to 116 of the Company's full-service hotels
during January 2001 and acquired the Lessee Entities owning the leasehold
interest with respect to four of the Company's full-service hotels from
Crestline (one lease) and Wyndham (three leases) during June of 2001. As a
result, the Company's revenues now reflect hotel level sales instead of rental
income.
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. The Company 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 were 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''). As a result of the acquisition of the Lessee
Entities in 2001 by the TRS, there no longer is a third party credit
concentration. Separate financial statements for the years 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.
80
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company 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 was represented by a note evidencing a loan that
bore interest at a rate of 5.12%. 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 acquisitions of the Lessee Entities, the
working capital was acquired by the TRS.
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 Company sublet the HPT hotels
(the "Subleases") to separate 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 payable by Crestline under the
Sublease consists of the minimum rent payable under the HPT lease and an
additional percentage rent payable to the Company. The percentage rent payable
by the Sublessor 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 provisions 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)
2002.................................... $ 6 $ 108
2003.................................... 6 104
2004.................................... 6 101
2005.................................... 1 97
2006.................................... 1 95
Thereafter.............................. -- 1,164
--- ------
Total minimum lease payments............ 20 $1,669
======
Less amount representing interest....... (4)
---
Present value of minimum lease
payments........................... $16
===
81
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $48 million and $722 million,
respectively, payable to the Company under non-cancellable subleases.
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.
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
$65 million and $77 million at December 31, 2001 and 2000, respectively, and is
included in other liabilities on the consolidated balance sheets.
The Company remains contingently liable on certain leases relating to
divested non-lodging properties. Such contingent liabilities aggregated $57
million at December 31, 2001. However, management considers the likelihood of
any substantial funding related to these leases to be remote.
Rent expense consists of:
2001 2000 1999
---- ---- ----
(in millions)
Minimum rentals on operating leases.... $107 $107 $106
Additional rentals based on sales...... 32 36 29
---- ---- ----
$139 $143 $135
==== ==== ====
10. Employee Stock Plans
In connection with the REIT conversion, the Company assumed the employee
obligations of Host REIT. Upon the exercise of stock options in Host REIT
common stock, Host REIT will issue shares of its common stock in return for the
issuance of an equal number of OP Units of the Company. Accordingly, these
liabilities and related disclosures are included in the Company's consolidated
financial statements.
At December 31, 2001, Host REIT maintained two stock-based compensation
plans, including the comprehensive stock plan (the ''Comprehensive Plan''),
whereby Host REIT may award to participating employees (i) options to purchase
Host REIT's common stock, (ii) deferred shares of Host REIT's common stock and
(iii) restricted shares of Host REIT'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, 2001 were approximately 15 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, Host Marriott 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.
82
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 HM Services is no longer
publicly traded, all future payments to the Company will be made in cash, as HM
Services Corporation has indicated that the receivable will not be settled in
Autogrill SpA stock. As of December 31, 2001 and 2000, the receivable balance
was approximately $6.4 million and $8.8 million, respectively, which is
included in other assets in the accompanying consolidated balance sheets.
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 2001 and 2000, respectively: risk-free interest rates of 5.2% and
5.1%, volatility of 37% and 32%, expected lives of 12 years, and dividend yield
of $0.78 per share and $0.91 per share. The weighted average fair value per
option granted during the year was $2.73 in 2001 and $1.06 in 2000. Pro forma
compensation cost for 2001, 2000 and 1999 would have reduced net income by
approximately $855,000, $811,000 and $919,000, respectively. Basic and diluted
earnings per share on a pro forma basis were not impacted by the pro forma
compensation cost in 2001, 2000 and 1999.
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 Host REIT's stock option plans that have been
approved by the stockholders for 2001, 2000 and 1999 follows. Host REIT does
not have stock option plans that have not been approved by the Company's
stockholders:
2001 2000 1999
------------------------ ---------------------------- ----------------------------
Shares Weighted Weighted Weighted
(in Average Shares Average Shares Average
millions) Exercise Price (in millions) Exercise Price (in millions) Exercise Price
--------- -------------- ------------- -------------- ------------- --------------
Balance, at beginning of year.......... 4.2 $5 4.9 $ 4 5.6 $ 3
Granted................................ 1.4 8 .6 .10 .6 10
Exercised.............................. (.6) 4 (1.2) 3 (1.3) 3
Forfeited/Expired...................... (.1) 8 (.1) 10 -- --
--- ---- ----
Balance, at end of year................ 4.9 $6 4.2 $ 5 4.9 $ 4
=== ==== ====
Options exercisable at year-end........ 2.9 3.2 4.2
=== ==== ====
83
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options at December
31, 2001:
Options Outstanding Options Exercisable
- - ----------------------------------------------- ------------------------------
Weighted Average
Range of Shares Remaining Weighted Average Shares Weighted Average
Exercise Prices (in millions) Contractual Life Exercise Price (in millions) Exercise Price
- --------------- ------------- ---------------- ---------------- ------------- ----------------
$1 - 3 2.0 5 $ 2 2.0 $ 2
4 - 6 .2 7 6 .2 6
7 - 9 1.6 14 8 .4 8
10 - 12 1.0 14 11 .2 11
13 - 19 .1 11 18 .1 18
--- ---
4.9 2.9
=== ===
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. Host REIT accrues compensation expense for the
fair market value of the shares on the date of grant, less estimated
forfeitures. In 2001, 2000 and 1999, 23,000, 20,000 and 11,000 shares were
granted, respectively, under this plan. The compensation cost that has been
charged against income for deferred stock was not material in 2001, 2000 and
1999. The weighted average fair value per share granted during each year was
$12.99 in 2001, $9.44 in 2000 and $14.31 in 1999.
Host REIT from time to time awards restricted stock shares under the
Comprehensive Plan to officers and key executives to be distributed over the
next three years in annual installments based on continued employment and the
attainment of certain performance criteria. Host REIT 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 Host REIT's common stock. In 2001, 2000 and 1999, 130,000,
889,000, and 3,203,000 shares of restricted stock plan shares were granted to
certain key employees under these terms and conditions. Approximately 593,000
and 106,000 shares were forfeited in 2001 and 2000, respectively. Host REIT
recorded compensation expense of $7.6 million, $11 million and $7.7 million in
2001, 2000 and 1999, respectively, related to these awards. The weighted
average grant date fair value per share granted during each year was $12.82 in
2001, $8.87 in 2000 and $12.83 in 1999. Under these awards 2,010,000 shares
were outstanding at December 31, 2001.
In 1998, 568,408 stock appreciation rights (''SARs'') were issued under the
Comprehensive Plan to certain directors of Host REIT 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
Host REIT upon conversion to a REIT. The SARs are fully vested and the grant
prices range from $1.20 to $5.13. In 2001, 2000 and 1999, Host REIT recognized
compensation (income) expense for outstanding SARs as a result of fluctuations
in the market price of Host REIT's common stock of $(1.2) million, $1.4 million
and $(2.7) million, respectively.
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.
11. 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
84
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1999
through 2001.
12. Acquisitions and Dispositions
Effective March 24, 2001, the Company purchased the 5% voting interests in
each of Rockledge and Fernwood that were previously held by the Host Marriott
Statutory Employee/Charitable Trust for approximately $2 million. Prior to this
acquisition, the Company held a 95% non-voting interest in each company and
accounted for such investments under the equity method. As a result of this
acquisition, the Company holds 100% of the voting and non-voting interests in
Rockledge and Fernwood, and its consolidated results of operations will reflect
the revenues and expenses generated by the two taxable corporations, and its
consolidated balance sheets will include the various assets, including,
primarily, three full-service hotels and certain limited service hotel
partnership interests, including the Joint Venture interest. The Company's
acquisition, including certain joint venture interests, totaled approximately
$356 million in assets and $262 million in liabilities, including $54 million
of third party debt.
On June 28, 2001, the Company consummated an agreement to purchase
substantially all the minority limited partnership interests held by Wyndham
with respect to seven full-service hotels for $60 million. As part of this
acquisition, the leases were acquired from Wyndham with respect to three hotels
by the TRS, effectively terminating the leases for financial reporting
purposes. The entire purchase price was allocated to the minority limited
partner interests purchased.
During January 2002, the Company transferred one of our non-core properties,
the St. Louis Marriott Pavilion hotel, to the mortgage lender. Due to the
original structure of this deal, the Company has not received any cash flow
after payments of debt service from this property since the original spin-off
in 1993. In the first quarter of 2002, the Company will write off the remaining
$13 million of property and equipment, eliminate $37 million of mortgage debt
and related liabilities and record a non-cash gain of approximately $22 million.
In 1999, 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.
During February 2002, we filed a shelf registration statement for 1.1
million common shares to be issued to a minority partner in the San Diego
Marina Marriott Hotel in exchange for certain interests in the San Diego
partnership. On March 15, 2002, this minority partner sold the 1.1 million
common shares to an underwriter for resale on the open market. Concurrent with
the issuance of the common shares, the Operating Partnership issued to us an
equivalent number of OP Units. This transaction did not materially impact our
ownership percentage in the Operating Partnership. We received no proceeds as a
result of these transactions.
Subsequent to this exchange, other minority partners in the San Diego hotel
have notified us of their intent to exchange additional interests in the San
Diego partnership for approximately 6.8 million OP Units. We expect these
exchanges to close during the second quarter. After completion of these
exchanges the minority partner will own 10% of the interest in the San Diego
hotel.
During 2001, 2000 and 1999, respectively, approximately 42,054,000, 652,000
and 467,000 OP Units were redeemed for Host REIT common stock, respectively. In
2000 and 1999 an additional 360,000 and 233,000 OP Units were redeemed for $3
million and $2 million in cash, respectively. No OP Units were redeemed for
cash in 2001.
85
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 2001, the Company disposed of two hotels (751 rooms) for a total
consideration of $65 million and recognized a net gain of $12 million. During
1999, the Company disposed of 5 hotels (1,577 rooms) for a total consideration
of $198 million and recognized a net gain of $24 million. There were no
dispositions in 2000.
13. Fair Value of Financial Instruments
The fair values of certain financial assets and liabilities and other
financial instruments are shown below:
2001 2000
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(in millions)
Financial assets
Receivables from affiliates...................... $ 6 $ 6 $ 164 $ 166
Notes receivable................................. 48 48 47 44
Other............................................ 6 6 9 9
Financial liabilities
Debt, net of capital leases and Convertible Debt
Obligation to Host Marriott.................... 5,586 5,512 5,305 5,299
Convertible Debt Obligation to Host Marriott..... 492 349 492 432
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 value of the bank credit
facility and other notes are estimated to be equal to their carrying value.
Senior notes and the Convertible Debt Obligation to Host Marriott are valued
based on quoted market prices.
14. 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 including the management
of the majority of the company's hotels including franchised properties;
financing for joint ventures including the acquisition in 1996 of two
full-service properties for which Marriott International provided $29 million
of debt financing and $28 million in preferred equity and the 2000 acquisition
of two partnerships owning 120 limited service hotels (see below); and certain
limited administrative services.
The Company currently is in the process of negotiating changes to the
management and other agreements with Marriott International and its affiliates.
If made, the changes, which remain subject to the consent of various lenders to
the properties and other third parties, would be effective December 29, 2001.
The proposed changes would result in reductions in incentive management fees on
the portfolio of Marriott-managed hotels, reduce certain expenses to the
property, lower our working capital requirements, clarify the circumstances and
conditions under which Marriott International and its affiliates may earn a
profit on transactions with the hotels, and provide greater approval rights
over budgets and capital expenditures. The Company is also negotiating to
expand the pool of hotels that are subject to an existing agreement that allows
us to sell certain assets without a Marriott International management
agreement, and to revise the method for determining the number of hotels that
may be sold without a Marriott International management agreement or a
franchise agreement, in each case, without the payment of a termination fee.
There can be no assurance that the negotiations will be successful, that the
changes will be made in substantially the form described or that we will
receive the necessary consents to implement these changes.
86
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marriott International currently has the right to purchase up to 20 percent
of the Company's outstanding stock upon certain changes in control of Host
Marriott. In connection with the Company's negotiations with Marriott
International on changes to the management agreements, we are discussing
terminating this right and clarifying existing provisions in the management
agreements that currently limit the Company's ability to sell a hotel or the
company to a competitor of Marriott International.
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 4). 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 a result of the consolidation of Rockledge, we now have a controlling
interest in the entity Elcrisa S.A. de C.V. that owns two hotels located in
Mexico City, Mexico. Marriott International holds the remaining interest of
Elcrisa S.A. de C.V. and is the manager of the hotels.
In 2001, the Company, as the lessee, paid to Marriott International $162
million in hotel management fees and $6 million in franchise fees. In 2000 and
1999, the fees were paid by Crestline and Wyndham, as the lessees, and totaled
$240 million and $218 million, respectively. In 2000 and 1999, the Company paid
to Marriott International $0.2 million and $0.3 million, respectively, in
guarantee fees pursuant to certain debt service guarantees provided by Marriott
International. No guarantee fees were paid in 2001. In 2001, 2000, and 1999,
the Company paid to Marriott International $2 million, $2 million, and $3
million, respectively, for certain administrative services and office
space.
15. Hotel Management Agreements
Of the Company's hotels, 101 are subject to management agreements under
which Marriott International or one of their subsidiaries 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 that are
generally 3 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.
Pursuant to the terms of the agreements, Marriott International furnishes
the hotels with certain 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 on a fair and equitable basis. 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.
87
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Lessees are obligated to provide the manager with sufficient funds,
generally 5% of revenue, 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. To the extent the
lessee is not required to fund such amounts into escrow accounts, the lessee
remains liable to make such fundings in the future. As of December 31, 2001,
the Company is obligated under its management agreements to fund FF&E
requirements in excess of amounts placed in restricted cash accounts of $37
million.
The Lessees assumed franchise agreements with Marriott International for 8
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 hold management agreements with The Ritz-Carlton Hotel Company,
LLC ("Ritz-Carlton"), an affiliate of Marriott International, to manage ten 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 and funding of the contractual
amount is not required in the current year.
The Lessees also hold management agreements with hotel management companies
other than Marriott International and Ritz-Carlton for 21 of the Company's
hotels (8 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 21 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.
16. Relationship with Crestline Capital Corporation
The Company and Crestline entered into various agreements in connection with
the conversion to a REIT in 1998.
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; (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. 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.
Crestline also had other agreements in connection with the distribution
related to asset management services as well as non-competition agreements.
These agreements were terminated effective January 1, 2001 in connection with
the acquisition of the Crestline Lessee Entities.
88
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17 . 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 475 rooms as of December 31, 2001, 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. As of December 31, 2000 and 1999, the Company's foreign
operations were limited to four Canadian hotel properties. Effective March 24,
2001, the Company purchased the 5% voting interest in Rockledge, and, as a
result, foreign operations of the Company included two properties in Mexico
City, Mexico. There were no intercompany sales between the foreign 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):
2001 2000 1999
------------------- ------------------- -------------------
Long-lived Long-lived Long-lived
Revenues Assets Revenues Assets Revenues Assets
-------- ---------- -------- ---------- -------- ----------
United States.......................... $3,692 $6,800 $1,382 $6,991 $1,279 $6,987
International.......................... 62 199 25 119 24 121
------ ------ ------ ------ ------ ------
Total............................... $3,754 $6,999 $1,407 $7,110 $1,303 $7,108
====== ====== ====== ====== ====== ======
18. Quarterly Financial Data (unaudited)
2001
--------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(in millions, except per unit amounts)
Revenues................................ $ 869 $ 988 $ 848 $1,049 $3,754
Income (loss) before income taxes....... 43 67 (9) (34) 67
Income (loss) before extraordinary items 40 55 (9) (27) 59
Net income (loss)....................... 40 55 (10) (28) 57
Net income (loss) available to
unitholders........................... 35 46 (19) (37) 25
Basic earnings (loss) per unit:
Income (loss) before extraordinary
items.............................. .12 .16 (.06) (.13) .10
Net income (loss).................... .12 .16 (.07) (.13) .09
Diluted earnings (loss) per unit:
Income (loss) before extraordinary
items.............................. .12 .16 (.06) (.13) .10
Net income (loss).................... .12 .16 (.07) (.13) .09
2000
--------------------------------------
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------
(in millions, except per unit amounts)
Revenues................................ $ 175 $ 186 $ 227 $ 819 $1,407
Income (loss) before income taxes....... (73) (64) (17) 259 105
Income (loss) before extraordinary items (74) (66) (21) 364 203
Net income (loss)....................... (69) (68) (21) 365 207
Net income (loss) available to
unitholders........................... (74) (73) (27) 361 187
Basic earnings (loss) per unit:
Income (loss) before extraordinary
items.............................. (.28) (.26) (.09) 1.26 .64
Net income (loss).................... (.26) (.26) (.09) 1.27 .66
Diluted earnings (loss) per unit:
Income (loss) before extraordinary items (.28) (.26) (.09) 1.13 .63
Net income (loss)....................... (.26) (.26) (.09) 1.14 .65
89
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 2000, contingent rental revenue was deferred on the balance sheet
until certain revenue thresholds were realized. All contingent rental revenue
previously deferred was recognized and therefore has no impact on the full year
2000 revenues, net income, or earnings per share.
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 unit due to the required method of
computing the weighted average number of units in the respective periods.
19. Supplemental Guarantor and Non-Guarantor Subsidiary Information
All subsidiaries of the Company guarantee the Senior Notes except those
owning 42 of the Company's full service hotels and HMH HPT RIBM LLC and HMH HPT
CBM LLC, the lessees of the Residence Inn and Courtyard properties,
respectively. The separate financial statements of each guaranteeing subsidiary
(each, a "Guarantor Subsidiary") are not presented because the Company's
management has concluded that such financial statements are not material to
investors. The guarantee of each Guarantor Subsidiary is full and unconditional
and joint and several and each Guarantor Subsidiary is a wholly owned
subsidiary of the Company.
The following condensed combined consolidating financial information sets
forth the financial position as of December 31, 2001 and 2000 and results of
operations and cash flows for the three fiscal years in the period ended
December 31, 2001 of the parent, Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries:
90
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Condensed Combined Consolidating Balance Sheets
(in millions)
December 31, 2001
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Property and equipment, net............. $1,111 $2,135 $3,753 $ -- $6,999
Investments in affiliate................ 2,651 2,004 -- (4,513) 142
Notes and other receivables............. 704 96 156 (902) 54
Rent receivable......................... 2 17 25 (44) --
Due from manager........................ (5) 9 137 -- 141
Other assets............................ 118 210 256 (52) 532
Restricted cash......................... 22 3 89 -- 114
Cash, cash equivalents and marketable
securities............................ 222 52 78 -- 352
------ ------ ------ ------- ------
Total assets......................... $4,825 $4,526 $4,494 $(5,511) $8,334
====== ====== ====== ======= ======
Debt.................................... $2,545 $1,293 $2,532 $ (768) $5,602
Convertible debt obligation to Host
Marriott.............................. 492 -- -- -- 492
Other liabilities....................... 96 216 359 (230) 441
------ ------ ------ ------- ------
Total liabilities.................... 3,133 1,509 2,891 (998) 6,535
Minority interests...................... 1 -- 107 -- 108
Limited partner interest of third
parties at redemption value........... 194 -- -- -- 194
Partners' capital....................... 1,497 3,017 1,496 (4,513) 1,497
------ ------ ------ ------- ------
Total liabilities and partners'
capital............................ $4,825 $4,526 $4,494 $(5,511) $8,334
====== ====== ====== ======= ======
December 31, 2000
Guarantor Non-Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------- ------------ ------------
Property and equipment, net............. $1,181 $2,253 $3,676 $ -- $7,110
Investments in affiliate................ 2,550 1,947 -- (4,369) 129
Notes and other receivables............. 593 55 152 (589) 211
Rent receivable......................... 12 12 41 -- 65
Other assets............................ 122 155 222 (60) 439
Restricted cash......................... 14 6 105 -- 125
Cash, cash equivalents and marketable
securities............................ 244 45 24 -- 313
------ ------ ------ ------- ------
Total assets......................... $4,716 $4,473 $4,220 $(5,018) $8,391
====== ====== ====== ======= ======
Debt.................................... $2,250 $1,247 $2,259 $ (434) $5,322
Convertible debt obligation to Host
Marriott.............................. 492 -- -- -- 492
Other liabilities....................... 226 376 306 (215) 693
------ ------ ------ ------- ------
Total liabilities.................... 2,968 1,623 2,565 (649) 6,507
Minority interests...................... 3 -- 136 -- 139
Limited partner interest of third
parties at redemption value........... 823 -- -- -- 823
Partners' capital....................... 922 2,850 1,519 (4,369) 922
------ ------ ------ ------- ------
Total liabilities and partners'
capital............................ $4,716 $4,473 $4,220 $(5,018) $8,391
====== ====== ====== ======= ======
91
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Condensed Combined Consolidating Statements of Operations
(in millions)
Fiscal Year Ended December 31, 2001)
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES...................................... $ 212 $ 355 $ 4,216 $(1,029) $(3,754)
Depreciation and amortization................. (80) (128) (170) -- (378)
Hotel operating expenses...................... -- -- (2,507) -- (2,507)
Property-level expenses....................... (42) (68) (172) -- (282)
Rental expenses............................... -- -- (1,029) 1,029 --
Minority interest............................. (4) -- (12) -- (16)
Corporate expenses............................ (5) (10) (17) -- (32)
Interest expense.............................. (212) (118) (215) 52 (493)
Interest income............................... 54 22 12 (52) 36
Net gains (losses) on property transactions... 13 (11) 4 -- 6
Equity in earnings (losses) of affiliates..... 136 92 (4) (221) 3
Other expenses................................ (9) (8) (7) -- (24)
----- ----- ------- ------- -------
Income from continuing operations before taxes 63 126 99 (221) 67
Benefit (provision) for income taxes.......... 1 (2) (1) (6) (8)
----- ----- ------- ------- -------
INCOME BEFORE EXTRAORDINARY
ITEM........................................ 64 124 98 (227) 59
Extraordinary item--gain on extinguishment of
debt (net of income taxes).................. (1) (1) -- -- (2)
----- ----- ------- ------- -------
NET INCOME.................................... $ 63 $ 123 $ 98 $ (227) $ 57
===== ===== ======= ======= =======
Fiscal Year Ended December 31, 2000
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES...................................... $ 260 $ 414 $ 733 $ $1,407
Depreciation and amortization................. (69) (106) (156) -- (331)
Property-level expenses....................... (50) (70) (156) -- (276)
Minority interest............................. (7) -- (20) -- (27)
Corporate expenses............................ (7) (13) (22) -- (42)
Interest expense.............................. (183) (109) (196) 22 (466)
Interest income............................... 38 7 17 (22) 40
Net gains on property transactions............ 1 1 4 -- 6
Equity in earnings (losses) of affiliates..... 144 211 (11) (319) 25
Other expenses................................ (17) (209) (5) -- (231)
----- ----- ----- ----- ------
Income from continuing operations before taxes 110 126 188 (319) 105
Benefit (provision) for income taxes.......... 93 2 3 -- 98
----- ----- ----- ----- ------
INCOME BEFORE EXTRAORDINARY
ITEM........................................ 203 128 191 (319) 203
Extraordinary item--gain on extinguishment of
debt (net of income taxes).................. 4 -- -- -- 4
----- ----- ----- ----- ------
NET INCOME.................................... $ 207 $ 128 $ 191 $(319) $ 207
===== ===== ===== ===== ======
92
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year Ended December 31, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
REVENUES.......................................... $ 236 $ 387 $ 680 $ -- $1,303
Depreciation and amortization..................... (60) (94) (139) -- (293)
Property-level expenses........................... (55) (63) (150) -- (268)
Minority interest................................. (5) -- (16) -- (21)
Corporate expenses................................ (5) (11) (18) -- (34)
Interest expense.................................. (196) (121) (190) 38 (469)
Interest income................................... 44 20 13 (38) 39
Net gains on property transactions................ 12 12 4 -- 28
Equity in earnings (losses) of affiliates......... 331 200 (2) (523) 6
Other expenses.................................... (35) (10) (6) -- (51)
----- ----- ----- ----- ------
Income from continuing operations before taxes.... 267 320 176 (523) 240
Benefit for income taxes.......................... 8 5 3 -- 16
----- ----- ----- ----- ------
INCOME BEFORE EXTRAORDINARY
ITEM............................................ 275 325 179 (523) 256
Extraordinary item--gain on extinguishment of debt
(net of income taxes)........................... 10 -- 19 -- 29
----- ----- ----- ----- ------
NET INCOME........................................ $ 285 $ 325 $ 198 $(523) $ 285
===== ===== ===== ===== ======
93
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Condensed Combined Consolidating Statements of Cash Flows
(in millions)
Fiscal Year Ended December 31, 2001
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash from (used in) operations....................... $ 156 $ (90) $ 215 $ 281
----- ----- ----- -----
INVESTING ACTIVITIES
Proceeds from sales of assets........................ 45 -- 15 60
Capital expenditures................................. (58) (109) (119) (286)
Acquisitions......................................... (63) -- -- (63)
Other................................................ 10 -- -- 10
----- ----- ----- -----
Cash used in investing activities.................... (66) (109) (104) (279)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt.................................... (584) (45) (129) (758)
Issuance of debt..................................... 866 94 8 968
Issuance of OP Units................................. 3 -- -- 3
Issuance of preferred limited partner units.......... 143 -- -- 143
Distributions on common and preferred limited partner
units.............................................. (326) -- -- (326)
Transfer to/from Parent.............................. (234) 155 79 --
Other................................................ 20 2 (15) 7
----- ----- ----- -----
Cash (used in) from financing activities............. (59) 172 (75) 38
----- ----- ----- -----
INCREASE IN CASH AND CASH EQUIVALENTS................ (112) 206 (57) 37
CASH AND CASH EQUIVALENTS, beginning of year......... 244 45 24 313
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of year............... $ 222 $ 52 $ 78 $ 352
===== ===== ===== =====
94
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year Ended December 31, 2000
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash from operations....................................... $ 116 $ 117 $ 301 $ 534
----- ----- ----- -----
INVESTING ACTIVITIES
Capital expenditures....................................... (82) (149) (148) (379)
Acquisitions............................................... -- (40) -- (40)
Other...................................................... (29) -- -- (29)
----- ----- ----- -----
Cash used in investing activities.......................... (111) (189) (148) (448)
----- ----- ----- -----
FINANCING ACTIVITIES
Repayment of debt.......................................... (192) (12) (113) (317)
Issuance of debt........................................... 451 -- 89 540
Issuance of OP Units....................................... 4 -- -- 4
Issuance of preferred limited partner units................ -- -- -- --
Distributions on common and preferred limited partner units (260) -- -- (260)
Redemption or repurchase of OP Units for cash.............. (47) -- -- (47)
Repurchase of Convertible Preferred Securities............. (15) -- -- (15)
Cost of extinguishment of debt............................. -- -- -- --
Transfer to/from Parent.................................... 104 88 (192) --
Other...................................................... (3) (2) 50 45
----- ----- ----- -----
Cash from (used in) financing activities................... 42 74 (166) (50)
----- ----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................................. 47 2 (13) 36
CASH AND CASH EQUIVALENTS, beginning of year............... 197 43 37 277
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of year..................... $ 244 $ 45 $ 24 $ 313
===== ===== ===== =====
95
HOST MARRIOTT, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year Ended December 31, 1999
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Consolidated
------ ------------ ------------ ------------
OPERATING ACTIVITIES
Cash from operations................................. $ 46 $ 111 $ 203 $ 360
----- ----- ------- -------
INVESTING ACTIVITIES
Proceeds from sales of assets........................ 3 192 -- 195
Capital expenditures................................. (68) (168) (125) (361)
Acquisitions......................................... (3) (5) (21) (29)
Other................................................ 19 -- -- 19
----- ----- ------- -------
Cash (used in) from investing activities............. (49) 19 (146) (176)
----- ----- ------- -------
FINANCING ACTIVITIES
Repayment of debt.................................... (229) (186) (1,016) (1,431)
Issuance of debt..................................... 290 23 1,032 1,345
Issuance of OP Units................................. 5 -- -- 5
Issuance of preferred limited partner units.......... 196 -- -- 196
Distributions on common and preferred limited partner
units.............................................. (260) -- -- (260)
Redemption or repurchase of OP Units for cash........ (54) -- -- (54)
Repurchase of Convertible Preferred Securities....... (36) -- -- (36)
Cost of extinguishment of debt....................... (2) -- -- (2)
Transfer to/from Parent.............................. 40 60 (100) --
Other................................................ (79) (25) (2) (106)
----- ----- ------- -------
Cash used in financing activities.................... (129) (128) (86) (343)
----- ----- ------- -------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................................ (132) 2 (29) (159)
CASH AND CASH EQUIVALENTS, beginning of year......... 329 41 66 436
----- ----- ------- -------
CASH AND CASH EQUIVALENTS, end of year............... $ 197 $ 43 $ 37 $ 277
===== ===== ======= =======
96
CCHP I CORPORATION AND SUBSIDIAIRES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
97
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 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 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
98
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.
99
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.
100
CCHP I CORPORATION AND SUBSIDIAIES
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.
101
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.
102
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.
103
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''),
104
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.
105
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 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
106
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.
107
CCHP II CORPORATION AND SUBSIDIAIRES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
108
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
109
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.
110
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.
111
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.
112
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.
113
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.
114
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 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.
115
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This
116
CCHP II CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
117
CCHP III CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
118
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
119
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.
120
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.
121
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.
122
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.
123
CCHP I 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.
124
CCHP I CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
125
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
126
CCHP III CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
127
CCHP IV CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 29, 2000 and December 31, 1999
With Independent Public Accountants' Report Thereon
128
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
129
CCHP OV CORPORATION AND SUBSIDIAIRES
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.
130
CCHP IV CORPORATION AND SUBSIDIAIRES
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.
131
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.
132
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.
133
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.
134
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.
135
CCHP IV 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 $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
136
CCHP IV CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
137
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
except as noted from Host REIT's 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 fiscal year).
Item 10. Directors and Executive Officers of the Registrant
(a) Information concerning directors of Host REIT appears in Host REIT's
Proxy Statement, under "Election of Director". This portion of the Proxy
Statement is incorporated herein by reference
(b) For information with respect to Executive Officers, see Part I of this
Annual Report on Form 10-K.
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 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).
3.2* Eleventh Amendment to Second Amended and Restated Agreement of Limited Partnership of
Host Marriott, L.P., dated as of August 3, 1999, establishing an additional class of units entitled
the Class A Preferred Units.
138
Exhibit No. Description
- ----------- -----------
3.3* Sixteenth Amendment to Second Amended and Restated Agreement of Limited Partnership of
Host Marriott, L.P., dated as of November 29, 1999, establishing an additional class of units
entitled the Class B Preferred Units.
3.4* Twenty-fifth Amendment to Second Amended and Restated Agreement of Limited Partnership of
Host Marriott, L.P., dated as of March 27, 2001, establishing an additional class of units entitled
the Class C Preferred Units.
3.5* Thirtieth Amendment to Second Amended and Restated Agreement of Limited Partnership of
Host Marriott, L.P.
4.1 Amended and Restated Indenture dated as of August 5, 1998, 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).
4.2 First Supplemental Indenture to Amended and Restated Indenture dated as of August 5, 1998
among HMH Properties, Inc., the Guarantors and Subsidiary Guarantors named in the Amended
and Restated Indenture, dated as of August 5, 1998, and Marine Midland Bank, as Trustee (the
"Trustee") (incorporated by reference to Host Marriott Corporation Current Report on Form 8-K
dated August 6, 1998).
4.3 Second Supplemental Indenture, dated as of December 11, 1998, among HMH PROPERTIES,
INC., a Delaware corporation (the "Company"), the Guarantors and Subsidiary Guarantors named
in the Amended and Restated Indenture, dated as of August 5, 1998 (the "Indenture"), and Marine
Midland Bank, as Trustee (incorporated by reference to Host Marriott Corporation Current Report
on Form 8-K dated December 11, 1998).
4.4 Third Supplemental Indenture, dated as of December 14, 1998, by and among HMH Properties Inc.,
Host Marriott, L.P., the entities identified as New Subsidiary Guarantors and Marine Midland Band,
as Trustee, to Amended and Restated Indenture, dated as of August 5, 1998, among the Company, the
Guarantors named therein and Subsidiary Guarantors named therein and the Trustee (incorporated by
reference to Exhibit 4.3 of Host Marriott, L.P.'s Registration Statement No. 333-55807).
4.5 Fourth Supplemental Indenture, dated as of February 25, 1999, among Host Marriott, L.P. the
Subsidiary Guarantors signatory to the Fourth Supplemental Indenture and Marine Midland Bank
as Trustee to the Amended and Restated Indenture, dated as of August 5, 1998, as amended and
supplemented through the date of the Fourth Supplemental Indenture (incorporated by reference to
Exhibit 4.2 of Host Marriott, L.P.'s Registration Statement No. 333-79275).
4.6 Sixth Supplemental Indenture, dated as of October 6, 2000, among Host Marriott, L.P., the
Subsidiary Guarantors signatory to the Sixth Supplemental Indenture and HSBC Bank USA
(formerly Marine Midland Bank, as Trustee to the Amended and Restated Indenture, dated as of
August 5, 1998, as amended and supplemented through the date of the Sixth Supplemental
Indenture (incorporated by reference to Exhibit 4.2 of Host Marriott, L.P.'s Registration Statement
No. 333-51944).
4.7 Ninth Supplemental Indenture, dated as of December 14, 2001, among Host Marriott, L.P. the
Subsidiary Guarantors signatory to the Ninth Supplemental Indenture and HSBC Bank USA
(formerly Marine Midland Bank as Trustee to the Amended and Restated Indenture, dated as of
August 5, 1998, as amended and supplemented through the date of the Ninth Supplemental
Indenture (incorporated by reference to Exhibit 4.2 of Host Marriott, L.P.'s Registration Statement
No.333-76550).
4.8 Indenture for the 63/4% 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).
4.9 First Supplemental Indenture, dated December 29, 1998, to Indenture, dated December 2, 1996, by
and among Host Marriott Corporation, HMC Merger Corporation, Host Marriott, L.P. and IBJ
Schroeder Bank & Trust Company (incorporated by reference to Exhibit 4.1 of Host Marriott
Corporation Current Report on Form 8-K, dated December 30, 1998).
139
Exhibit No. Description
- ----------- -----------
4.10 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).
4.11 Amendment No. 1, dated December 29, 1998, to Guarantee Agreement, dated December 2, 1996
(incorporated by reference to Exhibit 4.2 to Host Marriott Corporation Current Report on
Form 8-K, dated December 30, 1998).
4.12 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).
10.1 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).
10.2 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).
10.3 Host Marriott Corporation and Host Marriott, L.P. Comprehensive Stock and Cash Incentive Plan,
as amended and restated December 29, 1998 (incorporated by reference to Exhibit No. 10.8 of
Host Marriott Corporation's Form 10-K for the year ended December 31, 2000.)
10.4 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).
10.5 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 1996).
10.6 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).
10.7 Amendment No. 3 to the Distribution Agreement dated March 3, 1998 by and among Host
Marriott Corporation, Host Marriott Services Corporation, Marriott International, Inc. and
Sodexho Marriott Services, Inc. (incorporated by reference to Host Marriott Corporation
Registration Statement No. 333-64793).
10.8 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).
10.9 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).
10.10 Distribution Agreement dated December 22, 1995 by and between Host Marriott Corporation and
Host Marriott Services Corporation (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated January 16, 1996).
10.11 Amendment to Distribution Agreement dated December 22, 1995 by and between Host Marriott
Corporation and Host Marriott Services Corporation (incorporated by reference to Exhibit 10.16
of Host Marriott Corporation's Form 10-K for the year ended December 31, 1998).
10.12 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).
140
Exhibit No. Description
- ----------- -----------
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 Employee Benefits and Other Employment Matters Allocation Agreement dated as of December
29, 1995 by and between Host Marriott Corporation and Host Marriott Services Corporation
(incorporated by reference to Host Marriott Corporation Current Report on Form 8-K dated
January 16, 1996).
10.18 Tax Sharing Agreement dated as of December 29, 1995 by and between Host Marriott Corporation
and Host Marriott Services Corporation (incorporated by reference to Host Marriott Corporation
Current Report on Form 8-K dated January 16, 1996).
10.19 Host Marriott, L.P. Retirement and Savings Plan and Trust (incorporated by reference to
Exhibit 10.26 of Host Marriott Corporation 1998 Annual Report on Form 10-K for the year ended
December 31, 1998).
10.20 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).
10.21 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).
10.22 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).
10.23# Form of Management Agreement for Full Services Hotels (incorporated by reference to Host
Marriott Corporation Registration Statement No. 333-51707).
10.24 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).
10.25 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).
10.26 Amended and Restated Communities Noncompetition Agreement (incorporated by reference to
Host Marriott Corporation Registration Statement No. 333-64793).
10.27 Registration Rights Agreement, dated as of October 14, 2001, by and among Host Marriott, L.P.,
the Guarantors named therein and the Purchasers named therein (incorporated by reference to
Exhibit 10.43 of Host Marriott, L.P.'s Registration Statement on Form S-4 No. 333-73550).
10.28 Amended and Restated Credit Agreement, dated 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's Registration Statement
No. 333-51944).
141
Exhibit No. Description
- ----------- -----------
10.29 First Amendment to the Amended and Restated Credit Agreement, dated as of October 23, 2000,
among Host Marriott Corporation, Host Marriott, L.P., Various Banks and Bankers Trust
Company, As Administrative Agent (incorporated by reference to Exhibit 10.41 of Host Marriott's
Registration Statement No. 333-51944.)
10.30 Second Amendment and Waiver of Amended and Restated Credit Agreement, dated as of March
2, 2001, among Host Marriott Corporation, Host Marriott, L.P., Various Banks and Bankers, and
Bankers Trust Company, as administrative Agent (incorporated by reference to Exhibit 10.42 of
Host Marriott's Form 10.42 of Host Marriott's Form 10-Q for the quarter ended September 7,
2001.)
10.31 Third Amendment and Modification to Amended and Restated Credit Agreement, dated as of
November 15, 2001, among Host Marriott Corporation, Host Marriott, L.P., Various Banks, and
Bankers Trust Company, as Administrative Agent, dated as of November 19, 2001 (incorporated
by reference to Exhibit 10.41 of Host Marriott Corporation's Current Report on Form 8-K dated
December 5, 2001).
10.32 Amended and Restated Pledge and Security Agreement, dated as of May 31, 2000, among the
Pledgors and Banker's Trust Company, as Pledgee (incorporated by reference to Exhibit No. 10.44
of Host Marriott, L.P.'s Form 10-Q for the quarter ended September 7, 2001).
10.33 First Amendment to Amended and Restated Pledge and Security Agreement, dated as of March 1,
2001, among the Pledgors and Bankers Trust Company, as Pledgee (incorporated by reference to
Exhibit No. 10.41 of Host Marriott, L.P.'s Form 10-Q for the quarter ended September 7, 2001.)
10.34 Amended and Restated Subsidiaries Guaranty, dated as of March 1, 2001 (incorporated by
reference to Exhibit 10.43 of Host Marriott, L.P.'s Form 10-Q for the quarter ended September 7,
2001).
10.35 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).
10.36 Host Marriott Corporation's Non-Employee Director's Deferred Stock Compensation Plan
(incorporated by reference to Exhibit 10.7 of Host Marriott Corporation's Form 10-K dated
March 26, 1999).
12.1* Computation of Ratios of Earnings to Fixed Charges.
21.1* 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
. December 21, 2001--Report of the announcement that Host Marriott,
L.P., of which we own approximately 9/1/2/% interest and are the
sole general partner, completed a $450 million senior notes
offering. The notes carry a 9/1/2/% coupon rate with a final
maturity of January 15, 2007. The net proceeds of the offering were
used to repay nearly all of the outstanding balance under our
revolving credit facility. In addition, we reported on the December
20, 2001 announcement that we had completed the previously announced
sale of the Vail Marriott Mountain Resort hotel with Vail Resorts
Inc. and had completed the sale of the Pittsburgh Marriott City
Center hotel to the Shaner Hotel Group. Total sale proceeds for the
two properties were approximately $65 million of which approximately
$20 million will be used to repay the remaining outstanding balance
under our revolving credit facility. The remaining proceeds will be
used for general corporate purposes.
. December 5, 2001--Report on the operating environment subsequent to
the September 11, 2001 terrorist attacks, amendment to our bank
credit facility, and the current status of our debt compliance.
142
. June 4, 2001--Report of the announcement that Host Marriott
Corporation agreed to issue to the Blackstone Entities 18,200,000
shares of its common stock upon redemption of 18,200,000 units of
limited partnership interest in Host LP, which will in turn be sold
to an Underwriter for delivery on June 4, 2001 to sold to the public.
. May 8, 2001--Report of the announcement that Host Marriott
Corporation agreed to issue to the Blackstone Entities 10,000,000
shares of its common stock upon redemption of 10,000,000 units of
limited partnership interest in Host LP, which will in turn be sold
to an Underwriter for delivery on May 8, 2001 to be sold to the
public.
. May 3, 2001--Amendment to Exhibit 23.1, the Consent of the
Independent Public Accountants, to Form 10-K filed April 2, 2001.
. May 1, 2001--Report on Form 8-K/A to amend the unaudited pro forma
statements of operations filed as part of the Form 8-K dated April
13, 2001 to reflect adjustments to the recognition of minority
interest expense and the tax provision.
. April 13, 2001--Report of the termination of the Crestline leases
through the purchase by Host Marriott Corporation, through its
operating partnership, Host Marriott, L.P., of the lessee entities
with respect to 116 of our full-service hotels for $207 million in
cash effective January 1, 2001. In order to provide a clearer
understanding and comparability of our results of operations, we
have presented unaudited pro forma statements of operations by
quarter and year-to-date for the two fiscal years ended December 31,
2000, adjusted to reflect the transaction as if it occurred on
January 1, 1999.
. March 23, 2001--Report on the issuance and sale of $130,000,000 of
10% Class C Cumulative Redeemable Preferred Stock by Host Marriott
Corporation on March 27, 2001 at $25.00 per share, with underwriting
discounts and commissions of $.8125 of the principal amount at
maturity, generating expected net proceeds of approximately
$125,000,000.
. February 7, 2001--Report of the announcement that Host Marriott
Corporation agreed to issue to the Blackstone Entities 12,500,000
shares of its common stock upon redemption of 12,500,000 units of
limited partnership interest in Host LP, which will in turn be sold
to an Underwriter for delivery on February 7, 2001 to be sold to the
public.
143
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 February 25, 2002.
HOST MARRIOTT, L.P.
By: /s/ HOST MARRIOTT CORPORATION
------------------------------
Its General Partner
By: /s/ ROBERT E. PARSONS, JR.
-----------------------------
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/ RICHARD E. MARRIOTT
- ----------------------------- Chairman of the Board of Directors February 25, 2002
Richard E. Marriott
/s/ CHRISTOPHER J. NASSETTA President, Chief Executive Officer and
- ----------------------------- Director (Principal Executive February 25, 2002
Christopher J. Nassetta Officer)
/s/ ROBERT E. PARSONS, JR. Executive Vice President and Chief
- ----------------------------- Financial Officer (Principal February 25, 2002
Robert E. Parsons, Jr. Financial Officer)
/s/ DONALD D. OLINGER Senior Vice President and Corporate
- ----------------------------- Controller (Principal Accounting February 25, 2002
Donald D. Olinger Officer)
/s/ ROBERT M. BAYLIS
- ----------------------------- Director February 25, 2002
Robert M. Baylis
/s/ TERENCE C. GOLDEN
- ----------------------------- Director February 25, 2002
Terence C. Golden
144
Signatures Title Date
---------- ----- ----
/s/ ANN MCLAUGHLIN KOROLOGOS
- ----------------------------- Director February 25, 2002
Ann McLaughlin Korologos
/s/ J.W. MARRIOTT, JR.
- ----------------------------- Director February 25, 2002
J.W. Marriott, Jr.
/s/ JOHN G. SCHREIBER
- ----------------------------- Director February 25, 2002
John G. Schreiber
/s/ HARRY L. VINCENT, JR.
- ----------------------------- Director February 25, 2002
Harry L. Vincent, Jr.
145
SCHEDULE III
Page 1 of 3
HOST MARRIOTT, L.P. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(in millions)
Gross Amount at
Initial Costs December 31, 2001
----------------- Subsequent ------------------------
Buildings & Costs Buildings & Accumulated
Description Debt Land Improvements Capitalized Land Improvements Total Depreciation
----------- ------ ---- ------------ ----------- ---- ------------ ------ ------------
Full-service hotels:
New York Marriott Marquis Hotel, New
York, NY................................ $ 255 $ -- $ 552 $ 58 $ -- $ 610 $ 610 $ (201)
Other full-service properties, each less
than 5% of total........................ 2,006 721 5,325 1,067 696 6,417 7,113 (1,064)
------ ---- ------ ------ ---- ------ ------ -------
Total full-service...................... 2,261 721 5,877 1,125 696 7,027 7,723 (1,265)
Other properties, each less than 5% of
total................................... -- 40 27 (55) 0 12 12 (16)
------ ---- ------ ------ ---- ------ ------ -------
Total................................... $2,261 $761 $5,904 $1,070 $696 $7,039 $7,735 $(1,281)
====== ==== ====== ====== ==== ====== ====== =======
Date of
Completion of Date Depreciation
Description Construction Acquired Life
----------- ------------- -------- ------------
Full-service hotels:
New York Marriott Marquis Hotel, New
York, NY................................ 1986 n/a 40
Other full-service properties, each less
than 5% of total........................ various various 40
Total full-service......................
Other properties, each less than 5% of
total................................... various n/a various
Total...................................
S-1
SCHEDULE III
Page 2 of 3
HOST MARRIOTT, L.P. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(in millions)
Notes:
(A) The change in total cost of properties for the fiscal years ended
December 31, 2001, 2000, and 1999 is as follows:
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
Additions:
Capital expenditures and transfers from construction-in-progress... 278
Deductions:
Dispositions and other............................................. (214)
------
Balance at December 31, 2001.......................................... $7,735
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SCHEDULE III
Page 3 of 3
HOST MARRIOTT, L.P. AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(in millions)
(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal years ended December 31, 2001, 2000, 1999 and 1998 is
as follows:
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
Depreciation and amortization......................................... 281
Dispositions and other................................................ (66)
------
Balance at December 31, 2001.......................................... $1,281
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(C) The aggregate cost of properties for Federal income tax purposes is
approximately $5,609 million at December 31, 2001.
(D) The total cost of properties excludes construction-in-progress properties.
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